LONDON—If one thing has become clear during this downturn, it is that there are some counterproductive practices in our industry. This relates in part to my last article on HotelNewsNow.com (“Adapting to changes in the market”), in which I describe how often decisions are made with little knowledge of the real market picture, without effective checks and balances, and without recourse to one fundamental question: What impact did that have on my market share?
In other words, there are too many hunches and not enough fact.
Traditionally, hotels use budgets, forecasts and market share as the three main performance matrixes, probably in that order of importance. Budgets are the simplest: Take last year’s actual figures, estimate what percentage you feel the business will grow, work in any extraneous circumstances (Easter falling in different months, or the ‘off’ year of a big event) and set a target. The hotel then will look carefully at its own month- and year-to-date figures compared to last year and compared to budget.
Forecasting is more complicated, but, simply put, it measures business on the books and expected business over the coming days and weeks. As a supplement to the forecast, more sophisticated operations measure the all-important pick up (i.e. how early the bookings are coming in and what percentage of the business is coming in on the day of stay). This is especially difficult to predict in a downturn. Figures from the late ’90s showed lead times on bookings averaging 12 to 14 days in advance of stay, whereas at the moment this has dropped to two or three days.
Lastly, there is market share. It is arguably the most useful of the three but also the most underused among independent hotels that don’t fully understand how it works and therefore don’t trust it. Market share looks at your mathematical position in any given market, as defined by your relative performance compared to a particular competitive set. Used properly, looking at share of the market is the most important check and balance against the business decisions that any hotel can make.
There are two simple adjustments that hotels can make to their business practices that will have a clear impact on their short- and medium-term performance. Many hotels place more emphasis on budgets than market share, but it’s easy to see why. If you are measured and your bonus is based on budgetary targets, then as long as those targets are met everybody is happy. The flip side of this, however, is that it causes rigidity in thought that aligns the property along artificial lines of achievement. The hotel market is fast and fluid. Luxury and upper-upscale properties in London in the summer of 2006 were able to grow average rate more than 40 percent because they were fast to spot and respond to a spike in demand. Other hotels comfortably over budget and unwilling to jeopardise those internal targets by taking risks despite clear evidence in market share data waited far too long and missed out on a huge opportunity. The irony is that the growth they posted was in excess of 10 percent, comfortably over budget. But they missed out on a huge potential upside because they hadn’t responded fast enough.
In a down market, the same principle of knowing your market applies and is even more important because the budget system of running the business is redundant. If the market is falling and dipping into negative territory, chances are the month- and year-to-date budget you have made is worthless. By looking at market share, not only will you have a performance measure that makes sense, you will also have visibility on what impact your decisions are having on your revenue per available room and can help to stop unnecessary discounting. In the same way that growing 10 percent might have represented a missed opportunity, dropping 10 percent might actually be a great achievement if your competitors have dropped 15 percent.
Market share is the all-important check and balance. This is a balance to both the hotel’s own preconceived idea of the marketplace and their place in it, and also a guide to what effect the current strategy really has on the business. Many GM’s will have a very clear idea of their property and what they have to do to maximise the performance of that hotel. Unfortunately, time and again those preconceptions are based on assumptions and gut feelings rather than fact. In some instances, they actually can be reluctant to look at market share in case it contradicts what they are saying. In the growth part of the cycle, this results in missed opportunities for growth that are hidden by the generally upward performance of the market. In the downturn, this thinking can be catastrophic.
This brings us on to price comparison or so-called ‘rate-scraping’ tools. I would argue that these potentially are an important indicator of what is happening in the market, but only if used in tandem with market share information. These tools by definition look at the published rates (e.g. rates visible on the Global Distribution Systems and Internet and account for about 10 percent to 25 percent of the business coming into a hotel). Too often hotels make pricing decisions based on these tools alone. That is dangerous for two reasons: Firstly, why would anybody run a business on information that covers at most 25 percent of the business (and not even actual revenue, but a snapshot of what might potentially happen on any given time period) all without visibility on why those rates are available and the business strategy behind them? Secondly, these systems all encourage discounting, trying to stimulate demand that just isn’t there at this stage of the cycle.
That is not to say that these tools don’t play an important function, but they have to be part of a decision-making process that includes visibility on what effect the action had (i.e. I changed my rate, what effect did that have on my RevPAR penetration compared to my competitive set?). If the result is negative, then by definition it was the wrong decision to make. The real danger is when there are no market share numbers to look at. We only have to look at many markets in Europe that are experiencing huge falls in rate and occupancy to see that is happening. If the demand is absent and rate is falling significantly anyway, it can only mean that hotels are discounting to stimulate something that isn’t there, and the effect is mutually assured destruction.