New York Hospitality by Vijay Dandapani

Astroturf and Meat Puppet marketing

A recent Associated Press report discusses how "a growing number of regulators, trade groups and site owners are cracking down on so-called "AstroTurf" marketing — seeding the Internet with seemingly grass-roots testimonials, reviews and comments that aren't as organic as they seem."

The report notes that the Federal Trade Commission has already interceded in cases involving spurious claims sponsored by companies and individuals that had life threatening consequences for buyers of products and services. Further, the FTC plans to vote this summer on updating 29-year-old guidelines on endorsements, making it clear they ban phony online reviews. Truth in advertising rules were written circa 1980 well before the internet era much less the era of blogs and Twitter but as the FTC spokesman notes "the same principles about transparency and truth in advertising apply."

Apparently the European Union too has directed "member countries to ban falsely representing oneself as a consumer, and other trade groups and businesses are deleting suspect reviews and issuing apologies." But as the AP report rightly notes "some experts say it may prove difficult to enforce traditional truth-in-advertising standards on the freewheeling, ever-expanding Web."

The hotel industry also found mention thanks to Tripadvisor's recent "red-flagging (of) a number of its 400,000 hotel reviews, saying it suspected they came from hoteliers seeking to pump up their ratings or knock down competitors."

Wikipedia defines Astroturf marketing as "a form of propaganda whose techniques usually consist of a few people attempting to give the impression that mass numbers of enthusiasts advocate some specific cause." while a Washington Post article of a couple of years ago refers to a Meat Puppet as "a fictional person that passes as an actual human being online." The former is arguably legal and can be ethical while the latter is borderline illegal and almost certainly unethical. Yet, a variety of producers (many of whom are reputable) and manufacturers regularly partake of these marketing tools.

 Fortunately, the hotel industry generally appears not to embrace these methods. However, the power of user-generated content to influence on online buying obviously results in some wayward instances. Tripadvisor is smart to clamp down on it whenever it sees instances. That is good for both the industry and the UGC medium.

Customer satisfaction trends - ACSI scores

That recessions precipitate cutbacks at almost levels of an enterprise is no surprise. Historically, one consequence of those cutbacks has been lowered customer service owing to a paucity of staff and inclination on those that remain. Yet this time around appears to be somewhat different as a recent report in the Wall Street Journal points out based on the results of a survey conducted by the University of Michigan and widely known as the American Customer Satisfaction Index.

The report cites some leading American consumer companies as examples. Sprint Nextel is reported to have seen its ACSI score (from the index) go up by 12.5%.  Others include the Cheesecake Factory which added "an online customer survey to its mystery shopper program to assess service in its restaurants". Based on results, the restaurant change simplified the way waiting times were displayed at its outlets. Others mentioned in the Journal report include Comcast Corp where  its ACSI score shot up 9.5%. Some surprises by way of mention include US AIrways where ACSI scores went up 9.3% apparently due to the introduction of a hand-held scanner to trace mishandled baggage.

Airlines have found mention along the same lines at other publications including The New York Times which notes that airlines (surprisingly) are "putting some personal contact back into flying". The NYT article says that Delta Air Lines is "reviving a moribund airport service program known as the “Red Coats,” for the crimson-jacketed service staff who roam airport concourses in search of passengers in need."

Nevertheless, the trends are not necessarily all up as the Journal article points out that "improved satisfaction scores also may reflect lower customer expectations and a shrinking pool of customers demanding attention."

For hotel companies ACSI scores have held steady from  at 75 since 2007, which is also the same as when the scores were instituted in 1995. That in itself is overall a positive given how busy the industry was in '07 and '08 (till September).

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.

Customer first vs customer knows best

The Wall Street Journal has an article by writer Kelly Spors entitled "The Customer Knows Best" which examines how the internet has enabled companies in diverse industries to easily find out what consumers think. The article notes that companies, particularly small businesses, "are using the Internet to involve customers in decisions on everything from what to sell, how products look and work, how much they cost, and even how the company operates, like what hours a store should be open or how its floor space should be laid out." It goes on to quote an executive from a foundation that promotes entrepreneurship as saying that "Your customers might be better at designing your product than your elite team of product designers, who might be hiding in an ivory tower somewhere." 

The hospitality industry is probably a pioneer in consumers designing a product with former customers turned entrepreneurs like Kemmons Wilson and Cecil Day going on to start international chains Holiday Inns and Days Inns based on their experiences. More recently, user-generated-content is substantively about using customer feedback to tailor the hospitality experience both in operations and design. But even in design ideas both individual hotels and large companies such as IHG have taken to drawing upon suggestions from customers.  For instance, the newly opened MAve Hotel in New York City got its name from potential customers based on a contest. IHG's Innovation Hotel is touted as a "a showcase of some of our best ideas in sustainable tourism" and includes a "have your say" feature on its website where the company looks to "get your feedback on the innovation hotel" which they presumably will attempt to incorporate.

Nevertheless, as the Journal article notes, the approach has its drawbacks including "the risk that the crowd that provides input isn’t representative of the people who might buy the product (service) later on." It also could stymie innovation with entrepreneurs going along with a safe middle of the road approach to products, service and delivery. The hotel industry probably would have not seen a number of design ideas and products from the boutique concept to a focus on bedding as most of these owe their provenance to innovative ideas that came directly from entrepreneurs and managers from within the industry.

Ultimately, while putting the "customer first" in every aspect of service is de rigeur, it is probably infeasible to design and build a hotel on a "customer knows best" or democratic basis without sacrificing innovation to a substantive degree.

Unfortunate brand names

The hotel industry has mercifully been spared when it comes to choosing unfortunate brand names that, in some instances, have had decidedly deleterious outcomes for the owners. In the latter category General Motors' Nova is one of the more prominent ones as nova in Spanish could translate into "won't move". The most colossal misnomer for the industry occurred in the eighties when the grandiloquently named Allegis corporation was slated to become a travel powerhouse that included Westin, Hilton International, Hertz and United Airlines. It perished in short order.

Lately, the industry has been on a tear with new names with appeal with a capital A including Aloft, Andaz and Ascend besides Element, NYLO and a host of others. However, the founders of one of the most successful distribution channels in the age of the internet have launched a high profile new venture that they have chosen to name Getaroom.com. The model is arguably suspect for more than its unfortunate choice of a name. The Urban Dictionary defines "get a room" roughly as a social situation that compels a couple to find a hotel room as a consequence of their behavior.

The larger issue, though, is the business model of Getaroom. The company states that it sets itself apart from its competitors in that customers know the hotel in advance but not the discounted price which they get from reaching a proprietary call center. But apart from the many teething problems it faces, the model is built around price opacity. The site's founders are quoted as saying "Hotels don’t want their rates published. Occupancy is weak across the board, but hotels don’t want to lower their price across all distribution channels." The last part is true but other room suppliers can easily observe competitors' prices through a number of informational sources including direct observation. The ostensible edge they have is likely to get steadily eroded as both hotels other distribution channels get a measure of the discounts.

Apart from spurring an unsustainable race to the bottom for hotels, the model likely does little for the consumer and even less for hotels.

Hotel debt: Downward spiral?

Hotel loans and portfolios can't seem to get enough of bad news with the latest being Barron's downgrading Starwood Hotels to underperform from Neutral. In doing so, Barron's analyst noted that it was "in conjunction with our industry note in which we are lowering estimates across our hotel coverage. We are updating our view and now expect the hotel recovery to manifest itself in the second half of 2010 versus our previous assumption of late 2009." Somewhat scathingly, if unfairly, the downgrade opines that "Starwood's former strengths are now weaknesses. During the boom Starwood's world-class real-estate holdings, higher-end brands and international growth allowed significant multiple expansion. Today, each of these former positives exposes the company to higher-than-average risks, for which we do not believe investors are compensated at present levels."

The news on the debt front for hotels also seems unremittingly bad with a spate of announced defaults that began with Extended Stay of America's Chapter 11 bankruptcy filing last month followed by the technical default of Red Roof Inns on its conduit loans. Days later, the Washington Post reported that the owners of the landmark Watergate hotel in Washington D.C. "defaulted on a $70 million loan that came due this week, another fallout from the real estate crash and the collapse of Lehman Brothers, a partner and equity investor in the property." San Francisco Business Times reported yesterday that the Millenium partners, owners of the Four Seasons in San Francisco treaded the path taken by Red Roof Inns and "purposefully stopped making debt payments as a strategy to jump start renegotiating the debt with the special servicer."

The spate of bad news on hotel assets and their debt does have a silver linging. Reading between the screaming headlines of distressed debt Red Roof and the Four Seasons in San Francisco, it is obvious that both owners resorted to a deliberate strategy of default with a view to renegotiating their debt for what are evidently cash flowing assets in these troubled times involving CMBS loans. With no go to loan officer as in traditional debt, it seems as if the best way to get the attention of the servicer.

But even in traditional debt that is in default the FT reports that there is a resumption of debtor-in-possession (DIP) financing, heretofore shunned by investors and lenders. DIP financing has historically played a key role in repositioning hotels in bankruptcy with the "new" lender" getting to supercede all prior (defaulted) debt in hierarchy thereby providing much needed funds for cash flow and FF&E upgrades necessary to reposition the hotel. That may be particularly critical for smaller single asset bankruptcies involving hotels that are likely to come up in the near term.

Ranking cities - America's favorite

The San Francisco Examiner reports on a survey by Tripadvisor.com which states that "New York is America’s favorite city". Not entirely unexpectedly enough TA members voted the Big Apple as also the “Friendliest and Most Helpful” as well as the “Least Friendly and Helpful” city.

However, the Financial Times reported earlier in the week that these rankings are subjective and depend on one's preferences and, more relevantly, that many of the ostensibly liveable cities such as Vienna, Austria and Zurich, Switzerland had fewer than half a million residents.

Nevertheless, rankings matter for perceptions develop around them and can help make or break businesses, including hospitality given its dependence on transient visitors that come to savor the best. Mercer consulting's quality of living ranking covers 215 cities and is "conducted to help governments and major companies place employees on international assignments. Curiously Mercer's ranking is based on a point scoring index where all cities are ranked against New York which is their base city with an index score of 100. In 2009 Mercer rated Vienna at 108.6, and Baghdad 14.4.  The Economist Intelligence Unit also rates cities using a "liveability rating" and in its recent listing Vancouver, Canada was top dog.

None of the indices, with the exception of the TripAdvisor survey, seemed to have considered the quality and/or quantity of hostelry as a factor in their list.  It can't hurt if the hospitality industry insinuated itself in the process by making itself more visible to the rankers.