RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
Email: rickswig@rsbaswig.com
Web site: http://www.rsbaswig.com
 
,
 Hotel Operators Must Share Blame with the
Economy for Stagnant Performance
.
For Some Hotel Markets, a 40% Decline in Revenue Since 2000
has contributed to an 80% drop in net operating income.
 
by Rick Swig, January 2004

National average daily rates for hotel guest rooms fell for the third year in a row in 2003, pushing ADR to 1991 value levels when factoring in inflation. This is a trend that has not occurred for at least three decades.  Historical trends that couple demand with rate increases show that the opportunity to match the room rates achieved in 2000 may not present itself for at least four or five years in many cities. And for some geographical markets, a 40% decline in revenue levels since 2000 has contributed to an 80% drop in net operating income. The economy and other factors have certainly played their part in creating these statistics, but hotel operators should look to themselves for a great deal of the blame.

Lower business demand has created a more competitive market and venomous rate wars. Operators have scorned third-party distribution channels because they have under-mined the value of guest room rates and poached customers from their brands. At the same time, hotel operators provided the inventory and pricing strategies that led to this deteriorated state of affairs. Additionally, operators have cut product standards and services, which helped to reduce expenses, but undermined customer experiences.

Being a customer is often the best method to discover the flaws in hotel operations. Staying at a major, brand-name, full-service hotel within a prominent market allowed me to understand how an individual hotel operation can impact its customers, its owners, its brand and itself.  My experience started with reserving a room at a pre-negotiated group rate for a four-night stay. The inquiry for an additional fifth night resulted in a rate quote that was double the group rate. This sent me shopping to a third-party distribution channel where the room was purchased for 20% above the original group rate. When I arrived with the assurance of a confirmation code, plus a major credit card guarantee and the brand’s frequent guest, VIP status, I was informed that “other customers had not checked out” and, therefore, there was no room available.

After assuring the front desk agent that this displacement was not going to happen because I had followed the hotel’s rules that promised me a fair transaction, I asked him to summon his manager, who forthwith appeared with the same answer that no room of any kind was available due to the behavior of other customers. The hotel manager abstained from responsibility on the hotel’s behalf.  When I asked him to find a parlor with a pullout couch in his property management system, a room was found almost immediately. Before I was escorted to the room, I asked him to assure me that this would not be my resting place for the next five nights. He promised that I would not be charged for the first night and given an upgraded room for my remaining four nights. However, next month’s credit card bill arrived with the charge for the first night’s room.  On the way up to the room the guest service agent that guided me admitted that the front office management customarily overbooked and, consequently, the discounted rate customers were most often displaced. This was reported to a very upset meeting planner the next morning.

Either through mismanagement, dishonesty or simple broken promises, the hotel dishonored its brand, third-party distribution channel, credit card affiliate, individual frequent guest customer, a meeting planner and itself. In fact, the third-party channel probably paid the hotel less than the group’s rate and pocketed revenue that the hotel could have otherwise enjoyed if it had dealt ethically with its customer in the first place.

Hotels have developed highly technical revenue management programs to maximize revenue, but the immediate side effects have been lower revenues, weakened customer relationships, reduced reserves for capital replacement, fewer proceeds available for investor distributions and lower asset valuations. Each of these aspects impact property owners significantly.

My allegory touches on some key issues of the past year and 2004. Recapturing ADR levels lost to deteriorating market conditions will be more important than stimulating demand in the future. Equally important will be recapturing customer loyalty and faith by maintaining the promise of fair pricing, value and expectations of products and services. 

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Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be contacted at rickswig@rsbaswig.com.
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Contact:
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
E:mail:   rickswig@rsbaswig.com
Website: www.rsbaswig.com
Tel:  (415) 541-7722
Fax: (415) 541-5333

 
Rick Swig Article Index:
Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed  / November 2003
Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003
Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003
New Business Practices Essential to Lodging Companies’ Success / February 2003
Unreliable Market Trends Yield an Uncertain Direction / October 2002
The Bigger They Are, The Harder They Fall / September 2002
News of Boutiques’ Demise Is Greatly Exaggerated  / May 2002
Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002
Hotel Lenders Face Challenges In Tough Climate / October 2001
Where We Are Now Depends on Starting Point / Summer 2001
Solid Management Practices Can Improve Franchise Value / May 2001
Hotel Market Stagnation To Continue / January 2001
Here Today…but Tomorrow? / November 2000
Ready, Willing, and Unable? / August 2000
Independent Hotels: The New Brand Alternative / June 2000
Ankle Biter Syndrome / January 2000
Redefining a Mature Hotel Sector / November 1999
Focus On Operations Is Not Enough / August 1999
What’s Next?? / May 1999
Growth Through Management  / Feb 1999
Expect a Subdued Market in 1999 / Feb 1999
Hotel Real Estate: Back to Fundamentals / Nov 1998
The Hotel Investment Barometer For Institutional Investors / 1998
The State of Independents / 1998
Success (or Survival) of Boutique Hotels and Resorts / 1998



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