Boom Year: Maneuvering In A Seller's Market

<FONT SIZE="+3"><B>Boom Year: Maneuvering In A Seller's Market</B>

By Randall Smith

Last year was the most successful and profitable year in the history of the U.S. lodging industry, according to Smith Travel Research's 1996 HOST Study. The primary factors for this strong year are 50 months of increases in the number of rooms sold, higher room rates and improved operating efficiency.

This boom year follows what was a slow period for the industry. The hotel business is quite cyclical, although the cycles can run for several months or even years. Like any business, the lodging industry is subject to the economic laws of supply and demand, but demand is geared to the general economy and supply often is governed by the availability of funds for development.

Based on our continued monitoring of the performance of 13,000 hotels, these cycles seldom coincide. The sharp increase in demand that began in January 1992 was readily absorbed by existing inventory. In addition, since the industry was just recovering from the building boom of the late 1980s and the resultant debt restructuring, there were few funds available for new development. The rate of increase in supply began to show an appreciable rise in late 1995, but by that time the rate of change in demand had dropped dramatically.

Just as the demand did not correspond with supply, recent demand cycles have not correlated with the average daily rates. The chart at the left shows the rate of change in average rates in luxury and resort hotels compared with the fluctuations in rooms sold. In each type of hotel, the line representing price changes has recently gone in the opposite direction from the number of rooms sold.

The industry is now on a campaign for better profits, and increasing the average room rate is essential to this strategy. The comparison of pre-tax income (loss) and room rates for the past seven years shows that profitability has gone from a loss of $5.7 billion in 1990 to a profit of $10 billion in 1996. Rates have followed a similar pattern.

The full-service, luxury-upscale and resort segments of the lodging industry are generally the ones most attractive to corporate buyers of housing. Over the rest of the decade, the fundamentals for these groups will be affected by the following factors:

<H3></H3> Very little new construction. These types of hotels are expensive to build, difficult to staff and hard to finance.

<H3></H3> Higher occupancies or, from the buyer's viewpoint, fewer vacancies from which to make a reasonably priced selection

<H3></H3> Room rate increases that average 4 to 5 percent annually

The outcome is graphically represented in the chart on Page 12, which shows how the average daily rate is expected to surge in luxury and resort hotels as the number of average daily vacancies in those segments declines.

The industry will become the seller's instead of the buyer's market we had in the early 1990s, when operators turned to heavy discounting to fill rooms and gain advantage over their competition. Coping with this fundamental change will be a challenge for all corporate travel purchasers.

What Can Be Done

The first step in managing this process is to know as precisely as possible your company's requirements. How many room nights are purchased by the main office and the branches annually? What level of accommodations and services do your representatives require and what are the preferred travel times? Are there alternative facilities, dates and days of the week that can be substituted? Can your people be persuaded to trade down under certain conditions or at special times? If you have significant meeting business to place, this can be an added incentive in making a deal for all your needs. It helps if you can provide details of the spending habits of those attending meetings, their status with the company and the possibilities of pre-and post-meeting events. You have plenty of clout if you know the value of your business, the volume of your potential bookings is large, you can be flexible on dates and services, and you can report a good track record in terms of honoring commitments.

The second step is to become thoroughly familiar with lodging industry fundamentals and with the policies of the sellers of lodging accommodations. This can be done best by talking with hotel owners, conference directors, catering managers and other travel buyers. Learn the industry's strengths, weaknesses and pricing patterns. Find the people with the authority to make rate and service concessions, and get to know them. Some of the specific steps that can be taken are:

<H3></H3> Try to book accommodations during slow periods. The accompanying charts show the months of the highest and lowest vacancies in some of the industry segments.

<H3></H3> Check the computer mapping programs to obtain alternative hotel submarkets; most of these mapping aids show the facilities available within a reasonable radius of major cities.

<H3></H3> Explore the possibilities of special deals with one or more of the chain operators. Many of these companies provide facilities that range across the entire spectrum of price and service. If you can guarantee a good level of regular business with time flexibility, it would be worth it to most operators to make a deal for special prices for your constituents.

While these suggestions deal with necessary travel, there are ways to avoid travel. In the event that you are forced by budget restrictions to reduce the amount of travel and the length of hotel stays, there are other steps to be considered:

<H3></H3> Investigate new developments in telecommunications. Many hotels have provisions for holding a conference in a guest room or in a special meeting space; attendees can interact via TV screens and modems. They can be in their offices or even in their homes if they have the appropriate equipment.

<H3></H3> Consider reducing attendance at conventions and meetings. Hold more regional sessions where some attendees will not require housing.

There seems to be no doubt that the demand for accommodations in the full-service, higher-priced hotels will continue to increase and that few new, large properties will be built in the next few years. Rate discounts will become increasingly difficult to obtain, and booking meetings during the most popular periods will become a formidable task.

Volume buyers of hotel rooms and meeting planners must develop strategies now to deal effectively with the market dynamics expected for the next few years.

Knowledge of industry nuances and trends is essential to this process. Buyers looking for information on the fundamentals of the lodging industry might find many of our publications helpful. We especially recommend the 1996 HOST (Hotel Operating Statistics) Study for an overall view and our regular monthly newsletter "Lodging Outlook" for reports on lodging industry performance and periodic analyses of the various segments of the business. Buyers also can contact the American Hotel & Motel Association Information Center for a complete list of other industry publications.

Randall Smith is chief executive officer of Smith Travel Research, a hotel research firm in Hendersonville, Tenn.