Articles - US Lodging: Fall 2011 Report Card

US Lodging: Fall 2011 Report Card

There is no shortage of recent news and events which have cast dark clouds on the future of the world. A global economic crisis, rising tensions in the Middle East, and U.S. political uncertainty and rancor have all contributed to a broad crisis of confidence. If the U.S. economy is not currently in a recession, it is certainly at the cusp of slipping into one. On the positive side, despite high unemployment and a largely languishing real estate market, U.S. corporate profits are strong. The 2012 election will produce either a reinvigorated Obama administration, or a new government in Washington DC. Either way, many believe a new era with positive momentum will unfold after the balloting, with American corporations finally deploying cash from liquid balance sheets.

Despite a sluggish economy, U.S. hotel operating metrics have remained positive and many prognosticators anticipate a continuation of this trend. I believe that if in fact we experience another recession, the macroeconomic effects of a double dip will not bode well for short term industry metrics. However, development of U.S. hotels will remain relatively muted for the foreseeable future as economics do not justify new building, and with the exception of EB-5 Immigrant Investor financing and public/private partnership opportunities, construction debt capital will be difficult to obtain for such initiatives. Until the middle of this past summer, the perceived long term upside in the lodging sector resulted in heighted transaction activity and pricing of all types of hotel assets. In particular, major hotel assets situated in gateway U.S. markets were highly sought after by lodging centric REITS that enjoyed the ability to raise relatively low cost capital through IPO’s and follow-on offerings. Recent turmoil in world capital markets and a hyper-sensitive stock market has resulted in significant declines in hotel REIT share prices, that subsequently led to the inability to now acquire assets. Several hotel REITs including LaSalle Hotel Properties and Ashford Hospitality Trust have recently been trading at large discounts to unlevered asset value, and have announced stock repurchase programs. Management of these entities perceives a strategic opportunity to create shareholder value by selling assets and reinvesting in their own portfolios.

LW Hospitality Advisors (LWHA) continuously monitors the major U.S. hotel sale transaction market. The

LWHA YTD Q3 2011 Major U.S. Hotel Sales Survey illustrated below, includes 83 single asset sale transactions over $10 million each that are not part of a portfolio allocation. These transactions totaled more than $6.7 billion, and include over 26,000 hotel rooms with an average sale price per room of approximately $260,000. By comparison, the YTD Q3 2010 survey identified 67 transactions totaling more than $3.5 billion including 18,900 hotel rooms with an average sale price per room of $185,000.

Click image to view report

Trade activity of U.S. lodging assets declined dramatically during this past Q3 2011 as illustrated on the following table:

Click image to view report

It is interesting to note that during Q3 2011, in addition to a dramatic decline in total number of trades and total dollar volume of major sales, the average size deal was more than 50 percent below prior quarters of the year. Furthermore, the average price per room sold in Q3 2011 was significantly below prior quarters of the year.

Other notable observations from the 17 major deals included in the LWHA Q3 2011 Major U.S. Hotel survey are as follows:

• Thirteen transactions or more than 75 percent, included assets located on both U.S. coasts and Hawaii;

• Six transactions or more than one third, included assets located in California, and

• The Hyatt on Capitol Square in Columbus, Ohio traded for 35 percent or $10.5 million lower than what it previously sold for during 2007.

Several previously announced noteworthy U.S. hotel sale transactions that were slated to close during Q3 2011 have yet to be effectuated including:

• Host Hotels & Resorts $442 million acquisition of the Grand Hyatt in Washington DC;

• LaSalle Hotel Properties $405.5 million purchase of the Park Central in New York;

• Chatham Lodging Trust’s $24.9 million acquisition of the Residence Inn Pittsburgh University Medical Center.

Several previously announced noteworthy U.S. hotel sale transactions have reportedly been terminated during Q3 2011 including:

• Host Hotels & Resorts contract to acquire the St. Regis Monarch Beach in Dana Point, CA

• Cerberus Capital Management and Chatham Lodging Trust in August abandoned a $1.12 billion deal to buy Innkeepers USA Trust which includes 64 hotel assets

Despite a sluggish economy, U.S. lodging industry fundamentals continue to be fairly strong. Given a myriad of global and domestic issues, the verdict on short term future industry performance is far from clear. Any downturn in U.S. hotel metrics that may occur will be moderated by limited new hotel development. Share prices of publicly traded hotel focused REIT’s do not currently justify acquisition activity, and they are effectively now out of the market. Large sums of raised private capital funds, and overseas investors from throughout the globe are now better positioned to deploy capital into hard U.S. assets including hotel investments, which have traditionally offered superior risk adjusted returns. The world is awash with liquidity, which to some extent will back fill the void left by REITS who until recently were flush with cash and extremely acquisitive. The United States has always been, and will always be the safest place on the planet to invest. Furthermore, urban 24/7 markets such as New York, Boston, Washington DC, and San Francisco are highly sought after as many hotel assets trade at below replacement cost. Finally, when one considers the recent trade of the W London – Leicester Square at roughly $1.6 million per room, U.S. inner city hotels appear relatively inexpensive.

Daniel H. Lesser is president & CEO of New York City-based LW Hospitality Advisors LLC. He may be reached at daniel.lesser@lwhadvisors.com. Opinions expressed in this article are the author's own.

Articles - Revenue Management Now Aims to Influence Demand to Materialise in a Profitable Way (Sept ’11)

Revenue Management Now Aims to Influence Demand to Materialise in a Profitable Way – By Ritesh Gupta
Date: 2011-09-27

IN-DEPTH: Among all the developments from the recent past, the ones related to price-sensitivity modelling are probably the most significant in re-defining revenue management (RM), says Pieter Dorhout, Founder, Pieter Dorhout Consulting

Pieter Dorhout, Founder, Pieter Dorhout Consulting

The hotel industry has witnessed the emergence of price optimisation tools that incorporate real-time competitive rates with a hotel’s demand and booking patterns to recommend the best price.

Overall, the industry is focusing more on price elasticity and price optimisation as part of its overall revenue management strategy.

Referring to developments pertaining to price-sensitivity modelling, Pieter Dorhout, Founder, Pieter Dorhout Consulting says rather than accepting demand as it materialises, RM now aims to influence demand to materialise in a profitable way.

“Or in sports terms: RM is evolving from being a neutral, passive referee to becoming an active player in the market,” Dorhout told EyeforTravel’s Ritesh Gupta in an interview.

“This has profound implications for the RM algorithms, processes and people. There are great examples of companies who have taken on the related challenges and reaped rich rewards. However, as with most investments, a higher return is usually accompanied by a higher risk. In this case, the appetite for sophistication needs to be balanced against the ability to deal with complexity, and getting this balance wrong can be extremely painful,” shared Dorhout, who is scheduled to speak at the forthcoming Revenue, Yield & Pricing for Travel Europe 2011 Conference, to be held in Prague (29-30 November) this year.

Dorhout spoke about the significance of RM in the travel sector, pricing and segmentation practices, deals/ discounting, and other relevant issues. Excerpts:

How do you assess the significance of revenue management in the travel sector in today’s business environment?

Pieter Dorhout:

It’s a shame that the phrase ‘change is the only constant factor’ has become such a cliché, because it has actually never been more true than today. In this context, revenue management can help travel operators adapt very quickly to changing market conditions. In fact, sophisticated players will automatically adapt their presence in the market: when demand is falling short, incremental cost become the relevant benchmark for pricing, but when (or where) demand is soaring, opportunity costs become the price threshold. In other words, especially in these uncertain times, RM is crucial to the core business of every travel company: making profit.

What do you think travel professionals can learn from RM specialists in the other sectors?

Pieter Dorhout:

Lots! Although universities now offer modules in RM, and lots of mathematical research is carried out, it is still fair to say that most RM practitioners have followed the learning-by-doing path. As a result, RM practice is very much defined at the industry level, and there is relatively little cross-pollination across industries. I now offer a RM Concepts training course, which takes a step back from day-to-day practice, in order to explore the underlying conceptual principles. This will not only deepen the revenue manager’s understanding of his own job, but will also make it easier to learn from RM application and RM trends in other environments.

Revenue management in hotels is constantly evaluating several issues at this juncture – dynamically measuring the responsiveness of guests to price changes, RM tools and ancillary revenue streams, and automated systems. How do you assess the future of RM in this industry?

Pieter Dorhout:

You are right: RM is evolving into many directions at the same time. In the past, it was mainly recommending which products (especially length-of-stay) should be closed, and to do that, a reliable demand forecast was required. Now, lots of developments – some of which you name – aim to extend the RM footprint as well as increase its sophistication. I think this will have two main implications:
· RM will become less clearly defined, and RM practitioners will have to invest more time and effort in liaising with other disciplines, especially marketing;
· It will be harder to keep an eye on the big picture: the more ambitious the RM department and RM system become, the harder it will be to know that every single commercial decision contributes to overall profitability, i.e. to carry out RM’s main task. Keeping profitability as the guiding principle for all these new initiatives will require vision and discipline.

How do hotel operators need to look at their existing pricing and segmentation practices in order to gain optimal results?

Pieter Dorhout:

It is important to distinguish between market segmentation and channel management. Distribution has effectively become a commodity, and the low barrier to entry has resulted in a wealth of economically viable channels. For the operator, it is now neither effective nor efficient to put significant effort into managing individual channels, and rate parity is a generally sensible outcome. However, that does not mean that market segmentation has lost its profit-generating power. For example, it would be tempting to say that network airlines will soon adopt the low-cost airlines’ one-way pricing practice. And some already have. But I know for a fact that the ability to distinguish between leisure and business demand by means of duration is still extremely valuable for other airlines. For hotels, I think the message is: don’t throw the baby out with the bath water; rate parity across channels is fine, but commoditisation of your product probably isn’t.

It seems there is an appetite from consumers to always lap up special deals, discounts and special offers. What do you recommend to hotels considering that so many options for flash sale initiatives are now available?

Pieter Dorhout:

Make sure you keep an eye on the big picture: if you can’t see the wood for the trees then you can rest assured you’ve lost the plot! Secondly, bear in mind that treating distribution channels differently is costly, and if you believe that distribution is now more or less a commodity – as I do – it is probably more beneficial to focus on decision variables that you do fully control. Just as an example, rather than working out which channel is best suited for an exclusive, limited-distribution deep discount, you could use the same energy to talk to local restaurants, theatres, parking garages, museums and/or shops to create an attractive package for general distribution.

Hoteliers are looking at the total worth of the customer and not just the amount they spend on the room. This is where CRM and Revenue Management will merge. How do you see the maturity level of the same?

Pieter Dorhout:

I will present my views on this at the Prague conference.

In short, I think there is still a long way to go, and – perhaps more worryingly – the road to go is not necessarily the road we’re going… I’m not a great fan of unnecessary complexity. In merging CRM and RM, it seems logical to treat every (loyal) customer as a micro-market segment and/or to try and optimise life-time value. Doing this will certainly keep the theorists ahead of the real world for many conferences to come…But again, I’m concerned about our ability to ensure that all the related decisions do indeed contribute to overall profits. Personally, I’d recommend to develop a joint, coherent vision for CRM and RM, but to give up some detail and algorithmic ambition, so that it can actually be implemented without too much risk. I’m looking forward to discussing this with people with a different view!

Can you provide an insight into initiatives being taken by the industry to maximise profits by accurately forecasting demand by segment, and setting price and availability restrictions to ensure access for the most valuable customers?

Pieter Dorhout:

The question contains an accurate definition of what RM has always been about. In fact, in times of economic turmoil, the trend can go in the opposite direction: as high-value business demand becomes more erratic and also more likely to materialise as bookings for lower-value products, holding out for the big bucks may look like a risky strategy. Similarly, new industries wishing to adopt RM should consider very carefully if they serve any late-booking high-value demand at all. For example, tour operating doesn’t really have that kind of demand, and that changes fundamentally the context for applying RM (practices or systems). The airline industry is often the pinnacle of RM sophistication, but following them too slavishly is not a good idea.

Revenue, Yield & Pricing for Travel Europe 2011 Conference

Pieter Dorhout, Founder, Pieter Dorhout Consulting is scheduled to speak at the forthcoming Revenue, Yield & Pricing for Travel Europe 2011 Conference, to be held in Prague (29-30 November) this year.

For more info, click here

Or contact:

Rosie Akenhead
Global Events Director
rosie@eyefortravel.com
0044 (0) 207 375 7229

This article comes from Hotel News Resource
http://www.hotelnewsresource.com

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Articles - The Pitfalls of Last-Minute Sales in Hospitality

The Pitfalls of Last-Minute Sales in Hospitality – By Max Starkov
Date: 2011-10-12

Last-minute sales in travel are not a new phenomenon. There have been many attempts to find a way to dispose of these empty airline seats, idle rental cars, and empty hotel rooms at any cost. Theoretically it makes economic sense: it is 4PM, I have 20 empty rooms, and if I sell them at 50% off rack, I will still be making some money from my otherwise perishable inventory, right? Wrong!
Last-minute sales in hospitality at lower discounted rates are not sustainable in hospitality as this approach jeopardizes all other distribution channels (hotel mobile site, hotel traditional website, GDS, phone reservations, even OTA distribution). This is especially valid today in the viral and mobile environment we live in and with the smart hyper-interactive travel consumers we are dealing with today.

What Is the Situation in Hospitality?

Last-minute sales have been tried and failed repeatedly in the hospitality industry. Remember LastMinuteTravel.com? Where is this site today? At the height of the dot-com bubble this site even had a splashy multi-million Super Bowl commercial.

Currently Hotels.com has a last-minute hotel deals section on their site (http://www.hotels.com/last-minute-hotel-deals/). Our analysis shows that these last-minute deals are more of a marketing gimmick and, due to contracted rate parity provisions with the hotels, these “last-minute” rates are no different from the “regular” hotel rates you can find on the main section of the site, on any other OTA, or on the hotel own website.

Priceline announced recently opaque Last-Minute Hotel Deals as part of a broader last-minute travel section on the site. Travel consumers can now book hotel rooms up to 11pm the same day they travel and still save up to 40 percent over other leading online sites when they use the “Name Your Own Price” model, which is Priceline’s traditional opaque program.

There is a new kid on the block, a mobile-only last-minute discount OTA called HotelTonight.com, which operates in the following manner:

Hotels upload room allotment and rates for the same day via an extranet
Average discounts range 30%-35%

For these last-minute discount sites to exist there must be a Market Equilibrium (Price-Quantity) between: The Demand Side (quantity of engaged last-minute deal buyers) and The Supply Side (quantity of fresh, intriguing last-minute deals).

As travel demand improves, hoteliers will become increasingly reluctant to participate and provide the supply side of the equation with fresh, intriguing last-minute discounts. Online travel consumers, disappointed by the lack of fresh/intriguing last-minute discounts, will revert back to the traditional booking channels: hotel direct, voice, GDS and OTAs. As a result both sides of the equation will suffer and shrink.

In this sense HotelTonight.com and some OTAs are trying to re-create in the mobile space what other players in the field have tried repeatedly and failed. My prediction is that HotelTonight.com and similar last-minute discounters will not last long as these sites employ a business model that is against the hospitality industry’s best practices for channel management and rate parity, and will suffer as a result of supply and demand economics.

Why Hoteliers Should Avoid Last Minute Sales?

Here are only some of the reasons why it is not a good idea for hoteliers to utilize the last-minute deal business model and why this business model will not survive the test of time in hospitality, similar to the example from the airline industry:

Last-minute sales sites are a recessionary phenomenon, not a new and exciting distribution channel. There is nothing revolutionary about their technology, which has been around for years.
The mobile channel is not the reason for the emergence of HotelTonight.com and similar last-minute discounters, it is a mere enabler. The recession is the only reason for these last-minute sites’ resurgence of late.
Last-minute sales of empty hotel rooms may sound logical and makes sense in theory, but in reality they work against rate parity and destroy all other distribution channels and price integrity.
The economics does not work for the hospitality industry:

ü Flawed business model: the discounted rate is out in the open, which goes against rate parity principles, contractual obligations with OTAs, preferred corporate accounts, group rate contracts, best rate guarantees, etc.
ü Lack of opaqueness establishes a low market price: hotel can hardly charge rack rate again since customer has accepted the discount rate as the market rate.
ü Leads to cannibalization of existing customer base: as discussed below, most mobile bookings happen in the last minute anyway.

In this hyper-connected social and mobile world, the booking window has shrunk tremendously over the past few years and travel consumers have embraced the mobile Web as a legitimate booking channel:

Typically, mobile bookings are for the next 48 hours (Google).
Many major hotel brands report that 80% or more of their mobile bookings are for the same or the following day.
Sixty-one percent of online consumers are willing to book travel via a mobile device (Google, September 2011).

In other words, people are booking closer and closer to the day of the actual arrival, meaning that it is easier for them to wait until the last minute and see what the last-minute rates on HotelTonight.com or a similar service are as opposed to booking in advance via the hotel desktop or mobile sites.

In the age of social and mobile “word of mouth,” it will not take long for all regular and frequent guests at your hotel to hear about the lower last-minute rates offered via an OTA or a service like HotelTonight.com. What will be the result? The hotel will soon witness that:

Booked guests are canceling existing reservations made via hotel website, phone, GDS, OTAs and re-booking via HotelTonight.com using the lower rates.
Potential guests are waiting until the last minute to see what the last-minute rates are for the property and other hotels in the city/location they are traveling to and booking in the last minute.
OTAs are after the hotel for these last-minute “deviations” from the contracted rate parity clauses.

A Case Study from the Hospitality Industry:

There is a very good case study from New York City where a luxury boutique hotel was (mis) using Twitter to offer last-minute discounts for unsold rooms for the night:

Every day at 5PM the hotel would send out a Twitter-only Last-Minute Special that was 25%-30% below BAR (discount varied based on number of empty rooms available for the night).
All 8,000-10,000 Twitter followers received this last minute special.
Potential guests, new and old, frequent and occasional, were waiting for these last-minute specials to book via their mobile phones or call from the airport or from the taxi cab while en route to the hotel (5PM traffic to Manhattan – you get the picture).
There have been numerous cases when people were waiting in the lobby of the hotel to receive the 5PM last-minute deal and then walked up to the reception desk and booked their stay right then!
There have been many cases where guests arriving with advance reservations booked at much higher rates via the hotel website, voice, GDS or an OTA, demanded at the front desk to be accommodated at the lower “last-minute rate of the day.” The front desk had to oblige reluctantly.
Major ruckus and noisy scandals at the front desk were a common occurrence on a daily basis.

In 6 months or so the hotel discontinued the practice and spent at least a year after that repairing the damage to its price integrity.

What Should Hoteliers Do to Avoid Last Minute Sales?

Now that we have discussed that last-minute room sales are against industry best practices and do not work in hospitality, what should hoteliers do?

To begin with, if hoteliers are doing everything right in the direct online channel, the hotel would not need to use last-minute discounters. Instead of relying on last-minute discounters, hoteliers should invest in the direct online channel, both traditional and mobile Web.

Second, make the mobile web your priority in Q4 2011 and 2012. The mobile channel has already become an important travel planning and transaction channel in the U.S. and worldwide. Hotel guests and travel consumers are already mobile-ready, and hoteliers and travel suppliers have to respond adequately to this growing demand for mobile travel services.

Third, hoteliers should focus not on “naked” rate discounts like last-minute deals, but on hotel special offers, packages and promotions that provide real value, such as: limited time offers, advance purchase promotions, complimentary amenities and upgrades, loyalty point promotions, family, weekend, spa and romantic packages, etc.

In this economic environment, it is essential for hoteliers to embrace all three of the above steps in order to increase market share by taking advantage of this new mobile travel planning and booking consumer behavior, as well as the shortened booking window and last minute nature of mobile bookings.
Please continue to read the entire blog article on HOTELSMag.com, as well as see a full selection of Max Starkov’s blog articles on hot industry topics and latest trends in the online channel in hospitality.

This article comes from Hotel News Resource
http://www.hotelnewsresource.com

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