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Group booking patterns require pricing reset
September 5 2013

Group demand is still there. It’s just materializing in new ways, according to panelists at the Hotel Data Conference.

Highlights
  • Guests are booking outside traditional group room blocks.
  • Transient bookings have increased dramatically.
  • The rise of global economic headwinds is one key industry trend.
     

NASHVILLE, Tennessee—Shifting consumer-booking behaviors are undermining the old group business model, requiring a reset in the way hoteliers price and sell rooms.

Group and transient demand were clearly segmented blocks in the past, but today the lines have blurred as more travelers book outside group blocks to find more affordable rooms in shorter windows, according to Jan Freitag, senior VP of strategic development for STR, parent company of Hotel News Now.

To emphasize his point Wednesday during the “Kicking off: Establishing the industry’s position” opening general session of the 5th annual Hotel Data Conference hosted by STR and Hotel News Now, Freitag pointed to stagnant group demand numbers in U.S. upper-upscale urban hotels, which traditionally host meetings and conferences.

Year-to-date July, group demand was down 2% from the prior peak in 2007. Transient demand at those same properties, however, was up 30%, he said.

Transient demand at upscale hotels in the same locations increased 51% during the same period, he added, which suggests many of those traditional group customers are not only booking outside the room block at the host hotel, but they are also booking at more affordable properties nearby.

The demand is still there, Freitag said. It’s just materializing in a different way.

“Don’t just focus on what used to be true five years ago, 10 years ago, when you grew up where there was specific group, there was specific transient, and never the two shall meet,” he said.

Fellow panelist Adam Sacks, founder and president of Tourism Economics, shares a slightly opposing view, arguing group demand in its traditional form is indeed on its way back.

Citing data from Destination Marketing Association International, he said during the past two years destination marketing organizations have reported an increase in group demand.

Depending on which trend a given hotelier sees, he must tailor his pricing strategies accordingly, Freitag said.

“We’re not attuned to changing our room rates the way we should,” he said.

Case in point: transient average daily rate. Despite a marked increase in transient demand, rates have crept back slowly, from $167 July year to date in 2011 to $175 in 2012 and $182 in 2013, according to STR data.

Key trends
The panelists touched upon a number of other trends during the session, including:

Economic headwinds
Two years ago, occupancy drove most of the growth in the hotel industry. Last year, increases came from ADR.

“This year the gains are going to be harder won on both fronts,” Sacks said.

The reasons are multifold, stemming from a confluence of macroeconomic factors. Europe is still in a recession. Austerity measures in the U.S. are weighing on gross domestic product. “Even (Brazil, Russia, India and China), whom we rely upon for strong growth to drive global trade, have been faltering,” he added.

But Sacks advised attendees not to panic.

“We’re at peaks in terms of (revenue per available room) and ADR,” he said. “To be able to consolidate those gains, even if we’re not able to go much further given limited supply growth, that’s not a bad story.”

Construction
The number of rooms under construction in the U.S. increased 23% year-to-date July compared to the same period during 2012, Freitag said. Such growth might seem scary at first glance, until one sees the actual numbers behind them. That 23% bump saw the number of rooms under construction rise to 76,000 in 2013, which pales in comparison to the 211,000 under construction during the prior peak in 2007.

Nationwide, supply growth is still well below the industry’s long-term average, Freitag said, with the notable exceptions of Washington, D.C.; New York; Nashville, Tennessee; and a few others.

The nature of new supply has shifted since 2007 as well, he explained. The majority of hotels being built today are in the limited-service sector, which has undermined pricing power in the midscale and upper-midscale segments.

Additionally, hotels with more than 50,000 square feet of meeting space have become a dying breed, Freitag said. Twelve such properties opened during 2008, compared to zero during 2012 and year-to-date 2013.

Travel and tourism growth
Travel and tourism continue to be a growth driver in the global economy, according to Val Bauduin, partner in the U.S. hospitality division at Deloitte & Touche LLP.

“We expect that tourism’s going to be 10% of global GDP by 2023. This is a growth industry everywhere,” he said.

One in 10 jobs globally will be travel-related by the next decade. That growth represents 70 million jobs, two-thirds of which will be in Asia, Bauduin said.

Shifting loyalties
The old definition of hotel loyalty has changed, Bauduin said. Points-based systems that used to drive repeat business have become replaceable commodities.

“The current loyalty model doesn’t seem to work as well as we all think it should,” he said. “For experienced business travelers, up to 30(%) to 40% of their spend could be with another brand than their primary stated preference.”

The best loyalty programs replace points with personalization, he said.

“We really see an opportunity to refresh all the loyalty programs.”

COMMENTS   Show All
CrenshawSTR
9/11/2013 12:00:00 AM
I wholeheartedly disagree with the notion that booking outside the block is a phenomenon that is impacting the hotel business in any meaningful way more so than in the past. I base this statement on a number of pieces of information: 1) It's been going on for years, well before the downturn. 2) For all the metasearch technology that enables this behavior (also not new to the post-down turn era) there have been advancements in technology that keeps guests booking INSIDE the block. 3) When speaking with the finance folks at many companies, the F&B spend is not disproportionately high which would indicate feeding more people than registrants. In my opinion, this is a story line that sounds good, but takes away the focus of the real issue which is that group is still 4 million room nights away from recovering to the prior peak levels on a 12 month moving basis. Even if there is some noise in that number, there has been a seismic shift in what makes up the segmentation in the hotel business over the last 5 years.
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