Report No. 1 CONFIDENTIAL

A proposal for starting up a hotel in

Chile

Submitted to: Submitted By

Dr. R. Raghunathan Ms. Veena Rani – Chairman

Prof. Sudhir Sachdev S. Venkateswaran – CEO

Sumit Raj - CFO

Hemant Khosla – CMSO

MBA C424: International Business

Birla Institute of Technology and Science, Pilani – 333031

Class Year 2012

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INTRODUCTION

We, Green Park Hotel, are a conglomerate of Peninsular Corporation founded in the year 1986.

The businesses include hotels, consumer goods, restaurants, pharmaceuticals and retail chain in

India. The worth of the group was 1987.11 Cr as on March 2011. Our hotel business is growing

at 20% in terms of revenue for the last two consecutive years and at this time we are planning to

expand our operations to increase our revenue, and to reduce risk through diversification. Among

the prospective countries, we found Chile as a favourable destination for investment. Hence, we

are planning to expand our operations in Chile.

Chile is a coastal country in South America between Andes Mountains in the east and

Pacific Ocean in the West. Chile has an area of 756,950 square kilometres and a total coastline of

6,435 kilometres. It shares its border with Peru in the north, Bolivia and Argentina in the east.

The political and economic stability of Chile makes it a highly attractive destination for foreign

direct investment (FDI). The legal structure is also favourable to FDI. The national language in

Chile is Spanish - the second most spoken language in the world [1]. The labour force work hard

to meet the deadlines.

BUSINESS ENVIRONMENT ANALYSIS

The Mode of entry into Chile can be decided based upon the analysis of the cultural, economic,

political and legal environment prevailing in Chile. These are the major factors governing the

foreign trade.

Culture in Chile: The Republic of Chile has considerably homogenous culture throughout the

country. The official language of Chile is Spanish. German and English are also spoken in Chile.

Several steps are taken by the government to impart English language among the public to make

them employable under foreign firms. Majority of Chileans are Catholics (80%) and few are

Protestants (11%). In Chile the family framework plays a central role. It is common to classify

people based on their income and religion. Religion also played a key role in Chilean politics.

These factors are similar to that of India. Though these factors are a formidable advantage for us

there is a language problem. Even though literacy level in Chile is at 96%, only 8% of graduates

speak English.

Economy of Chile: Chile is being considered as one of the most stable economies in the world.

GDP growth was 1.5% in 2009 and 5.2% in 2010; the economy is expected to grow around 6% in

2011. Unemployment averaged at 7% in 2010. Wages have risen faster than inflation as a result

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of higher productivity, boosting national living standards. Since 2006, the percentage of Chileans

below the poverty level had been between 13% and 14%. Chileans have the highest per capita

disposable income in Latin America ($6864) in 2010. They also spend an average 7% of their

disposable income in Hotel and Tourism. Chile's economic policies have created significant

opportunities for foreign investors to participate in the country's steady economic growth. Foreign

investors receive treatment similar to Chilean nationals in nearly all sectors (Except in areas of

mining and agriculture). In 2007, inflation inched toward 8%--the first time inflation had

exceeded 5% since 1998. In 2008, inflation increased further, hitting a high of 9.9% in October

2008, before moving lower again at the end of the year. In 2009 and 2010, inflation in Chile

decreased to between 2% and 2.7% [2].

Political System: Chile has a stable democratic system. Chile changed from an authoritarian

political system to a more of Democratic system in early 1990s [3]. Chile is now run by an

elected president. The rules governing transfer of legislative and executive powers are clearly

established in the constitution, are accepted by all political parties. Constitutional reforms passed

in 2005, end the right of each branch of the armed forces to express political opinions to the

authorities through the National Security Council and hence armed forces intervention in

governance is eliminated. Labour organisations have been strengthened as a result of labour

reforms, but there is little risk of violent demonstrations. International relations are peaceful,

although relations with neighbouring Bolivia, Peru and Argentina have been strained at times in

recent years. The country also has very low corruption. According to corruption perception index,

Chile was ranked 25th out of 178 countries as the least corrupt nation [3]. An open climate

ensuring competition among departments and performance based incentives were the reason for

less corruption.

Legal Framework for FDI: The foreign investors are protected by a foreign investment statute

(D.L.600). Under this statute, any foreign investor gets the right for the following: Right to

repatriate abroad the invested capital after one year, and profits derived there from at any time,

Right that no discrimination will be made by the Chilean Government or its agencies against the

foreign investor or the company in which the investment was made, Right that the capital

invested (calculated in its original non-Chilean currency equivalency) will not be taxed when the

assets purchased with the investment are sold or the Chilean business is liquidated, Right to

freeze all income taxes affecting the investment at a fixed rate of 42% for a period of 10 years

from the operations’ start-up, Right to freeze custom duties and value added taxes affecting the

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import of the machinery and equipment (with certain limitations) needed to implement the

relevant project.

The procedure for foreign Investment in Chile is simplified. The investor should send an

application to Foreign Investment Committee (FIC). As soon as an investment application has

been filed with the FIC, the investor may carry out the investment in Chile. In the event that the

application is approved, the corresponding investment shall be governed by D.L. 600 and entitled

to the rights granted therein. In the event that the application is rejected, or the investor withdraws

it, the investment already made can be, repatriated within a term of 90 days. The legal costs other

procedures involved in making a FDI in Chile is much less when compared to that of other

countries. In Chile, the entire investment process will be completed within 22 days and at 4 times

less cheaply than other regional countries.

The overall income tax burden affecting the income of an enterprise owned by a foreign

entity will amount to 17% payable by the enterprise plus 35% payable by the foreign owner, less

17% of distributed amounts, which is accepted as a credit against the 35%. But he has the right to

exercise an option for fixing the tax at 42% for initial 10 years. In line with Chile’s policy to

minimize tax barriers to foreign investors, the reform means that foreign investors do not have to

pay Chilean taxes on earnings which are obtained from investments in other countries.

TRADE AGREEMENTS OTHER COUNTRIES

Chilean governments have actively pursued trade-liberalizing agreements. During the 1990s,

Chile signed free trade agreements (FTA) with Canada, Mexico, and Central America. Chile also

concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association

agreement with MERCOSUR—Argentina, Brazil, Paraguay, and Uruguay—went into effect in

October 1996. Chile completed free trade agreements in 2002 with the European Union and

South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC)

organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed

trade agreements in recent years with New Zealand, Singapore, Brunei, India, China, and most

recently Japan. In 2007, Chile held trade negotiations with Australia, Thailand, Malaysia, and

China. In 2008, Chile signed an FTA with Australia, and expanded agreement (covering trade in

services and investment) with China. The P4 (Chile, Singapore, New Zealand, and Brunei) also

plan to expand ties through adding a finance and investment chapter to the existing P4 agreement.

Chile's trade talks with Malaysia and Thailand are also scheduled to continue in 2011.

Based on the above facts, we can say that the environment for making a direct investment

in Chile is safer when compared with other countries. Hence, we chose to start business in the

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country by buying an existing Eco luxury hotel in Patagonia, Chile (Through a Direct

Investment). The prospective returns that we can get from the business, its potential and our

business strategy will be discussed hereafter.

SWOT ANALYSIS OF THE COMPANY

A SWOT analysis of our firm and environment in Chile is given below.

STRENGTHS

Diverse portfolio serving multiple

customer segments

Hotel already in operation,

recruitment expenses can be reduced

to a large extent.

Prior experience in hospitality sector

WEAKNESS

Lack of global presence.

Lack of well established brand name

in Hotel industry.

THREATS

Growing recession which affects

global economy.

Presence of global competitors like

Marriott, Sheraton and also from

local players.

The place near the border of Chile &

Argentina. The border issues are a

special concern.

English Speaking Population is less.

OPPORTUNITIES

High per capita disposable income.

High growth potential in tourism

industry (20% in the 2009-10).

The country (Chile) has highly stable

& supportive political conditions.

Increase in flow of international

tourists every year.

MARKET ANALYSIS

Market Potential: The total market for tourism in Chile was 9522.2 billion CLP (Chilean Pesos).

It is expected to grow to 14761 billion CLP in 2019. The Patagonia region alone contributes to

around 30% of this income. The international tourists mainly come from neighbouring countries

like Argentina, Brazil, United States, Mexico and from some European countries. The domestic

tourists come from all over Chile to Patagonia.

Competition: There is a stiff competition for Hotels in Patagonia. There are a number of

domestic players with a few international players. The facilities in the hotels vary based on the

price they charge. A few basic amenities are common to all hotels and they include restaurants,

honeymoon suites, Safari services etc. But few players are providing additional facilities like Golf

courses, Spa, etc. Some Famous luxury hotels in Patagonia are Cabo de hornos, Diego de

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almagro, Finis terrae, Isla rey jorge, Jose Nogueira, Los Navegantes. The international Players

include Marriot and Sheraton.

Price: The price of hotels range from $100 to $1400 per day depending on the facilities offered at

the hotels. We have planned to price the room at $549 for normal rooms and $999 for Suites. The

major facilities provided at the hotel are wi-fi access, fitness and spa, laundry/ dry cleaning,

casino, swimming pool, artificial beach, night clubs and meditation centre. The discussion of

income and expenses are shown in the P&L account in the appendix.

We have planned to provide low price compared to other hotels in the category and our customers

will be tourists who wish to spend vacation together as a family.

Our Mission: To strive for delighting our guests every time by creating engaging experiences

straight from our hearts.

INVESTMENT PLAN

We are provided with an initial capital of 50 Crores (Equivalent to 50 billion Chilean pesos or

11Mn US$). This investment is considered sufficient for starting the business in Chile. We are

purchasing a running hotel in Patagonia for $4,000,000. We have planned to invest additional

$2,000,000 in renovation work, $1,000,000 is reserved for the relocation expenses of the four

executives and remaining fund will be used as working capital. From the third year onwards, we

are making profit and we do not need to pay taxes for five years as an incentive from the Chilean

government.

The details of expenses and investment are provided in the appendix.

MARKETING STRATEGY

Segment:- We are focusing on the tourists from Chile and neighbouring countries like

Mexico, Argentina, Canada etc

Target:- Our target customers will be affluent young families without or with kids and

singles who come from Chile as well as neighbouring countries. Our customers will be

adventure seekers, outdoor lovers and skiers.

Positioning:- We want to position ourselves as the hotel providing the value for money.

We want to communicate a message that ―get immersed in Patagonia its not just about

visiting‖

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ADVERTISING & PROMOTION

We need to invest heavily in promotion activity for the initial two years. We have kept a separate

budget of $4 million during our first year of operation.

Television –The advertisement would be given in major news channel and national entertainment

channel. The advertisement will be broadcasted between 7 to 9 PM during weekdays and 7 – 11

PM during weekends.

Print Media – The advertisement would be given in national newspaper and magazine. The

national newspaper which we are be targeting is the Santiago times and the national magazine is

Chile Pepper.

Film Ads - The advertisement made can also be shown in the movie theatres as filler.

Radio Channels – Radio Bio-Bio is having a broad coverage in Chile. We would be putting an

advertisement in Radio Bio-Bio.

In the major cities of Chile, billboards would be used to spread the awareness among the

population. We are also keeping a separate budget for the sponsoring the major television show.

Discounts will be provided during the festival season like Columbus Day and Christmas.

Reward for the regular customer – The regular customer will be given a card in which they can

collect the reward points and can redeem it later.

We are looking for a tie-up with some of the major travel agents. The commission based travel

agent service will be taken.

HUMAN RESOURCE PLANNING

According to the recommendations of the World Tourist Organization, the optimum number of

staff per 10 rooms in a 3 star hotel is 8 persons, in a 4-star hotel it is 12 persons and in a 5-star

hotel, 20 persons. The hotel which we are buying is having about 130 employees including

housekeeping staff. For our continuous and unhindered operation, we need about 50 employees.

We will be hiring the professionals from the market with an attractive offer, which would be

beneficial for both the employees and our company. We have contacted with the Chile branch of

Les Roches International School of Hotel Management, which ranks within the top three hotel

management institutes in the world, for fresh graduates.

For the first year of operation, part of workers will be hired on the temporary basis. However, the

management team will be hired on the full time basis. All the employees and the workers will be

given a proper training as per the culture of our hotel. They will also be given motivational

training.

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The members of the management team from India on deputation will be given a relocation

expenses. An additional $1 million is assigned for relocation of the four employees.

CONTINGENCY PLANS:

If the hotel industry by any cause does not work out properly, we have these few other options

which can be further worked upon:

1. Give off the place as some villas (Holiday Homes) by structuring them accordingly.

2. Artificial tourist attractions like Theme parks, Water Park, Ski Grounds, etc.

3. Yoga Ashram.

CONCLUSION

Chile is a growing economy with high middle class population. The tendency to spend on tourism

and other recreational activities are increasing every year. Moreover the business environment in

Chile is more investor friendly and EIU (Economic Intelligence Unit, a part of ―The Economist‖)

ranked Chile as 20th most favourable nation to start a Business. Hence we firmly believe that

expanding our Hotel Business in Chile will be more profitable. We also hope to expand our

business to other countries and establish our hotels all over the world.

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BIBLIOGRAPHY

1. A world travel and tourism council report on "Travel & Tourism Economic Impact"

2. "Chile - A land of opportunities 2011" a report by Foreign investment committee,

Goverment of Chile

3. Doing business in chile,2006 by CariolaDíez Pérez-Cotapos&Cía Ltda.

4. Legal environment for investments in chile by Figueroa & Valenzuela, Abogados, 2008.

5. "Doing Business in Chile 2011" a report by The World Bank and the International

Finance Corporation.

6. Risk and foreign direct investment in emerging economies: lessons from the former soviet

union by James P. LewandowskiDepartment of Geography and Planning, West Chester

University.

7. http://www.nationsonline.org/oneworld/chile.htmOne world Nation Retrieved on 22 Aug

2011

8. http://www.bcentral.cl/eng/publications/statistics/integrated/pdf/mi_quarterIV2010.pdf

Microeconomic indicators Central Bank of Chile accessed on 22 Aug. 11

9. http://en.wikipedia.org/wiki/United_States_Department_of_State US Department of State

accessed on 22 Aug 2011.

10. http://www.btinternet.com/~vrota/hotelstaffing.htm Hotel Staffing accessed on 22 Aug

2011.

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APPENDIX

Table 1: Profit and Loss Statement

Year I Year II Year III

Revenue from Deluxe Room 80,15,400 1,00,19,250 1,20,23,100

Revenue from Suite 36,46,350 54,69,525 72,92,700

Revenue from Others 50,00,000 60,00,000 65,00,000

Total sales Revenue 1,66,61,750 2,14,88,775 2,58,15,800

Cost of Sale of Deluxe Room 24,04,620 30,05,775 36,06,930

Cost of Sale of Suite 10,93,905 16,40,858 21,87,810

Cost of sale of others 25,00,000 30,00,000 35,00,000

Total Cost of Sale 59,98,525 76,46,633 92,94,740

Gross Margin 1,06,63,225 1,38,42,143 1,65,21,060

Operating Expenses

Depreciation 3,00,000 3,00,000 3,00,000

Sales Expenses: Commission 16,66,175 21,48,878 25,81,580

Sales Expenses: Salary 13,32,940 15,04,214 15,48,948

Promotion 41,65,438 47,27,531 54,21,318

Maintenance Expenses 33,32,350 42,97,755 51,63,160

General and Admin Expenses

Management Salaries 8,33,088 8,59,551 9,03,553

Overhead Costs 3,33,235 4,29,776 5,16,316

Total Expenses 1,19,63,225 1,42,67,704 1,64,34,875

Profit Before Tax -13,00,000 -4,25,561 86,185

Tax @ 42 % 0 0 0

Profit After tax -13,00,000 -4,25,561 86,185

Table 2: Economic and Current Account of Chile

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Fig 1: Stock Market in Chile