Cutting costs, rates to stem Middle East’s supply panic
Cutting costs, rates to stem Middle East’s supply panic
11 FEBRUARY 2019 9:10 AM

All sides want to maintain rate integrity amid bloating supply, but hotel owners and operators in the Middle East appear to uphold different arguments in the battle for survival, distribution and market share.

ABU DHABI, United Arab Emirates—Oversupply is a dilemma the Middle East is coming to grips with for the first time since its meteoric hotel industry rise, according to sources.

Among the solutions to weathering oversupply, hoteliers must weigh participating in the race to the bottom of the average-daily-rate curve or cutting costs to be leaner businesses until the supply is absorbed.

Play with rate
At a session titled “Dealing with the oversupply crunch” at The Gulf & Indian Ocean Hotel Investors’ Summit, panelists said the first question hoteliers need to ask themselves is why customers would choose their particular properties.

“Repositioning, rather than cutting rates,” said Claudio Capaccioli, SVP of development and asset management at NH Hotels. “We have to provide more value for money (and) invest in the product.”

Anil Bhardwaj, director of AA Almoosa Enterprises—which contains Golden Sands Hotels, an owner of nine United Arab Emirates’ hotels—said now is a good time to renovate.

“When rates are falling as they are, you have to start to react to that,” Bhardwaj said. “Firstly, how do you minimize that fall, and the other challenge in Dubai is the F&B crisis, which again partly is due to oversupply. So maybe we look at half-board of full board, micro steps.

“One thing operators do not pull their weight behind is finding new markets. Take the four or so largest players, with such large presences and networks. … Cannot they look at new markets? They do not do that.”

Jake Stein, senior director of owner relations at Expedia, said experiences are the biggest differentiators.

“The industry can hold rates if you look to the long term, but, I agree, we need to find good value-add,” Stein said. “The most important thing is for hotels to provide unique, connecting experiences for guests that they cannot buy. This connects with your customers and your rates.”

Bhardwaj said one advantage several markets in the Middle East have is that their governments are supportive of the industry.

“We all have a silent partner in the government, which sees tourism as a major driver,” Bhardwaj said.

Play with costs
Another option is to cut costs to improve the bottom line, panelists said.

Bhardwaj said the hotel industry has never been good at doing this. He championed zero-based budgeting, in which every expense is justified and agreed to at the start of each quarter or other mandated period.

“I come from finance, and I hate to say this but the industry is very weak on the cost side,” he said. “I have to explain what is zero-based budgeting to CFOs that started as GMs, and operators, even with a year or two to sort it out, never have. And with ADR falling, owners are becoming very concerned.”

Stuart Etherington, VP of hospitality assets at Dubai Holding, said he advocated more incentivizing for operators in the region such as placing earnings before interest, tax, depreciation and amortization performance clauses into hotel management agreements.

“They will be incentivized,” Etherington said. “Costs can be cut. If your (personal assistant) has a secretary, there is something wrong.”

Etherington said barriers do exist in securing high-level management in the Middle East.

“There are challenges around visas, but it is not like it was in the 1990s,” he said. “Mostly (cutting expenses) is about mentality.”

Capaccioli said Middle East hotels average more employees per room than other global regions, and that’s not sustainable.

“In Europe, the average is 0.3 employees per room, and then I came here, it was five, although now it is nearer one,” he said. “But still we do track how long it takes for every employee to do every task, and this is not just in housekeeping, but also front office.

“Margins have increased year after year, but it requires human resources to break down the policies, and with IT coming in (to help).”

Play with, or slay, OTAs
Hoteliers in the Middle East are reliant on the OTAs, panelists said, and that comes at a price.

“It is the hotel operators’ inability to help pay the rent that gives OTAs all the strength they need,” Etherington said.

He added it is still significantly cheaper to get guests via OTAs, so maybe the solution is to stop asking for help from operators’ sales teams.

“The government is telling us a great deal of demand is from Korea, but how many of us are out looking in Korea?” Etherington said. “OTAs are expensive, but not as much as our own sales and marketing. Should we perhaps shut them down?”

Franchising is also becoming more popular in the Middle East.

“There is a move to franchises, which are cheaper and more efficient. (Franchises) will pick up quite a lot in the region,” Capaccioli said.

“We could use a few more entrepreneurs (in the Middle East),” Etherington said, who added as there was a lack this has fueled the interest in franchises in Saudi Arabia and the UAE, the region’s two largest economies and hotel markets.

“This is being done to cut costs, and it does not have any downside,” Etherington said.

The technology does exist to better target new markets, Stein said.

“Where is the data coming from that tells us where the demand is coming from, and how do we take opportunity of this?” he said. “This is the responsibility of all of us.”

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