Buyers Make Most Of Hotel Seller's Market

By Jay Campbell / December 15, 1996

Buyers Make Most Of Hotel Seller's Market
BTN editors recently assembled buyers, suppliers and an analyst for an editorial roundtable on hotel negotiating. Participants were Robert Mandelbaum, vice president and director of research for PKF Consulting; Jeanine Schoning, vice president, travel industry sales for Inter-Continental Hotels; Dan Geller, director of national corporate travel for ITT Sheraton and co-chair of the RFI-RFP subcommittee of the NBTA hotel committee; Howard Brooks, director of expense management and travel administration for Sony Music Entertainment Inc.; Audrey Lord-Hausman, manager of corporate meetings and travel at McKesson Corp.; and Bob Grant, director of corporate travel for Charles Schwab & Co. and the manager of Schwab's own travel agency. 

BTN: Robert, how do rate increases and occupancy look for the year ahead, and what is the life of the seller's market beyond next year?

Robert Mandelbaum: Probably the biggest factor is on the supply side where, especially in the major cities, the larger business and convention hotels traditionally used by corporate travelers and meetings are just not being built, which means there is less competition coming online. Assuming there is a healthy economy, it should continue to be a favorable supply/demand situation for owners and operators for the next two to three years.

We are projecting that this year average room rates in the major cities we surveyed went up approximately 6.9 percent. We project that to tail off slightly in 1997 to approximately 5 percent. I should caution that we also expected it to tail off a little bit in 1996 and we were completely wrong, the rate grew twice the pace that we thought it would. The bottom line is that in the major cities we see rate growth continuing and occupancies to pretty much stabilize.

BTN: In cities such as New York and San Francisco, how much do you think rates are going up right now?

Mandelbaum: New York is growing at 7 to 9 percent. Here in San Francisco, we are growing slightly less, from 5 to 7 percent. We're seeing acheived average daily room rates around roughly twice the pace of inflation.

BTN: Where are the markets in which the buyers can do best?

Mandelbaum: Interestingly enough, there are not that many. In 42 of the cities where we tracked occupancy, 21 are going to experience a decline in occupancy this year, and in 18 of those 21, rates are still growing greater than inflation. So it seems that the rate movement is still there, even in markets that are showing some softness now.

BTN: Where are the best buys?

Mandelbaum: Philadelphia is projected to have low rate growth, as is Washington, D.C., and San Antonio, Texas.

BTN: What are travel buyers doing to combat the rate hikes?

Howard Brooks: Leveraging our volume and trying to work more with chains than individual properties. When it comes down to it, it is still very much a relationship business. Travel managers tend to have long memories, and we'll remember who comes through for us now.

BTN: So overall what do you think the increase for your hotel spending will be?

Brooks: I'd half Robert's 7 percent to 3.5 percent or somewhere in that neighborhood.

Bob Grant: I wholeheartedly agree that we're in a business of relationships and we're a good example of that. Three years ago we used 151 different hotels in the city of San Francisco alone to buy 7,000 room nights. In the last year and a half, we reduced that to five at the most, and we focus most of that business at one or two.

BTN: So what's the increase you will pay for hotels this year?

Grant: I'm looking at 4 percent on standard, but at the same time I'm faced with another problem. We're changing our standards in a good many places to be consistent. We've been buying hotels in New York at $180 a night and buying hotels in San Francisco at $90, but we're not getting the same product. We're leveraging but are we being consistent? And consistency has some merit in this business as far as your travelers go.

Dan Geller: The question that comes up is how deep does the relationship go? And how much can the company and the travel manager enforce? If relationship counts and long-term benefits count, is there a way to enforce it all the way to the traveler? That's our challenge when we look at market share.

Grant: We will tell people where to stay, and I think we have pretty reasonable control over that. Where we begin to lose is when we run into lack of availability at a particular property. I can't put people in the hotel if you don't have space and if 80 percent of the time when we are looking for space you don't have any, then the relationship deteriorates.

We're improving our program internally by putting direct connections to our preferred hotel chains on our intranet so that people can click in, they can book a hotel, they can look at the facilities, they can see the meeting space. They can even get things that aren't really available by talking to one of our travel counselors. They can check their club points and things that we really don't have time for.

BTN: How long has this been in place?

Grant: A few weeks. At the same time we put in a travel booking engine so they can book their airline reservations and we're hoping that we can get to the point of processing 40 percent of our total reservations using an automated agentless process.

BTN: Because we're in the seller's market phase of the cycle now, does that mean that hotels are a little less willing to negotiate preferred arrangements or to enter into chainwide deals?

Jeanine Schoning: The loyal client has to be treated in a very careful manner right now while things are very good for us because we know that this seller's market is not going to last forever. What is less easy is if someone with no track record comes and says, "I'd like to enter into a relationship." There you have to be very precise about the parameters that you set, because you want to service your established clients first and then you want the yield after that.

BTN: Is last room availability becoming a problem in this market, and is that something that you all are negotiating for?

Geller: Last room availability goes back to what we were saying about relationships. For Sheraton last room availability is, how shall I put it? If it takes two to tango, then last room availability is the champagne that they drink when they tango. Meaning that what we are saying to the customer is, 'we are willing to sacrifice for a true relationship that will reward both sides if we see that the compliance is there and the market share justifies it.' I know that last room availability has gone away from many other hotel chains or that it is restricted to certain occupancy levels. We do not restrict it, but we are very careful as to which companies we extend it.

Schoning: It has become one of the negotiation points now. It is part of the preliminary discussion. And like Dan says, it is rare that it will be extended. It used to be a normal part of the contract. Now to get a contract back with last room availability crossed out is not unusual.

BTN: What are the buyers' experiences with last room availability? Do you have any tactics, such as buying room blocks?

Grant: Begging is good. We've gone in the last few years to two-tiered pricing where if the hotel is over 80 percent booked and we're booking inside of 10 days, then we pay a different price than otherwise.

Schoning: We have a property that does that and it works quite well.

BTN: How long has that been in effect?

Schoning: Probably about six months at most. What they're doing in the contract is building in pricing depending on what they can project their availability will be, especially when they know that the last quarter is really tough. So if a corporation is willing to accept a higher rate in the last quarter, then that will affect rates and last room availability and the rest of the negotiations.

BTN: And how long have you had this as part of your policy, Bob?

Grant: We've been using it for two years only in selected cities and I've done that to get away from so many layers of pricing. One of our biggest operations is in Phoenix, where I pay $42 for a room in July and $325 for the same room in February. That plays havoc with my whole pricing strategy, so I'm going to create a more simplified approach but maybe pay a little more. I don't think that we're in a position, especially now, to be unreasonable with our volume or our leverage because it is a two-way street. We have to have availability and we have to be willing to trade something for it. Either the volume is there that carries enough weight with the property to give us preferred access to inventory or we're willing to trade price for it.

Audrey Lord-Hausman: Particularly in a headquarters city, you're never going to get away from having that last minute push when that very important person is coming in, and how many times can you go knocking at the door? So maybe an approach like this is good, but certainly last room availability is important to us in certain cities, with certain hotels when we're negotiating.

Brooks: In our case it's something that I always ask for, but the only ones that I insist be part of our final agreement is perhaps the top three or four chains, or the top five or seven or so individual properties that we're giving so much business to that if we don't get what we want, it will really hurt their revenue stream if we do shift-and they are generally aware of that.

BTN: What about the early checkout fees? Have any of you run up against those or attempted to negotiate them away?

Grant: I'm not paying any attention to it. If it happens, it's an issue for the traveler in terms of planning. If the corporation allows them to change their travel or requires that they change it then the company has to pay the penalty for that. We make travelers responsible for financial relationships with the vendors once contracted. The same with meetings. We had a meeting in Phoenix cancel last week and our department found out about it truly by accident. Everybody got busy, they forgot to tell us. They paid for 45 hotel rooms and I wasn't the least bit sympathetic with them.

Lord-Hausman: My concern is that it's the business travelers who are going to be hit by that. A lot of travel is changed on the road and is out of your control as the traveler. All of a sudden you're asked to get back to Oklahoma City or wherever. Nothing has happened that I've heard of yet, but my concern is that after awhile that is going to get real tedious because it's going to be, 'wait a minute, this wasn't my choice.' I could understand it with big association meetings, when you sign up for the whole thing and the final night's event is on Wednesday night and you leave Thursday. But by Wednesday afternoon you are dog tired and you say, 'oh, I don't think I can do this anymore. I'm just going to check and see if there is a late flight, then go on out the door.' I really understand that one.

Schoning: We are testing it in two cities, Chicago and New Orleans, which are our two convention hotels, where we have had enormous amounts of exactly what you describe.

Geller: What Audrey just said is exactly the reason Sheraton does not penalize individual business travelers for early checkout. If an individual business traveler is on the road and he or she needs to go somewhere ahead of schedule, there is no early checkout fee. Group business is different, as you said, if there is a room block for 200 and 100 leave two days earlier. And it happens. But it's different, this is a group contract and dealt with as attrition, but for the individual business traveler, ITT Sheraton is one of the few hotel companies that does not charge for early checkout.

BTN: What's your experience been with early checkout fees, Howard?

Brooks: I'm working on getting rid of some of them. I don't know whether I'm going to be successful yet but like everything else, that's negotiable. Even if I can't get rid of it, then hopefully there will be some other trade-off so that perhaps I won't take any increase in the room rate for next year if they're going to charge me $25 when people check out early.

BTN: Are there amenities that you negotiate for, especially as a quid pro quo for more in rate?

Brooks: Well, health clubs are a must, that has to be in there, and also breakfast and parking and in a lot of cases we run into concessions.

Lord-Hausman: Yes, I've explored different things that we can do, discounts on food at the property or something like that. Certainly a special consideration to any VIPs that come in.

Brooks: We went in the same direction. I would much rather say anytime somebody can show their corporate ID card, whether they're staying in the property or not, if they are going to be entertaining in a hotel they should get a 10 percent discount. In some cases I have actually gotten as much as a 25 percent discount in restaurants in hotels.

Grant: We've done the same thing. If I'm going to negotiate for an amenity, it's going to be something that will help me drive business to that property, like breakfast or transportation to the office if that hotel isn't across the street. And we've had that in some cases where the property we wanted to use was a drive, so it meant a rental car. So they're providing airport transfer and transfer from the hotel to the property round trip. That allows me to channel the business.

BTN: Are there other things that buyers are looking for as a trade-off for a better hotel rate?

Schoning: Today the rates are the most important thing. It is more important to get the rate right or even a little lower than to offer anything else at this particular time.

Geller: I would say the two most demanded items from travelers are to be on the corporate club level at the corporate club room-not so much for the breakfast but the ability to increase productivity. The other amenity is a late checkout. We find this to be probably number one in demand.

BTN: What other challenges are buyers facing in the negotiating process?

Geller: I think the next area to really explore is reducing the cost of the transaction. I'm not talking about the electronic transaction now or the GDS, I'm talking about the labor and resources that go into this annual ritual of negotiations. There is a lot of waste. Maybe we don't need a six-page bio on each hotel every year if it's the same hotel.

Grant: I don't do RFPs at all. I just abhor the process of sending multiple requests to lots of people to make work for them which in turn makes a lot of work for me when it comes back. If I go to a new city and my preferred vendor has a property in that city, that's where I ought to be going.

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