Despite the slow start, 2016 is expected to be profitable with a soft landing in 2017.
At Woodstock, Neil Young approached the microphone and said, “This song starts out slow and fizzles out altogether.” Well, this year started out slow but it will not fizzle out.
Contrary to those who feel the party is over, 2016 will continue the trend line of 2015 albeit with a somewhat muted feel and a slow start. This summer will jump with average rate growth due to unprecedented leisure demand stimulated by low gasoline prices and that American mindset: “It is my birthright to travel and visit my friends and family!”
Because the headwinds we expect in 2017 will not have fully materialized, we will still have a very profitable year in our industry. As we predicted last year, we are not foreseeing a recession as we have experienced in past economic downturns, but more of a soft landing in 2017 as the economy pulls back slightly.
There are a multitude of factors that will affect our industry and lead to this soft landing. While there has been a dramatic collapse in oil and other commodity prices, the U.S. economy has returned to fairly full employment, inflation risks remain low and the Fed is not sure if it will lower or raise interest rates. As such, 2016 will be another great year by the time it is over. Our forecast is only reduced by the poor Q1 start, hence, our 2016 forecast is reduced from 5% revenue-per-available-room growth to 3.75% since Q1 was virtually flat to 2015.
The impact of the economy in 2016 and 2017
With 2016 being a presidential election year in the U.S., the effects of new economic policies will only start to be noticeable in 2017, including the Department of Labor overtime law revisions that go into effect 1 December. Furthermore, in 2017 new supply will begin to take its toll on occupancy and start to pressure rates, especially when factoring in Airbnb’s negative impact on peak demand periods. The sharing economy—and mainly Airbnb—has yet to really affect the hospitality industry as most of the impact has been during the aforementioned high-demand periods.
Fallout from minimum-wage increases and changes to the overtime laws for salaried workers will begin to be noticeable in 2017 and rising health care costs will negatively affect profits. As mentioned above, we are lowering our U.S. RevPAR Forecast to 3.75%, down from our original 5%, however, there are no meaningful changes in fundamentals going into the summer of 2016. Supply-and-demand dynamics are strong in most markets and rate growth should be solid all summer.
The bottom line for hotel owners is sell now if you do not plan to hold for a few years as next year will not be as robust.
Trends to watch in 2016
Marriott International’s pending acquisition of Starwood Hotels & Resorts Worldwide as well as the Expedia acquisition of Orbitz and HNA Group’s proposed Carlson Hotels deal are harbingers of a consolidation coming in the hotel industry. While it is too soon to determine what other brands or companies will decide to come together, it is clear that we are entering the age of consolidation as the economy is clearly in the mature stage.
Hotel values may have peaked nationally as real estate investment trusts are not actively purchasing since their stocks declined and the runway from 2013 to 2015 is shorter. However, values will not decline sharply this year. Private equity is in abundance, 2016 still has a positive, election-year outlook and foreign capital continues to find the U.S. lodging industry attractive.
Although we are coming to the end of our current economic cycle, it does not mean we are entering a recession. We are currently still forecasting between 1% and 2% growth for 2017, but as hoteliers we need to prepare ahead of time for this pullback after several years of fantastic growth. Invest in upgrading your product while profits are strong and interest rates are low so you can keep up with the new supply as we enter this soft landing. With the current geopolitical threats around the world, any unforeseen event could tilt this soft landing toward a more difficult economic environment.
Strategies to Succeed
Digital Marketing—Today, there is no excuse to rely on gut instincts in developing an operating strategy. Fact-based decision-making is much easier now that systems are available for general managers and marketers to improve their business acumen. Technology, data and analytics are all improving, and teams must not work in a vacuum, meaning that synchronized decisions with all departments are paramount to success. There are business intelligence and analytic applications that, coupled with a revenue-management and reputation-management system, can be deployed to automate the information process.
The online travel agencies have been considered the enemy long enough. Consider them a friend but do not rely on them, as the goal must be to increase direct bookings to your property. Think of them as strategic partners that make up less of your demand component going forward. Now is a great time to start testing the waters and see what works in revenue management and digital marketing. Be innovative and see what drives new revenues and what does not.
Content Creation—Remember that when content is created it must be created for different devices. Mobile is king! Ergo, fine tune your content by channel and medium.
Content must be fresh and original as well as valued by your readers/guests. Marketers must also work with revenue managers so that the content targets the guest that is appropriate for the hotel. Customer-acquisition costs that contribute to the the bottom line—including booking engine transaction cost, ad spend and all other costs associated with customer acquisition—are very high and will certainly continue to be high if a large number of those guests do not return. Repeat guests are much easier to get back than new guests. Experience during the guest stay as well as communication before and after check-out is critical.
Knowing your audience, keeping a fresh web presence and understanding your channels will go a long way toward successfully marketing to both new and repeat guests. Desertion management, which is a way to address the guest who does not come back, can allow you to have much better reviews while retaining guests who were going to leave and never come back. In other words, if you do make an error, catch it and make a comeback!
Revenue Management—Demand forecasts by market are good but the real question is “What are the booking patterns in the market?” Also, what future dates are already selling and at what pace?
Do not rely exclusively on competitive market intelligence as cancellations may not be captured in time for you to react. Sharing economy or vacation rentals might affect the market, especially during high-demand dates. The truth is, no matter how good your revenue management system is, an experienced user wins in every market.
Analytics—Today’s analytics can assist hoteliers in providing guests with personalized and responsive experiences. The ability to target the wants and needs of today’s travelers is so far beyond that of just a few years ago. So long as the data we have is not abused, we have huge opportunities to provide incredible service. To ensure this, if you do not have a dedicated customer experience team, now is a good time to create one.
Enjoy the summer—it will be financially rewarding for those who are prepared to capture high rates while we can.
Robert A. Rauch is CEO of the hotel management and consulting firm RAR Hospitality. Rauch is an internationally acclaimed hotelier with more than 40 years of industry experience. RAR Hospitality has four independent hotels in its portfolio with an additional property under development.
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