By: Robert Rauch, Principal
April 5, 2013
The venerable institution of hospitality has been turning around over the past two decades. The combined impact of shifting demographics and new technologies are the primary catalysts for this metamorphosis. The Internet provides consumers an opportunity to think of the hospitality industry components as commodities. Hotels, restaurants, spas and the like have been lowering prices to gain a competitive advantage.
A Quick Summary of Hospitality Pricing
Revenue management is the set of techniques that determine which reservation requests to accept and which to reject to optimize revenue. The principles of revenue management had their origin in the airline industry back in the 1970s, but the concepts are equally applicable to hotels, restaurants, attractions, and recreation venues.
The airlines used mergers and supply constraints to avoid the commoditization dilemma. They simply owned the routes they wanted and pulled aircraft off the runways, which in turn filled flights. Hotel brands, led by Marriott and Hilton in the 1980s and 1990s, delivered a myriad of new brands such as Homewood Suites by Hilton, Hilton Garden Inn, Residence Inn by Marriott, and Courtyard by Marriott. By the 21st century, every major hotel company had a verticality of brands from budget to full-service hotels. Online Travel Agencies (OTAs) began to sell hotel product at deep discounts and this led the brands to negotiate fees with the OTAs.
Restaurant chains from fast food to quick service to fine dining began price wars, and attractions began pricing that included pay for a day, come for a year. It is time for the industry to price based on value perception and not price as if it is a commodity.
Know your Customers’ Behavior and Decision Process
Packaging is the answer to the commoditization conundrum. The large amount of demographic and psychological information available about the make-up of today’s traveler and hospitality user requires analytical skills and creativity to correctly respond to the marketplace. The MMGY Global/Harrison Group 2012 Portrait of American Travelers provides detailed information on consumer wants and needs today. This year, expect a boost in travel spending due to a renewed belief in quality experiences that are worth the splurge.
Product choices by consumers are influenced by a model of the consumer decision process. There are several risks that hospitality executives must overcome to achieve success in the marketplace:
1. Performance Risk – the chance that the product may not satisfy the consumer
2. Financial Risk – the monetary loss from a wrong decision
3. Physical Risk – the likelihood of illness or injury to a guest/consumer
Loyalty to a chain is a major factor in product choice by consumers. Airlines, hotels, restaurants, spas, and many attractions allow guests to accumulate points that may be exchanged for free passes, guest stays, and meals. The consumer’s perception of the hospitality company and what it stands for is paramount to the success of the venture. Product quality must be exceptional, service must be at the level of “wow,” and there must be a compelling value proposition for the consumer to choose your business.
Sample Formulas for Success
My father, Richard A. Rauch, Ph.D., created a multivariate model of consumer behavior that applies here in part. As such, I am borrowing key facets of this model from his work in the field of retailing in the 1990s:
A = B x W x N
A: Attitude toward the business
B: Belief of a consumer that the business possesses a particular desirable attribute
W: Weight of importance of the attribute to the consumer
N: Number of attributes important to consumers
Recently, at a conference hosted by Hotel Interactive, I listened to a presentation by Martin Sklar, former President of Walt Disney Imagineering. He told us about Mickey’s Ten Commandments and they hold true today:
1. Know your audience
2. Wear your guests’ shoes
3. Organize the flow of people and ideas
4. Create a visual magnet
5. Communicate with visual literacy
6. Avoid overload – create turn-ons
7. Tell one story at a time
8. Avoid contradictions – maintain identity
9. Ounce of treatment – ton of treat
10. Keep it up (maintain it)
Expect More International Visitors
Average rates and occupancy levels in the US are likely to increase over the next few years for a very new reason. “Leisure demand from abroad, fueled in part by the new Discover America campaign, will stimulate new demand,” according to Arne Sorenson, president and CEO of Marriott Hotels & Resorts during a recent Global Business Travel Association (GBTA) panel discussion in Boston. Brand USA, the destination marketing organization (DMO) behind Discover America, is the national marketing engine promoting US travel to international visitors.
The U.S. has about 5 million hotel rooms and almost no new supply in the construction pipeline, Sorenson noted. At the same time, China is ramping up to send about 100 million leisure tourists into the international market every year. If the U.S. gets its typical share, that will mean an additional 10 million visitors from China alone.
A Second Look at Refinancing
When moving from your business plan to your actual budget, remember that while a zero-based budget is time consuming, it will save you tens of thousands of dollars on your bottom line. Each dollar on the bottom line increases the value of your asset by about $16 depending on capitalization rates. So a savings of $60,000 means an increase in value of about $1 million!
If refinancing is an option, remember that interest rates are unbelievably low right now and that debt is actually available! As a matter of fact, though it is limited, there is even some new development activity in the pipeline. While there is still some economic uncertainty, this industry is cyclical and we are already in the fourth inning of the recovery. Look back and remember 1996-2000 and 2004-2008. Compare them to 2012-2016. The money is made in the middle innings and we are there.
Sustainable tourism has become a trend. At the recent The London Group 2013 Real Estate Forecast, we did not discuss this trend in depth, however, it is a force to be reckoned with as much as mixed-use development. As the world’s population soars and resources become increasingly scarce, businesses must act responsibly. In a world where videos go viral and transparency has increased markedly, it makes sense to be known as a concerned developer…and it finally has been proven to pay off economically in many instances. It can also serve to protect the reputation of the developer in the community that often will fight good development in the name of “all development is bad!”
Gary London, President of The London Group, made a great case for mixed-use development in a recent article about One Paseo in Carmel Valley.
While financing today requires some creativity, there are loans available. One creative financing scheme is EB-5. This source of alternative financing is not easy to put together but has supporters in the investment community. This does not change the paradigm of putting together a great development team, having strong sponsorship, an experienced contractor and operator, and more. The bottom line is that there are opportunities to build hotels in strong markets where current products are doing well despite their age.
Summary and Conclusion
2013 is a recovery year.
The tourism market has outperformed the economy over the past year. By and large, by all measurements, travel demand is up. This past year the hospitality industry has seen growth in both occupancy and average rate. The industry’s occupancy will likely increase by 1 percent, average daily rates will rise by 4 percent, and revenue per available room will increase by 5 percent. Remember that our industry is now more of a science than an art…great stewardship of your properties will reward you in the millions over the next few years. May the wind be at your back and the occupancy, rate, net income, and values make you happy this year and for many years to come!
Robert A. Rauch, CHA, is a veteran hotelier, developer, owner, operator, consultant, professor, and principal at The London Group Realty Advisors. He can be found at www.hotelguru.com.