Demand is far outpacing supply in key hotel markets around the world, driving occupancies and rates to record levels. These trends are placing even greater pressures on corporations to better manage hotel costs, currently rising at double the rate of inflation, panelists told more than 100 participants at the Association of Corporate Travel Executives' forums in Atlanta and Dallas last week.
In Atlanta, Smith Travel Research vice president Jan Freitag said the firm expects an average daily rate increase of 6.7 percent in 2006 and 6.5 percent in 2007 in the United States. Luxury properties in New York are increasing rates at double that average, while downtown Boston and San Francisco also are higher. In its 2007 Industry Forecast, BCD Travel advised clients to expect a 6 percent average increase in hotel costs.
"In 2008 and 2009, the supply-demand balance will even out and occupancy will flatten out, and the question is, what will happen to rates?" Freitag asked.
Demand began outpacing supply in 2003, said Omni Hotels corporate director of sales and marketing John Hackett, citing industry reports from Smith Travel Research and TWR/Dodge Pipeline. By 2004, demand rose 4.2 percent, compared with a 0.6 percent rise in supply. JPM Securities projects the "hotel up-cycle" to last until 2010, Hackett said.
Despite the supply-demand imbalance, panelists said corporations can take steps to reduce costs. "There are things that are controllable," Hackett told the ACTE executive forum in Dallas.
While the market conditions are prompting corporations to more aggressively manage hotel programs, BCD Travel vice president of hotels Maria Chevalier estimates that 50 percent of hotel spend remains unmanaged.
"Leverage global volume where you can," suggested Chevalier. "There are a lot of chains now going into international markets where they are not as strong."
Advised Flextronics International director of global procurement travel services Gordon Gunther, "Before you do anything, look at your culture and organization. Because we're a low-cost company, we're very focused on costs [and] able to mandate--and travelers must abide by it."
To gain leverage in negotiations, corporations need to advise hotels if they can mandate preferred-supplier usage, bias their displays in online booking solutions or implement other ways to guarantee volume, panelists said.
For example, Gunther said Flextronics was able to save $250,000 a year by consolidating volume in San Jose from 20 hotels to just two primarily properties. Once partners are selected, Gunther said, he doesn't switch just to save a dollar or two since the cost of "change management" in terms of traveler clarity on supplier relationships is far greater.
"Don't let the studies drive increases," Gunther said. "Look at your volume. Did you make your commitments? Are new properties opening? Make sure you are well informed before you negotiate."
Noting other hotel negotiation trends, Chevalier said an increased number of hotels are declining to respond to requests for proposals, raising qualifying room-night volume thresholds and reducing the number of corporate client accounts at individual hotels. Last room availability is also demanding a premium rate.
Several panelists also mentioned growing use of electronic folio data. "Hotel folio data is very, very important--to get info that has the name of the hotel, instead of [a management company]" is critical to data integrity and negotiation, said EDS hotel program director Christi Hedrick. In its hotel bid process, currently underway for next year's program, EDS asked respondents to detail hotel folio availability or plans for it.
Chevalier said corporations now receiving hotel e-folio are asking, "Now what do I do with it?" The data allows corporations to analyze cost of stay, rather than just rate, and to use that as leverage with suppliers, she added. The U.S. initiative "is only in 40 to 50 percent of hotels. It will be years before it impacts you on a global level," she added.
Factoring in Internet access, breakfast, parking, airport shuttles or other expenses detailed on folios, corporations can compare "cost of stay" against properties that include such items in a slightly higher rate.
Gunther and Hedrick shared their contrasting views of negotiating hotel deals locally, or nationally. Gunther said his experience is that "you'll get a better deal with local representatives because they're talking to the owner." Hedrick opined that with 1,500 preferred hotels globally and $85 million in hotel spend, she doesn't have time for local negotiations and instead relies on strong relationships with national chain representatives.
But a wave of flag conversions is giving Gunther pause. As hotels switch flags or chains, it sometimes takes months before bedding, training and service standards are delivered. "There is inconsistent product with lots of changes," he said, which may confuse travelers about what to expect from a brand.
Panelists in both forums also discussed ways to deal with dynamic pricing. Gunther noted that floating rates--set discounts off market rates of the day--are confusing to travelers, hard to audit and even harder to mandate. It's also difficult for the travel department to offer a consistent product that includes breakfast and high-speed Internet, as prices for those services may also vary.
Of greater concern to Hedrick is the fact that the "technology you have today can't load percent discounts. Travelers need to go through multiple screens to see prices and availability."
"Does this new pricing model make sense?" Chevalier asked. "At the start of the year, we heard about it a lot, but then it kind of got quiet. We're not seeing quite the push. Hotels were beginning to test the waters and see how open the buyers would be to this pricing model and I think, candidly, the buyers came out and said, 'We're not--not when you're raising rates.' "
"But there are many situations where dynamic pricing makes sense for corporations," she added. "If a company doesn't have heavy concentrated spend, absolutely dynamic pricing could potentially work if you look at the analysis."