Leven Eyes Market In Downturn

Lodging industry veteran Michael Leven, chairman and CEO of US Franchise Systems, whose brands include Hawthorn Suites, Microtel Inns & Suites and Best Inns & Suites, recently met with BTN hotel editor Bruce Serlen to talk about the harsh realities of operating in today's weakened economy and the opportunities for travel buyers.



BTN: Much has been written this year about buyers supposedly trading down from full-service to midprice brands. Are you seeing any buyers trading down?

Michael Leven: Trade down really can be looked at in two ways. One is when the buyer essentially takes a lower-price hotel as a substitute for a higher-price one. We're seeing a little bit of that, but not as much as one would think. What we're starting to see, however, is trading down within the hotel segment you're in. New supply comes into a market, for example, in a destination where we have a hotel that's doing very well. Another hotel at the same price point opens in that market. They proceed to go after the business we have at a substantially lower price. That customer then comes back to us and says, "Lower your price or I'm leaving. I like your product, but this other product is as good or appears to be as good."

BTN: This wouldn't go on at other times?

Leven: It's economically driven. It wouldn't go on, in fact, if there was enough demand in a market that's getting new products. Because the hotel industry is a high fixed-cost business, incremental revenue is a contributor to overhead and profitability. Therefore, we're constantly facing hotels in our market that will lower prices when they're new to try to grab the existing business so they can make their mortgage payments.

BTN: And you end up with price compression?

Leven: Exactly. If there's not enough business in the area to keep demand steady for all hotels, you get price compression. That's what's gone on in a lot of markets this year. Buyers mistake that for trading down when, in fact, it's rates going down. There's no trading down in hotels in that instance.

BTN: Likewise, are you seeing hotels approaching business travel buyers with offers to renegotiate?

Leven: From where I stand, it's pretty widespread in the areas of the country that have been doing business with the big technology companies, which are under serious economic pressure today. I'm not seeing it in areas that aren't tied to the Intel- and the Cisco-type clientele. However, that's not to say that such a situation won't occur. A lot depends on the supply of comparable facilities in a particular market.

BTN: As a hotelier, how do you respond to the competitor who's prepared to renegotiate rates, or the buyer demanding concessions on rates?

Leven: Requests to renegotiate happen in down economic times. My response is, it's a fact of life, so you better have all your ducks in a row and be prepared to renegotiate to hold the business. This will mean accepting a smaller level of profitability, rather than no profitability.

In other words, say that you're eating a 12-ounce steak tonight and I told you, "You can eat the whole thing." Tomorrow night, I might say, "You have to share that steak with someone else." So I take six ounces and you get to eat six ounces.

But you say, "Sorry, I don't want to do that." Well, the reality is that you'll then have no steak at all. Therefore, you're better off eating six ounces now. This is probably a heretical statement to make, but there's no stopping renegotiation, if there's not enough business in the marketplace.

BTN: Can you imagine a scenario in which all of your best clients ask you to renegotiate?

Leven: The negotiated rate would be hard and fast in a normal business environment. Believe me, you can take it for granted that in normal times renegotiation would not be acceptable to any supplier. But in abnormal times, suppliers will want to renegotiate because they need the help and they want to buy loyalty going forward. Accordingly, it behooves hotels—and other suppliers, in fact—to try to accommodate those users that are heavy customers, if that's a requirement, in the hope they would get back the difference later when the economic picture improves.

BTN: When the lodging industry was stronger in the past, buyers often complained that hotel companies didn't value their long-term relationships. Do you feel the shoe is now on the other foot?

Leven: You're right. It's a relationship and I think you would look to maintain the relationship, especially if the customer is a top one in the marketplace. You can't renegotiate with everyone. Some customers aren't worth renegotiating with. But you have to be able to determine where you should have some level of flexibility in the market and where you shouldn't.

BTN: What then can the buyer expect in requesting that the hotel company renegotiate?

Leven: Clearly, the objection the supplier will have is, "If you're not supplying me with any significant business today, why should I renegotiate?" But if you are providing the supplier with significant business and you can guarantee some level of loyalty, you should expect to get something from the supplier to make that mutually acceptable.

BTN: How might that conversation actually play out?

Leven: In a manner of speaking, the renegotiation is a trade off. "We'll renegotiate the rate in return for X. Or I'll give you the competitive rate for the remainder of the year. But as the economy turns, I'd like to get my rate back. Can you assure me that when things are good, I can go back to my normal condition? Because if I'm going to end up at this level of pricing with you forever, it's not necessarily going to give me the appropriate level of profitability. So, if I work with you and you work with me, let's see if there's a bargain in there to get us through this time period."

BTN: Do you find that buyers are prepared to make such assurances?

Leven: In many cases, you'll get that assurance when it's within the buyer's control. In some cases, however, there's no control because the buyer might have orders from above that stipulate this is all we will ever pay for a hotel. Consequently, I think these times deserve a certain level of honesty and candor between supplier and buyer that makes for successful business.

BTN: So, it comes back to the quality of the relationship?

Leven: When everybody's doing well and throwing money all over the place, that doesn't test anyone's relationships. The test of a relationship, like the test of a marriage or anything else, isn't in good times. Rather, it's when times are more difficult, when you have to be mutually dependent to get through it. A good buyer and a good supplier get through it.

BTN: That said, would you describe the scenario going into negotiations for 2002 rates as a buyer's market?

Leven: In today's market, the buyer would seem to have more leverage as things slow and the supply of hotel rooms grows, but that switches back and forth. You hear people talk about "buyer's market" and "seller's market," but it's part of the cycle.

BTN: Are you hopeful that the economic situation will start to turn around by year-end?

Leven: I think the industry is going to be disappointed this year with the level of business, which, from an industry standpoint, translates into the level of RevPAR growth. I wouldn't go so far as to say we're going to have negative RevPAR growth, but I wouldn't be so optimistic to say that couldn't happen. A lot really depends on a couple of different elements.

We know for sure that transient corporate business is going to be off all year. I mean, as far as we can see, a turnaround is just not going to happen as quickly as some would like to see. Fall is the big meetings and conventions season and we don't yet know how attendance there will hold up. Should attendance hold up, the year will probably be okay, but not great. If attendance doesn't hold up, we're going to be looking at a disappointing year. Frankly, I don't expect a great turnaround until the spring of 2002.

BTN: The extended stay segment, which includes USFS' Hawthorn brand, has been very strong during the past few years. Does extended stay have an advantage in the current downturn?

Leven: The question about extended stay is, how viable is it going to be going forward. It has been a bit of the beneficiary of the strong economy that we've had. But we're optimistic that the nature of the extended stay customer looks like it still has a long way to go. In other words, the extended stay customer is going to continue regardless of the economic cycle.

Yet, it's really market related. For example, in a place like New England, in a high-tech environment, extended stay's slipping a bit. But if the economy goes the other way, we expect it will come right back.

BTN: Do you believe the downturn might end up being the catalyst for further industry consolidation?

Leven: At times like this, when profitability is under pressure, what happens is that owners/operators might look to buy similar types of properties. This way, they can consolidate overheads and charge up profits. Consolidation in our business today is a bit more difficult because there are all kinds of technology integration, human integration and brand integration problems. So it's not as easily done as said.

BTN: Do you see USFS expanding in this way? And if so, where do you see opportunities?

Leven: We think we have some opportunities to use our salesforce and our service capability over additional brands more than we have now, even though it requires more people. I certainly wouldn't like to do any brands that compete with the ones we have today. So, yes, we're in the market for additional brands, but it has to be the right fit. I wouldn't want to create a business model, if I could avoid it, that has a lot of brands that are really at the same price point. I think that makes it difficult for both the franchisee and the franchiser.

BTN: Buyers often like to work with brands that have critical mass on the national level. At what point do you feel your brands will achieve this degree of distribution?

Leven: From an RFP buyer standpoint, we're pretty well saturating the major destinations for both Hawthorn and Microtel. However, for us to become a truly national power we would need Microtel to be at the 400- to 500-hotel level and Hawthorn at the 300-hotel level. Considering that, as of mid-August, there were 242 Microtels and 151 Hawthorns—and we're opening them at an approximate rate of 50 Microtels and 40 Hawthorns a year—you can see we have a while to go.

BTN: As a franchiser, how does USFS work with corporate buyers in the negotiation process?

Leven: We don't get a lot of interest in multiple brand negotiations the way large hotel companies do. If we did, we certainly would negotiate that way.

The problem for us is that we don't set rates for the company; the individual hotel owners set their own rates. Consequently, it's difficult for us to be able to gain any leverage from one brand to the other.

We do provide information to all the properties about an account and they turn in the RFP. They set the rates. In fact, that's not much different from the companies that own their hotels. In other words, the national sales effort serves in an advisory role.