By: Robert Mandelbaum, PKF Consulting - November, 1996

The average room rate for hotels in the United States continues to grow at an extraordinary pace. Through the first nine months of 1996, the room rates for U.S. hotels shot up 8.3 percent over the average room rate achieved in 1995, more than double the 2.9 percent pace of inflation. In fact, the 286 percent ratio between average rate growth and CPI is the greatest disparity since 1986.

Such strong rate growth is to be expected, given the high occupancy levels achieved in the majority of markets. What is perhaps more noteworthy is the ability of hoteliers to raise rates in those markets experiencing the first signs of overdevelopment. In the South Central region, for example, where all 12 cities surveyed are showing a decline in occupancy, our study reveals a 6.2 percent increase in average room rates. In 11 other markets around the nation showing a decline in occupancy, nine were still able to boost their room rates in excess of inflation.

Rates: Come On Down!

After experiencing five years of rate growth below inflation (1989 through 1993), hotel owners and operators certainly must be relishing the current three-year trend of rate growth in excess of inflation. While management sees their ability to increase room rates so strongly as both necessary and market-justified, recent feedback from travel managers and meeting planners reveals feelings of betrayal and disrespect. From the corporate consumer side, budgets don’t allow for rate increases of more than four to five percent. In addition, travel managers understand that the hotel business is cyclical, and they know that, eventually, the hotel sales troops will be tracking them down, pleading for their corporate and group business.

In defense of the hotel industry, the recent rate increases should not be perceived as gouging. Rather, the industry has seized the opportunity to regain some of the lost profits of the late 80s and early 90s. With the 100 percent degree of accuracy hindsight bestows on an industry pundit, it appears that during the recent recession, the industry discounted rates more than it should have. The industry needs 1997 to yield another year of rate growth in excess of inflation if the national average room rate is to reach the point it would have achieved, had the rate growth kept steady pace with inflation since 1986.

The Winner Can’t Overbid

All this presents an interesting challenge to hotel management. How do you take advantage of the current market conditions that allow for strong rate increases, while not upsetting your base of regular customers? It is very tempting to displace loyal, yet lower-rated preferred accounts, with higher-rated transient business.

Further discussions with professional travel planners reveals a realistic attitude towards the situation. They realize that the pendulum of rate negotiating leverage swings both ways. In general, we have found that corporate and meetings travel managers are prepared to pay a rate premium when market conditions warrant. What they don’t want is to receive either a cold shoulder or a lesser degree of service.

Next: The Showcase Round

As with most provider/client relationships, it all comes down to effective communication. Strong rate increases are much more easily accepted when fully explained and accompanied by a commensurate degree of service. What the hotel industry needs to learn now is how to sell in a seller’s market. In San Francisco, for example, the Convention and Visitor’s Bureau is taking the lead and offering hotel sales staffs a special seminar on this topic.

With the national occupancy level expected to remain relatively high for the remainder of the decade, market conditions should remain favorable for increases in room rates. This is especially true in the major urban markets where the prospects for new competitive corporate and convention hotel development is limited. Assuming that inflation remains in control, the natural expectations of the industry’s consumers will be that future increases in hotel pricing should grow in a similarly controlled fashion. With these contrasting points of view, the potential exists for a continued strain between hotels and their most treasured guests. Hopefully, both sides will remember that it is a cyclical business, and each will eventually need the services of the other.

For additional information contact Robert Mandelbaum at the firm:

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