New York Hospitality by Vijay Dandapani

The road to perdition - discount redux

It's raining discounts in the travel industry with hotels arguably leading the way. The Associated Press reports that " Major hotel companies are cutting event costs" as they "are taking it easier on clients planning large events".  The list of majors include Omni, Hyatt, Marriott Fairmont, Wyndham and a host of other lesser known names. The "freebies" include "waiving fees of $10,000 or more that are levied when an event draws fewer guests than promised; offering 2 percent discounts, doubling reward points and easing penalties for individual no-shows;10 percent discount at resorts and a 6 percent discount at hotels in North America and a 3 percent discount on the total room bill and 10 percent discount on food and drink".

Hotel room rates across continents have also seen discounts either directly on the rate or by providing "free nights". A recent Business Travel News report headlined "Hotels Taking A Worldwide Beating on Room Rates" notes that "All major cities in (worldwide) January saw year-over-year decreases in average rate—based on actual room nights booked and the rates paid by HRG's clients in the United Kingdom as well as industry figures—and Moscow was the only city surveyed to see a modest rate increase of 3 percent in February. Most cities were down for the two months together, and rates fell faster in February than in January in the cities surveyed, according to the Hogg Robinson Group, an international corporate travel services company".

The slew of discounts offered on almost all aspects of the hotel industry's revenue base has, expectedly, had many financial ramifications not the least of which is a ratings cut on public companies by Moody's. But as a Zacks Investment Research report points out all this will 'in most cases result in material long-term damage to the (hotel) business".

Discounts are the road to perdition and despite all the high minded talk about "rate integrity" last year when the first signs of a recession were obvious, hotels, particularly, at the high end have seen dizzying rate drops. That view is underscored in this report in the Wall Street Journal headlined "Falling Room Rates Threaten to Prolong Hotel Downturn".

Live! - Yapta for hotels

This site advocated a Yapta for hotels in June last year and is pleased to note that Yapta has done just that recently.

CNET reports that "Online travel shopping service, Yapta, announced Friday that it has launched a new hotel price tool that will allow users to track and compare pricing on national and international hotel rooms. According to the company, users will be able to choose the hotel they're interested in and then sign up to be alerted when rates drop. The site checks the hotel prices daily and compares them to find similar properties. Once a customer's specified threshold of affordability is reached, they can be alerted to the price drop and acquire a room. The tool is available now".

As noted last year on this site "Such a trend (as when Orbitz announced last year that it will reimburse some customers if airfare later falls) can have material consequences for hotels, most of whom practice the yield management of yore. So far, there is no YAPTA (an acronym for our "Amazing Personal Travel Assistant") for hotels as hotels' "best rate guarantees" usually pertain to the period when booked. Some such as Marriott's "Look No Further® Best Rate Guarantee" have a 24 hour period for the prospective guest within which a better rate, if found, is the chain not only matches the price but gives a further 25% discount. But no nationally recognized hotel chain leaves that period open ended like the airlines have begun to do. Were that to happen, no doubt in response to straitened economic times, there is little doubt that a YAPTA like site, if not YAPTA itself will emerge".

Yapta certainly seems to have its ear to the ground and is ahead of the curve in discerning customers' needs.

Business and marketing strategies for the downturn

Today's Wall Street Journal has a section on business insights for the downturn written in collaboration with MIT Sloan Management Review. A page in the section is devoted to strategy used by organizations in emerging markets which are roiled by a volatile economy more frequently than what is encountered in western countries. While the ideas and suggestions are broad based many apply to the roller-coaster state of the hotel industry in the US.

For starters, the article notes what is encountered often in today's hotel revenue management situations - "when times are tough, customers focus on getting the best deal for their money. Often this means trading down". That is the bane of the upper end of the hotel market as consumers refrain from "splurging" and avoid the Ritzs of the world for seemingly banal vanilla hotel rooms. In contrast, in emerging markets, the Journal notes that companies get "customers to trade up to premium products - even though disposable income is much tighter". They do that by having incremental differences in prices between premium and basic goods thereby signaling higher value in the premium market. That means lower profits on the premium brand but a greater willingness to stay with it. For a hotel company with brands across market segments, that would mean smaller differences in pricing across brands but the ability to sustain occupancies in that segment.

The authors of the WSJ article next suggest that companies "increase product and service visibility". Noting that the downturn has "led to sharp cuts in marketing budgets, and more are inevitable" they note an age old truism applicable across industries: "keeping customers you already have is a lot easier - and less expensive - than trying to land new ones". Latin American companies apparently "allocate shrinking resources with an "unwavering focus on retaining customers. And it pays off".  This is brought about by, unsurprisingly, focusing on "point of purchase" as this is the only time when "the customer, the customer's wallet and your product are all in the same place". For hotels, closest analogous situation would be the interaction at the front desk when a guest checks-in. That reinforces the need to step up customer service training for that department as well as retooling loyalty retention programs to keep the guest coming back.

Thirdly, the authors suggest that companies "rethink what customers value". Merely rethinking marketing or pricing strategies will not suffice as "continuing economic fallout in Western economies may mean that customers simply can't afford certain products or services anymore". Emerging market economy companies emphasize "pay-as-you-go" strategies as a way of offering value to customers. The 80s concept of layaways in western economies is akin to that and, in fact, is making a comeback in the retail segment. Hotel companies too can pick up on it.

Lastly, the authors urge to look at the broader marketplace and monitor economic data to "figure out where the market is headed". That enables an easier switch in strategies thereby outflanking competitors. In the end the article underscores one theme - a need to remain optimistic. "Western managers assume they must address decreases in demand and declines in revenue only through drastic cutbacks. Managers in emerging markets realize that turbulent financial times can be a tremendous opportunity to strengthen competitive position and financial performance -- with the right mix of strategy and innovations".

Race to the bottom - discounting

Brandweek, a marketing magazine with an emphasis on the subject of branding has a recent article noting that a Dollars & Consumer Sense 2009 study by Yankelovich  finds that consumers often have a negative reaction when they see the price slashed for their favorite product or service. No surprises there but history appears to be repeating itself as, in all downturns, hotel rates seem headed for a race to the bottom as mentioned in the following report in the Financial Times.

Titled somewhat inadequately as "Beleaguered hotel industry dreams of sunnier times ahead", the report notes how hotel "revenues are plummeting; hotel occupancy is spiralling downwards. Research by Smith Travel, the hotels consultancy, shows occupancy levels on the slide in Asia, like-for-like average daily rates more than 20 per cent down in January in Europe, and revenues per available room for that month dropping 16 per cent in the Americas and 30 per cent in Europe". It goes on to say that "desperate hoteliers are slashing room rates, ignoring the lesson of the last bout of heavy discounting, which came in the aftermath of the September 11 terrorist attacks. It took years for hoteliers to restore their pre-2001 prices. Average room rates in London are down to about £100 ($140) a night". New York is not far behind as its "luxury and upscale hotels are in a frenzy of price-cutting".

London and New York hoteliers seem not only to have not learnt from history but appear not to heed professional marketing advice as profferred by the President of Yankelovich Monitor who notes that "people are suspicious if you significantly discount your brand. If you make significant changes in your value proposition it can confuse them. You have to give them reasons to buy stuff as opposed to just lowering prices as a knee jerk reaction to the economy".

The discounting frenzy as a result of sharply declining business is seemingly at odds with the business report summarizing this year's ITB in Berlin where the organizers claim that "six out of ten exhibitors were unaffected by the global recession and that business was up ten percent". The business optimism exuded by the exhibitors is of course based on a prognostication of the future while the rampant rate cutting in major cities is a knee-jerk reaction to immediate economic woes. Nevertheless, as prior rate cuts have shown, it is easier to drop rates while it is quite another matter to raise them. History has repeated itself despite industry consensus before the recession to hold rates. Then again as philosopher George Santayana noted "Those who cannot learn from history are doomed to repeat it".

ITB & Triskaidekaphobia

Paraskevi-triskaidekaphobia is a mouthful to describe an irrational phobia - the fear of Friday the 13th. But neither that nor Peniaphobia, the fear of poverty that seems to be driving US consumers to keep their wallets shut, seems to have kept exhibitors from ITB. Travel Daily News reported that "the 43rd ITB Berlin 2009 opened on 11 March, with almost the same number of  exhibitors as last year, despite the global economic downturn. Event organisers Messe Berlin reported that all available space had been booked by 11,098 companies from 187 countries - only 49 fewer exhibiting companies than in 2008".

Besides many renewals, the exhibition features some new ones, many of whom negotiated better rates with the forum organizers for space, including India's MAHARAJAS’ EXPRESS, that nation's first trans-country super luxury train which at $2,500 per night is probaby the most expensive train ride anyone could take. Others such as the Emirate of Abu Dhabi set up shop for the first time via its Abu Dhabi Tourism Authority.

The US presence, while less than the previous year in terms of new exhibitors, in its relatively new location at hall (2.1) has continued to improve on its heretofore image of exclusivity and seclusion with easy access and, surprisingly, finding itself next to Russia. Nevertheless, as in previous years, the level of state (government) involvement was more negative than positive. While the Russians were busy staging folk dances with much merriment, the US stand was the only one which had a stall devoted exclusively to Customs and Border Protection. Tour and travel personnel do need to be aware of the byzantine rules that keep changing for tourist entry (even for visa waiver countries) to the US especially when compared to entry to the EU which although also uses biometrics for visitors limits it to during the visa process, if one is necessary.

Revival of travel?

Gas prices and high air fares did not immediately stifle business or even leisure travel last year but a steady decline in the latter and finally a spate of discounts in the air just might get people on the road as these reports point out. A fair presumption is that there will be some relief for a beleaguered hotel industry with many parts of the country reporting near dire slippages in Revpars.

Britain's Daily Telegraph paper reports that falling demand is putting pressure on airlines to reduce their fares and, thereby creating some bargains for holidaymakers. There are unprecedented falls in air fares as carriers try to combat a declining demand for air travel with fares to many destinations – particularly long-haul – cheaper than ever. The paper reports that "return fares to New York this week fell to as low as £225 (inclusive of charges and taxes). At today's exchange rates that amounts to approximately $320.00, a remarkable bargain if one were to compare that to an Amtrak one ticket from Boston to DC which amounts to $168.00.

On a similar vein, closer to terra-firma, Reuters has a report headlined "Americans hit the road again as gas prices fall". The report rightly notes that "U.S. consumers pinched by the economic crisis, falling gasoline prices have created what some analysts call a sort of stimulus package that has pumped billions of dollars in disposable income back into their wallets.

Events like the foregoing usually bring about a revival in consumption. This time though economists and Wall Street seem unsure with the former noting a shift from consumption to thrift. Wall Street in the meanwhile seems in a terminal malaise with a relentless dive to a never-ending bottom. Till there is a true reversal there are going to be more stories in the hotel industry of the negative variety than those that hint at optimism for the future

Experience a liability?

The Wall Street Journal's business section has a timely piece entitled "Dangers of Clinging to Solutions of the Past". At a time of unprecedented economic turmoil, managers across industries rely on experience to cope with the gale force winds of change and, per research quoted in the article, experience often proves less than equal to the task at hand.

Academics like Kishore Sengupta, an associate professor at France's Insead business school who designed a simulation to test project management ability, says "users with 10 or more years of project-management experience collectively generated higher costs and more errors and missed more deadlines than less-experienced colleagues".  Another academic, Vijay Govindarajan, a professor at Dartmouth College's Tuck School of Business, started looking into experience 25 years ago, when considering why some companies failed at long-range strategy. After studying businesses like Encyclopedia Britannica and Sears, Roebuck & Co., he concluded that "some managers are so set in past ways that they can't cope with new situations".

With hotel companies in the forefront of the free fall  that is gripping the travel industry in the US, fresh perspectives to deal with Revpar declines (Smith travel reports a 5 point drop in occupancy for January) will surely be welcome. One way to stimulate fresh thought may be to emulate the Chicago Conservation Center which bucked the trend last year by launching a bonus program to keep employees motivated during trying economic times - that idea came from appointing a board of advisers from outside the organization. For hoteliers that may be a tough act to follow but a circle of advisers could include suppliers and clients. Another way may be to engage the existing customer base as IHG has done with the social business site Jive.

Separately, one non-management related development that will surely abet a recovery is the pull back of projects such as these two as a consequence of the credit crisis. Strong revpar growth over the last three years contributed to many speculative hotel builds that were predicated, as in prior boom times, on relentless rate rises. A relative slowing down of building activity likely will restore some semblance of normalcy for the industry.