Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
|By Rick Swig, Summer 2001
In answer to the question, “How’s business?” a hotel owner should retort “Compared to what?” In most cities and regions occupancy levels are down from calendar year 2000. Although nobody should accept lower performance in a subsequent year, there should be no denying that 2000 was a special juncture, where each of the market segment stars aligned perfectly and record REVPAR levels were achieved. The flaw was the belief that the aberration was a trend and would continue into 2001.
In Fall, 2000 public hotel companies began to feel the pressure of Wall Street to continue the great 2000 business surge. The trickle down effect pushed local management in primarily high visibility assets and top twenty markets to create 2001 budgets for increased occupancies and even higher guest room rates, even though there was little precedent for these. In fact in several markets hotel operators forecasted increases, even when citywide convention calendars noted downturns. Furthermore, even as the stock market turned downward in late 2000, hotel operators did not recognize the forecast for a negative trend in business.
As the first quarter of 2001 evolved, daily Smith Travel Research started providing indicators of cracks in the occupancy dike. The individual business traveler was staying at home, as companies reduced expenses to increase quarterly earnings or survive. While the markets with the previous 24-month mega-gains, such as New York, San Francisco, and San Jose, crumbled most quickly, other top twenty market areas evidenced some weakness as well. And why not?
Review of historical performance reveals that most markets went beyond any previously forecast stabilized occupancy levels in 2000. If hotel operators would have recognized that the surge of demand in the Commercial traveler segment was not a permanent situation, then the downturn of 2001 would be perceived as less damaging.
Whether it is called a recession or some other moniker, there is an economic correction ongoing in the United States. Areas like the Silicon Valley in California reflected immediate business adjustments with travel moratoriums and employee layoffs, while other areas have begun their remedial patterns. Economists preach that low product inventory levels will make the bowl of the downturn less deep than it was in the early 90’s recession. These predictions limit the extent of economic pain to a range between fourth quarter 2001 and late 2002. No predictions here, however!
In a downturn individual hotels will show different tendencies. These tendencies will reflect the strength of their brands, the competency of their management, the judgement of ownership, and in the case of newer hotels the justification to be built in the first place. The report card is any accurate market penetration analysis that ownership chooses to review. Strong hotel operations still slip in a weaker market, but flawed hotels exhibit an accelerated downturn in similar climates.
Many hotel operations benefited from the compression of demand in 2000 without establishing the solid underpinnings of a solid sales effort or loyal customer base. The affiliation with a strong brand has become more of a factor in 2001 than ever before. Brands with consistent products, solid distribution, benevolent frequent guest programs, and true customer loyalty are really proving their value through their level of occupancy contribution. By the end of 2001 brand development officers will truly be able to measure relative brand strength by comparing cross-market occupancy penetration levels.
Smart hotel operators understood the short term nature of the 2000 upheaval and built strong relationships with customers either through consistent sales dialogues, service or reasonable pricing that equaled an expected price/value relationship. The less fortunate managers forgot the basics of marketing and direct sales, and simply harvested overflow demand, charged high rates, and delivered little in service or customer recognition. This latter group now finds itself wondering why their market penetration has slipped so badly. The knee jerk reaction of rate reduction may buy market share temporarily, but it may also undermine overall market strength long into the future.
The last several years of relative prosperity have brought record profitability to the hotel industry, as unit by unit profitability plus owner’s returns have soared. Staff re-engineering over the last decade and the addition of new technology tools have allowed the payroll reductions, which have created the primary contribution to higher yields. As revenues have recently decreased from previous thresholds, owners and managers will have to resist the temptation to further reduce staffing levels and service offerings to sustain profitability. The risk is the undermining of the basic values that attracted and will sustain loyal customers.
Additionally, owners, who spent money on maintaining or increasing the competitive nature of their hotel buildings, as profits were being made, will now realize the benefit of those investments. After five relatively strong years of prosperity, there is little excuse for the under-maintained hotels or under-funded capital reserve accounts. Even as owners find themselves with less financial yield for capital improvements in the upcoming period of economic retrenchment, the physical state of well-maintained buildings should be adequate enough to sustain limited capital deferral without losing a competitive product position.
Not surprisingly, there will be the discovery that some hotels were developed prematurely. The realities of 2001 are returning fringe properties to their rightful positions and new hotels into their original projection paths for establishing stabilization based on historical trends.
So how’s business? It’s probably pretty good, if an owner reflects on what was projected for 2001 back in 1997 or 1998. Those with less reflective points of view would probably deny that position, however. Dreamers will look to an immediate return to the year 2000 reverie, while the more realistic will review historic market trends and the health of the primary demand generators to reforecast their view of the immediate future with more moderate projections.
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
Tel: (415) 541-7722
Fax: (415) 541-5333