In these tough economic times, even the most high-toned hotels aren't above a little begging in order to lure visitors. For example, the Ritz in Paris is offering rooms at a reduced rate as part of an elaborate package that includes free round-trip rail travel from London, dinner for two at the Eiffel Tower and free tickets to the Moulin Rouge. The hotel also is throwing in a cruise on the River Seine for good measure.
The deals sound just as appealing on this side of the Atlantic. The Palace Hotel in New York is offering rooms for $299 a night, more than $100 below regular rates, with free lunch at Le Cirque 2000 and discounts at Saks Fifth Avenue included. Nearby, the Hudson — an Ian Schrager boutique hotel — has gone one step further, advertising a rate of $175 for the first night, with the second night free.
Meanwhile, the world-famous Breakers in Palm Beach, Fla., has discounted rooms ordinarily priced at $450 a night to less than $300 and thrown in restaurant coupons and health-club access. In the Windy City, the elite Peninsula Chicago is offering a weekend rate of $295 per night, with the third night (Sunday) thrown in for free, in effect reducing the total to just below $200 per night, less than half its regular rate.
Clearly, these are trying times for hotel operators. With occupancies still down 15% and higher in many big-city markets since 2000, hotels that had grown complacent during the travel boom of the late 1990s have suddenly had to relearn the fine art of sales and marketing. Most have slashed rates, though this downturn is about more than offering bargain prices.
Free food, transportation and parking — not to mention a host of other come-ons — are being loudly advertised to draw in guests. There are new alliances, too, with hotels now routinely offering rewards to frequent travelers that are redeemable for free hotel stays, auto rentals and airline upgrades.
How tough are market conditions? The national hotel occupancy rate for 2001 was 60.3%, down from 64% in 2000, according to Hendersonville, Tenn.-based Smith Travel Research. Meanwhile, revenue per available room (RevPAR) retreated 6.7% last year. Conditions hardly improved in January. In Chicago, occupancies came in at 46%, down from 51% in January 2001, while the average daily room rate (ADR) was $127, down from $137 a year earlier. Also, Sunday and Monday night occupancies in the Windy City clocked in at a meager 26% in January.
“In the late 1990s into 2000, hotel operators were running at 70% occupancies and they had gotten fat, dumb and happy,” says Theodore Mandigo, president of T.R. Mandigo & Co., a hotel consulting firm based in Elmhurst, Ill. “Now these same operators find that they are at 60% and less [occupancy], and they've had to make adjustments. The only other year in the past two decades in which I can recall a decline in RevPAR was 1991. So this is an unusual time. Hotels have begun to promote like never before.”
The decline in RevPAR in the past year has contributed to a general falloff in hotel valuations, most hotel experts agree, though there have been so few transactions since Sept. 11 that the picture is somewhat murky for appraisers. Mark Lanspa, managing director at G.E. Capital Corp. in New York, figures that valuations for big-city, full-service hotels are down between 5% and 10% on average in the past 12 months.
“The properties hurt the most are the big upscale chains as well as resort and airport locations,” Lanspa says. He adds that the decline in values may have minimal overall impact, since he foresees little merger and acquisition activity in coming months.
“Hotel owners are holding out,” Lanspa says. “Generally, they will wait for cash flows to come back to more normal levels before they consider selling. Hotel properties today are well-capitalized, and I don't think you'll see many companies forced to sell at depressed prices.”
Even with all the discounting and freebies in the hotel sector, Lanspa estimates that the industry overall will still earn a pre-tax profit of $15 billion in 2002. “The industry isn't as strong as it was in 2000, but $15 billion is still a lot of money,” he says.
Full-service establishments in large cities are hurting the worst for patronage right now. Consequently, deluxe brands such as Peninsula and Four Seasons have switched from running glossy ads in magazines like Town & Country to promoting discounts in the Sunday travel sections of local newspapers.
Such advertising has reverberated to the point that even the most modest limited-service establishments are regularly running specials to fill up empty rooms. Consumers, of course, are having a field day, with budget-minded travelers suddenly finding four-star hotels affordable at last.
In October, Parsippany, N.J.-based Howard Johnson, with 525 franchised units worldwide, unveiled its “Spirit America” program, which features rates of $39 to $59 per night, some 40% below the regular prices of $69 to $100 per night.
“In these difficult market conditions we've had to de-emphasize image building and take a tactical approach instead,” explains Mary Mahoney, president and CEO of Howard Johnson, which has 15 properties in the Orlando, Fla., market alone, most of them running half empty in recent times. “Everything seems to be price-driven now. Research we've done since Sept. 11 tells us that travelers are only willing to go back on the road if they can get good value on airline ticket prices and hotel rates.”
Do reduced rates work?
However, the explosion of discounting has generated widespread controversy. Many experts contend that lower prices don't necessarily impel cocooning families to leave home and travel. Hotel rates, they add, have little impact on a corporation's decision to send its salespeople and other employees on the road.
“We've seen nothing to indicate that dropping rates stimulates demand,” says Michael Barnello, COO of LaSalle Hotel Properties Inc., a Bethesda, Md.-based REIT that owns 17 hotels in 11 states. “If you go from $250 a night to $150, people don't suddenly climb into their cars to make a trip.”
LaSalle, whose portfolio suffered an 11% drop in occupancy last year to 65.3%, has avoided rate discounting, opting instead to offer perks such as free airport transportation and free breakfast, and upgrades to private concierge-level rooms.
“If a corporate client comes to us and asks for a price break or something else, we're likely to ask them to give us something back in return, such as exclusivity or a guarantee of significant volume,” Barnello says. “It boils down to a battle for market share. Clients are leveraging one hotel against another to get the best deal they can.”
Beverly Hills, Calif.-based Hilton Hotels also has shunned most opportunities to discount room rates. Instead, the chain is offering $100 meal credits to its guests who stay at least four days at one of its resort properties. In some markets, the company has resorted to a form of room-rate discount, offering a free third night to guests staying two nights, along with 20% discount coupons for Avis car rentals. “With deals like this, we think we're attracting people who might instead stay with relatives on a trip,” says Joanie Flynn, vice president of leisure marketing at Hilton.
At Baymont Inns & Suites, owned by Milwaukee-based Marcus Corp., rates have been cut as low as $49 per night, down from the regular rate of $65 per night. But the chain is doing something more: improving its rooms. Baymont Inns & Suites has added pillow-top mattresses, ergonomic desk chairs, feather pillows and plush towels to a new class of rooms marketed to members of a frequent-guest program. The new features were promoted on cable television's The Weather Channel and in print beginning in mid-February, with the provision that non-members could stay in the rooms by paying a $5 upcharge.
“In tough times like this, we notice some competitors taking away services and tightening up,” says Craig Farrell, senior vice president of sales and marketing at Baymont. “We're doing things like putting free bottled water into all our rooms for the first time. This is a period when many travelers are susceptible to trying new brands. They may be dissatisfied with the properties where they used to stay and looking around to see what else is available.”
Luring travelers to San Francisco
Even some of the country's favorite travel destinations have fallen on hard times. In San Francisco, hotel owners have devised a wide range of strategies in the face of a steep decline in visitors. The Westin St. Francis, owned by White Plains, N.Y.-based Starwood Hotels and Resorts Inc., touched off a discounting frenzy when it began offering rooms at $119 per night, a steep decrease from the ordinary rates of more than $300 per night.
But Starwood was chagrined to find that the lower rates didn't boost volume as much as hoped, and that the discounting cut into profit margins. So the company pulled back, and now the lowest rates are more narrowly promoted on Starwood's Web site.
San Francisco-based Kimpton Hotel & Restaurant Group LLC, which owns 16 boutique hotels in the city, has been walking a tightrope with most of its properties suffering recent decreases in occupancy of 20% to 30%. The company has only narrowly advertised discounts.
But Kimpton has begun offering free guest parking, a considerable bonus in a town where 24-hour garage parking runs $30 and more. It also has promoted extras like free wine receptions in its lobbies each evening, complimentary shuttle service to major stores and the financial district, and even free tickets to the Wax Museum on Fisherman's Wharf. Serrano Hotel, where rates range from $149 to $199 per night, offers free pay-per-view movies and bowls of popcorn.
Stephen Pinetti, senior vice president of sales and marketing at Kimpton, emphasizes that computerized yield-management techniques are more crucial than ever. Rates might be reduced to $100 per night, with free parking thrown in, on a week when occupancies are forecast at 50%. If occupancies are likely to be running at 70%, then rates get boosted to $150 per night. If a big convention is scheduled and the hotel is likely to be sold out, the rates revert to $250 per night, and perhaps the free-parking deal doesn't get offered that week.
Sometimes a hotel operator has to call in its chips to keep customers in the fold. When the best five-star hotels in San Francisco began to discount, Kimpton noticed some of its longstanding corporate clients suddenly sending traffic to non-Kimpton properties.
“We got on the phone and reminded those companies that two years ago, when San Francisco was sold out, we stood by them and gave them low rates,” Pinetti says. “Those corporations are out of the other hotels now and back on board with us exclusively.”
Changing ad strategy
However, negotiations over room rates don't do much good when a corporation has downsized its workforce and cut its travel budget.
“In cities like Detroit and Cincinnati our business is down, and in some cases it's because companies have let workers go and reduced travel budgets,” says James Gard, vice president of marketing services for Prime Hospitality Corp. in Fairfield, N.J. Prime owns 235 hotels, most of them under the AmeriSuites flag.
With RevPAR down 12% company-wide last year, Prime took a leap into uncharted waters: It began advertising for the first time on television, promoting both the AmeriSuites and Wellesley Inns and Suites brands. In late October, the company unveiled its “Share the Season” promotion on cable television and radio, with rooms discounted from $80 to $59 per night.
“We learned a valuable lesson in this. You can build brand equity over the air,” Gard says. “Our company never had the budget for national TV before, but now it's become a priority for us.”
Other companies have changed their advertising mix lately. Irving, Texas-based FelCor Lodging Trust Inc., the nation's second-largest hotel REIT and owner of Crowne Plaza, Westin, Sheraton, Hilton, Marriott and other top hotels, has begun to focus more of its ad budget on regional publications. “It's having a positive effect,” says Thomas Corcoran Jr., president and CEO of FelCor. “We walk our parking lots and see that people are driving from farther away.”
FelCor also has devised some unusual marketing partnerships. For instance, its Crowne Plaza properties have signed up 24,000 customers for a frequent-stay program that offers free golf balls to customers, who also get a free set of golf clubs from Spalding after their ninth Crowne Plaza stay.
In another partnership, the Chicago Tourism and Convention Bureau recruited American Express as a partial sponsor of its “Winter Delights” promotion. In the program, 75 downtown hotels banded together to advertise low weekend rates in suburban newspapers with the aim of luring local residents into the Loop for shopping and theater. For instance, the Palmer House Hilton could be had for $119 a night and the Hotel Allegro for $89 a night. The program has been a modest success, pumping occupancy rates up to 63% in the hotels during the cold weekends of January.
Some hotels have had to rethink their target customers. Washington, D.C.-based MeriStar Hotels and Resorts Inc., which manages more than 215 hotels, has encouraged some of its general managers to widen their views of the market.
“In some cases, we're asking our four-star hotels to go after customers who would normally be staying in three-star hotels by offering them attractive rates,” says Robert Morse, president of hotel operations at MeriStar. The company's hotels are opening more rooms for American Automobile Association (AAA) and American Association of Retired Persons (AARP) discounts.
Wingate Inns is pursuing a similar course. In its “Get Going” campaign, Wingate is making its AAA rates, typically 20% off the rack rate, available to anybody. Thus a hotel with a regular rate of $80 per night and a corporate rate of $72 per night is selling rooms at the AAA rate of $64 per night.
There have been other changes in the daily routine in most Wingate hotels. “We're suggesting that hotel franchisees host regular catered luncheons on their properties for corporate planners who can swing business to them,” says Keith Pierce, president and CEO of Parsippany, N.J.-based Wingate Inns International Inc. “We're also suggesting that they write thank-you notes to their top 100 guests to say that their business is appreciated.”
When will it end?
Ultimately, the travel slump likely will not end until the economy takes an upswing, says Rick Besse, president of Fort Worth, Texas-based Winslow Group Inc., a hotel development and consulting firm. “Too many companies panic in a time like this and figure the first thing they have to do is lower their rates,” he says. “But that isn't what will bring back travelers, particularly business travelers.”
Like others, Besse is cautious when asked to predict a return to normalcy. “It could come late this year, and it might not be until 2003 or even 2004,” he says. In the meantime, hotel operators will have to be patient.
“Eventually the industry will get rates back up to where they should be and business will stabilize,” Besse says. “Until then, we'll see a real market-share war, with hotel companies competing for any advantage.”
H. Lee Murphy is a Chicago-based writer.