Hoteliers Strain To Maintain, And Gain, Corp. Biz In '02
For the second consecutive year, the U.S. lodging industry in 2002 faced a much more precarious environment than either hoteliers or travel managers could have imagined in the halcyon days of 1999 and 2000. While both occupancy rates and room revenues in 2001 suffered as a result of the sluggish economy and widespread cutbacks in business travel, occupancy rates in many gateway cities rose in 2002. Room revenues, however, remained depressed, the result of rampant price cutting intended to drive demand. In hindsight, though, many hotel executives believe the cuts were overly drastic.
Seen through this prism, the Business Travel News Top U.S. Hotel Chain Survey is especially informative this year for the insider perspective it provides into how buyers view the hotel brands they deal with across the price point spectrum. During the past two bidding seasons, buyers have grown accustomed to having greater leverage in negotiations with hotels over rate and amenities. The survey shows buyers to be highly demanding and most critical when it came to assessing the quality of the hotels they selected for their travelers. Of equal importance, however, was whether buyers felt they were dealt with professionally throughout the negotiating process.
Still, as 2002 progressed, buyers came to understand that their newfound leverage in many cases was illusory, if they could not deliver on two counts: First was the matter of volume projections. Given that room night volumes frequently were lower than usual—due to less business travel across the board—hotels looked most favorably on accounts whose travel policies contained strong mandates. Secondly, hotels were more disposed to work with an account if the buyer was able to move marketshare in a given destination to their particular company.
"Because travel volumes are down significantly, hotels have been left to play a marketshare game, which means they're measuring their own results in relation to the competition," said Terry Sullo, manager of travel and meeting services at Akamai Technologies in Cambridge, Mass.
Marketshare always has been an indicator of success, but not to the degree it became last year. "When sales people call, it's the subject that comes up first and foremost," said Donna Reidy, manager of travel services at Ryder in Miami.
For hotels, gaining marketshare has become tantamount to market penetration. "Business from our key accounts may have decreased, but as long as our share improved, we've covered the account," said Mike Fiorentino, northeast regional director of sales and marketing for InterContinental and Crowne Plaza. "If our share at account X, for example, was at 30 percent and there's less travel, but our share has gone to 40 percent, we've penetrated that account."
Analysts Record Grim Stats In '02
For 2002, lodging industry analysts estimated that U.S. occupancy rates for the full year would be 59.3 percent, down slightly from 59.9 percent in 2001. According to PricewaterhouseCoopers, however, revenue per available room suffered further: Nationwide RevPAR in 2002 was expected to drop 2.6 percent from 2001.
Analysis of Smith Travel Research data further indicated how drastically RevPAR actually fell for key U.S. gateway cities. These are the destinations that tend to have the most business travel. Through November, for example, RevPAR in Chicago, Boston and New York fell 48.4 percent, 36.5 percent and 13.7 percent, respectively, compared with the prior year. The comparison for the three cities even was starker when compared with 2000. From that banner year, RevPAR was off 55.5 percent, 57.3 percent and 38.7 percent, respectively.
Individual cities defied easy categorization. "Of the top 25 U.S. markets, Houston had the greatest occupancy loss," said Bjorn Hanson, PwC global hospitality and leisure industry leader. "New York, close to the other end of the scale, had only a narrow occupancy loss." However, the opposite was true regarding room revenues. "New York saw a dramatic loss in average daily rate, while Houston actually gained in ADR."
Among types of hotels, upscale and upper upscale properties fared the worst, given the preponderance of this type of inventory in the major cities. "Occupancy mostly recovered, but we haven't seen any strength in rate recovery," Hanson said. By contrast, the midprice sector—both with and without food and beverage—recovered both occupancy and rate.
PwC estimated that U.S. occupancy rates would rise to 60 percent in 2003. While positive for the industry, this still is significantly down from 2000, when occupancy rates reached 63.6 percent. The expectation, meanwhile, is that RevPAR will continue to lag. "We expect to see a gain of 2.1 percent over 2002, but when you factor in inflation of 2 percent, it means RevPAR growth of a negligible 0.1 percent," Hanson said.
Built into all of PwC's 2003 forecasts were two baseline assumptions: no major terrorist threats or acts would occur against U.S. interests, and no military action would be taken involving Iraq. Hanson spelled out five factors that have suppressed demand: uncertainty about Iraq; the downturn in corporate profits, which has fueled business travel reductions; traveler inconvenience; federal terrorist alerts; and the first globalwide recession in 18 years, causing a slowdown in both domestic and international demand.
Attempting To Acquire New Biz
Faced with such uncertainty, new hotels invariably struggle the most to come up with a viable marketing strategy since they lack an existing customer base from which to draw. One strategy was to broaden their appeal to as many market segments as possible: transient, group business travel and extended stay, not to mention leisure travel.
At the Renaissance Grand Hotel, which opened this month in St. Louis, for example, the strategy was to capitalize on both transient and group business, attracted by the property's 70,000 square feet of meeting space and location adjacent to the America's Center convention center. Yet, Renaissance, which is part of Marriott International, also has downtown St. Louis' extended stay market covered, thanks to the project's second component, the 165-suite Renaissance St. Louis Suites Hotel across the street from the 918-room Grand. The all-suite property opened last April.
"In designing the project, we wanted to capture the extended stay as well as transient bookings, and understood that these travelers have their own requirements in terms of extra space and amenities they look for to make their trips successful," said Traci Russell, director of marketing for both components.
Hotels Renovate To Entice Clients
Existing hotels also have been broadening their reach. This month, the Grand Hyatt New York unveiled a new 5,000-sq.-ft. ballroom, with an additional 3,000 square feet of pre-function space fashioned out of a former restaurant. "In this market, we're trying to be less transient-oriented and more reliant on the group side," said Gary Dollens, vice president and managing director. "For a hotel with over 1,300 keys, we had only about 35,000 square feet of meeting space. The ratio of meeting space to guest rooms was on the low side."
Similarly, the desire for more—and enhanced—meeting space was a factor in the renovation completed last month at the venerable Eden Roc in Miami Beach, which also is part of Renaissance. "Among other changes, we did a major reconfiguration of our meeting space to create five new rooms that are appropriate as breakouts," said Randy Griffin, director of marketing. Griffin noted that flexible breakout space was a high priority for many groups, pharmaceutical companies especially.
Broadening the customer base was only one of the defensive strategies employed during the current downturn. For such established full-service brands as Sheraton Hotels & Resorts, the solution was to introduce a guest room refurbishment at the same time as a major quality improvement effort, which affected about 200 Sheratons in the United States and Canada.
"We knew for Sheraton to continue attracting the transient and group business we were used to would take a significant investment in the brand," said Tommy Morel, area director of sales and marketing for Starwood Hotels & Resorts in New Orleans. The 1,100-room Sheraton New Orleans was one of the first properties in the chain to get the upgraded Sheraton Sweet Sleeper bed and Ralph Lauren-inspired interior. "Not only does the investment serve us well right now in terms of the competition, but it positions us for when the market strengthens down the road," Morel said. The room renovations at the New Orleans property were completed in December, while an equally extensive meeting space expansion still is underway. The Sheraton Service Promise quality initiative, rolled out in September, compensates travelers when they encounter service glitches or other problems.
During 2002, the lodging industry did not see any industry-transforming mergers or acquisitions. However, two significant hotel management companies joined forces in August. The merger of MeriStar Hotels & Resorts and Interstate Hotels Corp. gave the combined entity, which kept the Interstate name, a portfolio of more than 400 hotels in North America and Europe. Marriott, Hilton and Starwood flags are among the 30 brands represented by the company.