As the hospitality industry continues to deal with the challenges presented by the economic slowdown, franchisees and franchisors alike are working hard to persevere, adapt and navigate through this unprecedented landscape. For some, it can be tempting to respond to low occupancy levels by not only cutting costs, but also reducing rates in an attempt to drive business to their specific hotel. This often then creates a downward spiral as other local hotels undercut rates in an effort to respond.

Mark Carrier

Perhaps the biggest challenge facing the industry at this crisis point is pricing. In fact, the impulse to reduce rates is so strong that, in many cases, operators have been pricing rooms below the actual cost of operation—never mind earning enough for a return or to pay debt service. Ultimately, this short-term strategy creates a competitive “race for the bottom” and the industry becomes locked into an unhealthy deflationary price spiral, which is under way right now. Studies have consistently shown that dramatic and pervasive price cutting in an attempt to gain market share is ultimately a (self-) destructive behavior. The occupancy gains would have to be so high to offset the price loss that it makes little economic or logistical sense to engage in such a practice, but we are doing this, nonetheless. Why? Individual hoteliers must demonstrate a more long-term and disciplined approach.
 
Complicating this scenario is the growing influence of third-party brokers and online travel agencies. While these services can be valuable additions to brand distribution when used selectively, many hoteliers are employing them as primary distribution channels. The cost of this distribution is extraordinary and often not realized clearly. Hoteliers often look at the net rate rather than the fact that we are actually paying fees that range from 18 percent to 30 percent. This amount would be shocking if we accounted for it on our P&L’s.

The leverage third-party sites hold, combined with the sluggish economy and an increase in competitive price-cutting practices, is a one-two punch that, for some hoteliers, leaves them in the vulnerable situation of losing control of their pricing at the same time that third-party brokers are working to gain more and more control over inventory. If that pattern continues, the brands, hotel owners, and operators risk becoming little more than a commodity. We must control our inventory and set prices that rationally reflect the value we are delivering.

Unfortunately, the general consensus is that the trend for 2010 will remain negative. The overall outlook is very guarded, and PKF Consulting and Smith Travel Research both forecast a year of revenue-per-available-room reduction. Occupancy is expected to stop falling, but with group demand not yet rebounding and business travel predicted to remain slow, pricing pressures will remain. As a result, the key to a lasting recovery is going to be revenue generation.

Franchisees should look to their brand for programmatic support that promotes the product and encourages travel and longer stays. Don’t engage in self-destructive price-cutting that creates an artificial short-term market-share gain. This is the hospitality equivalent of rearranging deck chairs on the Titanic. Operators should look to implement innovative programs and promotions.

Robust franchisee/franchisor communication will be critical in the coming year as brands look to help their franchisees take full tactical and strategic advantage of available resources. The success of revenue generation initiatives will depend largely on the ability of franchisors to sharpen their message and provide clear, consistent and effective communication and support on a few select, carefully targeted issues.

At the same time, industry groups should continue to encourage members and fellow hoteliers to be long-term in their thinking, reminding everyone that market share is not the only measure of success. We can make 2010 a step forward on the road to recovery for our industry if we embrace the notion that price is not the only important thing to consumers, and understand that racing to the bottom is not a productive long-term strategy for success.

Mark Carrier is the senior vice president of B. F. Saul Company’s Hotel Division and chairman of IAHI, the owners association for IHG brand hotels.

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