by: David J. Sangree, MAI, CPA, ISHC and Joseph Pierce, December
What a difference a year makes. As a nation we find ourselves with rising
unemployment, a declining housing market, and tight liquidity markets.
As the financial crisis has become widespread, the hospitality industry
has been similarly impacted with declining occupancy levels and slower
or negative ADR growth. This article discusses 10 proactive strategies
for hoteliers to adapt to the economic downturn and try to improve profitability
in their hotels or resorts.
Occupancy and ADR Performance: Occupancy percentages have shown declines
in the months of September and October 2008 in all segments of the hospitality
industry and across all regions of the country. The following chart shows
the year to date lodging performance through October 2008 as presented
by Smith Travel Research.
Although occupancy has declined through October year to date across
all segments of the industry and all locations, ADR has increased. However,
this trend has eroded in the months of September and October 2008 as occupancy
declined sharply, dragging down the ADR of many segments. All segments
have shown large declines in occupancy during the past two months, with
the luxury segment and resort locations showing the sharpest declines.
We project that occupancy will decline nationwide for the third straight
year in 2009 particularly in the first half of the year. We project that
ADR will show only limited growth on a nationwide overall basis while it
will show declines in the luxury and resort segments in 2009.
THE ADAPTIVE HOTELIER
Economic downturns require introspection but not despair. As hoteliers,
we are always on the lookout for the best practices, the maximization of
resources, and the highest return on our valued assets. In the harsh light
of an economic slowdown we need to revisit our operations and our relationships
so as to continue providing value to our guest while defending who we are.
Not all adaptations require cost cutting or downsizing. Although these
are valuable tools, hoteliers do not want to jeopardize a hard earned reputation
with loyal customers, lose a property’s identity, or fail to deliver on
the promises of a brand. Properties need to continually refine the product
offering to match guest expectations, a concept that is even more poignant
in tough economic times. We have identified a number of concepts which
can aid in the successful navigation of these difficult times.
1. Revenue Management: As hotel managers we are charged
with the responsibility of increasing not only occupancy but also total
revenue of our properties. Applying systematic processes to the decision
making effort will maximize the endeavor. The budget process is a valuable
tool, but operating based on budget expectations in a volatile environment
risks a gap with actual results that may yield unrealistic expectations.
The use of forecasting tools and proper control of availability are invaluable
to the overall health of the property. Understanding the value of distribution
channel management and proper pricing while assessing the competitive position
of the property within the market is crucial.
2. Fixed vs. Variable Expenses: When revenues decline, expenses
which were originally thought of as fixed may become variable, particularly
for underperforming properties. The evaluation and streamlining of operations
should be an ongoing function of hotel management. As markets evolve properties
need to adapt and provide the services which meet guest expectations while
reducing or eliminating services which no longer meet guest needs.
3. Rate Strategy: Previous economic downturns have taught us
that reducing rate in the face of occupancy decline does not attract more
demand. The strategic reduction of rate within specific market segments
may be necessary to maintain a competitive position, but such decisions
must be weighed against long term strategies. The ability to regain from
the discount price in the future can be a difficult proposition. Additionally,
indiscriminate rate reductions may be perceived as a reduction in value,
harming a hard earned reputation.
4. Associates: Employees can add extraordinary value to a hotel.
Inadequate orientation, poor supervision, minimal recognition programs,
and poor training describe a formula for the diminished value of a hotel.
The most impactful costs on a hotel’s profit and loss statement are the
costs associated with turnover. Screening and orientation help ensure that
the hotel is hiring compatible individuals. Recognition programs (beyond
employee of the month) provide associates with the sense of belonging and
appreciation. Keeping associates informed of economic challenges is useful,
particularly when asking them to cut back on hours or limit salary increases.
Employee feedback from associate opinion surveys can provide plans of action
by which the operation can improve and associates can be motivated.
5. Ancillary Services: Hotel management should continue to evaluate
the operation of ancillary services, big and small. Restaurant operations,
spas, indoor waterparks, and other operations need to be evaluated to determine
if they meet the needs and expectations of the property’s guests. Does
the property’s restaurant need to be open for breakfast or would a continental
breakfast satisfy the guest expectations? For indoor waterpark resorts,
the operation of the waterpark and spa may be curtailed on weekdays during
the school year as families with children will not be available to utilize
the facility. Independent operations may have more flexibility to implement
the reduction of services than branded properties, but in all instances
a careful evaluation of guest expectations must be undertaken to avoid
the appearance of value lost to loyal guests.
6. Real Estate Tax Assessments: The assessment of real estate
taxes can be based on a variety of methods. Organizations should be vigilant
in monitoring how their real estate tax assessments were determined. The
tax assessment may have been based on periods when rates and occupancy
were stronger, thus overstating the income of current operations. It is
also possible that the assessment of your hotel may be positioned at a
higher rate than that of comparable properties in the market. If it can
be determined that your real estate tax assessment is too high, consider
contesting the assessment. A successful contention of a real estate tax
assessment could provide tax relief for years into the future.
7. Brand Standards: Branded hotels generally outperform independent
properties in most markets. The strength of a brand in part is based on
the consistency and standards of the product regardless of marketplace.
Keeping the brand fresh and current in the mind of the public is the expectation
of each brand owner. With that expectation is a responsibility to keep
the property consistent with the standards of the brand. However, in challenging
economic times, complying with these standards can be difficult. If a new
bedding package is part of the brand standard and should be installed by
year-end, tough economic times may impose financial constraints that prohibit
the property from complying with the standard. Communication with the franchisor
with realistic timelines for the implementation of the brand standard may
very well yield a favorable response and keep a valuable relationship intact.
8. Renovations: The development of capital replacement budgets
and the setting aside of reserves for replacement are long term strategies
that keep a property fresh and competitive in the marketplace. If an organization
has reserves for replacement set aside, now may be a good time to implement
needed renovations which will allow the property to emerge stronger when
the economy improves. The accelerated price of energy earlier this year
suggests that renovations related to energy efficient technology would
yield future returns. If the property is experiencing reduced occupancy,
renovation disruptions will be minimized relative to the guest experience.
9. Customer Identification: An economic downturn is an opportune
time to revisit the 80/20 rule – 80% of your business comes from 20% of
your customers. Make sure your property provides the value these customers
expect and, where possible, exceeds that expectation. Unfortunately these
guests may be experiencing the same economic challenges your property is
experiencing. However, staying in touch and exceeding their expectations
when the opportunity presents itself will be rewarded when the guest is
traveling regularly again. Exceeding guest expectations is rarely unrewarded.
If some of the 20% need to suspend travel in these times, your relationship
with them has provided insight into the needs of an industry, association,
or group which can be transferred to other clients.
10. Community Relations: We define the hotel industry on a national
and sometimes global stage, but for most properties it is the local market
which provides the demand generators. Understanding the needs of businesses
in a property’s own back yard provides opportunity for long term relationships.
Local chambers of commerce and economic development groups can provide
information on the trends of local business, new business, and incentives
to attract businesses. Convention and Visitors Bureaus have a wealth of
information involving leisure-related demand, additions to supply within
the region, and groups targeted for the market. Such community involvements
allow hotel operators to be aware of opportunities which may arise or threats
which need to be addressed.
Effective hotel management is a task which requires constant vigilance
and adaptation to market conditions in good and bad times. The current
economic downturn will present challenging operational and marketing opportunities
for properties for some time. It is management’s responsibility to evaluate
their hotel and foster the changes and adjustments needed to exceed guests’
expectations while minimizing the potential loss in revenue and preserving
the bottom line for ownership.
J. Sangree, MAI, CPA, ISHC is President of Hotel & Leisure Advisors,
a national hospitality consulting firm. He performs appraisals, feasibility
studies, impact studies, and other consulting reports for hotels, resorts,
waterparks, golf courses, amusement parks, conference centers, and other
leisure properties. He has performed more than 1,000 hotel studies across
the United States and Canada. Since 1987, Mr. Sangree has provided consulting
services to banks, hotel companies, developers, management companies, and
other parties involved in the lodging sector throughout the United States,
Canada, and the Caribbean. He has spoken on various hospitality matters
at seminars throughout the United States and on Good Morning America and
CNBC. He has written numerous articles for, and is frequently quoted in
magazines, television, and newspapers covering the hospitality field. He
can be reached via telephone at 216-228-7000 ext. 20 or via e-mail at email@example.com.
Joseph Pierce is a Senior Associate with Hotel & Leisure Advisors.
He has been a hospitality consultant and appraiser since 2003. He has performed
appraisals, market feasibility studies, and impact studies in numerous
states. He has a wide range of experience in management and accounting
at a variety of Westin, Marriott, and independent hotels and resorts. He
can be reached via telephone at 216-228-7000 ext. 23 or via e-mail at firstname.lastname@example.org.