Buyers Come Up Short: Hotels Stay The Course As Cos. Miss Targets
Faced with reduced travel budgets, many buyers have pared down their initial volume projections made to hotel companies in negotiating 2002 rates. In response, hotel companies are scrambling for ways to manage the shortfall, short of threatening to reevaluate negotiated rates upward in the next contract period. Instead, hotels are struggling to keep the buyer relationship intact, expecting that travel patterns will rebound down the road.
The issue of overly optimistic room night projections first surfaced as the economy worsened through 2001. While business travel began to return to normal levels in January and February, occupancies in key business destinations remained far below prior year levels. Confronting widespread occupancy declines and, hence, reduced room revenues, hotels have resorted to a back-up measure of success: If buyers can't produce the room nights projected, are they able to move market share? In other words, could they consolidate their room night requirements in a given city into the hands of their hotel company, thereby taking market share away from the competition?
In the past, significant shortfalls in volume projections invariably resulted in negotiated rates being reassessed. Hotels today are much more wary of taking such a punitive step.
"With our people still traveling less due to budget restraints, we simply need fewer room nights in many of our most-traveled-to cities, especially compared to the days when travel levels were at their peak," said Kevin Maguire, travel manager for Tokyo Electron America in Austin, Texas. "I can say, however, that we haven't gotten one call from a hotel vendor saying they couldn't work with us because of the drop in room nights. This would have been unheard of 18 months ago."
In the present market, accuracy of information is at more of a premium than ever. "The more accurate—and candid—you can be in making your travel projections, the more willing the hotels will be in wanting to work with you," said Gary Polito, manager of corporate travel for Bose Corp. in Framingham, Mass.
Polito said it doesn't help anyone when the initial projections are way out of kilter; they just create an unrealistic expectation that buyers are then unable to deliver on. "Today, this means having reliable data on a market-by-market basis, because there may still be cities where your rate of travel is still strong and you can leverage that to help you in cities where your numbers have fallen," he said.
Even in the heady days of 1999 and 2000, volume projections often were confused with volume commitments. Considering the vagaries of business travel—even in the period before travel budgets were under the pressure they are today—it is difficult to make anything more definitive than projections.
"That's why when we work with hotels, we resist making anything in the nature of a commitment," said Erin Barth Wilson, vice president of global travel for Credit Suisse First Boston in New York. "We just won't do that."
Regardless of the economic cycle, buyers said what mattered to them was the long-term relationship they had built with their hotel partners.
"Even though our room projections may be down, the hotels still need our business. So we're looking for the relationship to count, if only in anticipation of the time when our needs return to normal," Polito said.
An account's ability to move market share also has become a negotiating tactic in today's market. "We've tended to stay with our preferred suppliers, precisely because we value our long-term relationships," he said. "But these hotel companies know that we're able to move market share to a competitor, if we chose to, so it makes them more disposed to working with us."
The U.S. lodging industry's performance in the first months of 2002 underlined the bleak situation facing hotel companies and explained why holding on to their corporate accounts' business was especially crucial for them.
Overall, U.S. occupancy rates for January fell 6.7 percent, compared with January 2001, according to Smith Travel Research, the Hendersonville, Tenn.-based firm that tracks lodging industry performance. In key business travel markets, however, the monthly decline this year was much more severe.
In San Francisco, Boston, Dallas and Washington, D.C., for example, occupancy rates dropped 23 percent, 15 percent, 13.6 percent and 13.2 percent, respectively. It is cities such as these where the large multi-brand hotel companies have their largest concentration of rooms and, therefore, the greatest exposure on revenue. Preliminary performance data for February, meanwhile, is consistent with these results.
As with other aspects of rate negotiation, hotels are more likely to downplay shortfalls in volume projections for accounts whose hotel travel policies include mandates.
"All else being equal, the stronger the mandates requiring compliance that are built into a company's policy, the greater leverage the travel buyer tends to have in working with hotels," said Julie Hylton, director of hotel management for American Express Consulting in Dallas.
Similarly, hotels to a much greater degree are asking what support the travel policy gets from senior management and are measuring buyers' willingness to share
For their part, hotel companies don't want to see the door shut on an account, even if the production they're seeing falls short of projections.
"Hotels have acknowledged that these projections are much more of a guessing game than ever before," said Kevin Kelly, executive director of business transient travel for Fairmont Hotels & Resorts in Chicago. "In this way, 2001 and 2002 will always have asterisks next to them in the record books because business travel demand fell so precipitously."
The scenario hotels least want to see, taking the long-term perspective, is to lose the account, so they are much more apt to be conciliatory. "In the same way, the overall decrease in demand has caused hotels to reassess their criteria for granting national or global account status to a client," Kelly added. "In many cases, they've lowered the number of room nights needed or number of properties a buyer has to work with in order to get this special consideration."
Outside of the United States, hotels have faced the same drop in U.S. business travel demand, in many cases exacerbated by travelers' reluctance post-Sept. 11 to fly internationally.
"We always try to work closely with our best clients," said Stephen Alden, area manager for Starwood Hotels & Resorts Worldwide in Rome, which includes the St. Regis Grand, the Westin Excelsior and the Sheraton Roma.
"A strength right now is that we're able to sit down with global accounts individually and leverage their needs in cities around the world," Alden said. "In other words, they may require fewer rooms in one city, while their travel to Rome or another city is at prior or even greater levels. So, we're able to reach a mutually agreeable solution across their whole program."