<B>Hotels Fish For Biz</B>
<I>Luring Corporate Buyers With Renegotiated Rates As The Bait</I>
By Bruce Serlen
In a major and unexpected turn of events, hotel companies, which until this spring were taking a hard line on rates, now are approaching travel managers with offers to renegotiate rates--even midweek in gateway cities where demand had been strongest.
In many cases, the reduced rates are being offered by hotels presently in the travel manager's 2001 hotel program as a last-ditch effort to pull market share from other hotels. In other cases, the offer of bargain rates is coming from hotels that, for one reason or another, were excluded from the 2001 program and are looking not only for a second crack at 2001, but a foot in the door for 2002.
Driving the reversal is the fact that U.S. hotel occupancy rates and room revenues have fallen--in some instances, drastically--each month since February of this year, compared with the same period in 2000 (BTN, June 25).
For buyers, the turn of events comes at an opportune time. On the one hand, they're under increasing pressure from senior management to realize savings.
At the same time, however, unexpected cutbacks in their own companies' travel budgets mean they need fewer room nights in these same cities because travel has been curtailed. Consequently, they may have less leverage when it comes to negotiating. The sudden opportunity to renegotiate also presents buyers with a situation they aren't necessarily comfortable with. In fact, a number expressed ethical concerns about the loyalty they feel they owe their existing hotel partners.
"We're being approached with attractive rates by hotels in markets that, for the past three or four years, were impenetrable by us," said Kevin Maguire, travel manager for Tokyo Electron America. "The rates we're being quoted are down an average 30 percent, but, in some cases, the drop is as steep as 50 percent." Cities involved include: San Jose, San Francisco and Tokyo Electron's home base, Austin, Texas.
The irony for Maguire is that his company's own travel is down 20 percent. "We find we need fewer rooms precisely at the time when availability as an issue in these cities has disappeared," he said.
In this regard, Maguire said he was seeing additional cost savings from not having to pay a premium for guarantees on last room availability. "In the past, we'd try to negotiate LRA in the key cities to ensure we had the space we needed and weren't always successful. With the downturn in the market, there's certainly no need to pay for LRA," he said.
The hotel offers being extended would be in effect for the remainder of 2001 and, in some cases, through the middle of 2002. "It's both 'keep and get,' " Maguire said, meaning that he's hearing from hotels that want to keep the business they already have with his company, as well as from those that first want to get a share of that business. "The latter includes hotels we wanted to work with, but couldn't get agreeable rates."
To a large degree, hotels are being driven by the desire to increase their market share in a particular market. "We're being approached with lots of creative thinking, including deals that entail back-in rebates," said Bill Davidson, manager of corporate travel and meeting services for Sematech Inc., which also is based in Austin. In addition to lower rates across the board, Sematech would get cash back in the form of a rebate, if Davidson meets certain volume goals. "The hotels look at what business we've given them historically and, if you can do better for the remainder of the year, you get the rebate," he said.
Davidson, who described the current situation as "quite a phenomenon and a little crazy," said any idea of switching from full-service to midprice brands as a cost-saving measure wasn't necessary for his company because of the deals he has been offered. "There's no need to trade down when we're already seeing such savings," he said. "Besides, our people are used to staying in full-service properties. This way, they can have the level of service and comfort they expect at significantly reduced prices."
In this kind of market, pricing distinctions between deluxe, upper upscale and upscale hotels have begun to blur. "Deluxe and upper upscale brands have come to us the past few months with prices that we had been paying for regular full-service properties," Davidson said.
In some cases, the reduced rates are being offered for a specific, limited period. "Three months is the typical block of time for many of the offers we've received with the rate reverting to the original after that date," said Sheila Kittle, vice president of corporate travel for Raymond James Financial in Tampa. "Mostly, the hotels extending the offers seem interested in shoring up short-term demand. My sense, though, is that they'll then extend the special rate when the three months are up, depending on the market at that time."
Given how widespread the rate reversal is, it's likely to have an effect on 2002 negotiations, which typically begin this month and next. "In our case, the new rates we're being offered are for the remainder of 2001, but it can't help but influence upcoming negotiations," Davidson said.
The timing has put hotels at a disadvantage. "You can't help but wonder if the hotels aren't shooting themselves in the foot," Kittle said. "Even if hotels in a particular market hold the line on rates, the overall impression is that the market has eroded."
Indeed, travel managers have begun wondering if the underlying climate for 2002 requests for proposals already hasn't changed in a critical way. "There's the sense that it's become much more of a buyer's market than it was a year ago," said Rick Wakida, San Francisco-based U.S. travel manager for the Asia region at Vodafone Americas. "Hotels are much more willing to negotiate, though the degree still varies by market." Wakida said he'd been approached with reduced rates much more by hotels seeking to be included in his program than by those already having this preferred status. "If they can get in the program, they feel they'll be in a much better position going into 2002."
Regardless of the reversal on rates, buyers whose companies have large hotel programs still hold the upper hand in negotiations. "Buyers with large programs can often afford to be more aggressive," said Terry Sullo, manager of travel and meeting services at Akamai Technologies in Cambridge, Mass. "We already had good rates for a company with a program our size. Plus, my volume is down significantly because of cutbacks in our own travel, so I'm wary of hurting my negotiating position with my existing hotels for 2002."
Likewise, Kittle is exercising caution in weighing the reduced rates. "We're trying not to have a knee-jerk reaction that in the end will hurt us," she said.
Precisely because they've worked hard to build relationships with the hotels already in their program, travel managers are concerned about sabotaging those relationships. "Hotels have approached us with lower rates, both hotels already in our program and those we've worked with in the past that are looking for a way to crawl back in," said Hanna Murphy, director of travel management for Siemens Shared Services in Santa Clara, Calif. "At the same time, we've heard of travel buyers going to hotels and asking to renegotiate rates, typically because they're being intimidated by senior management to realize short-term cost savings." But this invariably means pulling business from existing suppliers. "We've chosen instead to stay with the hotels in our program. Frankly, we don't feel it's ethical to do otherwise," Murphy said. "Buyers who are ready to make changes in the hope of getting short-term gains don't place enough value on the relationships they already have in place."
Murphy said that when hotel occupancies were strong in recent years, she relied on these relationships to get her the availability she needed at rates she thought were reasonable. "Now that demand has fallen, you don't want to desert the suppliers who cooperated with you in the past," she said.
Davidson agreed: "The good times for the hotel industry are going to come around again," he said, "and we want our partners to remember that we stood by them when they had lean times."
The current market reversal should be seen as a learning experience, Maguire said. "It's unfortunate that it had to take a downturn of such dramatic proportions for the hotel industry to see the need for working together," he said. "Hopefully, both sides can now learn that a long-term relationship is the ultimate objective.