Hotel Substitution Stalls
<B>Hotel Substitution Stalls</B>
By Bruce Serlen
With travel budgets under siege in response to the weak economy, reports were rampant in April and May of widespread trading down--that is, buyers deserting the full-service hotels that their travelers were accustomed to in favor of more cost-effective midprice properties. As the economic downturn entered the second half of the year, however, these reports were proven unfounded.
To the chagrin of midprice hotel companies seeking to gain market share, many buyers last week said that while some trading down may be occurring, it's hardly cut and dry. Rather, they've squeezed out cost savings from a variety of strategies that reflect the company's particular situation and the destination involved. Alternatives have ranged from limiting the number of travelers and trips to booking airport hotels and corporate apartments to tightening the core travel policy.
For these buyers, creativity and staying the course have replaced any easy knee-jerk reaction to the current belt tightening. With many companies' negotiations for 2002 beginning next month, these buyers expect this hard-scrabble approach to have a positive influence on the rates they will pay next year.
Had the midprice brands succeeded in getting buyers to trade down on a large scale, it would have positioned them much more favorably for 2002. Longer term, the challenge for these brands is to retain any newly found market share once the economy rebounds and travel budgets return to normal.
Spoiling the party for their midprice rivals, full-service brands have shown a willingness to compete on rates by renegotiating (BTN, July 16). For such large, multibrand companies as Marriott International, Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide, trading down often entails cannibalizing one brand's market share for the benefit of another brand. But at least the company has retained the business--and, defensively, kept it out of the hands of the competition.
Many buyers are standing by their agreements--just as they would expect their suppliers to do were the conditions reversed. "We're sticking with the agreements we've had in place for 2001," said Connie Freeman, director of procurement and travel services for Pitney Bowes in Stamford, Conn. "When the RFP season gets fully underway for 2002, we'll be looking for hotels' best rates, regardless of price point."
Other buyers have made changes to their program midstream. "Sure, we've added midprice properties in certain locations, but we've hardly eliminated full-service hotels," said Gary Polito, manager of corporate travel at Bose Corp. in Framingham, Mass. "The full-service properties have the services our travelers expect and we've been able to negotiate better rates at many of these hotels because they're eager to keep our business on the books."
Much of Bose's travel is to the company's manufacturing sites. As a result, what are secondary destinations for other buyers may be primary destinations for Polito. "These are locations where there may only be midprice properties, so travelers' expectations will be lower. But in the end, they still find the hotels in the program have most of the amenities they're looking for," he said.
Buyers also have interpreted trading down to mean different type properties, as opposed to merely different price points. "We've negotiated for more airport properties, for example, because our people more and more want to be able to fly in and out easily," said Hanna Murphy, director of shared services travel management for Siemens in Santa Clara, Calif. "There's a time savings, but it's also an amazing cost containment measure." Murphy also said she's gained negotiating leverage because she's able to steer meetings to these properties, giving her additional room nights when negotiating rates for her transient travel.
Unexpectedly, the economic slowdown has given companies the chance to strengthen the hotel provisions in their basic travel policy, which historically have been much less stringent than provisions affecting air travel.
"Mandates had never been built into this portion of the policy before--travelers could pretty much stay where they wanted--so we've taken the opportunity to put some real teeth into the program," said Donna Reidy, director of travel services for Ryder Systems in Miami. "Not only does this save money because the mandated properties are midprice and we have negotiated rates in place, but I get the benefit of the extra volume when it comes to negotiating for next year."
At first, Ryder travelers weren't happy with the new restrictions. "Once they understood the rationale behind the changes--and the impact on the company's bottom line--resistance essentially went away," Reidy said. "Also the fact that the mandates had the full backing of our senior management was a big help."
Other companies have focused on more closely examining the purpose and extent of the business trip itself, with travelers expected to make each trip more productive. "We're asking our people to do more on each trip, which at times can mean extending the length of stay," Polito said.
Trips have been consolidated. "Travelers now are expected to visit multiple locations on a single trip, which is a form of cost containment as well," Murphy said. "But people appreciate it because they're away fewer days, which is less of a hardship on their families."
Bose also has begun sending fewer travelers on trips where warranted. "Two or three people may have gone before, but we're paring down. Ironically, this may actually mean a longer hotel stay for one traveler, but in terms of the overall trip, costs are still down," Polito said.
Like Bose, Lockheed Martin used mostly midprice properties before the downturn in the economy, so trading down has been a non-issue.
"Because many of our business units are government contractors, they're used to traveling on per diems, so cost controls are built in," said Richard Wooten, director of corporate travel services, who is based in Bethesda, Md.
With cost-consciousness part of the culture, even the business units where per diems don't apply have gotten the message. "It's just part of the environment in this industry today, so we've gotten little negative feedback from travelers," Lockheed Martin's Wooten said. He noted that many midprice brands have undertaken major expansions lately. "As a result, many of the hotels in the program are relatively new and people are generally pleased with level of comfort they find," Wooten said, adding, "new is nicer."
Longer stays have become more the rule at International Dairy Queen, so much so that Linda Riley, Minneapolis-based manager of corporate travel, has booked corporate apartments for the first time. "We were already used midprice properties, so we're not trading down in that sense. But we have found that corporate apartments in certain cities provide flexibility and cost-savings in a way we hadn't taken advantage of before," she said.
Stays have become longer in the present economy. "Even if travelers aren't going to be using the apartment every night, it makes economic sense for them to leave their clothes there for a night or two and then use the apartment again when they return," she said.
Other cost advantages are more hidden. "Corporate apartments are more residential in feel than hotels, so when travelers stay in one, they're more likely to eat there as well, so meal costs are lower," Riley said.
Buyers with global hotel programs express caution about trading down outside North America. "While buyers can count on midprice brands having certain consistency standards in North America, that isn't necessarily the case outside of North America," said Rick Wakida, San Francisco-based U.S. travel manager for the Americas Asia region at Vodafone.
The sense that trading down hasn't yet become a dominant factor was reinforced by the large, multibrand hotel companies, which started to release second-quarter 2001 results this month. At Marriott International, for example, the entire lodging portfolio saw significant drops in occupancy during the quarter, but the decline in occupancies at the limited service brands, which include Courtyard by Marriott and Fairfield Inn, was 5 percent, only 1 point less than at Marriott's full-service brands.