Recovery, in a sense

By Richard Mandigo

June 01, 2010 4:08 PM

Earlier today, someone told me that our last update on our website’s blog was from October 2009. The truth is, we pretty much just forgot about it for a while. We’re sorry about that!

A lot has happened over that time. There have been tons of articles that could tell you what happened technically, but since this is a blog, I figured I’d try to use as little jargon as I can.

So, people pretty much agree that we’ve hit bottom and now it’s just a matter of time until we start seeing decent recovery. The question of exactly how long that will take is the real trick, of course. Just because something’s not getting worse doesn’t mean it’s getting better.

A lot of different consulting companies have had forecasts out for last year and most of this year that have been revised extensively. This means that the companies can look back at the end of the year and point to their revised forecasts and produce almost perfectly accurate results. To use a bad sports metaphor, it’s easier to know who the winner of the World Series is going to be in October than it is in April. Just don’t claim that you knew what the results were going to be back at the start of the season.

These are still useful tools, and we’re not going to disparage the hard work that went into them. But if you’re looking at where a hotel is going to perform in a year or three, you need to know that in a recovering market, things change, and quickly, and that projection scenario is really more of a best-guess than anything else. There’s a reason long reports come with so many clauses.

It’s pretty easy to guess where something is going to go when you’re in a stable market. It’ll grow a bit, year by year, and then it’ll even out. Occupancies will go up, rates will go up with them, and when occupancies flatten, the rates will still climb a bit further. That’s probably what you’ve read if you’ve ever seen a feasibility study. It’s the most normal scenario.

For a while now, everything’s been going down, and fast. The problem is, now that occupancies are starting to come back up, rates aren’t coming back up with them. And it’s not logical or mathematically sound or statistically probable from past trends. This may all sound a bit self-defeating, but it’s honestly not. It’s just important to know what you’re getting when you look at these projections.

Rates are still down because of a bunch of factors, some of which were accounted for, and some which weren’t. Things like the growing role of travel websites account for some of it. Package deals are part of it. Three nights for the price of two and similar deals help keep up the daily published rate, but are still giving away a night for free, which hurts. The consumer is keenly aware that they can still get great deals, and so they’re going to push harder to get what they perceive as a bargain. And probably the most difficult to predict, hotelier confidence hasn’t come back.

We’re at a point where things are starting to look better, but it seems like it’s very tenuous. Although occupancies are up, the people running the hotels don’t want to do anything to jinx it. This pretty much directly translates into keeping prices low. There’s a lot of data out there that suggests that like most superstitions, this doesn’t have a lot of basis in reality. But it FEELS right. And what’s worse, nobody wants to be the first person to test it out, because if no one else does it, then yes, your customers will go elsewhere for a bargain.

The hotel industry is legally prohibited from sharing rates and such with other brands or hotels because it would be considered collusion. Lots of other industries get around this. Some with fewer scruples than others, but there’s an easy legal way to get your rates back up.

It’s called confidence. And until the whole industry believes we’re actually recovering, those rates are going to stay low. And confidence isn’t something that’s usually taken into account in projections.

A lot of companies earlier this year showed forecasts with all three key metrics down to varying degrees, or only token increases in occupancy. Our earlier forecasts for this year were probably a bit too aggressive in Average Daily Rate, which is remaining flat, but our projections for increased occupancy and revenue per available room have been pretty much spot on.

Since I’m writing again, expect a new article soon about “nightclub hotels”, and why I felt the need to just completely make up a new term to describe a growing phenomenon.

Related tags: Consluting, Feasibility, Hotels, Projections, Recovery
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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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