Demand in the luxury lodging segment has steadily climbed year to date, but average daily rates and group rates are not keeping pace, according to Smith Travel Research. In comparison with dismal 2008 and 2009 figures, occupancy and revenue in the sector have jumped this year, but the sluggish ADR performance has some predicting corporate buyers will maintain their leverage over luxury hotels in the 2011 negotiation season.
In luxury, "it is a buyer's market, and hotel sales managers tend to negotiate based on current market conditions even though most people are expecting things to get better next year," said Mark Woodworth, president of PKF Hospitality Research. "Hotel sales managers were really burned last year, and they are really trying to get people back in the door. The leverage of the negotiation is with the buyer and the corporate meeting planner for next year. But as ADR starts to grow, that is when corporate sales managers will get a little more aggressive and the pendulum will start to swing."
Bob Brindley, vice president of BCD Travel's advisory division Advito, similarly said that in markets where demand and ADR remain depressed, corporate accounts will be able to hold off rate increases. "In some higher-demand markets, like New York and Singapore, luxury properties will aggressively hold rates at the initial offer point," said Brindley. "In other markets where overall demand is still depressed, we expect luxury properties will act like the upper-upscale segment and negotiate down during the request for proposal season."
STR predicts 2010 luxury demand will increase by 5.7 percent and occupancy by 3.6 percent, but ADR will go down 1.1 percent. For 2011, the group expects luxury demand to increase 3.1 percent, occupancy by 2.5 percent and ADR by 3.9 percent. Responding to this ADR growth, many corporations will drop these properties from their preferred listings, according to Brindley. "Some clients with upper-upscale policies have taken advantage of attractive rates from luxury properties in 2009 and 2010," he said. "If these rates increase more than the market, these customers will once again tier down to upper upscale. For most clients that have an upper-upscale-or-below policy, if a luxury hotel is currently in a transient program, it would only be because of price point, no other choice or safety."
Geographically, luxury occupancy in 2010 through May was up in Asia-Pacific (17.6 percent), South America (12.6 percent), North America (8 percent), Europe (7.7 percent), the Caribbean (7.4 percent) and the Middle East and Africa (2 percent). However, ADR remained under pressure, with declines in South America (2.7 percent), North America (1.9 percent), the Middle East and Africa (1.2 percent) and Europe (0.8 percent). In Asia Pacific and the Caribbean, rates were up 4.4 percent and 2 percent, respectively.
"Regions of the world play a large part," said Brindley. "Asia and Latin America seem to have more of a propensity to use luxury as that is what is available or what is deemed 'safe.' For the United States and Europe, luxury is only used when the price point comes in competitive with the upper-upscale equivalents or for VIP use only."
Buyers Concerned With Perception And Price
In some cases, corporations still are moving away from booking rooms and hosting meetings in luxury hotels for fear their companies may be perceived as spending extravagantly. "We are still very cost-conscious, and we are still not promoting luxury hotels because of perception," said a buyer in the pharmaceutical industry, in which "codes [of conduct] prevent us from having meetings at a property that is a 'resort' and that has nothing to do with the economy; it's because of the corporation's integrity agreement, and that is a business practice that will continue."
Others said luxury properties will remain in their programs, but that price sensitivity still will exist in 2011 as it did in 2010. Claudia Hurtado, AllianceBernstein global travel manager, said that although luxury rates were "very aggressive this year," next year's rates will "probably not" be, but "it all depends on the market." Luxury properties that "aren't within reason" or do not "negotiate a reasonable rate" will be removed for more competitive offers, she continued.
"We never removed the luxury segment. Am I going to include more than I did last year? No, the [number in the program is] going to probably be the same," said Hurtado. "The hotels are going to try to push rates because I don't know how they are going to operate on these low rates."
"The majority of clients have maintained not adding five-star properties to their program," agreed Sherie Hermann, Carlson Wagonlit Travel global project manager of the hotel solutions group. "The rates coming out of those hotels are more in line with the lower-star properties to be able to get business, but we didn't see an uptick in clients wanting to add more luxury hotels into their mix. Most clients are really looking at cost savings, but they are also looking at the public's opinion of using luxury hotels as a negative. Perception is still a consideration. If the rate is just too high, it doesn't matter what class they are in; they are not going to be accepted."
Hoteliers "feel that if their occupancies are increasing, they will have the pricing power for 2011 and 2012," explained Jan Freitag, Smith Travel Research vice president. However, hotels will take "a little while to recover" from the severe hit to group cancellations, he added.
[Speaking broadly about corporate rates at all service levels, executives with Marriott International and Starwood Hotels & Resortslast month discussed the potential for percentage increases.]
Group Demand Impedes Luxury
Group demand was still below 2008 levels but improving over 2009, according to Freitag. Group rates year-to-date in May averaged $223, compared with $245 in 2009 and $262 in 2008. "Hotels make a killing on meetings and events," said Hurtado, but for companies like AllianceBernstein, the focus is not on holding internal meetings yet. "We didn't have meetings for a while," she noted. "That was one of the areas that was hit the hardest, and [we] basically stopped having meetings and events. We have always been conservative with things like that. The only meetings that we did have were client-driven ones, [meetings] more focused on the internal employee were stopped."
Meetings were "hurt from a pricing perspective," acknowledged Marriott International COO and president Arne Sorenson, speaking at a New York University hospitality conference in June. "As the economy comes back we see the Ritz-Carlton brand revenue per available room growing faster than any of our other brands; that's because they fell harder, but it's also because they have an experience to offer. I suspect you will see less [corporate] and more of a meaningful family vacation, experiences of a lifetime."
Group is "coming back, we are already booking now for the future where we weren't a year ago," said Isadore Sharp, former CEO and current chairman of Four Seasons Hotels and Resorts. "These aren't people going there just to have a good time, they're going there for incentive [meetings] or other reasons. It is good business to give people an incentive, and travel is probably one of the best you can give. The group base is coming back, and we now see an improvement in our occupancy. Rate is still sluggish, and that will take time because the only time we can start dealing with rate is when you have stable occupancy."
During the second quarter, real estate investment trust Host Hotels & Resorts, which owns many Marriott and Starwood properties, reported group activity in luxury hotels increased by 7 percent while corporate group was up by 34 percent, according to CEO W. Ed Walter.
Luxury Not Going Away
This past quarter, Marriott's worldwide luxury business did "extremely well," according to Sorenson. The Ritz-Carlton brand reported flat ADR of $297, an increase in occupancy of 9.9 percentage points, to 71.9 percent, and growth in RevPar of 16 percent, to $212.67. Still, Marriott's luxury figures lagged from second-quarter 2007, when ADR was $357.95, RevPar was $269.10 and occupancy was 76.2 percent. Marriott in the June 2010 quarter reported luxury revenues of $364 million, up from $324 million during the same period last year but depressed from the $370 million achieved in second-quarter 2007.
Starwood Hotels & Resorts reported second-quarter ADR drops for its St. Regis and Luxury Collection brands of 1.8 percent, to $287.60, whereas occupancy increased 7.2 percentage points, to 63.6 percent, and RevPar jumped 10.7 percent, to $183. During the same period in 2007, ADR was $339.19 and occupancy held steady at 68.6 percent. "Our luxury brands are enjoying a great rebound with RevPar gains over 15 percent for the year," said Starwood CEO Frits Van Paasschen during a quarterly earnings call.
Luxury "as a product will always be a part of the industry," Four Seasons' Sharp said. "The idea of 'luxury is dead' might be 'the new normal' but there is always going to be a top end of every market that wishes to enjoy the best."
There is a concern that until rates reach past levels, properties will continue to cut services in order to stay afloat. "To combat the decline in revenue at the hotels, a lot of services and amenities were cut," said PKF's Woodworth. "Until you can move ADR, you can't increase your profitability. So you have all these new guests, but if profits aren't going to grow, can they reinstate the services that were cut in 2009? That is a big issue."
Although Four Seasons had to make cuts, Sharp said, the brand managed to "be creative" in order to "maintain the standards that our customers have come to accept and request." During this downturn, "people worldwide used their ingenuity to try to reduce cost, not to reduce the standards that the customer would come to expect," he said.
For corporations, "that was a concern last year," Advito's Brindley said, "but hotels will keep service levels up to maintain their brand reputations."