Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
|by Rick Swig, February 2002
Looking forward into 2002 necessitates a look back into 2001, which was the most challenging annual period in the hotel business for at least a decade. There was clearly a trend throughout 2001 that expectations of growth after the millenium year were to be dashed quickly. All three major demand segments of Leisure, Commercial, and Group deteriorated after the first quarter, while the tragic events of the final quarter accelerated the inevitable fall to the bottom. Aggressive hotel management tactics in response to market change attempted to save return on capital or earnings per share, but some of this management by spreadsheet may have created long term undesirable impacts on individual hotel units and/or their brands.
In the years following 1991 hotel management learned and implemented significant cost saving skills. The result was the realization of previously unachievable industry-wide profit growth and margins. Increased operating efficiency was created through improved management tactics related to labor and general overhead control plus the increasing emphasis on guestroom inventory revenue yield. Full time employee (FTE) populations shrank, while revenue per available room (REVPAR) launched especially after 1995.
Hindsight now reveals that beginning in 1999 and certainly extending into 2000 there was a significant economic bubble. Multiple trends and events came together simultaneously to create a revenue nirvana, where all demand segments were performing at record levels with perceived growth trends to indicate that the parade might extend well into the future. We now know that not to be the case, as the bubble burst in 2001. Now there is conjecture that 2002 will exhibit tendencies, which will look like an extension of 1997 or 1998 yearend trends.
To salvage income in the last quarter of 2001 hotel management took drastic measures to grow revenue and reduce expenses. These tactics were an extension of those learned in the early 1990's. Unfortunately, a good expense management calculations on a spreadsheet may in some cases be revealed ultimately as a mistake in judgment with regard to the overall welfare of the affected hotel asset. This would be especially true in the full service segment.
Much of the full service hotel segment profited significantly in the
bulging economy. As travelers rewarded their financial success with
upscale indulgence, some of the greatest revenue growth over the last two
years was exhibited in the upscale, full service segment. During
the same period the "focused" or "select" hotel segment, which is led by
the Courtyard by Marriott and Hilton Garden product types, became an important
challenger to full service hotel market penetration. These quasi-full
service environments with competitive price points are an important full
service alternative with direct impact on that segment. Their greatest
success has been the development of confusion between their product type
and that of full service.
Although price reductions may seem to induce demand, in a distressed environment with reduced demand in general the result of discounting tactics may result only in shifting market share between competitors. The net result reveals no overall increase for any stakeholders in occupancy and a reduced average daily rate (ADR) base for the market in general. When the overall ADR base for the market is reduced, then recovery to original levels may take years. Short-term gains through discounting actually can undermine the long term revenue production and value of an asset.
Another logical step in a downturn is to cut and cut….staff and services. Reduce or abandon restaurant operations. Banish bell and front office staff. Prune the fine trimmings. Although a temporary life preserver for a full service operation, the ability to sustain full service positioning and justify higher guestroom rates to the customer becomes even more challenging. There is critical risk that both an individual hotel's product value and its associated brand integrity will be permanently tarnished. Thus, short-term maneuvers to buoy cosmetic valuations may not be worth long term afflictions.
The owner's priority to preserve cash flow and any management company's determination to reach incentive management fee levels is certainly understandable. Management by spreadsheet may disregard the core values of full service product delivery, however, and thus undermine or present a conflict with "The Promise" made to the customer.
Any customer expects a value related to the representation of the product
and price. In the hotel business price/value applies to every product
tier. Product variations and brand standards allow hotel operators
to represent differentiation to customers. This clarifies positioning
and pricing tiers. If products and services are not delivered as
expected or promised, especially in a fragile economic environment, then
the tendency for customers to trade horizontally or down to another product
becomes ripe. This is especially true in the full service segment.
During economic downturns there should be guidelines and options for austerity initiatives. Management by spreadsheet alone without regard for long term impact on customer habits and thus overall asset and/or brand value is a poorly conceived choice, however.
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
Tel: (415) 541-7722
Fax: (415) 541-5333