National Report–“Hold rate.” How many times have you heard that advice?
As often as industry prognosticators preach that lowering daily room rates can only be detrimental, one would think owners and operators would avoid dropping rates. But according to Smith Travel Research, average daily rate across the U.S. was down nearly $10 from July 2008 ($107.90) to July 2009 ($98.41), meaning some hotels aren’t heeding that advice.
“It’s certainly not because folks in the industry are foolish. They’re trying to make some complex tradeoffs,” said Cathy Enz, professor of strategy at the Cornell University School of Hotel Administration.
So, who’s discounting their rates and why?
Luxury
It’s possible that luxury properties—which are competing for business as travelers trade down and lavish meetings are frowned upon—are skewing the overall data. In July, ADR at U.S. luxury properties was $248, down 15.9 percent from the beginning of this year, according to STR.
“The average figure could be skewed if the higher-end properties are drastically reducing their rates,” said Justin Taylor May, corporate revenue manager for Charlestowne Hotels, a management company operating a mix of 23 branded and independent properties.
Can luxury hotel operators really be blamed? Occupancy at U.S. luxury properties fell to 60.1 percent in July, down nearly 15 percent from January, according to STR. If luxury operators can get guests in their hotels, they hope to get some non-room ancillary spend out of the deal, specifically for food and beverage.
Lalia Rach, divisional dean of NYU’s Preston Robert Tisch Center, said upscale hotels that are discounting also are seeing higher customer satisfaction scores.
“As the consumer, if I’m used to staying at a mid-priced property, and because of discounting I can stay at an upscale, am I going to be satisfied? Of course,” Rach said.
Limited value
Another adopter of the slashing strategy is the average midscale-without-F&B property in a tertiary market. Many of these cookie-cutter properties are too similar to the properties around the corner and, without much to differentiate themselves, are forced to beat the competitors’ rates.
“Many hotels that aren’t bringing much to the table competitively are forced to [cut rate],” Enz said. “The best of the best are maintaining rate and integrity because they are confident they have a value proposition. It is part of defining who they are.”
From a revenue manager’s standpoint, May said hotel operators should pay close attention to where competitors are priced to ensure rates aren’t too high or too low.
“Too high and the consumer will book another property,” May said. “Cutting rates can sometimes be the right answer; sometimes a lower rate can shift demand from one hotel to another, but lowering rates in and of itself doesn’t actually increase demand.”
Seasonal demand
That may be true, unless your hotel is in a hot resort destination, such as the Caribbean or even many cities in the Southern U.S. In these destination markets, it is apparent hoteliers must lower rates to get guests in the offseason, which also could contribute to falling ADR during summer months in the U.S.
“In Phoenix in July, everyone is messing with rate,” Enz said. “Not that they should, but the fact of the matter is there is very little demand.”
At Sunset Resorts, comprised of three all-inclusive resorts in Jamaica, guests can save up to 60 percent this fall in addition to special mid-week rates.
Sunset Resorts’ SVP of sales and marketing Michele Olivier said the Caribbean is a slightly different animal, but admitted to rate cutting.
“We have found that yes, this year, in order to remain competitive, we have had to discount,” Olivier said.
Promotions
At the end of the week, promotions—such as buy three nights, get one free—may bring in the same revenue as five discounted nights sold. The difference, Enz said, is that the customer comes away with a different perception, which is key. Promotions show the customer what the daily rate is, so when they come back, they know what rate to expect.
“You want to avoid signaling to the customer the product is not as valuable as what you have been driving in the past,” Enz said.
Expected revenue
Another arena to blame for industry-wide discounting: lenders. Financial institutions play a large role in how properties are operated, especially in today’s economy. To a bank, any revenue is better than zero revenue, even if it means a collective loss for the industry.
“People are cash-flow sensitive,” Enz said. “When you reduce rate, you can get some money to pay the bills. It’s better to have $40 to pay the bills than zero.”
Reality
The reality of today’s situation is lowering rates can increase occupancy by stealing some of the competitors’ guests. Hoteliers know it’s a lose-lose situation for the industry because the hotel down the street is losing revenue and, with drastically lower rates, so is the hotel discounting.
But with customers taking advantage of shrinking booking windows, the industry fighting a negative rhetoric and owners unable to pay the bills, the industry is backed against a wall.
“We’ve trained our customer to wait for last-minute deals. We’ve trained our customers to look for early-bird discounts. We try to peak when demand is high,” Olivier said. “There comes a point where we’ve got to try and level out rates.”
Comments
on: 09/23/2009 - 9:37 pm
Now that we have been presented a clear picture of the silly hotel operator foolishly lowering his prices to the demise of his enterprise while simultaneously tanking the industry - how about we take look at the REAL story?
The experts use an erroneous assumption about room rates being static. Our hotel industry has grown up. No longer do we employ legacy pricing strategies whereby a single "rack" rate determines our all of our other prices. Today we use dynamic pricing (price tier with demand) AND we also employ Best Avail Rate models set at different ranges for all the various channels.
Beyond dynamic pricing & BAR model aspects, there are two important factors at work. Each factor plays directly upon the ADR results that the experts are buzzing about. The first factor is the shift of our demand mix away from the commercial biz traveler during '09 - for years, the very foundation of our mid-week occ. For simplicity, assume that the 100-room Hotel Ivy enjoyed 70% occupancy in '08 and has just two sources of business: 1) commercial business traveler & 2) hotel consolidator. In '08, comm'l biz represented 75% with consolidator representing the remaining 25%. In this simplistic scenario, the price point for comm'l biz was always $129. For the consolidator, the price was consistently $69. Flash forward to '09 when Hotel Ivy experiences a crushing blow from the AIG effect & corporate austerity measures thus experiencing a steep demand decline from his most important customer! In desperation, the operator offers the consolidator rooms he would normally have held aside for his bread-n-butter comm'l traveler - and yes, mid-week at $69 in order to counter the loss of mid-week demand. While he gets a 10% increase in demand from the consolidator, he is still nowhere near catching up to '08 occ. Without dropping the price for either of the segment one penny, the natural result is an ADR decline of 5%. A change in business mix plays a big part in the ADR results.
Factor number two...The hotel chains/brands have not held their end of the bargain for being the most important distribution channel to its affiliated hotels. Instead, we find that Online Travel Agencies [OTAs] are once again asserting themselves into that role (an uncanny resemblance to what happened after 9-11). And the OTAs have been very smart going about it. First, they were set on making sure that the average Joe/Jane would find them first whenever they went searching on-line for accommodations. And then they got the chains to work with them to guarantee them inventory at rates that are below those that the operators working independently would ever have allowed them to have (what's that you say Mr. Franchisee - You don't like the rate and the commission terms we set for you...well then you don't get to play). Now armed with supply at the very best rates these OTAs are the ones doing all the advertising to the consumer while the chains sit idly by on the sideline complaining that they have no advert budgets to launch meaningful campaigns (how do you think the OTAs did it when they first started?...where are your priorities?). Instead, the chains have been trying to use their frequent guest programs to insulate them from the threat posed by this replacement channel. Guess what? Hotels.com just entered into the frequency club space (10th night free at any hotel you choose). Why does that matter? Well in the simplistic scenario of Hotel Ivy, simply replace the alternate demand segment of "consolidator" with OTA but add to this that the chains lowered the price point for them by $10 and you have a very good idea of why ADRs are falling.
It's not discounting, it's the shift in demand and the foolishness of the chains that is generating ADR declines.
Happy Hospitality,Greg MillerPM Hospitality Strategies, Inc.
on: 09/28/2009 - 3:12 am
Not planning to play the moderator here, I still think that both Jason and Greg have both important things to say.
On one side you have loads of independant hotels, many may not have much to differenciate them from the other property(ies) next door, so they entered the price war. I experienced it in Paris where my largest neighbour was down selling systematically; we all knew that their plan was to close for a long-due refurbishment in the near future, did the guests know about it?
Then you read Cornell's studies telling us to maintain rates at all cost, even if your neighbour is slashing rates.
Our Corporate Offices come next with even more pressure to reach budgeted targets (revenue and costs), ignoring the circomstances and therefore pushing us towards OTA's and maybe, cutting down on quality (supplies, services, maintenance).
Bankers might be on the way too. Do they understand that selling more whatever the rate means higher variable costs and lower (or no) margin? Which you will be accountable for with your next P&L.
And as you just start to figure out where you stand, Starwood publicly and blatantly announces severe rate cuts (up to 50%?), and soon after, the possibility of downscaling among their luxury hotel portfolio. Not to mention ACCOR signing up with Gullivers Travel Associates (the "King of Discounts" worldwide, the hypermarket of travel) just as the recession was in full motion; I bet that many ACCOR properties now see their BAR being undercut by GTA all over the place ("Octopuss" is the perfect name for their market killer).
Yes, we've trained our customers to shift to internet bookings. We did so well that even business travellers have started to do just the same. If they don't, they compare with their yearly preferred rate and ask for an adjustment.
Yes, our business mix has changed with this global crisis. Will it return to our well know "comfort zone", what we knew and put into nice marketing models for years?
So where are we taking it from there? Shall we wait and see? Shall we keep on fighting one another while customers watch and grab whatever silly offers come out of it?
Can't we talk, exchange, unite? Why large property Directors would not educate small property Operators? Would "experts" exchange their ideas and open up to other's?
Without being accused of price fixing, could we work side by side? I am a fool to think that it would stabilize the market, that we would all probably look more credible in the eyes of our customers? We might even focus back onto the core of our business: service excellence to our guests.
Let sharks (finance, business consultants ...) fight among themselves. We're far better at looking after people.