It's the worst recession in living memory, travel budgets have been slashed and there are fewer travellers out there - but five-star hotels are holding their rates. Why? Tom Otley investigates
There's no doubt the five-star and luxury end of the market is being badly hit in the current recession.
After a period of almost unprecedented growth, both in terms of new brands and the geographical reach as they expanded into new territories, they have been left high and dry by the sudden downturn. Many now find themselves opening new top-end properties into markets already over-saturated. The luxury sector was heavily reliant on bankers flying around the world to discuss financing new developments, many of which are now on hold. As a result, the meeting rooms are empty, the suites unoccupied, and hotels have seen occupancy and rev par (revenue per available room) figures plummet.
Yet for corporate travel buyers, the frustration comes when, having seen the negotiated deals rendered irrelevant by the general drop in rates, these same hotel chains are reluctant to discount. In many cases, the rate on hotels' own websites are more competitive. And yet those rates seem only available to leisure travellers rather than for the truly valuable customers of the hotel. So what is going wrong?
No chain-wide discounts
The five-star hotel chains believe that if they discount across the board, it will adversely affect their business not only today, but for years to come. It will damage their brand ("How can it be luxury if it is available cheaply?"), it will affect revenue, and so force them to cut costs, and it will be difficult to get the rates back up again once the recession ends, as was the case post-9/11. All strong arguments, especially when added to the belief among the hotel executives that discounting isn't going to stimulate demand from business travellers. As Simon Cooper, president of Ritz-Carlton puts it: "You can't stimulate business travel, but you can stimulate leisure.
That's working fine ..." For Cooper, there are two things to do: "Be as smart as you can with your operations ... and try to replace the rooms that business travellers are not occupying."
It's a point echoed by Rosewood Hotel and Resorts chief operating officer, Bob Boulogne: "You could argue that discounting might drive incremental leisure but in the corporate sector, it is a little bit trickier." As Boulogne puts it, referring to Rosewood's Texan home city where it has three hotels: "You are either coming to Dallas or you are not."
So luxury chains are replacing business travellers who aren't travelling (or who aren't prepared to pay the rates) with leisure travellers. Yes, it will be at a discount, but that discount can be disguised in a number of ways (upgrades, free extra nights, amenities included in the rate and so on) which explains the rates on the websites.
What the top-end hotels aren't doing is offering a lower rate for business travellers. Michael Marshall is corporate vice-president, sales and marketing, for Rotana Hotels, which manages 68 properties across the Middle East and North Africa: "We are alert as to what's going on in the market [and] to what our competitors are doing, and we listen to our customers. We need to continue the long term relationships we have with a lot of the corporate accounts, so we can have some form of flexibility in pricing. But it has to be done as a partnership to help us through the short term, to help us get back to where we were before. And it's a matter of making sure everybody is focused."
Of course, conditions change from one market to another. As Kurt Ritter, president and CEO of Rezidor Hotels, which operates the Radisson Blu and Park Inn brands, puts it: "If I were to send out a memo to all our hotels saying you do or do not discount, I would be a fool. Instead, I say before you discount, know exactly what you are doing. This doesn't necessarily bring you new clients, but we need to value-add instead, and each property has to do its own calculations. I have seen the big chain brands giving rooms away and, of course, they fill the hotel, but to get those rates back up again can take 10 years. So for the time being we have not done any 'panic' discounting." Simon Vincent, president of Europe for Hilton, takes a similar line: "The last thing we want to do is discount midweek bookings."
He admits that corporate customers have been trying to renegotiate rates, however. "We talk to them and see if we can reach a consensus. We have to take each case on its merits and try to reach a sensible conclusion. Some we will move on, and some we won't." In the case of Hilton, the recession comes at an interesting time, since it is launching a number of new brands into the UK market, including some for cash conscious travellers. Something of a challenge if you are trying to maintain rates for the main Hilton brand. Explains Vincent: "Different market segments need different things; a lot of business travellers are less motivated about rate. For them it's more about guaranteed rooms, familiar surroundings, the service and so on. We're trying to be flexible for each of the customer segments, but we're not going to use rate as a blunt tool. We have to protect the integrity of each brand but clearly we have to be competitive. If anything, these launches strengthen us because it gives us differentials between the brands."
Ed Fuller, president and managing director of Marriott International Lodging, agrees: "In terms of rates, we're flexible during this economic crisis, because each hotel is trying to deal with the market it is in. In general, most customers have been reasonable. They're not walking in demanding a US$10 room. People understand where we are, where the market is and what the product is."
Recovery?
Chris Cahill, chief operating officer for Fairmont Raffles Hotels International, believes that the relative strength of the leisure market bodes well for luxury hotels: "I think there has been a fundamental change in the accommodation sector over the last 10 to 12 years." He says that there is growing evidence that people have moved upmarket and, since leisure is already there, business at some point has to follow. However, he adds: "I don't think there's anything you can do to stimulate travel - people need to believe we've hit the bottom."
Structural change
But for Richard Hartman, CEO of Millennium & Copthorne, the last year has signalled the beginning of the end for the request for proposal (RFP) process. He sees it as a structural shift. "What's happened today is a major shift in the way people make purchases," he says. "The corporate rates which we used to spend so much time negotiating with clients are only any good if the internet rate is higher. It's all too easy to find the corporate rate and then the best available rate on the internet. As long as the RFP rates are higher than the best available rate, you'll see a big drop in corporate travel - although you won't know how much of that business has moved to the internet."
To illustrate the point, Hartman relates how he visited a corporate client and was shown their system. "He selected a hotel - they have a list that employees are authorised to use - and the negotiated rate came up - let's say it was £200. Without having to push a button, the programme accessed the hotel's website and brought up the best available rate for the day, which was about £20 less than the negotiated rate.
"There, right on the screen within a few seconds, you had a choice: book the RFP rate or book on the internet." His conclusion? "I think the annual negotiation of RFP rates is something that no one's going to be doing within three years. It's all going to be dynamic pricing."
For Hartman, the change is a good thing as it will simplify everything . "There has been a complete lack of compression in pricing since last year because of the big drop in travel from the banking and financial sector. Frankly, it's no longer cool to spend $400 for a 30m2 room in New York."