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magazines.
The company spent heavily on direct promotion, and used the Barrier Reef resort as their
main sales promotional technique. Each day at a Freemantle hotel entitled the customer to
'stay points'. When the customer had enough 'stay points' they were entitled to a free stay
at the Barrier Reef hotel. The more points, the longer the stay. The business community
were enthusiastic about this idea as it enabled them to get free weekends or longer
holidays to be used with their partner or family.
Though the company had seen rapid sales progress over the past 5 years, the costs of
expansion had been considerable. Each of the hotels, with the exception of the Barrier
Reef resort hotel, had been developed as a greenfield site, often in conjunction with a
retail developer. This had meant that the working capital requirements of the hotel chain
had become more and more severe. The decision cycle over which Freemantle operated
was shorter than the competition as the directors had studied rapid building techniques in
the United States. The two recent hotel additions had been built and completed within 14
months, 6 months more quickly than the normal construction period. They had found that,
in Australia, they could achieve occupancy levels of 40 per cent in the first year of full
operation, rising to 60 per cent in the second, and reaching the normal Freemantle level of
occupancy in the middle of the third year. In common with all other hotel groups,
Freemantle found that very few of the costs in the hotel operation were variable, and that
capacity utilisation was essential to achieve adequate returns on capital (Table 12B).
Table 12B. Freemantle progress over the last 5 years with year 5 most recent, all sales
and costs in $ 000.
1
2
3
4
5
Rooms
1000
1400
1800
2200
2400
Revenue
20531
28743
36956
50107
54533
Costs of sales
17112
22642
29653
40000
41000
Profit
3319
6101
7303
10107
13533
(Interest)
1750
2300
2800
4500
4800
Net profit
1569
3801
4503
6607
8733
Dividends
300
400
550
800
1050
The company had managed to achieve higher levels of gross margin compared with the
competition, because of the customer mix and the lower cost structure (Table 12C).
Freemantle achieved higher levels of return on capital employed than the competition
because of greater control over cost centres, and the decision to provide a limited
restaurant service. The company had managed to control both its debtors and creditors
during the period of rapid expansion.
The rapid growth of the group, had put substantial strains on the balance sheet as the
company had required continual cash injections for expansion. Initially this had been
provided by a venture capital company Brolga Finance which had taken part in the set up
finance and the mezzanine re-financing. They had sold their stake as the company grew
away from Western Australia. The 5 year balance sheet movements are in Table 12D.
During the last years, the company had issued a convertible debenture stock instead of
more paper as the market had received five share placings over the previous 4 years. The
shareholders were now mainly institutions, such as banks and insurance companies. Over
the past 3 years, more and more foreign investors had bought stock in the company, as
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