|by Patrick Quek - September, 1998
The summer season for many hoteliers means an influx of tourists and a bump in occupancy. Layering leisure travelers on top of, or around, regular corporate or convention travelers not only helps fill weekends, but allows hotel managers to fill in weekday soft spots caused by the seasonal decline in corporate and convention business. In theory, a diversity of demand sources allows a hotel to withstand the monthly and annual fluctuations in travel patterns.
But what happens to those hotels that have an extreme bias towards one market demand segment or another? Nearly 55 percent of the hotels in our 1998 Trends in the Hotel Industry survey reported that one demand segment – whether leisure, business, or meetings - made up more than 50 percent of their total annual occupied rooms.
Wanted: Willy Loman
Hotels that accommodate more than 50 percent business travelers comprise 29.3 percent of our Trends sample. Surprisingly, limited-service hotels are the most prevalent property type of those hotels that cater primarily to business people. Business travelers today have learned to live without happy hour in the hotel lounge.
In 1997, it appears that hotel managers at business-oriented hotels
took advantage of the greater upward elasticity in corporate expense account
travel. Although corporate travel policies have tightened, business
travelers appear to be far more able to absorb an increase in hotel rates
than meeting planners or individual leisure travelers. The average
room rate at corporate-oriented properties grew 8.1 percent
in 1997, the highest among all property types. However, it should
be noted that the average daily room rate at a corporate-oriented hotel
was slightly less than that found in leisure-oriented properties.
While corporate rates are rising quickly, corporate travel planners still
have some leverage if they can provide hotels with a significant amount
of year-round business.
Due to the less seasonal nature of corporate travel, business-oriented
hotels achieved the highest occupancy of all the property types.
However, business travel typically brings with it a lower level of multiple
occupancy. Apparently, doubling-up has yet to take off as a policy
for corporate cost savings.
Vacationers Lead To Vacancy
Hotels oriented primarily toward leisure travelers face a greater challenge
than do business hotels when it comes to management of their market and
financial performance. Not only is leisure travel typically seasonal
in nature, but leisure travelers tend to view lodging as a discretionary
expenditure and bring with them a greater degree of rate-sensitivity and
While the seasonal nature of leisure travel places a cap on the potential occupancy for these properties, it enhances their ability to charge premium prices. Leisure-oriented properties experience the greatest swings in monthly occupancy. While heavy travel during respective in-season months and weekends may result in multiple sellouts, the low off-season volume barely covers fixed costs. The result is an aggregate occupancy that is the lowest of any property type. Fortunately, the concentrated demand for hotel rooms during a limited period of time frequently allows management to sell rooms exclusively at their highest rate categories. Thus, while fewer rooms are occupied, they are being sold at higher rates.
While the average daily rate paid in-season at leisure-oriented hotels is higher than that at corporate-oriented properties, it should be noted that the average room rate at the leisure-oriented properties did grow more slowly than any other property type from 1996 to 1997. Increased supply in the Sunbelt region and along the nation’s highways has given leisure travelers more choices, thus allowing them to express their rate-sensitivity. The slow growth in room rates, combined with a decline in occupancy, also lead to a relatively anemic 5.0 percent growth in profits for these properties.
Bring Me Your Masses
Convention-oriented hotels achieved the highest average daily room rate among all property types in 1997. The fact that only 4.8 percent of the hotels in our sample are predominantly oriented towards the meeting and convention segment is indicative of one of the reasons for the successful performance levels achieved by these properties. A limited amount of new hotels with significant meeting space, combined with strong growth in the meetings demand segment, has resulted in a strong market position for existing convention hotels.
The relative lack of new competition allowed for meeting/convention-oriented
hotels to be the only property type to achieve an increase in both occupancy
and ADR from 1996 to 1997. The combination of a rise in volume and
pricing resulted in a very strong 16.5 percent increase in operating profits,
far and away the highest among all property types.
Given the relative lack of new hotel venues for conventions, meeting planners continue to bring their business to resort properties. Resort hotels made up a third of those properties reporting a greater than 50 percent orientation towards the meetings market. Convention business helps resort operators offset some of that negative reliance on seasonal leisure demand mentioned earlier.
Practice Guest Management
These days, a lot of discussion is focused on the physical and service attributes of hotels. Whether building a new hotel, or preparing the marketing plan for an existing property, one needs to consider the potential demand segments to be served. While this analysis has focused on properties with an extreme orientation toward one segment or another, it has demonstrated that market orientation is a major influence on the financial performance of a hotel.
More often than not, the surrounding area will dictate the type of demand
a hotel will capture. But to varying degrees, management can manage
its mix of demand. When preparing your budgets and business plans,
be sure to analyze all the facility, service, and financial implications
of the market orientation of your property. This analysis will most
likely show that some market segments will be more profitable for your
hotel than others.
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