Owners and operators of independent hotels have a number of options available to them to prepare themselves for a possible downturn.
REPORT FROM THE U.S.—A downturn could be months or years away, but with hotel industry and other economic warning signs popping up, that’s enough reason for hoteliers to begin getting ready.
While hoteliers have long considered joining a brand as a way to ensure a larger safety cushion when times are tough, those in the independent space have a number of tools available to them to weather a downturn.
On a macro level, the hotel industry is softening, but that’s more on a market-by-market basis, said Rick Takach, chairman and CEO of Vesta Hospitality. Much of it depends on where new supply is coming in. No one knows for certain when a downturn is going to hit, and the industry generally follows the country’s gross-domestic-product growth, he said.
The hotel industry hasn’t yet reached the point where people need to have costs and contingency plans implemented, but the industry had been humming along at second gear and has downshifted to first gear since August, said Ray Martz, EVP and CFO at Pebblebrook Hotel Trust. Demand growth is at about 1.5%, which is about 75 basis points weaker than the industry was experiencing earlier this year.
“It’s still positive, but clearly decelerated,” he said. “You don’t have to make drastic changes to operations (right now).”
If cost-cutting strategies needed to be employed, Provenance Hotels would start with the low-hanging fruit, Principal and President Bashar Wali said. For example, company officials would look at the type of shampoo offered in guestrooms and consider switching to a brand that is less expensive but still high-quality, in keeping with the market and one that guests wouldn’t complain about.
“People who care enough about (shampoo brands) bring their own,” he said.
Provenance looks at all its supplies, from linens to water bottles, and tries to find a better way to buy them, Wali said. There are co-ops now that create buying power, and the company works with its vendors to negotiate pricing in good times and bad.
The biggest cost, of course, is labor, Wali said. Employers can’t demand more of their employees in a tight labor market because they’ll leave, and indie hotels already run tight ships.
“It’s the biggest source of savings, but the hardest one to pursue,” he said. “It’s hard because that is the single largest expenditure and it’s hard to get anything out of it.”
One positive thing about recessions is it allow hotel companies to reset expenses, Martz said. There’s a tendency that when the hotel industry goes longer in the cycle, spending creeps up.
“We have found when we have a recession, we have the ability to reset those and find out through creative means we can operate with less than we did before,” he said.
Going into the recession that followed 9/11, it was a common belief hotels break even when occupancy levels were in the upper 60% range, Martz said. Given how severe that recession was, the industry realized that point was much lower. The same thing happened after Lehman Brothers collapsed and business travel was clearly affected, he said.
Because of the current labor shortage, it’s difficult to hire people, especially in urban markets, Martz said. That means hotels have learned to operate with fewer people, which in a way will make the downturn a bit easier because the average property will have fewer full-time employees than the last recession.
While companies should review and potentially tighten their spending for a downturn, cutting the sales-and-marketing budget is counterintuitive, Wali said.
“We should spend more on marketing and sales, because we want to be noticed more in the face of new competition,” he said.
The only way out of this is through revenue, not cost-cutting, he said. Provenance has built strong relationships with its clients over the years, which builds loyalty.
In a similar vein, employers should take care of their employees, Wali said. The employees, in return, will take care of the guests.
“If you take care of them, they have no reason to ditch you,” he said. “They will spend, within reason, a couple bucks more where they are cared for over something new and shiny.”
A downturn is often a time to try something different, and Pebblebrook’s teams have found a lot of creative ways to do things, Martz said. Because its independent properties don’t necessarily have reward customers coming in, all of its hotel teams have to find business. There’s a skill in going out hunting for business, and being in the independent space has made Pebblebrook used to having to go out and get it, he said.
“We have a lot of good, creative, hungry folks on the independent side who do a fantastic job,” he said.
There are 18 hotels in the Provenance portfolio, and many of them are in historic buildings, Wali said. While the company can’t outspend the cool, new buildings opening in the markets, it can “out-service” them, he said.
While the company doesn’t focus dollars specifically on renovations during a downturn, it is constantly spending money on them, Wali said. That means its hotels are all in decent shape and can keep up with the competition at any point.
The hotel industry lags behind in technology, which is where alternative accommodations are creeping in because they use technology better, Wali said. If a hotel is in good shape, he said he would rather take money from renovations to focus on technology and customer loyalty to make it easier for guests to do business with them.
“Why do we make it so hard for you, the customer, to spend your money?” he asked.
At the moment, it is business as usual for property renovations and refurbishments at Pebblebrook, Martz said.
“If you have an independent hotel that you decided not to do a renovation and there’s a downturn, that’s going to make you less competitive versus the market,” he said.
It’s a natural tendency to avoid investing capital when times are tough, but experiences have shown those who invest capital have properties in good and fresh condition, he said. Without a brand affiliation and loyalty, there needs to be a reason for a guest to come to the hotel, he said.
Joining a brand?
It’s a common misperception that brands are safer during downturns, Martz said. It’s true to some extent that being part of brand will help attract guests to a property, “but (it’s) also very expensive,” he added.
“You’re looking at upfront fees and expenses in the 12%-to-14% range for branded properties that you’re going to have in a good period or in a recession,” he said. “Independent hotels don’t have all those costs. That’s a huge cushion in revenue if we do go into a downturn.”
In the last two cycles, the branded hotels Pebblebrook reviewed performed worse on the bottom line than the average independent lifestyle hotel, Martz said. The revenue might have been the same or less, but the fixed fees and expenses weighed it down. That’s why the bottom line was affected more, he said.
Soft-branding is a potential option, but Takach said he doubts Vesta would go that route unless it could make the numbers work. In comparing his branded and independent properties, he said his company isn’t doing too much different between the two.
“When it comes down to the fundamentals, when you acquire an independent hotel, you have to believe in the market, believe in the location, believe in the asset and you renovate properly, leverage properly and operate it properly,” he said. “I wouldn’t say there’s too much of a difference, at least for us, in what we’re doing.”