Travel buyers, in an effort to keep a lid on hotel rate increases for 2005, are driving more volume to a limited number of hotels in key markets. By showing their preferred hotels they can deliver marketshare, they hope not only to receive minimal rate hikes, but also to have the inside track on availability on midweek nights, when rooms are hard to come by in peak-demand cities, as hotels will not let down their best accounts.
Industry consultants expect negotiated rates for 2005 to rise 3 percent to 5 percent, with hotels getting increases as high as 6 percent in New York
(BTN, Sept. 20). From 2001 to 2004, buyers who were not able to lean on their preferred hotels to keep rates flat experienced only minimal increases.
"We're going to try for 2005 to focus down to a small number of hotels per city precisely with the idea of being able to deliver more marketshare," said Jim Haddow, chief of global procurement at A.T. Kearney in Alexandria, Va. "The hope is that any concerns about availability will be offset by the idea that they're our preferreds, so they'll help us on a peak night when we need a room."
Tina Itschner, corporate travel and purchasing manager for HNTB Corp. in Kansas City, Mo., has established an informal, city-by-city cap. "We can do a better job for our program by narrowing down the pack," she said. "Our goal for 2005 is to establish market by market the absolute number of hotels we need, meaning we could have only two or three in a large market and only one or two in a small market. In today's environment, we have people staying at a much larger number of properties in a market. If rates are going up, you have a better chance of minimizing increases if you're a better customer."
Hotels base rate increases on the amount of business they saw in 2004, according to Donna McGovern, hotel program manager for Interpublic Group of Companies in New York. "They look at each individual client and say, 'Who really has been with us, not only in 2004 but for the past three years, and hasn't held us to the wall?' They're going with that," she said. "In cities where you have more volume, you have more leverage than in cities where you don't."
McGovern also believes that the goodwill she builds up, rate-wise, in her primary cities will extend to cities where she has less leverage. "The chains are paying more attention this year to primary versus secondary cities," she said.
Though the negotiating season still has six to eight weeks to go, Haddow is candid with his prospective hotel partners. "Availability is an issue we've stressed with them. 'If we're going to make you a preferred, you've got to help us out when there are big conventions and at other times of high demand,' " he has told them. "So far, it's going as well as it can. Everyone's talking about rate increases this year. Our strategy is to stick with our preferreds and keep the number of hotels we use low. That way, we may be able to keep increases to a minimum. It makes more sense this year than to try to spread our leverage around."
At HNTB, Itschner in 2005 will conduct a grass-roots effort to reinforce to travelers the importance of compliance as a way of driving marketshare. "It can be hard at times for people at the local level to understand the connection," she said. "We'll be educating them on how we can be a better partner to the hotel and what, in return, that hotel can do for us."
Buyers said they need to keep volume projections realistic and then exceed them. "Some negotiators inflate these numbers, so they can get the upfront discount and then see if the hotel cancels the agreement," according to Yasuo Sonoda, travel manager at Macromedia in San Francisco. "Other negotiators give realistic estimates and always exceed them. In our case, we'll exceed projections this year at our key properties by 30 percent. So it's a win for the hotel in terms of marketshare. This is shaping up to be an especially challenging year for rate increases, especially for midmarket buyers whose volumes are limited. Hotels need to distinguish between accounts that inflate their projections and those that don't."
Fellow midmarket buyer Terry Sullo, manager of travel and meeting services at Akamai Technologies in Cambridge, Mass., agreed it was much harder for buyers with limited volumes to avoid rate increases. Sullo last year moved most of her program to Expedia Corporate Travel so her company could benefit from ECT's greater buying power. Sullo, however, retained negotiating responsibility for what she called her "relationship hotels."
"It's where we have the most volume, so I can get a better deal there myself," Sullo said. "To bring more hotels in those markets into the program would be counterproductive. It would weaken my position, rather than strengthen it," Sullo said.
Buyers' emphasis on delivering greater marketshare in 2005 is part of a larger market shift.
"Underlying negotiations this year is the reality that the balance of power has shifted from buyers to sellers," said Bjorn Hanson, global head of the hospitality and leisure practice at PricewaterhouseCoopers. "Buyers assume—in most cases accurately—that focusing on a small number of hotels will result in more favorable negotiations. As bargaining proceeds this year, hotels know that buyers have less leverage, meaning unless you're a 100,000 room night a year user, you don't carry that much weight. The fact that it's 5,000 room nights being discussed isn't as significant as it would have been in 2002 or 2003."
Once sell-outs start to become more frequent in 2005, as consultants indicate is likely to happen in key cities, buyers may have second thoughts on cutting back on their number of preferred hotels. "Of course availability is critical, but it's a market-by-market decision," said John Fox, senior vice president at PKF Consulting. Buyers have the option of paying a premium for last room availability, if hotels will not include it in the existing rate
(BTN, July 19). LRA, however, is of no use in a sell-out.
"The multi-brand companies tend to be particularly dominant in the key cities, so if you have a good chainwide deal, you'd be hesitant to dilute your influence," Fox said. "The large companies have reached the level where they really have numerous properties in key markets. Buyers have found they're better off having a lot of clout with one hotel than less clout with each of two hotels."
Pressure will be greatest in cities where occupancy rates are high. "In these markets, we're likely to see the most compression," Hanson said.
For Cindy Shumate, director of travel services at Estee Lauder in New York, the decision is not so clear. "We're trying to create a more targeted program in 2005, so we're focusing on our chainwide deals," she said. "We expect, though, our hotel directory will include some independent and non-chain boutique options that align with our brand ambiance. For regular business travel, we want to bring marketshare to the chain, but then we have situations where we require a different type of hotel. The two would co-exist in our key markets."
Having the broader inventory also would help if availability became an issue. "The independent and boutique hotels would serve as a back-up," Shumate said.