Discounting the bottom line

At the sidelines of the Lodging Conference in Phoenix, AZ last year
just before the onset of the financial crisis, many in the industry
swore to hold the line unlike previous downturns. But all that resolve
seems to have quickly melted as evidenced by across the board cuts in
rates since November last year for virtually all segments of the
industry. That can only be negative. And RFP's reflect that with buyers demanding substantive cuts relative to last year.

This blog has already pointed out the pernicious effects of discounts
earlier this year and there seems to be no let up as the recession
continues. Similarly situated industries like restaurants are quickly finding out that it is a race to the bottom as this recent article in the Wall Street Journal notes that "deep discounts that restaurant chains have been offering to lure
cash-strapped customers out of their kitchens are coming back to bite
them." The article also quotes a wall street analyst as saying that "We've been hearing from a lot of restaurant management teams that discounting wasn't driving the traffic they hoped for," In fact, restaurant giant, Burger King found its franchisees in open revolt over their attempt to ram down the sale of a double cheeseburger for $1.

On the heels of rate cuts are always cost cuts which which invariably end up affecting service levels and eventually the quality of the product itself as this recent news report from Reuters notes that the "latest quarter's cost-cutting could include everything from laying
off staff to paring back newspaper delivery… But with less to cut this time the
question (is) how deep the cutbacks can go before wounding hotels' core
product: service."  Necessity may be the mother of all inventions but it may not be so when profit margins are eviscerated as the not so ancillary corollary of discounting is noted in this New York Times article which quotes noted Harvard economist Robert Lawrence as saying that "When prices are kept too low, innovation is nearly impossible.

Besides rate cuts and even service cuts, the industry has also been battered by jurisdictions seeking to shore up steeply declining tax revenues. That the empirical evidence (as recently noted in Ocean City, MD) does not support the notion that occupancy tax raises increases municipal revenues is besides the point for most legislators.

However,in the midst of rampant rate cutting it is refreshing to come across a case of some cities raising rates as mentioned in this news item about hotels in Lausanne and Geneva, Switzerland.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.