By Allison Handy
When we talk about red flags and concerns about increasing acquisition costs, some might be inclined to dismiss any worries and point to continued growth and prosperity—both in the industry and across the larger economy. And it is certainly true that we are in the midst of a sustained period of strong performance.
The Prosperity Trap: Consider the following recently released data from TravelClick. As of this May, committed occupancy for the second quarter of 2018 through the first quarter of 2019 is up at 1.6% compared to a year ago. The pace of new commitments is continuing to edge upward, increasing by 0.1% over the last month. Additionally, 15 of the top 25 North American markets are showing committed occupancy increases compared to a month ago. The Average Daily Rate (ADR) is up at 2.7% based on reservations currently on the books for 2018, and is trending upwards in 23 of the top 25 North American markets. Actual occupancy for April was up 1.8% and ADR was a healthy 3.0%. RevPAR for April was up 4.8%.
The TravelClick outlook for the third quarter of 2018 is equally robust. Committed third-quarter occupancy is up 2.2% year-over-year (July committed occupancy is showing an increase of 1.8%, and August and September commitments are up 4.7% and 0.2%, respectively, relative to 2017 numbers). Transient demand is up 6.0%, business demand is up 4.6%, and leisure demand is up 6.6%. ADR for the third quarter of 2018 is up 2.4% over the same time last year.
All of this is undeniably positive, and marks the continuation of a years-long trend of strong performance across the industry. While some segments have performed better than others and market-to-market fluctuation remains, the overall trend-line is both positive and persistent. The problem, however, is that while a rising tide might lift all boats, it can also make that pesky leak seem like less of a problem than it really is.
Technology Giveth, and Technology Taketh Away: One of the most exciting aspects of the hotel industry is the degree to which new and emerging tools and technology have the potential to add value to everything from marketing, to operations, to guest service. As hotel owners and operators can attest, the volume of technology accelerators out there is on the rise: we are constantly being inundated with new and better tech solutions to improve the performance of our hotels. But as intriguing as innovative and inspired tech can be, it also presents a challenge. Because every single one of these new platforms and solutions comes with a price tag—sometimes a significant price tag.
Consequently, we need to make sure that we are both thoughtful and strategic when it comes to the review, consideration, adoption and implementation process. We need to be diligent about conducting a detailed ROI for every piece of new technology, and make sure that we are not just layering technology on top of technology simply for the sake of having the latest and greatest items in the toolkit.
Keeping up with the technology Joneses can be exhausting and expensive. And this tech tidal wave is not happening in a vacuum: it comes at a time when a tight labor market and increasing labor costs are also increasing financial pressures. And as new models to acquire guests proliferate and evolve, marketing expenses are also on the rise. On the marketing side, money = visibility, and it takes more money than ever before to maintain that visibility across a growing number of platforms.
Consider those platforms and channels that help you market and sell group business. Now consider how many entities take a cut of every group room that you book. Every system you advertise on will cost you, the salesperson who executes the booking needs to be compensated, the fee hotels pay to the brand for the consumed revenue (and those fees are not going down), the commissions that must be paid to third-party meeting planners, and, finally, (depending on what platform was used to make the booking) there may be an additional GDS fee or some other reservation or housing platform fee. It was estimated in 2017 that approximately 43% of the meetings revenue in the U.S. market was subject to intermediation by third-party planners, eChannels or a combination of the two and is expected to increase by almost 50% to an estimated 60% by 2022.
Yes, the top line is increasing. But if your costs—especially those associated with new technologies and an increasingly complex and costly marketing and reservation framework—are increasing at a faster rate than that top line, owners end up with a bottom line that looks less favorable than market conditions might suggest. The revelatory outcome of all of this is that, at the end of the day, owners can be left with less money than they were making a few years ago–despite higher rates and healthy occupancy numbers.
Upon Further Review: The explosion of travel and hospitality review sites—and the changing habits of consumers in how they use those sites and make hotel booking decisions—is also contributing to higher acquisition costs. The universe of review sites used to orbit around one primary star: TripAdvisor. Today, however, there are growing numbers of popular and populated platforms, from social media sites like Facebook and Yelp, to Expedia.com, Booking.com and other Online Travel Agencies—and consumers are relying on those sites to make their decisions. They are also visiting more of them, and spending more time there.
A 2017 Travel Website Behavior Study conducted by Fuel and Flip.to found that leisure travelers visit an average of 4.4 unique websites prior to making their hotel booking. It is important to note that these are not casual visits: those travelers spent an average of nearly 30 full minutes on each website. And what are they doing for nearly 30 minutes? They’re reading reviews!
This is important because before a hotel does anything else online, it is essential that it is looked upon favorably on these review sites. That means encouraging your guests to share their feedback on those sites. It means monitoring every one of the major review sites. It means engaging with those who are writing the reviews. Perhaps most importantly, it means aggregating all the feedback from those reviews and doing something about it on the property level. While there are aggregators out there who can track and collect this information, you still have to do the work of engagement and response. All of this requires more manpower and, ultimately, more money.
It is also no longer enough to rely on the brand website or to let the brand do your online marketing. And because there are so many brands out there now, we are also seeing some brand dilution, which requires hotels to do more of their own marketing.
Navigating Change: This constellation of rising costs is not business as usual. These are significant changes. Hotel professionals need to find a way to streamline these expenses. One of the first efforts on behalf of the brands to do just that was the decision to cut the group commission from 10% to 7%. While that directly impacts our valuable relationship with group meeting planners, who are a critical cog in the booking process, the cut was seen as a difficult yet necessary effort to try and salvage some of the profits that are eroding from ongoing increases in commission costs. But there are only so many places in the current booking structure where you can cut costs—and brands are understandably reluctant to cut their own commissions.
Perhaps the single most important step that any hotel professional can take is to educate their team and their professional partners. Everyone involved needs to understand how and why profits may be eroding, even at a time when business is booming. It is all too easy for people on the property level to bury their heads in the sand and continue doing business as usual, assuming that the brands are going to fight their battle for them. But if they grasp the scale and scope of the problem, they can take those critical steps to be more discerning about new technology platforms, to make smart and strategic digital marketing decisions, and to generally be more thoughtful about their expenses.
Consider the bigger picture. Think twice about that shiny new technology, and about whether or not the efficiencies and functionality it promises is worth the continuing rise in costs. At the same time, you never want to turn your back on powerful new tech tools and resources: solutions that can help us do our job better and potentially create new value.
Powerful and often expensive new technology solutions. An increasingly complex and competitive marketplace. A digital communications ecosystem that is more fragmented than ever before. Despite the industry’s hot streak, the bottom line—as always—is the bottom line, and if these larger structural trends continue, the cost of acquisition is only going to become more of a challenge going forward.
Reprinted from the Hotel Business Review with permission from www.hotelexecutive.com.