Charles Darwin’s ghost surely haunts the hospitality industry and its current calamity – the case for natural selection could not be more omnipresent. With conditions seemingly worsening every month and long-term outlook grim, many investments and operations will eventually cease to exist and only the astute and well placed will survive. It’s that shrinking feeling.
From a revenue management perspective, the following are some U.S. statistics, issues and conditions we’ve been monitoring in order to maximize and better understand the situation.
RevPAR Turmoil
According to the most recent PKF Hotel Horizons report of March 2009 the U.S. Lodging industry is facing severe setbacks in 2009, so you’re not alone. With all 50 major U.S. markets reported to have YOY RevPAR declines, with a total average of -13.7% by years end. In seemingly endless adjusted forecasts, the number is continuing to get worse with each passing month, just late last year Smith Travel Research (STR) was forecasting only a -5.9% RevPAR decrease in their US Lodging Industry Overview. For January 2009 the STR RevPAR decline was -15.7% and will be close if not worse for February. In the two most recent weeks March 1st and March 8th STR reported -23% and -25.1% RevPAR declines respectively, severe indeed. Initially general opinion was occupancy was going to cause the majority of declines; however with most markets current pricing wars, ADR has dramatically worsened – amplifying losses in profits. The forecasted loss of -6.4% in ADR is the worst since 1932 for PKF compiled data.
Supply and Demand Factor
As most industry followers are aware of, there had been considerable buildup in recent years with substantial new supply in the pipeline or underway. This will undoubtedly have a compounding effect on the RevPAR variances in 2009, fortunately current statistics point to notable decreases in build plans. In the PKF Hotel Horizons report supply is forecasted to increase +2.6% while demand drops -5.4% in 2009.
In one of the markets I’ve worked in, there had been a great example of new supply and aggressive pricing. An arguably wonderful five star product hit the market with a substantial premium; by the end of 2008 it had implemented a flat $99 rate through April 2009 (more than a 60% discount from their initial pricing!). In a moments time they went from zero-to-hero and started to swallow up production from most meaningful channels, it caused plenty panic. We all know that’s not sustainable or a coherent strategy to implement for long-term value, but it’s undoubtedly reflective of situations in which many managers are facing.
I recently compiled 2009 year-to-date statistics of over 5,500 rooms on the west coast market; unconstrained individual traveler demand in aggregate is down -27.52% (year-over-year) while rooms sold is down -20.07%, the aggressive rates do not provide a substantial enough “pop” in bookings or incremental capture. From what I’ve studied the negative variances are trending up since Q3 2008 almost in a negative linear fashion, however leveling off as of late. I don’t expect to see the variances sustain shrinkage until we arrive full-circle with adverse market conditions, most forecasts show incremental growths heading out of Q1, but there is undoubtedly a summer freeze in bookings. If you are not currently monitoring leisure demand in the summer, I highly recommend implementing strategies in order to build base. The summers of 2008 and 2007 were great for the West Coast, with international travel burgeoning and a whirlwind of domestic demand; the variances could be dramatic if the current conditions persist.
According to the Office of Travel and Tourism Industries arrivals to the U.S. began to plunge after August 2008. For contrast purposes, arrivals were up +15.4% in Q1 and by Q4 they were down -6.1%. The steady decline in international arrivals has been critical, as they typically book further out advance and at premium rates (with the current cutback on U.S. overseas flights I see it only worsening). Corporate individual travel and corporate group business has been the undoing mechanism for any hotel profitability growth scenarios. As with the airline industry, premium business travel is undergoing structural changes. In a current report from Amadeus, a polling of executive travelers showed 47% plan to take fewer trips over the next 12 months because of the economic downturn. Also they expect travelers to take fewer and shorter business trips while downgrading hotels. Buyers more than ever, even corporate are bargain hunting – like it or not. The booking window is certainly shrinking for business travel; travel agents are starting to see more bookings closer to travel dates. Corporations are finding new ways to avoid travel and keep meetings in house with advanced technology. All this leads to market supply scurrying for diminishing and cunning demand.
Many hotels raison d’être has been their corporate stalwart next door. For hotels that have depended too long on their production are nonetheless suffering mightily right now. In most cases the competitors have already locked in the residual demand of negotiated business in the market, so these hotels are left with little to fill the void. Intense renegotiations and preferred pricing wars have been underway for several months. No one has to search very far to read about some company drastically reducing travel plans, let alone slashing the workforce number. Furthermore with government voices publicly reprimanding corporate spending habits with all that’s gone on, I believe business leader’s confidence on travel spending or recreation has taken a major blow. Just ask Las Vegas.
U.S. leisure travel has less problems and the demand can be captured better with incentives, discounts, or promotions. It has not been very consistent as of late, but I can wager weekends are sustaining better than weekdays at this time. Not to say the average American doesn’t have issues: according to the U.S. Bureau of Labor Statistics the national jobless rate rose to 8.1 (12.5 million) in February, the highest in more than a quarter century, and the economy has lost 4.4 million jobs since the recession began in December 2007, a 16 month downward trend. The unemployment has been more pronounced on the West Coast (due to real-estate), for instance in California it’s at 10.5%. The official number doesn’t take into account those who are part-time looking for full time or those who have stopped looking, that more than doubles the total to 26.7 million unhappy, fearful, would-be workers. Home foreclosures are way up at close to +20% or 1 out of every 446 homes in America. In California that number is 1 in every 173 homes. Numbers from the Commerce Department show shopping by tourists fell -11.6%, lodging -10% and air transportation by -13% in the fourth quarter. Typically very resilient categories, some numbers are heading into unforeseen territory. Throw on the fire that The Conference Board Consumer Confidence Index reached an all-time low in February at 25, the index began in 1967.
Any recovery will be far from “V” shaped in America, and should resemble more of a gradual crawl. According to PKF, demand is forecasted to start having sustained growth in Q3 2010 and no sustained growth in RevPAR until Q1 2011.
Pricing
Lately there has been endless discussion and controversy regarding pricing, to drop or not to drop rate? On one hand you have long-term value and pricing power, on the other hand your competitor just dropped rate by 20% and the market is trending down ten percent. For me it’s not a simple pill to swallow either, I still believe the market is the dictator, as in basic economics. In America regarding the current credit boom/crash one has to wonder if the prices of the last couple years were even sustained market reality. Is the market value of the rates you’re offering even making sense, is it because they resemble close to what 2007 or 2008 was? Business and individuals are suffering; their spending habits and patterns will not be the same in the foreseeable future. Doesn’t it make sense to offer something that works, even if it is dropping rate?
Yet sustained pricing and perceived value are very powerful things, if you are to drop rate how long will it take you to get back? As an average revenue manager’s plug 2 to 7% growth every year across the board. If your public pricing is cut 10-20%, renegotiations with preferred accounts go down 5 to 10%, and discounts are deep at 20-30%, its simple math to notice it will be years to regain the original price. Let alone the eye popping year-over-year variances when hiking rates back up will plummet occupancy and erode customer satisfaction.
My trick to measure this is with capture ratio of demand. To measure if price points are working I monitor with my current demand the proportion of bookings to the demand and bookings of different period. Depending on hotel needs – flat is ok, I like to see some growth with excess availability, but is negative acceptable? NO. What’s the point of taking fewer rooms sold as a proportion of demand when your hotel is already doing worse? I find it a good way to at least say the price point is marketable.
As noted earlier leisure demand is still hanging in there on some levels, and sometimes even spiked on high demand periods or weekends in general. Layering rates and discounts by length of stay controls is a great way to flatten demand and generate revenue on other days of the week. The same can be applied on any given day while keeping your public pricing and perceived value intact. Caché rates are the current mantra, I suggest don’t be afraid to be aggressive with group rates, promotions, and discount channel availability in order to build base, all while leaving your premium rates unscathed and prime for the return. Dropping rate for premium business travelers is not going to generate substantial increments in production. However, I am advising to renegotiate and court key preferred accounts in order to maintain relationships and safeguard what’s still left. Finally, I believe the leisure consumer is more and more savvy, internet bookings galore, they are clearly aware of all the distressed inventory on the OTA’s, if you’re not pursuing these channels now would be the time.
