Deluxe hotels suffered the greatest drop in occupancy and revenue of any lodging category during the 2001 to 2003 downturn, but have enjoyed the strongest turnaround in the current rebound. Consequently, buyers who use these hotels can expect significant pressure on rates for 2005. Rate pressure is being felt across the industry, but is most pronounced at the high end. During the lean years, luxury properties provided traditional high levels of service and amenities, despite falling revenues, and did not recoup costs.
"Luxury hotels lost the most during the downturn, so their increases in occupancy and revenue per available room over prior years may be the largest," said Bjorn Hanson, global head of the hospitality and leisure practice at PricewaterhouseCoopers. "For all U.S. hotels, we forecast contract rates will increase 4.3 percent for 2005. Buyers looking at luxury properties in the top markets, however, will be asked to accept contract rate increases of up to 6 percent."
Deluxe hotels' return to solid footing was apparent by mid-2004 when public hotel companies released their second-quarter earnings. Four Seasons Hotels & Resorts, for example, saw second-quarter RevPAR jump 22.7 percent, year over year, compared with overall lodging industry RevPAR gains of 8.6 percent. Management fees increased 41.6 percent from the second quarter of 2003. Four Seasons chairman and CEO Isadore Sharp credited the "continued recovery in travel demand" for the strong performance.
Fairmont Hotels & Resorts quarterly RevPAR saw similar improvement. CEO William Fatt described the rebound as "remarkable."
Among the multi-brand companies, Marriott International's deluxe chain, Ritz-Carlton, outperformed other Marriott brands in the quarter, while Starwood Hotels & Resorts Worldwide's St. Regis chain and Luxury Collection hotels globally outdid both Westin and W Hotels, which compete in the upper upscale tier.
J.P. Morgan analyst Harry Curtis attributed deluxe hotels' RevPAR jump to increased demand for meetings and from both business transient and high-end leisure travelers. "Four Seasons and its competitors are beginning to see higher-rated group demand accelerate. The group booking pace is up 9 percent, year over year," he said. "As the positive trends continue and lower-rated groups are replaced with higher-rated ones, margins will continue to accelerate and fuel growth into 2006."
Year-to-date performance through August, as monitored by Smith Travel Research, shows U.S. deluxe hotels' growth in average daily rate, occupancy and RevPAR, compared with the same period in 2003, outstripped the growth of each of the other two full-service segments, upscale and upper upscale, by a considerable margin. Deluxe hotels' ADR rose 4.8 percent, while ADR for upper upscale and upscale hotels increased 3.6 percent and 3.3 percent, respectively. Occupancy at deluxe hotels rose 6.2 percent, while occupancy for each of the other two full-service segments increased 4.4 percent. Yet, deluxe hotels' rebound was more pronounced in RevPAR growth, shooting up 11.2 percent, compared with upper upscale hotels' 8.2 percent rise and upscale hotels' 7.8 percent increase.
Deluxe hotel demand has disproportionately returned vis-à-vis other full-service hotels, as the growth of new supply coming into the marketplace in the deluxe segment has outpaced new supply growth in other tiers. Through August, Smith Travel Research reported that the growth of new deluxe supply rose 2.7 percent, while the growth of new supply for upper upscale and upscale hotels increased 1.5 percent and 0.9 percent, respectively. The discrepancy is noteworthy, since costs entailed in developing a hotel increase higher up the full-service ladder. Consequently, the gap in supply growth demonstrates owners' and developers' long-term faith in the high-end category.
Business Travel News' 2004 annual Corporate Travel 100 research showed investment banks and other financial services firms are major users of high-end chains. Other types of companies may include those properties in their hotel programs to a limited degree, but buyers at financial firms, which include Credit Suisse First Boston, Goldman Sachs, Lehman Brothers and Merrill Lynch, indicated that deluxe chains were among their primary lodging suppliers. In addition to traditional brands, a number of these buyers included Leading Hotels of the World as a key vendor. Leading is a representation firm that concentrates on high-end properties, many of which are independently owned and managed.
Goldman Sachs' program for 2004, for example, uses Ritz-Carlton and Four Seasons as key providers, as well as Hilton Hotels. Deluxe rooms can be at a premium on peak nights in key cities. To deal with potential room shortages, Goldman's travel services department developed an allocation system by which the chains hold a small number of rooms per property at no charge up until a predetermined time. According to Susan Finkbeiner, the department's vice president and manager, the allotment not only ensures availability for Goldman travelers, but also helps the firm meet its volume projections. "We try to save as many rooms as we can for the last minute. If we haven't given the hotel the name of the traveler by whatever the cancellation period is, the rooms go back into the inventory of the hotel," said Finkbeiner, BTN's 2004 Travel Manager of the Year
(BTN, Aug. 16). The readiness of contingency rooms started to become an issue last year.
Credit Suisse First Boston's preferred suppliers include Four Seasons and Leading, though non-deluxe hotels also are in the program. Like many buyers, Lynn Frank, vice president of global travel, tried to add more price-point options to the program to suit travelers' budgets and requirements for specific trips. CSFB travel policy does not dictate the category of hotel travelers must book, as long as it is preferred. "In every major market, we have deluxe properties in the program," she said. "However, given the various purposes for business travel, we've added other property levels in order to offer a range of rates and services
(BTN, June 7)."
Many small and midsize buyers, given their budgets and typical types of travel, which tend not to include the high-profile customer visits common in investment banking, steer clear of deluxe brands. "Because of cost-cutting concerns, we're going mostly with midprice, limited service hotels in our U.S. program," said Rick Wakida, global travel manager at technology provider Openwave, in San Francisco. "Internationally, we're using more established upscale brands because travelers want the comfort of staying with a brand they recognize. In neither case, though, are we including five-star luxury properties. It's just not part of the culture."
As buyers weigh working with deluxe chains, distinctions can blur between the brand standards and service levels promised by these high-end hotels and those of the upper upscale and upscale tiers below them. Complicating the situation, Ritz-Carlton, St. Regis/Luxury Collection, Park Hyatt and Conrad are each part of a multi-brand company whose own upper upscale and/or upscale brands seem to promise many of the same services and amenities. Four Seasons, Fairmont and Mandarin Oriental Hotels, by contrast, are essentially single-brand companies, allowing their corporate management to focus solely on delivering one class of service.
Marriott, for example, positions J.W. Marriott Hotels directly below Ritz-Carlton in the upper upscale niche, followed by Renaissance Hotels and the core Marriott brand in the upscale tier.
"Regarding development, each part of the Marriott organization proceeds on its own, but won't make a broad-based decision without involvement of the others," said Ritz-Carlton president Simon Cooper. "We develop projects and, in some cases, find a great opportunity in conjunction with a sister brand. In Berlin, for example, we have a Marriott and a Ritz. Originally, the developer was interested in a 600-room Ritz, but we didn't think the market could support a deluxe hotel of that size, so it became an opportunity to develop both brands. Now we have a right-size Ritz and a right-size Marriott."
J.W. Marriott is the sister brand positioned closest to Ritz-Carlton. "J.W. as a brand is better known in Asia than the United States, though in all markets Ritz is positioned a step above with a considerably higher ADR," Cooper said. "J.W.s tend to be larger and contain more meeting space, so they appeal more broadly to groups, but there's no strategy to put one brand ahead of the other. Both represent different things to their customers."
John Wallis, senior vice president of marketing for Hyatt Hotels Corp., distinguishes the deluxe Park Hyatt from the upper upscale Grand Hyatt in more metaphoric terms. "We think of Park Hyatt as a sanctuary, where the high-end business traveler doesn't necessarily want to be seen, while Grand Hyatt is like a Broadway show, where you know you're going to be seen," he said. Like Ritz-Carlton, the Park Hyatt's exclusivity generates a significant rate differential. Hyatt Regency is Hyatt's upscale brand.
Wallis acknowledged Hyatt was following other multi-brand companies' lead. "When we adopted this brand strategy, it was because we saw other hotel companies operating three or four of their brands successfully in the same market. We decided to position Hyatt as the core brand and then position Park, Grand and Regency accordingly," Wallis said. "It's a bit like BMW with its 7, 5 and 3 series models or American Express' platinum, gold or green cards. Travel buyers around the world have begun to see the differences between the three."
Hilton is pursuing the same market saturation approach, according to Dieter Huckestein, president of owned and managed hotels. "In a market, there already may be a core Hilton, an Embassy Suites and a Doubletree, and it may be appropriate for a Conrad," Huckestein said. "Conrads with 200 to 300 rooms tend to be smaller than a Hilton, which traditionally has more than 400 rooms. The property has to meet deluxe specifications such as larger and better-appointed guest rooms, five-fixture bathroom and the appropriate service levels."