While it's still early to pinpoint to what degree hoteliers
will raise rates when 2012 negotiations commence in September, hotel executives
are projecting percentage increases in the mid-to-high single digits. Still,
analysts say strategic approaches could stave off more-than-moderate increases
in most programs.
Overall U.S. average daily rates in 2012 should return to
2007 levels, though only nominally, not adjusted for inflation, said STR Global
senior vice president of global development Jan Freitag during a recent
Business Travel Media Group webcast. Upper-tier hotels are reaching occupancy
levels of 66 percent to 69 percent, and hotels generally have pricing power at
60 percent occupancy, he said.
Even so, average daily rates for group travel remain low, as
they were negotiated in weaker economic times, and likely will "take a
year to burn off, maybe longer," Freitag said, which is hindering overall
rate growth.
"As you're going into negotiations for group rooms, the
booking windows have compressed, and there's very little visibility in the
future," he said. "Hotels say, 'Yes, we'll take you and give you a
good deal,' not trusting the data saying demand is back and demand rebounds are
sustained."
Advito vice president Bob Brindley said limited new capacity
would help edge rates up. A few select markets, including New York, have seen a
significant number of hotel rooms added in the past few years, but overall
supply growth this year in the United States has been limited, and it will
continue to be for some time.
"Corporate demand is strong, new building has totally
dried up, and all that leads to a good year from the suppliers' perspective,"
Brindley said. "A few markets have some capacity, which is tempering the
ability for hotels to go too crazy on rate increases, but we've seen more
sold-out situations as the economy has improved."
Expectations of U.S. corporate rate increases between 3
percent and 6 percent seem reasonable for 2012, Freitag said, with specific
markets trending a bit higher or lower. And for those buyers expecting to lower
rates without enacting a tiering-down strategy? "I wish you well,"
Freitag said.
An Early Start?
With most major industry forecasters predicting demand
growth throughout the rest of 2011, providing hotels with more ammunition to
boost rates, procurement professionals might be inclined to begin negotiations
earlier than usual, although analysts caution that could produce mixed results.
Adam Weissenberg, vice chairman and leader of Deloitte &
Touche's tourism, hospitality and leisure practice, said there is some logic to
the early-bird strategy. Not only might buyers get ahead of future rate increases,
but they also might be able to demand more attention from sales teams when
hotels are not in the midst of the peak negotiating period.
"It'd be smart for [buyers] to start the negotiations
earlier and lock up the rooms they need," Weissenberg said. "If they
can demonstrate to [hotels] that they'll meet their contractual obligations, I
don't know why, as an operator, the hotel would want to wait."
Reality does not always pan out that way, however. Advito's
Brindley said many buyers tried that strategy last year when demand appeared to
be on the upswing, and their only accomplishment was to prolong the negotiating
process. Hotels came back in the first round with aggressive price increases
and held a hard line, anticipating the better market conditions around the
corner.
"The hotels dug their heels in, and, for those pioneers
first in the market, there was less of a need for the hotels to pull back,"
Brindley said. "Clients who went out early only ended up doing extra
rounds."
Success with that strategy generally depends on a buyer's
clout and how important the business is to the hotel, said Jo Ann Baynes,
president of Uversa International, which recently was acquired by Lanyon.
Even if buyers are able to negotiate early, they risk
missing out on savings opportunities in select markets should conditions
change. Despite the predominant forecast, continued demand growth is not a
certainty, said Kim Maschoff, director of TCG Consulting's hotel practice. "The
optimism is there now, but what we see in July could very well be different
later on," she said. "There's a likelihood that something is going to
happen—political unrest, for example—that's going to throw things into turmoil."
Regardless of when corporations actually plan to send out
requests for proposals, consultants concurred that buyers should be working on
their programs now: collecting data, running assessments, reviewing strategies
and building a solicitation list. No consultant said delaying negotiations
beyond the usual timeframe was a good idea.
"We know this process takes a while, so buyers should
be in the process of getting their plans and teams together so they can release
the RFP at a sensible time," Maschoff said.
Negotiating Strategies
Knowing that rates likely will go up at least to some degree,
buyers should focus on value-adds in this year's negotiations, the consultants
said. In exchange for higher rates, hotels might be more willing to concede
certain amenity add-ons, including free in-room Internet access, breakfast,
parking and top-tier loyalty program memberships.
"Hotel companies have realized that Internet access is
something they have to give to corporate travelers," Deloitte's
Weissenberg said. "With things like health club access, I would expect to
see more of it this year."
Before pursuing this route, buyers should assess the true
value of the amenity, Maschoff said. Even though Internet access always is
listed as the top must-have amenity, if most of a company's travelers have
smartphones through which they check email, they might not use in-room Internet
much anyway. Free breakfast tends to be important to travelers in Europe but
not as much to their U.S. brethren, she added.
Buyers this year also might benefit from casting a wider net
in their initial solicitation list, including adding some select-service
properties in markets where they had primarily upper upscale hotels. Buyers who
limit themselves to just their usual hotels could face steeper increases than
those who contact competitive hotels before returning to the table, Brindley
said.
Maschoff said buyers should take a close look at their
corporate cultures before making drastic changes in hotel service levels,
however. "From a procurement perspective, on paper, it looks simple: You'll
save if you use a four-star hotel instead of a five-star," she said. "You
have to know whether your culture and travelers will allow for that, how it
will affect compliance and whether you're willing to put in the necessary
policies and communications to uphold that."
Brindley also suggested that buyers should be looking at
establishing rate caps in high-volume markets. That way, they can assure
travelers stay within budgets even in cases where the negotiated rates are not
available. Coupling this with encouraging travelers to book their hotel further
in advance helps ensure that they get better rates, he said.
Lanyon's Baynes said buyers who have not yet consolidated
group hotel spending with their transient spend would benefit from doing so
this year too. "Procurement is all about looking at the total picture,"
Baynes said. "You wouldn't buy pencils, erasers and paper clips all from
different vendors, so you can apply that same logic to hotel spend."
Dynamic Decisions
Buyers this year also might face greater pressure compared
with the past few years on accepting dynamically priced agreements in lieu of
fixed negotiated rates.
While many major hotel chains have encouraged buyers to move
to dynamic pricing in recent years, it has yet to gain significant traction
among hotel buyers. Even InterContinental Hotels Group, which developed a sales
initiative to make dynamic pricing more palatable to buyers, reported that just
under a quarter of its corporate accounts included dynamically priced rates
this year. In many cases, these are hybrid programs, in which key cities have
set negotiated rates and secondary cities have percentage discounts off best
available rates.
With the seller's market returning, hotels likely will
ratchet up those efforts this year, Brindley said. "They've been trying to
do it for the last eight years with limited success," he said. "It's
clearly not yet a strategy in line with preferred properties in your top
markets. Buyers want to lock in guaranteed rates, and there's still a big
incentive to continue to do that."
Baynes agreed, saying that despite the push this year,
dynamic pricing will take a backseat to fixed rates: "Corporations still
need to set a budget and know how much everything is going to cost."
Even so, buyers can use the dynamic pricing push to their
advantage, Maschoff said. Even if they've traditionally been able to negotiate
rates in areas outside of their primary markets, buyers might be better served
this year by focusing their negotiating resources on only those primary
markets. Negotiating a percentage discount in those other markets can be
simpler and not significantly different price-wise than what would have come
out of protracted negotiations.
"They should look at their
particular markets as individual clients, what their volumes are in the market,
so they can really create a strategy for negotiations," Maschoff said. "Buyers
need to focus their energy in the right places, where it really matters."
Originally
published in the August 2011 issue of Travel
Procurement.