Pricing power on the rebound?

At the onset of the financial crisis many hoteliers forswore that they'd hew to a strong pricing strategy. It quickly fell by the wayside with RevPars declining by as much as 30% in New York City alone. However, the tide appears to be turning in favor of pricing power for producers of goods and services in a number of industries including hotels.

The Wall Street Journal reports on how "an inflationary tide is beginning to ripple through America's supermarkets and restaurants". Major corporations such as  McDonald's  have begun to signal that they'll "try to make consumers shoulder more of the higher costs for ingredients". Others such as Domino's are adopting a time-tested tiered pricing approach that to upsell higher margin products with a view to raking in greater profits.  Morton's , the upmarket restaurant chain, which has seen an uptick in business since last year thanks to an increase in business travel, raised menu prices 2% across the board.

With regard to the hotel industry, Business Travel News notes that HVS has gone so far as to forecast that rates will grow by at least 5 percent each year, which means they would top 2008 levels by 2013. American Express Travel also reports that pricing power is being tipped to swing back to air and hotel suppliers for the first time in two years in 2011 as more competition for limited seats on planes and increased occupancy levels at hotels are expected. Assuming continued economic growth based on present trends and a resultant increase in demand together with capacity constraints both airfare and hotel rates are expected to grow up to high single digits in 2011. That according to American Express will effectively bringing prices back to pre-recession levels. Asia is expected to lead pricing increases with established Western economies seeing less pricing expansion.

While major brands such as Hyatt, principally in major conurbations, are seeing spikes in RevPar up to 6.9 percent in the latest quarterly report, hotels in smaller locales too are being urged to raise their room rates. In Rhode Island, a principal with the Pinnacle Advisory Group, castigated hotel operators for not "adjusting to the good news in their industry as quickly as they need to"! The consultant urged "all hotels to start charging more because if one holds out and doesn’t raise prices, the increase won’t work for the industry." Presumably, there was a caveat about price collusion somewhere in that exhortation.

The industry will do well to be wary of and preferably steer clear of blind-booking offers such as this one from Expedia which does very little for the bottom line and even less for brand enhancement. Under that offering hotel customers can "choose hotel rooms in more than 25,000 hotels worldwide for as much as 50 percent off comparable online rates."

In these fragile economic times, that penchant for discounting, however, is not limited in hotels as even sports teams such as the New York Mets are having to cut single-game ticket prices by an average of 14% in an attempt to increase revenues and coax spectators back to  Citi Field. It is unclear, yet, if it will provide the desired outcome.

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.

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