With the discretionary dollars of working Americans under attack, the biggest issue facing the hospitality industry in the short term increasingly appears to be room demand, not supply. The spike in food and energy prices and a rise in delinquencies on auto loans and credit cards, not to mention a softening job market, could portend some challenging times ahead for hotel owners and managers.
Adding insult to injury, U.S. consumer confidence in April fell to a 26-year low, according to a Reuters/University of Michigan survey, with nine out of 10 respondents indicating they believe the economy is in recession.
“The U.S. travel industry is going to have to fight for discretionary dollars,” says Dr. Lalia Rach, dean of the Preston Robert Tisch Center for Hospitality, Tourism and Sports Management at New York University. Those available dollars are shrinking, Rach emphasizes. “The price of food is going up, the price of electricity is going up, and we're seeing some stagnancy in wages. The price of gas also is going up. So, you have less to spend on vacation.”
Indeed, there are several unfavorable economic trends that are putting a strain on American households:
Food prices rose 0.2% in March and were 4.4% higher than they were 12 months earlier, according to the U.S. Bureau of Labor Statistics. The price of bread in March was 14.7% higher than 12 months earlier.
The percentage of consumer loans 30 days past due in the fourth quarter of 2007 rose to 2.65%, up from 2.23% a year earlier, according to The American Bankers Association. That's the highest level since the first quarter of 1992, when the delinquency rate was 2.75%.
The charge-off rate on credit cards — charges deemed uncollectible — in the U.S. rose to 5.59% in February, up from 4.51% in February 2007, according to Moody's Inc.
Meanwhile, the steep climb in gasoline prices to more than $3.60 per gallon nationally has led some hoteliers to resort to creative marketing campaigns to attract guests. For example, the Hilton Santa Fe in New Mexico is offering guests a $20 gas card for each night's stay. Clear across the country at the Renaissance Portsmouth Hotel & Waterfront Conference Center in Portsmouth, Va., a promotional package for guests includes a $25 gas card and free in-room movie.
Given the distinct possibility that gasoline prices could reach $4 per gallon sometime this year, Rach believes that the promotions are a particularly effective tool in some markets. “If we know this is something that is of concern to our target market, then as business people shouldn't we be doing something about it? This is one response.”
It's hardly the first time the industry has offered gasoline incentives to lure travelers. Mark Woodworth, president of PKF Hospitality Research, recalls that back in the early and mid-1970s, Atlanta-based Days Inns of America Inc. — later acquired by the Wyndham Hotel Group — launched a major marketing campaign in the Northeast that basically guaranteed a full tank of gas to anyone making a room reservation at the chain's hotels.
The oil crisis of that era had more to do with scarcity than price. “There were a lot of people who came to know the Days Inn chain 35 years ago because it creatively understood what the problem was with the consumer not wanting to travel,” recalls Woodworth.
The soaring gasoline prices make Woodworth increasingly concerned about the impact on the leisure traveler this summer. PKF is in the process of updating its forecast for 2008, which currently calls for 3% growth in revenue per available room (RevPAR). Heading into the year, PKF had initially projected RevPAR growth of 4.5%, but in March the researcher revised that figure down to 3%. “If the 3% number changes for RevPAR during our update,” Woodworth says, “it might be slightly lower as opposed to slightly higher.”
Ultimately, the economic downturn is going to force sales teams at the hotel property level to elevate their game to win business, says Rach of New York University. In many cases, sales forces have only experienced the boom times, and not the down part of the cycle. “At the property level our sales people have been order takers. What they've been doing the last couple of years is turning down business. So, are we going to help them understand how to find business?”
Matt Valley can be reached at [email protected].