Populism vs. The Hotel Industry

By Richard Mandigo

March 31, 2009 3:23 PM

March has been a bizarre moth, to say the least. We've seen extreme lows, the beginnings of recovery, and a million other things that no one has yet figured out. Is the worst over? In hotel terms, probably not, even if the economy only goes up from this point onward. Generally, the hotel industry is one of the first to suffer the down effects, and one of the last industries to recover. Almost everybody agrees that this year will be a write off, and several prominent consulting groups have revised their forecasts downward recently. With all that going on, what else could possibly be worth talking about?

For starters, STR released their February Market Data, showing a decline of 10% in occupancy and 7.8% in rate. Though these results are for the US as a whole, some markets suffered worse than others. Phoenix has taken the absolute worst of it, down 34.9% in RevPAR. The situation isn't good anywhere, really, but if you're looking for a bright side, it might be that some cities are a bit more insulated from the recession than the overall market. As should probably be expected, the luxury market took a beating (RevPAR down almost 30%!), while the economy market posted smaller declines. Will this mark a trend for hotel chains to again start focusing on downscale products?

Probably not. Hilton's newest brand is just the latest entry in the edgy-boutique-style-hotel category. When the W first came onto the scene, it raised a bunch of eyebrows. Now that everyone and their brother has a edgy, modern brand, the concept is beginning to lose some of its lustre. I mean, I get the concept, appeal to a younger crowd, charge more for what would otherwise be an upscale product, get people to see the hotel as a destination...it's admirable. Ironically, by trying to be so unique, they're starting to blend together.

Once you get past a a certain service level, hotels all basically offer the same amenities. Sure, maybe the soap's organic, or the sheets have a few hundred more threads per inch, but the name of the game becomes perceived value, as opposed to actual value. Is the guest going to pay an extra 50 to 100 dollars because the hotel is ultramodern and "cool"? Two years ago, the answer would have been a definite yes. Now it's a "maybe". It'll work in New York, or Miami, or a few other places, sure...but it sure won't work as well as it would have four years ago.

Speaking of four years ago, in 2005, we were one year out of the last major recession to cripple the hotel industry. The one that everyone was supposed to have learned all these important lessons about what to do the next time something earth shattering came along. One of the most important lessons was that deep discounting did not really help bring in more customers. With the start of this recession, we saw hotels react by initially being disciplined enough to remember to hold their rates. That lasted a few months, tops. We're back to a cycle of discounting by many hotels, or token rate increases of under 3%, in some cases. Ironically the one sector that has been holding its rates is the luxury sector, which is already the target of a bit more populist outrage than the brands would like. Luxury hotels used to be unique destination hotels. Now they're just another flag in a larger portfolio. So rather than target an individual hotel, it's easy to attack the whole industry. And related industries.

There's two ways to deal with populist outrage, one, you can address the complaints being leveled. Two, you can complain that the charges against you are unfair. The brands chose the latter. After all, they're a big important industry, and they didn't waste everyone's money like investment groups.

There's a few problems with the "whiny" approach. One, the hotel industry itself is NOT the target of populist outrage. The excesses of companies taking tax payer dollars and then spending them on luxury resorts did trigger public outrage, true, but the decline of the high end retreat is a self fulfilling prophecy from companies worried about public opinion. By whining about unfair treatment, the hotel industry has thrown its lot in with Wall Street.

Hotels have become a huge industry, serving a huge cross section of people. But, the hotel industry has been almost singularly focused on getting people to pay more for essentially the same service, and their approach has been to go "boutique". And it used to be just fine, because you could get a loan to build pretty much whatever you wanted.

But if luxury hotels are truly going out of style, a few editorials in the Wall Street Journal aren't going to change the inevitable. The hotel industry is not just the privilege of the rich. It serves a valuable role for commerce on a community level.

So why not look at this recession as an opportunity to focus on the mid-range or upscale brands, which have been virtually unchanged since the 90's. Why not build new brands (like the NYLO) that are budget conscious, while still delivering modern amenities. It's not impossible, and it's not even really that difficult. Heck, just focusing on modernizing brands would do a world of good.

Ted Mandigo, CPA, ISHC.
Director TR Mandigo & Co.

About TRM

TR Mandigo & Company is a Hospitality Consulting firm with over 35 years of professional experience. We specialize in hotel & resort market feasibility, litigation support, and portfolio valuation.

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