Investment Conference Returns Favorable Outlook

<B> Investment Conference Returns Favorable Outlook</B>

By David Meyer and Lynn Woods


<I>New York</I> - Upper upscale and upscale hotel construction is on the rise, and the strong U.S. economy will experience a "soft landing" late this year or next year, according to hotel CEOs and the industry's top analysts gathered at last month's annual New York University International Hospitality Investment Conference.

Even so, during the opening panel discussion, Ritz-Carlton's Horst Schulze said, "It's hard not to be enthusiastic about an economy that is showing more stability after a four-year exceptional high." The 35-property Ritz-Carlton is putting its money where his mouth is, with 26 more hotels in the pipeline, 14 of them in the letter-of-intent stage.

Norman Blake Jr., CEO and president of Promus, said he is not as optimistic about the second half of this year as he was about the first, and expects the first half of 2000 to be softer still.

Choice's Chuck Ledsinger said that even though he expects a little bit of a slowdown, he remains bullish, noting that "our break-even points have never been lower."

Carlson's Marilyn Carlson Nelson said, "technology is allowing us to take costs out and improve productivity, prolonging the strong economy." The Customer Care system Carlson is developing will allow service customization to "a market of one," she said. "I dream of never having to ask the same customer the same question twice."

All four CEOs said their companies are heading toward extranet relationships with corporate customers.

Conference chair Jonathan Tisch, who as CEO and president of Loews Hotels plans to double the company's size, largely at the high end, noted nonetheless that "overbuilding in the high end is a buyer opportunity."

Bjorn Hansen, noting the higher levels of upper upscale and upscale construction, predicted that "room starts will remain at extremely high levels." While he also acknowledged a dip in 2000, he forecast that the economy will "pick up in 2001." He said hotels will be looking for revenue enhancements such as amenities fees, surcharges for local calls beyond 20 minutes and parking. Hansen also noted that the industry break-even point was down to 54 percent occupancy, and showed the dramatic growth in publicly held hospitality assets from $2.7 billion in 1993 to $22.9 billion in 1998.

Stephen Rushmore of HVS countered that hotel transactions have slowed just as dramatically, with last year's 472 transactions as the lowest number since 1984. His summation: Hoteliers should buy in Baltimore, Houston and Tampa; build in Los Angeles, New York and San Diego; sell in Albuquerque, Phoenix and Tucson; and proceed with caution in Kansas City, Las Vegas, Oahu and Seattle.

Smith Travel Research CEO Randy Smith expects the industry to break the record $20.9 billion in profit it set last year. While average daily room rates are trending down, demand is growing and occupancy is stabilizing. Growth in supply in the upper upscale and upscale categories was higher than expected, with a 4.6 percent increase in upper upscale.

Smith said the key issues facing the industry are imbalances in supply and demand, room rate deceleration, demand leakage--in time shares and corporate apartments--and concentration of construction in segments, such as extended-stay and in specific cities.

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As the hotel industry becomes more sophisticated, hoteliers increasingly need to look beyond just rates to the total revenue picture, concluded panelists at a session on revenue management. "It's called 'profit management,' and it represents a shift from top line to bottom line management," said Caroline Lerner, director of the revenue management practice at The Graycon Group Inc.

For example, to get a better handle on how costs affect revenue, hoteliers might consider whether dividing the ballroom up to host three small events is more profitable than hosting a single one, said Richard Hanks, Marriott's executive vice president of sales.

Hanks said Marriott's yield management system has resulted in $400 million in extra sales each year--between 6 and 12 percent of the company's total annual revenue. He said the hot area of revenue management in the near future will be "cluster revenue management," in which companies look beyond pricing of a single property to the entire group of hotels in a region. Marriott is forming regional teams to help center decision-making in the cluster rather than at individual hotels. Marriott's 54 group-event booking centers are cross-selling other hotels with group space if the requested property is sold out, he added.

Jeffrey Osborne, Loews Hotels director of revenue management and market planning, said Loews also is beginning to experiment with cluster revenue management, including cross-selling between full- and limited-service brands. For Loews hotels in New York, "we're trying to get everyone together for pricing and coordinate the marketplace. The next step is to link the hotels up with technology," he said.

Meanwhile, Lerner said Graycon is working with the Savoy in London to centralize the sales effort of its four hotels: "For groups, if we know the Savoy is selling out and Claridge's still has rooms, we'll raise the rate at Claridge's."

The second trend in revenue management, Hanks said, is focusing on how to get a bigger share of the customer's wallet. "We're looking at the long-term value of particular guest segments. Fifteen years from now, we may go proactively after a certain segment more than we do today." By learning more about the predictability of customers, hotels also can better plan the type of properties to develop in the future.

The panelists also noted the fast pace of growth of Internet bookings. Loews has experienced annual growth rates ranging from 80 to 100 percent in e-bookings, and the firm is developing a group sales feature on its Web site. Marriott had $50 million worth of Internet bookings in 1998, compared with just $1 million in 1996.

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At a "Hotel Technology in the New Millennium" session, Paul Mercurio, vice president of information technology at The Graycon Group, said online hotel bookings now account for one-fifth of a percent of total bookings, but next year are predicted to rise to 2 percent. "Corporate clients want to eliminate high-cost distribution channels," he said, "and one way is through internal technology."

Mercurio said European corporations are ahead of the game in terms of driving Internet direct connectivity, noting that Siemens, for example, requires that RFPs be submitted electronically.

Panelists also said privacy issues are becoming more important as travel suppliers seek to gain more data about their customers. IBM Corp.'s travel and transportation industry global general manager Greg Conley said a key to resolving the issue is "to ask the customer first, 'what's in it for me?' If you can lay out the value, whether it's preferred treatment in airline seating or fast checkin at a hotel, you'll get a lot more yeses."

One outcome of obtaining more data, said panelists, is more Web-based multiproduct sales among travel suppliers. "Once the information is mined and analyzed, you'll see more alliances," predicted Conley, adding that airlines and hotel companies increasingly will develop the ability "to be where the customer is.