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True Concessions

Determining the Costs of Those Subversive Clauses in any Group Contract
Such as Comp Room Allocations and F&B Discounts


 
 
by Jil Larson, September 9, 2010

I’ve spent a good chunk of my career handling revenue management for big boxes, large convention properties in destination markets. These are some of the most challenging properties for revenue managers because they are entirely future-focused. This week’s results were largely determined by decisions made five to ten years ago, and many decisions made today won’t show results until 2017. This makes the convention properties unique within the hotel industry.

The complexity of moving parts can be overwhelming. I have yet to see a lead for the perfect group. You know the one. It has the exact rooms to space ratio, stay pattern, and F&B spend the hotel is seeking. Never happens. In fact, I have yet to see a group lead that meets just the first requirement. Forget the Holy Grail, find me a group that requires precisely the function space warranted for the amount of guest rooms and F&B provided and I’ll believe in miracles.

I’ll be writing a series of articles specific to the needs of convention properties, but today’s topic is concessions.

Concessions are the subversive clauses in any group contract that can quickly turn a great piece of business into a marginal opportunity, and during each economic downturn they tend to spread unchecked. This is problematic, since the business being booked today is likely to actualize smack dab in the middle of a peak time several years down the road. When evaluating a lead, it is absolutely necessary to factor the concessions into the true value of the group.

Regardless of market conditions, there are methods of ensuring concession decisions are being made soundly. Most are simply a matter of communication with the sales team, ensuring each sales manager is armed with the information necessary to negotiate concessions with the lowest impact to hotel profits. Many believe they are, but most are not.

Consider two concessions that are frequent tenants of group contract clauses, complimentary room allocations and F&B discounts.
Assigning one complimentary room for every 50 paid rooms was the norm ten years ago, but that figure has slid to as low as 1 per 20 in recent times. Sounds ominous, but how does a 1 per 20 comp allotment compare to a 20% discount in F&B? In an either/or scenario, would your property’s sales person make the right call?

For larger properties, it’s a valuable exercise to put together a concession calculator spelling out the common concessions used, their cost to the hotel, and their value to the client. Below is a list of items to consider:

1. Complimentary Room Allotment:  The cost of comp rooms to the hotel largely depends upon the dates being booked. Is the hotel likely to sell out and therefore potentially displace with the comp rooms? If so, the cost assigned to the comps needs to reflect the forecasted ADR of the rooms being displaced. If not, the cost for the comps is simply the cost per occupied room. There is obviously a significant difference. A general displacement ADR should be assigned for each future year, or even each season in the year, allowing an accurate cost calculation of the comp allotment. This is an important calculation because the value of the comps to the client is the same regardless of the hotel’s occupancy, whereas the cost to the hotel varies significantly. Another consideration when negotiating is whether the comps are assigned per night or cumulative. Per night is preferable to the hotel and generally results in a lower number of comps awarded.

2. Upgrades:  Here’s an underappreciated opportunity. Many premium room categories have the same cost per occupied room as the standard categories. In addition, every hotel has different premium rooms, allowing a point of difference to the competition. If the group is for dates when the market is unlikely to be compressed, upgrading into premium rooms has literally zero cost to the hotel, yet many sales teams are surprisingly reluctant to “give it away” and instead lean towards concessions that have associated costs. Itemize a list of every room category in the hotel, the rate premium each holds over the standard category, and the difference in cost per occupied room, if any. If suites consist of more than one unit, reflect the increased cost accordingly. Putting this into the concession calculator can assist the sales team in pumping up the concession value for the client with no cost to the property.

3. Meeting Room Rental:  Also known as pure profit, yet one of the first things to hit the pavement when concessions are being assigned. If room rental is waived immediately, it can’t be used when the negotiating gets down to brass tacks. If the RFP indicates bids won’t be accepted if rental is included, ensure that lost revenue is tacked on in other areas to compensate. Even a heavily discounted room rental can provide significant profit to the hotel vs waiving rental entirely.  As one function space manager once said, “just because it’s freesale doesn’t mean it’s free!”

4. F&B Discounts:  Deadly. Yet I frequently speak to sales people who interpret $100,000 in room revenue to equate to $100,000 in F&B revenue. A quick demonstration of profit ratios from the two departments and how much makes it to the bottom line will effectively adjust that thinking. Ensure your sale people clearly understand your rooms vs F&B profit margins. I recall the jaw-dropping reaction of a very savvy sales manager when I did the math and informed him we would be better off dropping the room rate $10 and assigning a 1 per 20 comp allotment than giving a 30% F&B discount to a group requesting it. The math is often surprising, make sure it’s being done.

5. Parking and Internet:  Is there a hard cost to the hotel for either or both? Or is it “just” a matter of lost profit? High speed Internet access is generally considered a given these days, but if your property does charge for Internet access this is an important concession to consider given the likelihood of usage. Presenting an option of with or without Internet, each with a different room rate, is effective, particularly since some groups are responsible only for the room rate and may give an unexpected response. Don’t throw Internet in without a quick glance to ensure there aren’t other values you can give the client that would have less impact on the revenue stream.

Lastly, the RM Three: Three concessions that rarely receive the attention they deserve can have an enormous impact on total hotel revenues – attrition allowance, cutoff date, and cancel and replace clauses. Usually only the revenue manager comprehends the value of these items.

6. Attrition Allowance:  The industry’s response to a rooms resold clause, and an agreement should contain one or the other but not both. Essentially, an attrition allowance is the hotel’s estimate of how many rooms it will be able to resell in the event the group does not pick up its entire commitment.  The hotel may turn away other business, particularly other group business, because it is holding a contracted block, therefore attrition allowances should be carefully worded. For many convention properties, if the group doesn’t pick up by the cutoff date, it is far too late to resell the rooms waived in the attrition allowance.  In many instances it is preferable to hand away other concessions like candy before waiving attrition.

7. Cutoff Dates:  Few things have more value to a revenue manager than the length of a cutoff date. The earlier the cutoff date, the more time revenue management has to re-strategize and adjust selling strategies to maximize revenues. The later the cutoff date, the more vulnerable the hotel is to the contracted group. Again, the cost of this concession fluctuates wildly depending on whether the group dates are during high season or low season. If the group is booking a need date, the cutoff date can be as short as necessary because the hotel is unlikely to be turning away business due to holding the group block. However during high season, the lengthier the cutoff date, the more revenues the hotel can generate. Contract accordingly.

8. Cancel and Replace:   The definition of a cutoff date is frequently forgotten in group agreements which can lead to “confusion” that virtually always benefits the client and hurts the hotel. In short, the cutoff date should be just that. After cutoff, any group rooms that cancel are reverted to the hotel for resale to the general public. But if that isn’t clearly defined in the agreement, clients are likely to assume they have the ability to cancel reservations after the cutoff date and replace them with new names. If a group is insisting on having a cancel and replace clause, that is the equivalent of having no cutoff date.  This prevents revenue management from the ability to accurately predict occupancy and set optimal selling strategies for any of the group dates. A large cost should be assigned to adding a cancel and replace clause to a contract, with increases in rate or other areas to offset this hidden revenue killer.

It may seem confusing, but developing a concession calculator based upon the above considerations can add tens of thousands (or more) to a convention hotel’s bottom line on an annual basis. Lay out the cost to the hotel and the value to the client of each, and prioritize concessions so the sales team knows which are preferred and which are to be avoided.

It doesn’t matter how much revenue lies in the first two pages of a group agreement. Concessions determine how much profit materializes by the last page.


Jil Larson is a twenty-five year veteran of the hotel industry with revenue management leadership experience within the Starwood, Marriott, Intercontinental, and Fairmont organizations as well as that of several independent hotels. 

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Contact: 

Jil Larson 
Prinicipal 
Dynamic Revenue Management Ltd. 
 Jil.larson@dynamicrevenuemanagement.com
www.dynamicrevenuemanagement.com
 

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Also See: Revenue Management or Urban Myth? The Fun Part of Hotel Revenue Management / Jill Larson /August 2010
OTA Issues - Not All OTAs Are Created Equal, But One of Them Is Due for a Comeuppance by the Hotel Industry / Jil Larson / July 2010
Uncommon Common Sense: Transient Rate Strategies to Take to the Bank / Jil Larson / July 2010
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