A laundry list of issues have combined to erode hoteliers’ abilities to increase rates even while the industry fundamentals have remained strong.
REPORT FROM THE U.S.—By many measures, the current U.S. hotel cycle has been a great one, in part because of its exceptional length and durability.
But if there’s one area where the current cycle has fallen short, it’s been hoteliers’ continued inability to increase rates even as they’ve enjoyed record high occupancies, sources said.
The rate issue has been the subject of serious study, said Carter Wilson, SVP of consulting and analytics for Hotel News Now’s parent company STR.
“There has been some pretty comprehensive analysis of why we’ve seen record-high occupancies and rate has effectively stayed at zero when you take away inflation,” he said. “That’s in stark contrast to the late ’90s when there might have been high occupancies, but it wasn’t as high as it is now.”
So what was the broad takeaway for that analysis?
“There’s no silver bullet to what the problem is,” Wilson said. “It’s a combination of many different things.”
And there is no one type of hotel or segment in the industry that has been immune to the phenomenon, he noted.
A crisis of confidence
To raise rates, hoteliers have to believe they have the power to do so. For most of the current cycle, that belief has been in short supply, sources said.
Wilson noted the Great Recession of 2008 and 2009 took a mental and emotional toll on hoteliers.
“People were still freaked out by 2009 and more hesitant to push rate,” he said.
Helga Buszta, VP of revenue management for Filament Hospitality, said at least part of the issue is a generally young and inexperienced workforce that didn’t recognize exactly how much pricing power it should have had.
“Revenue management is not in its infancy, but we’re cycling through so many individuals who have been minimally exposed to past events,” she said. “Some lack that confidence.”
While lack of confidence or inexperience wouldn’t be universal, one hotel’s ability to drive rate is dependent on whether its competitors are also driving rate.
Buszta noted this underscores the importance of industrywide education.
However, the problem isn’t simply that the industry isn’t sophisticated enough with revenue management, Wilson said.
“You can easily find many instances of effective revenue and yield management all the time, especially around special events and markets with high compression nights,” he said.
Sources agreed that many instances during this cycle highlighted the fact hoteliers have prioritized driving occupancy over rate.
“There are many theories on why operators are incentivized to sell out properties at the expense of cutting rates,” Wilson said.
Chris Cheney, VP of hotel performance and analytics for Stonebridge Companies, said one of the drivers of this has been the structure of loyalty program reimbursements for properties, which often made big jumps if hotels could achieve certain occupancy thresholds.
“So that put you in a position where you had to focus on that occupancy to get that reimbursement rate,” he said.
He noted hoteliers are often able to rebound more easily when missing on rate targets than with occupancy.
Both Cheney and Buszta noted many of the automated revenue-management systems being deployed by brands or third parties have the impact of de-emphasizing rate as they’re more driven by revenue per available room.
“Those tools, depending on how much we can influence them and rely on them to be in autopilot, also have the potential to hurt us,” Buszta said.
Cheney noted they are “entirely RevPAR-focused,” which often can be out of line with what owners really want.
“They’re not (ADR-), GOP- or NOI-focused,” he said. “If the system can find more RevPAR by selling to groups you wouldn’t normally, that’s exactly what it’ll do.”
Wilson noted some hoteliers seem to have de-emphasized rate, believing higher occupancies can more than make up for a lack of rate growth in some circumstances due to increases in things like food and beverage revenue.
Like so many other issues in the hotel industry, the lack of rate growth can be somewhat attributed to supply growth, at least in some areas. That’s becoming an increasing issue as the cycle ages, Cheney said.
“We’re seeing supply growth match demand growth, which puts a damper on pricing power a bit,” he said.
This has been largely an individual market issue, sources said, but Cheney noted some markets have been hit by the opening of especially large properties that can considerably shift dynamics within a market or submarket.
“Some markets have seen large chunks of supply come online with big boxes opening, and that has a ripple effect on group composition and rates,” he said. “Some hotels (sacrifice rate) to try to gobble up as much business as they can get before those big boxes get there. And after they open, there’s much more competition for large groups.”
Distribution and transparency
One of the clearest differences between the current cycle and previous ones is the prevalence and dominance of online third parties in the booking process, particularly the online travel agencies.
Wilson said this leads to an overall more complicated landscape for hoteliers managing rates.
“There are so many more channels now in general that property managers have to understand the right balance of,” he said. “If you’re trying to think about all the potential combinations that can drive rate the most, that’s a lot to learn and understand.”
Buszta said one of the problems is the OTAs—while great at assisting in customer acquisition—are often built around the idea of luring in travelers with promises of deals and discounts, and that’s only become more popular with the rise of sites with last-minute bookings and flash sales.
“That’s what drives that audience now; they’re going out there to search for a deal,” she said. “In my opinion, many of the OTAS have changed guests’ mentality.”
Buszta noted it’s driven many travelers to be less brand loyal, which presents opportunities for hotel companies with wholly independent portfolios.
Cheney said the effects of rate transparency “can’t be ignored.”
“I fully support what the brands are doing to make sure guests have awareness and see the value in booking the most direct channels,” he said.
The rise of alternatives
Cheney noted the rise of alternative-accommodations platforms such as Airbnb can’t be ignored when piecing together the puzzle of tepid rate growth.
“You don’t want to overemphasize alternative lodging, but if you go back three or four years, you see a lot of studies saying things like Airbnb are not having an impact on the hotel sector,” he said. “And I think today, broadly speaking, there’s more of a recognition that there’s an impact.”
Quantifying that impact can still be difficult, but he noted at his company it’s clear it has a corrosive effect on rates around events with a massive spike in leisure demand, pointing specifically at New Year’s Eve in New York City, spring break in Florida and South by Southwest in Austin, Texas.
“At South by Southwest specifically, prior to the rise of that alternative supply, hotels had immense pricing power because there was more demand than the market could accommodate,” he said. “That really let you drive price, but now there’s a demand release valve since it lets you ratchet up supply. That’s really reduced pricing power in key markets.”
What’s the solution?
Hoteliers hoping to hear there is a simple fix to all of these problems are set up for disappointment, sources said.
Buszta said one of the most important things hoteliers have to do is educate themselves and communicate across the industry.
“It’s about communicating (across the industry) in general so we all know what’s plaguing and benefiting us,” she said. “Industry and (chamber of commerce) events are great for bringing in information and expanding your information base.”
Cheney said one of the more positive recent changes from at least some of the major brands is a de-emphasis of occupancy tiers in their loyalty redemption formulas.
“There’s less of a push now to get over that ledge,” he said.
The current environment also underscores the need to establish base business, such as groups, early in the process, Buszta said.
“You should do whatever you can to build that base further out,” she said.
But that doesn’t have to only mean groups. Buszta noted she’s a big fan of using advanced purchase rates to layer in base business.
“There some argument about whether advance purchase should be considered discounting, but I really don’t think it is,” she said.