After several years of healthy growth, 2009 is expected to be much tougher for the U.S. tourism, hospitality and leisure (THL) industry. The combination of a housing debacle, credit crunch and rising unemployment has placed the nation’s economy at or near recession – leaving fewer discretionary dollars available for consumers’ leisure travel and other forms of entertainment. Corporations, meanwhile, are implementing cost-cutting measures such as reducing employee air travel and scaling back or eliminating group meetings at convention hotels and destination resorts.
Based on data from Smith Travel Research (STR), a leader in lodging industry benchmarking and research, 2007 was a banner year for the THL sector. On average, Manhattan hotels had occupancy rates within the 80th percentile. However, in August 2008, hotel occupancy rates fell, an alarming sign given that August is a typically strong month for U.S. leisure travel.1 By the beginning of fourth quarter 2008, the U.S. THL sector was starting to see measurable fallout from the economic crisis in the form of negative indicators in the hotel industry, a slowdown in the gaming sector and increased “trading down” from casual dining restaurants to quick-serve restaurants. The economic crisis isn’t confined to the United States, either. It is a global issue whose future impact might possibly spread to the THL industry in the form of decreased tourist activity from overseas.
Economic difficulties are expected to continue well into 2009, affecting how and where people travel. According to Deloitte’s October 2008 travel survey, 38 percent of respondents said they expect to spend less on vacation/leisure travel over the next 12 months, nearly double the 21 percent who expect to spend more.2 For example, consumers may be less willing to take a traditional, seven-day vacation, opting instead for a long weekend or a “mini-vacation.” Skyrocketing airplane ticket prices likely will prevent some people from flying to their vacation destination; they may decide to drive to a spot closer to home.
From a U.S. corporate travel perspective, companies will continue to look for near-term ways to cut discretionary costs – including business travel – to bolster their bottom line in this challenging marketplace.3 For example, an October 2008 Business Travel Coalition survey of 106 corporate travel buyers showed that nearly 26 percent had “implemented emergency travel cutbacks in the past weeks as a result of the financial crisis.” However, taking a longer view, the value placed on human connection and interaction remains important and business executives will still need to meet in person to make deals and decisions. While online video conferencing offers tremendous convenience and significant cost savings, it will never replace business travel or group meetings. In a November 2008 Deloitte Insights podcast, a THL industry senior economist commented that “[business executives will] still need to get together, look each other in the eye and understand one another’s body language [to conduct business].”4
Globally, while U.S. companies’ overseas growth may slow in the near term, THL companies view expanding their global footprint as an effective way to increase market share, build brand awareness and spread risk over the long term. The 2008 Olympics proved to be a big showcase for the THL industry and is expected to continue driving construction of hotel properties in China’s large- and medium-sized cities. In addition, most big hospitality companies were showing growth outside of the United States throughout the summer months. The cruise industry is expecting continued strong passenger numbers and is investing in bigger, more spectacular ships. Five cruise lines will debut their biggest ships to date within the next 15 months at a combined estimated cost of $4.47 billion. Among them is Royal Caribbean’s 220,000-ton, 5,400-passenger Oasis of the Seas, set to launch in December 2009.5
On the whole, THL companies can expect to be under continued duress well into 2009, but smart hospitality organizations with innovative and cost-effective programs will be able to increase customer loyalty and drive demand. Specific issues that are generating both challenges and opportunities for the industry include:
Building brand value
With economic conditions becoming more challenging by the day, building brand value is more important than ever. The competition for customers and market share is expected to intensify in 2009; therefore, the ability of a hotel, restaurant and cruise line or vacation destination to crisply define and consistently deliver on a distinct brand promise can help to increase demand and build customer loyalty. The hotel sector, particularly high-end properties, generally has been effective at building brand value, although companies still could make an effort to learn more about their visitors’ needs and preferences and, thus, deliver an even better customer experience. The airline sector, due to significant cost increases, appears to be doing less to build brand loyalty. Airlines’ practices of cutting flights, adding extra-baggage and additional surcharges, and failing to treat frequent flyers differently from occasional travelers, are eroding both their brand value and their customers’ brand experience. All companies need to make their customers feel special, particularly when there is more competition for fewer discretionary dollars.
A trend that, until recently, elicited only lip service from the hospitality industry, sustainability is now becoming a mandatory business requirement. The sustainability movement is being driven and shaped by forces outside of the industry’s control – among them sharply rising energy costs, increased regulatory pressures and growing consumer demand. A Deloitte survey of more than 1,000 business travelers in April 2008 revealed that 95 percent of respondents think that lodging companies should be undertaking green initiatives.6 Also, 48 percent of respondents to Deloitte’s October 2008 travel survey said they try to be green when they travel, an increase from 41 percent a year prior to that.
Increasingly, sustainability is becoming a more important factor to compete in the THL marketplace. While tensions can exist between pursuing sustainability and achieving profitable growth, particularly in a year when access to credit for capital greening projects is limited, evidence suggests that expenses can be lowered and demand can be increased by pursuing an eco-friendly strategy. For example, as there are far more “unsustainable” buildings in the United States than there are “green” buildings, THL companies in 2009 have a real opportunity to seize first-mover advantage in advocating and practicing sustainability – both for existing buildings and new construction – that may enhance the brand’s overall image and attractiveness to consumers.7 It is important to note, however, that while going green is smart for business, it will require frequent monitoring, both in terms of what consumers are thinking and in how buildings are performing relative to the latest standards.
The hospitality industry continues to be a field in which people start their careers and U.S. immigrants can obtain work, whether in a hotel, restaurant or casino. The challenge for THL companies is how to keep good employees and create loyalty in an industry with a historic turnover rate of 50 percent. While the United States’ economic downturn is likely to reduce turnover in 2009 because fewer job opportunities will be available, attracting and retaining high-quality employees will remain a long-term issue, particularly for companies looking to staff properties thousands of miles away from their U.S. headquarters. Additionally, immigration and unionization remain hot-button political issues that directly impact the THL industry.
Strengthening marketing and sales
The quest by THL companies to increase demand and brand loyalty requires heavier investments in marketing and sales, which may appear to fly in the face of cost-cutting mandates imposed during tough economic times. Deloitte’s 2008 publication, Weathering the Economic Storm, How Hospitality Companies can Thrive in Challenging Times, explains how strengthening the marketing and sales functions could reduce the financial burdens of hospitality companies and lead to stronger customer relationships in the long run. Specifically, four key actions can help THL companies navigate through 2009’s anticipated tough times:
Optimizing performance management capabilities. Establishing controls and metrics that enable hospitality companies to monitor progress toward achieving revenue growth can help them to justify their marketing, advertising, promotion and sales budgets. Similarly, linking marketing and sales budgets to the top-down corporate strategy goals can narrow the gap between marketing and sales budget allocation decisions and targeted growth expectations. Finally, measuring return on investment (ROI) against marketing spend can help to identify the effectiveness of the multitude of available options, such as multichannel marketing, digital media channels, Internet marketing programs and consumer collaborations.
Improving spend effectiveness across sales and marketing channels. Two actions that can help THL organizations improve their sales and marketing channels are: 1) identifying emerging cost-effective channels, including user-generated online content such as blogs, wikis, special-interest and social networking sites, audio and video podcasts, mobile phones, personal digital assistants (PDAs) and iPods; 2) using market conditions to renegotiate marketing/advertising contracts and vendor relationships.
Re-evaluating customer segments and touch-points. Economic pressures and the corresponding pullbacks in personal and business travel are creating a need for THL companies to re-evaluate their understanding and classification of their customers. Specifically, companies should rethink how to best segment their customer base and retarget different demographics to make up for the projected loss in traditional travelers and revenue.
Focusing loyalty programs on value. Effective brand loyalty programs can often contribute significantly to a hotel’s total paid lodging room nights. Many hospitality providers are improving their loyalty program effectiveness through a combination of rewards (e.g., points, miles and merchandise) and awards recognition (e.g., identifying needs, marking sure guests are called by name, delivering personalized services). As economic pressures change individuals’ travel behaviors, it is increasingly important to connect with loyal customers on an emotional level and to develop innovative approaches to increase the value of their membership programs.
Although the 2009 forecast for the THL sector is somewhat negative, the outlook is slightly rosier than for other industries Businesses will continue to cast a discerning eye on employee travel and group meetings at resort properties, but road warriors will press on. From a leisure travel perspective, consumers seem to be hanging on to their vacations and timeshare properties. They may take a shorter trip in 2009 and travel by car rather than air, but people love to stay in hotels, visit amusement parks, casinos and historic sites, and eat at restaurants, because they have positive experiences there. THL companies that continue to focus on building customer loyalty and look for opportunities to grow, particularly overseas, should be able to navigate, and even prosper, in these troubling times.
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2009 Industry Outlook: Tourism, Hospitality & Leisure PDF