Corporate buyers are creating alternative strategies to contain runaway hotel rates in such key European cities as London, Paris and Moscow, where availability is limited and demand is strong. Most experts agree there is almost no prospect of rates flattening, let alone falling, in those cities in the foreseeable future.
Buyers are considering such ideas as negotiating earlier in the season, switching to independent properties, trading down, negotiating for non-room rate items and avoiding those cities.
The root problem, according to John Licence, Europe and South Asia vice president of international sales for Marriott, is that "occupancy is well into the 80s in all three cities."
According to Robert Barnard, partner for hotel consultancy services at PKF, in London "that effectively means hotels are not completely full on the odd Sunday night and during the winter."
High occupancy has translated into sharp rate growth, compounded for U.S.-based buyers by the continuing decline of the dollar, which last month fell below 50 cents to the British pound for the first time since 1992.
Hotel rate growth may be decelerating. According to the travel management company HRG, the average rate paid by its clients in London in January to March 2007 was only 3.5 percent higher than the same period last year. That is precisely half the rate of growth registered by HRG over calendar year 2006. Similarly, HRG reports year-over-year rate growth of 3.5 percent in Paris for the first quarter of 2007, compared with an 8 percent rise for the whole of 2006.
In Moscow, the change is even more pronounced. According to HRG, average rates in the Russian capital leaped 36 percent in 2005 and a further 28 percent in 2006 to make it the most expensive city on the planet. HRG said year-over-year rates for Q1 2007 were up only 5 percent.
However, not all figures concur with those of HRG. According to PKF, average rates in London for March shot up 9.4 percent to £123 ($246). Meanwhile, pointing out that the United Kingdom is expected to show the strongest economic growth of all G7 countries this year, PricewaterhouseCoopers expects a rise in average daily rate for London of 5 percent in 2007, and the same again in 2008. With one travel manager telling BTN she could not find a room in London within the next two weeks for less than $600, there is no discernible prospect of a return to a buyer's market.
The advantages enjoyed by hoteliers in London, Paris and Moscow are not only measurable in higher rates, but also include raising the room-night threshold for contracts, greater insistence on contractual compliance, charging a premium for last-room availability—which Margaret Bowler, director of global hotel relations for HRG, estimated averaged 8 percent—or ditching it completely, and raising charges for non-rate items.
Looking ahead, there is only mildly encouraging news regarding supply in London, Paris and Moscow. PwC points out that 11,000 new rooms are expected to open in London by 2010, but according to the office of the Mayor of London, the U.K. capital needs 2,500 new rooms every year until 2026. Among hotel brands opening properties in the next couple of years are Marriott (at St. Pancras, which becomes the London terminus for Eurostar in November), Radisson Edwardian, Hilton and Shangri-La. Most new properties are in eastern areas of the city, which until recently has had little hotel stock at all but will be the center of development for the 2012 Summer Olympics.
In Paris, said Barnard, "there are potentially some new upscale hotels coming on to the market," but not enough to address the supply imbalance fundamentally. Barnard added that the most upmarket properties in Paris, known as "palace hotels," currently charge about $1,100 per night. What is more, things will get worse before they get better. Pascale Pitou, the Paris-based European travel manager for Kodak, is bracing herself for a rate spike between Sept. 7 and Oct. 20, when Paris plays host to the Rugby World Cup.
The news for Moscow is slightly more optimistic. "We will see rates there leveling out a lot quicker than in London or Paris," said Marriott's Licence. Part of the reason is that demand for Moscow is less rounded, with considerably less tourist and meetings traffic than its two western rivals. The other reason is that building of new hotels by the likes of Hilton is underway, following the demolition of about 6,000 Soviet-quality rooms between 2004 and 2006. New supply will be available in 2008, but it has to be understood in context. According to the real estate consultancy GVA Sawyer, there is sufficient demand for 90,000 hotel rooms in Moscow, yet currently there are only 12,500 good-quality rooms available, equating to 1.2 rooms per 1,000 residents. In other European cities, this ratio varies from six to 35 rooms per 1,000 occupants.
The other problem facing buyers of accommodation in Moscow is that they have little alternative other than to send travelers to expensive five-star hotels because there are few other options with acceptable security standards.
With the luxury of being able to pick and choose their corporate customers, hotels in these cities also are taking more interest in clients who offer the best spread of business and are most likely to plug the few gaps in their bookings. HRG's Bowler said this is even becoming evident in the availability rules that high-demand hotels are loading into global distribution systems. "We are seeing minimum night restrictions appearing," she said. "If a client tries to book a hotel for Monday to Wednesday nights, there is availability, but if they want to stay on Tuesday only, the system says the hotel is full."
Samantha van Leeuwen, U.K. head of hotel and venues procurement for PwC, also has noted aggressive tactics by hotels in London. "Hotels are removing LRA and room allocations, withdrawing rates and imposing early-checkout fees, which has traditionally been an American tactic that is not enforced in the United Kingdom," she said.
As for solutions, no silver bullet can pierce the impregnability of the principles of supply and demand, but that is not stopping buyers from trying to manage the problem. BCD Travel has suggested that clients make themselves more attractive sales prospects than other corporate clients by negotiating with hotels outside the traditional request for proposals season of September to December, for example.
This is a ploy that appeals to Kodak's Pitou. "It could be a good idea to change the time schedule," she said. "I will try to move in this direction with my U.S. counterpart. Hotels cannot see everyone at the same time."
Another buyer considering the same tactic is Dan Birkett, a purchasing category manager with Sanofi Aventis in the United Kingdom, who is struggling particularly to control rates in London and Guildford, a 30-minute train ride from the capital. In addition, Birkett has tried to grab hotels' attention by leveraging his company's substantial meeting business and its transient hotel spend. He also has negotiated on such non-rate items as broadband access, meals and parking.
Birkett has worked hard to develop personal contacts at hotels in high-demand locations, talking to them face to face and stressing his intention to build long-term relationships. "In some cases, they are not interested, but in others I believe it has helped to minimize rate increases," he said.
At the same time, Birkett is trying to encourage the most drastic solution of all, which is not to travel to high-demand cities in the first place. He is shifting the emphasis of his travel program toward travel avoidance, partly to deal with the problem of high prices and partly because of the increasingly important imperative of corporate social responsibility, which discourages travel for both environmental and work/life balance reasons.
For those continuing to travel to the in-demand cities, hotel consultant John Melchior offers two suggestions. The first is to consider independent hotels, of which there are far more than in large U.S. cities, or the networks representing them.
"There are still a fair amount of independents and they are usually more cooperative," Melchior said. When dealing with the chains, he said, a buyer may gain relief in rate hotspots by offering support for the chain in cities where its business is weaker.