REPORT FROM THE U.S.—When the Phoenix hotel industry was experiencing double-digit performance declines during the depths of recession, The Clarendon Hotel took a risky maneuver that threatened to draw the ire of the market’s dwindling base of demand.
It introduced a $25 “hotel service fee.”
“It had to be implemented during the recession in order for us to keep our doors open,” said GM and owner Ben Bethel. “We would not be here today if we had not implemented that fee.”
Bethel was not alone in his actions. The U.S. hotel industry collected approximately $1.55 billion in fees and surcharges during 2009, according to research from Bjorn Hanson, divisional dean of the Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management at New York University.
The “uniquely profitable” revenue source has increased ever since, Hanson said. Fees and surcharges—which cover everything from resorts, amenities, Internet, parking, early departure, reservation cancellations, room service delivery and mini-bar restocking—tallied approximately $1.7 billion during 2010 and $1.85 billion during 2011.
During 2012, Hanson projects the amount of fees and surcharges collected by U.S. hotels to increase to $1.95 billion.
The increase reflects a combination of 3.5% more occupied hotel rooms this year compared to 2011, plus higher fees and surcharge amounts at many hotels, especially resorts. Fewer hotels will have newly introduced fees and surcharges.
“The industry is being conservative in adding new fees or substantial increase in the dollar amounts collected for fees and surcharges,” Hanson said. “I think it’s in part because of research being done by the major chains indicates how unfavorable consumers view the airlines fees and surcharges.”
While the airline industry provides some cover to the hotel industry, hoteliers are likely to hold fees relatively stable through 2014, Hanson added.
Catching guests by surprise
When Bethel introduced the service fee at The Clarendon, he was careful to address two points.
The first dealt with value.
“Its’ OK to charge fees as long as you’re always giving the guest value that’s perceived to be higher than the fee,” he said. “That’s completely understandable.”
The Clarendon’s service fee, which was reduced to $17 as of 1 August, includes the following: breakfast ($10 voucher per reserved guest), parking, Internet, long-distance calls, unlimited bottled water, free snacks and drinks available at the front desk, in-room Keurig coffee machines, morning newspaper, access to the fitness facility, access to UltraFit Boot Camp classes, rooftop yoga sessions on Sundays, Flamenco dance lessons on Wednesdays and four pool passes.
The second point was transparency. While Bethel said consumers have been trained to expect certain fees and surcharges for nearly every transaction, adding too much to the final bill can lead to dissatisfaction.
GM at the Clarendon Hotel in Phoenix
Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management
“What seems to create the greatest dissatisfaction is the surprise or ambush factor,” Hanson said.
This is especially true among brands, where fees and surcharges at one property can vary from another nearby property within the same brand portfolio, he said, adding the decision to implement fees is typically decided by GMs and operators at each hotel.
The problem extends beyond individual brands, said Steven P. André, GM of the 248-room luxury Hutton Hotel in Nashville, Tennessee. If one hotelier charges a bevy of fees and his competitor across the street charges none, that inconsistency can drive dissatisfaction and shift demand.
“You have to be competitive within your market. It becomes much easier to have fees when everyone else has fee. … That’s one of the reasons why you have such pushback for the Internet is that it’s very different. Some hotels charge, some hotels don’t,” he said.
While transparency can help curtail the “ambush” factor, André said he was hesitant to outline each and every cost before a guest books a room, which most certainly would turn off some guests.
“There is a difference between being super upfront and having the information available to guests,” he said. “Making sure the information is accessible and you’re having full disclosure on your rate structure and fees is very important.”
While the total percent of overall revenue fees make up at each hotel might be small, they are especially viable profit drivers because nearly all of the expense already has been built in, Hanson said.
Most hotels always have held luggage for guests or allowed on-the-go travelers to check out early, he offered as examples. Charging fees for those services provides an added layer of revenue.
“It is a paramount source of revenue for the (hotel) industry,” Hanson said.
And when additional value-adds do present extra costs, Bethel said the redemption rate is still low enough to drive a profit.
The Clarendon, for instance, offers free international calls, and yet most of its guests opt to use Skype. The property also offers complimentary breakfast, and yet most guests either wake up too late to take advantage or are in such a hurry in the morning that they bypass the opportunity altogether.
“We’re offering a lot of things, but most of that money is being retained by the business,” Bethel said.
More than 20% of total room revenue at The Clarendon during the past 12 months is attributable directly to the hotel service fee, he said.
The Hutton’s André was a bit less transparent: “They’re usually pretty nice profit areas,” he said.