More business travel buyers are trading down in their 2003 hotel programs, opting either to desert full service hotels in favor of midprice alternatives or substantially increase the number of midprice properties with which they contract.
Since rate negotiations for 2003 continue into November and early December, it is unclear whether full service properties—as they did last year
(BTN, July 30, 2001)—again will come back with steep enough discounts to keep the midprice competition at bay. However, midprice chains are negotiating aggressively.
"In eight key U.S. cities, occupancy numbers for transient business and group bookings have declined in the upper upscale group, but the demand has filtered down into the midscale market," said Duane Vinson, an analyst at Smith Travel Research. "Our data indicate demand for hotels is still there, there's just been a movement in that demand." The eight cities—Atlanta, Boston, Chicago, Los Angeles, New Orleans, New York, San Francisco and Seattle—are among the top domestic business destinations.
Sean Shelton, CEO of Uversa International, which is managing hotel data for more than 100 corporate programs this year, has seen the market shift reflected in buyers' requests for proposals. "At the solicitation stage this year, a majority of our clients for the first time requested lower-price options in the markets where they bring the most volume," he said. "Buyers tell us they're under pressure from their companies either to switch from full service to midprice completely or just add more midprice options in different markets. This way, travelers with lower budgets can have a cheaper alternative."
Keith Boccuzzi, vice president and general manager of TQ3 Maritz Travel Solutions' northeastern region, described a domino effect at the two dozen mostly large hotel programs he manages. Given the pressure on individual budgets, buyers are more concerned with providing travelers a range of price points. "If buyers had used upper upscale hotels, they're now including upscale alternatives," he said.
Underlying the tug of war between hotel price points is the continued weakness of the domestic lodging industry overall. Keith Mills, industry analyst at UBS Warburg, said that of the hotels he polled, more than 70 percent "reduced October room rates further as a way of meeting their monthly occupancy targets."
In planning to move from full service to midprice suppliers, buyers this month said they expect little negative pushback from travelers. "Everyone's conscious that every dollar counts," according to Kevin Maguire, travel manager at Tokyo Electron America in Austin, Texas, who is looking at price points he wouldn't have considered in 1999 or 2000. "As long as the quality is acceptable and the rate appreciably lower, we'd go with it." Maguire also said he had trouble getting national account status from hotel companies for his program in those banner years. Now that having such status is less important, hotel companies have reversed themselves. "In fact, we've had midprice chains come in and want to do a national contract with us," he said.
At Ryder in Miami, travel services manager Donna Reidy is continuing the trading down process she initiated last year. "We're looking at our existing markets, but won't necessarily select the same midprice chains. We significantly lowered our average daily rate by trading down last year and are expecting additional savings this year, even though our travel volume is down, quite a bit in some cases," Ryder's Reidy said.
Increasingly, the gap between upscale and midprice has narrowed. "Some of the midprice properties we've added to our program actually have services and amenities that are more like full service properties used to be," said Bill Davidson, manager of corporate travel and meeting services at International Sematech in Austin, Texas. "This is especially true when it comes to high-speed access and computer support, which is of particular interest to our travelers because we're a technology company."
Connie Cirillo Freeman, director of corporate procurement and travel services at Pitney Bowes in Stamford, Conn., cautioned buyers that trading down to a lower price point can entail hidden costs. "Location remains crucial," she said. "In other words, a midprice chain might come in with a lower rate, but if the location entails a $30 cab ride to where the traveler needs to be, the savings quickly disappear."
For their part, hotel sales executives said the number of accounts trading down hadn't yet bottomed out. "You're seeing a lot of corporations that once stayed at four- and five-star hotels staying at two- or three-star properties, but they're hotels that are delivering terrific product at terrific value," said Mike Fegley, Six Continents Hotels vice president of global sales for the Americas.
Hoteliers understand that trading down is not an easy decision for buyers. Christopher Cope, Best Western International managing director of worldwide sales for North America, has seen buyers grappling with the best way to satisfy different classes of travelers. "Ultimately, you're going to have three categories of travelers within every corporation: executives, middle management and economy travelers," he said. "Buyers really need to have three tiers in their hotel program, because they're probably not going to want to put the CEO into a limited service property."
Cope advised buyers to be wary of full service hotels reducing rates to compete with midprice chains. "They might have cut their room rates, but the cost of the incrementals remains the same," he said. He cited such charges as parking and food and beverage, including the $12 hot dog. "Incremental charges always have been the hardest for buyers to control and that's never been more of an issue than today when costs are under such scrutiny," Cope said.
UBS Warburg's Mills sees the trading down phenomenon as symptomatic of a more fundamental shift. "An increasing number of travel managers are becoming part of their companies' procurement department, and this department is mandating cost controls for business travel like those used in other corporate departments," he said.
Uversa International's Sean Shelton chose to label it the "CFO variable. People that come from the procurement side don't necessarily understand the differences you need to take into consideration in a hotel program," he said. "They're used to just going out and getting the lowest bidder."