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The demand-supply equilibrium: When blue sky forecasting leads to the blues

July 14, 2012

A recent report on Bloomberg Businessweek carried the headline "Marriott's worries rattle hotel sector stocks" and notes that the hospitality leader had "reined in its prediction for fees for extras like Wi-Fi. It also says demand growth is slowing in the Middle East and in Asia, where economic growth is weakening. The company was particularly concerned about demand for higher-end hotels.

Bloomberg's report also noted that a mere month ago the company announced plans to have 4,000 hotels in 90 countries with  much of the growth to occur in China. Marriott was not alone as another leader,  Starwood Hotels, also planned on doubling its presence in China. Neither company appears to set much stock on reports about luxury brands such as Burberry and Chow Tai Fook who are seeing steep declines in sales in China.

One age old reason for it is the mixed messaging emanating from acknowledged experts. These include feasibility intermediaries who steadfastly hold to an optimistic forecast despite rising economic uncertainty and that major cities such as London and New York are "underhoteled", Ditto for analysts from investment houses such as Goldman Sachs who exuberantly cite that "global demand growth remains positive" while inexplicably stating that "there are no indications that supply is increasing in the U.S."  The latter does not comport with reality in many urban centers and particularly in New York where the past 4 years have seen a nearly 30% growth in supply.

The disconnect between expectations and reality in terms of customer supply is also played out for mega events like the Olympics.  London's hoteliers raised hotel rates by as much as 35% on average only to find many rooms remaining available. Now with the games just a few days away as this report in the UK's Guardian newspaper notes, hotels have now started to slash rates. No lessons seem to have been learnt from nearly identical outcomes for the last Olympics in Beijing when rapidly falterning demand prompted a retooling to attract domestic consumers. Certainly yet another case of Yogi Berra's "Déjà Vu all over again."

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