Cost pressures mount for hotel executives in 2019
 
Cost pressures mount for hotel executives in 2019
05 AUGUST 2019 8:22 AM

Executives from RLJ Lodging Trust, Hilton, Virgin Hotels, Davidson Hotels & Resorts and SH Hotels & Resorts shared ways their companies are finding growth in an increasingly tough operating environment.

WASHINGTON—When a hotel industry cycle gets as deep as the current one is, executives are bound to register worries about what’s ahead.

Hotel leaders speaking at the 2019 ALIS Summer Update event in Washington, D.C., were no exception, but despite concerns over persistent issues like labor, rising costs and profitability, they continue to find growth opportunities.

First-half growth and concerns
Most speakers could point out some positives about business during the first half of 2019.

Arash Azarbarzin, president of SH Hotels & Resorts, talked about good deal flow and the launch of SH’s latest brand, Treehouse.

“The biggest pleasant surprise has been the deal flow and number of deals we’ve signed so far this year,” he said. “We are actively working on 30 deals as we speak … and it’s a big deal for us to be negotiating 30 different deals all over the world. The economy has been stable, and our seven hotels are performing better than last year, so that’s great for us.”

Danny Hughes, EVP and president of the Americas region for Hilton, said growth for Hilton, particularly among its luxury brands, has been “very, very rapid.”

He cited recent openings for the company’s Conrad and Waldorf brands, and also mentioned the company’s Tru by Hilton brand on the other end of the chain-scale spectrum, which just opened its 77th hotel as of the end of the second quarter.

Raul Leal, CEO of Virgin Hotels, said the company is in growth mode across the U.S. and Europe. With two hotels open, the company has hotels in development in California; Las Vegas; Dallas; New Orleans, Nashville, Tennessee; and Edinburgh, Scotland.

John Belden, chairman and CEO of Davidson Hotels & Resorts, said the Davidson portfolio continues to do well despite some pressures related to the long cycle.

“I think ‘stability’ may be too weak of a word, but it’s great that we continue to grow and capital continues to be interested in our space and demand continues to grow,” he said. “Supply comes and goes, but we’re never really had a supply-induced recession.”

Leslie Hale, president and CEO of RLJ Lodging Trust, said she started out 2019 cautiously optimistic about the overall economy, but now has shortened that to “just cautious.”

“I’m not pessimistic, but just cautious,” she said. “We are looking at business investment, which continues to decelerate. The consumer continues to be strong, but we’re looking at all the data points. No particular data point will drive it, because the signals are somewhat mixed.”

Regulatory environment
With the event taking place in the U.S. capital, talk turned to the current regulatory environment, touching on interest-rate cuts, the impacts of tariffs and general uncertainty.

Interest-rate cuts “can’t hurt the economy,” Azarbarzin said—a statement echoed by Belden.

“With GDP being 75% of consumer expenditures and with a pretty strong younger generation that loves to put that money back in the system, it’s fantastic,” Belden said. “We’ve lived off of transient, and in particular leisure demand, because of this generation that loves to have experiences. And it’s not just them, but all of us now. So any way we can lower those borrowing costs and … have that money recycle through is a good thing.”

Hughes said Hilton sees strong demand for travel despite governmental woes.

“It’s all still there—fundamentals are right, unemployment is low, load factors in airlines are right,” he said. “There are wobbles around international issues, certainly China, but … I feel more positive about the future than perhaps some others.”

Hale said uncertainty is a keyword related to the current regulatory environment.

“Tariffs are affecting our business as we renovate hotels, because it’s costing us more to be able to do it,” she said. “And whether (these issues) are affecting business or not, it’s increasing uncertainty. That affects the business traveler and our industry, so there’s an overall lack of certainty.”

Azarbarzin agreed that volatility is a concern.

“We feel international business will be impacted by this current administration,” he said. “We do business with hotel companies all over the world, and there are so many risks when you hear about threats of tariffs and embargoes and closing borders. It creates volatility in our business, and we see investment vehicles going overseas because companies want to diversify and not put all their money here in the U.S.”

Labor issues
Panelists agreed that labor remains a top concern, whether it be around immigration worries or challenges attracting and retaining people in the hotel industry.

“We talk a lot about the consumer experience, but we have to look at how interesting the industry is to an employee,” Leal said. “Immigration and labor issues have an impact, and we need to think about how we still have to attract and retain employees in every city we’re in.”

He said Virgin is doing work to “marry the consumer journey and the employee journey,” which means making investments into an employee’s time with the company just as it makes investments into the guests staying in hotels.

The company created an app for its employees that gives them easy access to information like payroll, benefits and other administrative things, while also creating community.

Transactions and profitability
Speaking from the perspective as the head of a real estate investment trust, Hale said the industry is in a seller’s market right now.

“If you look at the landscape today, you know there’s plenty of equity that’s available, debt markets are cooperating and private buyers who use a lot of leverage will have an advantage,” she said. “Buyers and certainly sellers today are holding firm on their pricing, so it’s a seller’s market.”

Still, profitability is a concern, and speakers had different approaches to ensure their businesses are doing as much as they can given current cycle conditions.

“It’s a tough time right now to hold profitability,” Hale said. “The question becomes how much of it is a function of where we are in the cycle versus how much is a permanent paradigm shift, particularly given the movement of wages, insurance, taxes.”

Azarbarzin agreed, saying that revenue management has become increasingly important in an environment where it’s often more about controlling costs than cutting them.

Hughes said cycle dynamics can have a lot to do with profitability.

“When demand does drop a little, consumers have more choice, and we need to invest in the consumer experience even more,” he said. “That means that we need to be more creative about costs, and take advantage of critical mass.”

He added that distribution tactics play a role, too.

“In this world where experiences are at risk of being commoditized, we all need to invest in developing direct relationships with our consumers,” he said. “We have to stand firm on eliminating some of the third-party costs in our business.”

Belden said that for his company, maximizing profitability comes down to street-corner-level efforts externally and working hard to find savings internally.

“We look at experiences we can promote better, because we want to be more experiential than anyone else out there, and drive that better than anyone else,” he said. “And on the cost side, we’ve been redoing our procurement programs for the last two years.”

He cited everything from liquor cost management to insurance costs.

“We’ve been focusing on the unsexy but really, really important things because they affect everyone,” he said.

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