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San Diego Hotel Occupancy, Room Rates Up, But Not
 At Same Pace As Competition; Market Share
 Loss a Concern

By Jennifer Davies, The San Diego Union-Tribune
Knight Ridder/Tribune Business News

Dec. 12, 2004 - Hotel room rates are up. So is hotel occupancy, which is projected to be almost 73 percent for 2004. Petco Park and the bustling Gaslamp Quarter, with its hip, upscale hotels and restaurants, are drawing more visitors. After the post-Sept. 11 slump, the national travel business is also making a comeback, meaning more people are looking for places to visit -- for business and pleasure. So far this year, passenger traffic at San Diego International Airport is up 7.3 percent from 2003.

All of this translates into good news for San Diego and its tourism and lodging industries.

"Not only is San Diego the strongest hotel market in Southern California, it is currently one of the strongest hotel markets in the country," said a recent report by PFK Consulting, a hospitality industry research firm. No doubt about it, San Diego's tourism industry is to be envied, said Jeff Lugosi, an analyst with PFK.

"Everyone likes to whine about something," he said. "But San Diego doesn't have a lot to whine about, really."

Still, for San Diego's tourism industry officials, every silver lining has a cloud. While the area has continued to do well, they say, there are signs of darker days forming on the horizon.

They point to the city's lack of marketing resources, limited hotel growth, room rates that may have climbed too high, as well as increased competition from cities such as San Francisco, Anaheim and Phoenix, both for convention business and leisure travelers.

The upshot: While San Diego has performed well in the past, those glory days won't necessarily last forever.

"We have been exceptionally lucky, as the destination has continued to perform consistently," said Fred Sainz, vice president for public affairs at the Convention Center Corp. "Still, there are several challenges that are catching up with us. Without addressing them, we could wind up with a situation in a few years where we lose market share."

Their concerns are coming at a time when the city of San Diego has reduced its funding for tourism promotion, with hints from some City Council members that there might be further cuts to come. With the city facing a dire fiscal crisis and questions being raised about the Convention and Visitors Bureau's spending practices, the bureau's budget was slashed by more than 20 percent. The organization, known as ConVis, also was stripped of responsibility for marketing the San Diego Convention Center.

The cuts mean that San Diego has slipped from having the 11th-largest tourism marketing budget in North America to the 15th, moving behind such cities as San Antonio and Montreal.

Sainz and others contend that while local tourism numbers continue to climb, they may not be matching growth in other cities. From 2003 to 2004, for instance, San Diego had the lowest percentage growth in average occupancy among the cities it directly competes against, including San Francisco, Anaheim, Los Angeles, Orlando and Phoenix. Whereas San Francisco saw a 9.5 percent increase in that time period and Los Angeles had an 8 percent increase in average occupancy, San Diego's average occupancy rose only 3.8 percent.

San Diego also saw its revenue per available room climb at a slower pace than other markets. San Francisco and Phoenix had a 10.4 percent jump in revenue per available room from 2003 to 2004. San Diego's increase was 5.4 percent.

"My assumption is that we are losing market share," said Robert Rauch, director of San Diego State University's Center for Hospitality & Tourism Research. "But I'm not sure. It's still a guess." Rauch is working with ConVis on a larger study to see how the region stacks up against its competition.

Lelia Rach, dean of the New York University's Tisch Center for Hospitality, Tourism and Sports Management, sees no ambiguity. "San Diego will lose market share," she said. "I don't think you have to use 'possibly.' It's just far too competitive out there." Kerri Kapich, ConVis' vice president of marketing, said the preliminary results show that San Diego is indeed losing market share and that it is having an economic impact.

"Our growth is starting to slow down," she said. "We are starting to fall behind Los Angeles, San Francisco, Anaheim and Phoenix." Kapich declined to provide specific figures, saying the study was still in progress, but she did say that the economic impact was "in the millions and it will surprise people, I believe."

Diane DeRose, vice president of marketing for San Francisco's Convention and Visitors Bureau, said marketing is key for any destination. She pointed to Las Vegas, probably the most well-known of tourist destinations, and how it spends huge amounts of money on marketing campaigns, such as its recent "What happens here, stays here" advertisements.

San Francisco has begun its own push to draw visitors from Los Angeles and Southern California with a "Not in L.A." campaign, which features hidden San Francisco landmarks.

"There's a lot of competition out there, and it's critical for San Francisco and for San Diego to stay on top of minds," DeRose said. Reint Reinders, who heads ConVis, agreed that San Diego has been hurt by funding cuts. He pointed to San Antonio, which is a smaller city with fewer hotel rooms but has a larger marketing budget. "Our resources have dwindled," Reinders said. "This is not a good sign of where we are headed."

For an example of what could happen to San Diego, NYU's Rach pointed to Colorado's tourism business. In the early 1990s, the state discontinued a tourism tax, and between 1994 and 1999 spent no money on marketing. As a result, Colorado lost market share, costing the state $2.4 billion in revenue and $134 million in taxes, an editorial in The Denver Post contended. "They are now just crawling their way back," Rach said of Colorado's tourism business.

But it is not only in leisure tourism where San Diego may have a hard time competing. Sainz said the area faces increased competition from other cities building larger meeting facilities as well as providing higher subsidies to lure more lucrative conventions.

According to the San Diego Convention Center Corp., its national competitors will have doubled their exhibit space by 2007. In addition, convention centers in competitive West Coast cities will be more than 85 percent larger than they were in 2000.

Also, the San Diego Convention Center said it receives a lower subsidy than competing centers, including Anaheim and Phoenix. While those areas are able to offer large conventions their facilities rent-free, San Diego has a limited ability to match those kind of offers, Sainz said. Other cities look at offering such price breaks as loss leaders, attracting large groups that will spend money at hotels, restaurants and shops. "A lot of people in civic circles think it will come down to the fact that we are San Diego and that we have great weather," he said. "But in the most competitive convention market we have ever seen, weather isn't going to win the day anymore."

In other ways, San Diego may be a victim of its own success. The rise in hotel room rates, while good for local operators, may begin to scare away visitors. San Diego, with an average daily rate projected to be about $140 for 2004, is one of the most expensive hotel markets in the country. Still, despite all the potential pitfalls, most San Diego tourism officials acknowledge that the area has some basic strengths that can't be ignored. Or as Reinders puts it, "At the end of the day, we are still in San Diego, and that is a great starting point."

-----To see more of The San Diego Union-Tribune, or to subscribe to the newspaper, go to http://www.uniontrib.com.

(c) 2004, The San Diego Union-Tribune. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

 
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