2007 Forecast
Mixed signals show the cycle starting to turn down, but there is still money to be made from customizing the guest experience and mastering new tools for yield generation.
By Mary Scoviak, Contributing Editor -- Hotels, 12/31/2006 11:00:00 PM
The hotel industry’s ride is not over yet, but there is a feeling of transition in the air, especially in the United States. With notable exceptions such as Moscow (coming off a year of 20%-plus RevPAR gains) and destinations benefiting from special events, most operators forecast steady, but not quite stellar, performance for the next 12 months. Jan-Willem Den Ridder, Marriott International’s London-based regional vice president, development, Europe, Africa & Middle East, says that Marriott projects average RevPAR gains of 6% to 8%. Mark Wells, InterContinental Hotels Group’s (IHG’s) senior vice president of brand management, the Americas, Atlanta, foresees “decent” performance for 2007—“not as good as 2006, but still good by any standard.”
The view from above is not as bright. PKF Consulting sees demand in the United States going up a hair’s breadth .04% and RevPAR edging up a mere 2.9%. Smith Travel Research and PricewaterhouseCoopers predict the demand slowdown that started in 2006 will carry over into this year. Whichever projection proves accurate, it is clear that the business model is shifting from revenue per available room to total revenue per guest stay as the cycle powers down. The outlook is a bit more favorable in continental Europe, while Asia Pacific stands ready for another good year of RevPAR performance.
| THE GIST |
 In the United States, Hotel Investment Strategies, New York City, predicts hotel investors are likely to see double-digit returns on the order of 20%-plus until at least mid-2008. Appreciation looks positive through 2009. Income returns could average about 8.5% for the rest of the decade. Big markets should thrive, but some up and comers are making a strong bid: Mexico, South Africa, Central and Eastern Europe, Vietnem, Doha and Lebanon. 2007 will be about achieved daily rate gains more than occupancy. What's hot: ownership concepts, spas. Booking windows will continue to shorten for both business and leisure travel, predicts InterContinental Hotels Group's Mark Wills. "That will have a lot of implications for revenue management models and marketing." |
To maximize yield, owners and operators will have to spend money to make money. “Hotels will need to invest in amenities that enhance the guest experience through emotional engagement. Hotel groups will have to move away from 100% standardized services and products and move as close to a 100% personalized approach as possible,” says Jonathan Worsley, chairman, The Bench, London. Since occupancy does not have much room to grow in most markets, hoteliers will have to outcompete with new product and service concepts to drive rate. “People are happy to pay higher rates if there is a commensurate increase in the quality of amenities, size of room, technology and service. Owners or operators who are unwilling to make that investment will be left behind,” says J.T. Kuhlman, president, One&Only Resorts, Fort Lauderdale, Florida.
5-Star Potential
The difference between a good year and a great year always comes down to delivering what customers want most. In 2007 that can be summed up in one word: luxury. “When we close the book on 2007, the biggest trend will have been the widening of the luxury segment. It has grown significantly year over year, and it is very transient,” says Robert Logan, hotel manager at Raffles, Singapore. The number of U.S. households with a net worth of US$1 million, excluding their primary residence, has shattered records for three consecutive years, according to TNS Financial Services, an arm of the Londonbased international market research company TNS. The “nouveau riche” from Russia to China are spending more on luxury goods and luxury travel. “Luxury travel is very strong and will only continue to grow stronger,” says Jamie Chappell, managing director, The Bench.
The demands of this lucrative segment are rewriting the rules for development, design and service. With private jet travel soaring 20% to 30% in recent years, according to the National Air Transportation Association, 5-star hoteliers will be looking farther afield for the right development opportunities. First choice on the resort side will be exclusive, exotic locations. “Privacy is becoming more and more important. Luxury travelers want their own villa; they want to be separated from the other units in the resort. We will see more developments on private islands where there is no one except the staff and guests,” Kuhlman says. Targets range from the Indian Ocean to Mexico and Central America. Elegant tented camps in Africa are getting more attention. Next generation locations could include Vietnam, Tibet and Sri Lanka. In terms of size, smaller is better.
Each stay will have to be tailormade. “The year 2007 will be the year of customized services. We have seen things like romance concierges and technology butlers, but I think this year will take customer service to a new level with more personally delivered services,” says Charlie Peck, president and COO, Destination Hotels & Resorts, Denver.
“Head count” will be a major factor, Kuhlman says. Luxury hotels will have to have sufficient staff to personalize service. “A butler may have to work 10 days straight. Each guest needs to be sounded out if the hotel is going to deliver what that guest wants,” Kuhlman says. Also on tap are “discreet delivery systems.” Privacy will extend to not being interrupted by staff calls or a knock at the door. Small hatches will be installed in closets for delivery of newspapers or the return of laundry or shoes. “It is not so much about what amenity you are offering; it is about the tailoring of the amenity to the individual,” adds Jose Soriano, general manager, Four Seasons Hotel Canary Wharf, London.
 Michael Sheperd of the London Hilton on Park Lane is among hoteliers who believe travelers will demand that social responsibility play an even greater role in operations.
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City center luxury hotels are using design, technology and personalized service to compete for the high-spend market. “The ever-growing variety of choice provides the discerning traveler with greater alternatives as hotels fight for position. Investment in product will continue providing the ever better and sexier mouse trap to capture a greater share of the market. Marketing image influenced by the Internet will be a dominant factor; presentation will have an even more important role,” says Michael Shepherd, general manager, London Hilton on Park Lane.
Luxury hotels will be marketing heavily to differentiate their brands. Watch for the amenity wars to heat up with the rollout of multifunction entertainment features and “a sexy atmosphere” in guest bathrooms, design that is “fanciful, imaginative,” round-the-clock, personal service, technology that enables guests to play their own music, choose their own entertainment or communicate via faster telephony (perhaps with video capabilities) and techno-toys from finger-printed keys to beds that monitor blood pressure will influence this year’s 5-star booking choices.
Will the payback be there? Yes, says Paul McManus, CEO, The Leading Hotels of the World. He predicts luxury rate/occupancy leaders will include major markets such as New York, London, Hong Kong, Shanghai and Dubai. On the development side, the hotbeds remain in Asia Pacific and the Middle East. The challenge in building return, he says, will be maintaining a differentiated brand image at a time when a profusion of new luxury brands is creating customer confusion.
Paul Kirwin, Radisson’s Singapore-based president of Asia Pacific, says upscale hotels will continue to be the most profitable there. The hottest markets may be “the major cities of India where there is an absolute shortage of rooms.”
 WORLDHOTELS' Tom Griffiths predicts high-end resorts still benefit from average rate increases, but price increases at city center hotels will moderate as demand softens.
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Thomas Griffiths, WORLDHOTELS’ vice president, The Americas, New York, says highend destination resorts will continue to benefit from average rate increases as disposable income continues to increase. City center hotels will see good business, he adds, but price increases will moderate as demand softens. Bill Fortier, senior vice president, development group, Hilton Hotels Corp., Beverly Hills, California, forecasts room rates for the upper-upscale sector moving at two to three times the rate of inflation. Peck likes the prospects for urban “infill” areas. Den Ridder shares this optimism. “Supply is slow to come to market in the luxury and full-service categories. So, these sectors should do well as demand increases. It is the budget sector that may be leveling off,” he says.
Personalization is not just for the top of the market. Business class hotels looking to over-achieve in their markets are offering their own take on personalization. “There is a long-term consumer trend toward mass customization and personalization,” says Chip Conley, founder and CEO, Joie de Vivre Hospitality, San Francisco. “The winners will be companies who recognize there is a ‘target’ customer out there who is looking for a midpriced, stylish yet functional hotel alternative to what previously has been available only from a boutique hotelier. The losers will be those brands that do not aggressively move toward modernizing their old school brands. I will not name names, but there are three to four brands that risk becoming the Sears or JC Penney’s of our industry—old, tired stalwarts that are no longer relevant to today’s customers.”
Meeting Demand
Hard-working, full-service hotels “with lots of meeting space” could be among 2007’s other winners, Fortier says. From the United States to Asia Pacific, increases in group business will help fill gaps left by shifting transient demand. Thomas Meier, Raffles Hotels & Resorts’ Singapore-based area general manager, South East Asia & China, predicts strong regional and international meeting, incentive, conference and exhibition business will be a key driver for destinations such as Singapore—particularly if extra flights are added to provide easier transit into and out of the Lion City. Pending issuance of two more gaming licenses will only add to Singapore’s appeal to the group market.
| Doing Deals: Europe |
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The pace slows. With most of the large portfolios already sold, 2007’s European transaction volume is set to slowdown (compared with 2005/06, which saw volumes boosted by exceptionally large portfolio sales). Still, several portfolios will be sold in 2007.The UK may take a breather. If interest rates continue to grow, overall activity in the UK is likely to decrease compared to 2006, with yields falling below the cost of debt.CEE is the hot spot. Investment in pan-Europe will grow, especially in Germany and Spain. The Central/Eastern European (CEE) countries should see the most growth. Country risk is reduced. Current high yields are tempting short-term investors. With demand increasing steadily, the development cycle is likely to recommence over the next year in a large number of gateway cities and secondary cities.Private equity flows in. Across Europe, private equity groups will increase their presence and soak up the wholesale divestment by hotel companies.Bankers toughen up. The debt market will remain buoyant, although some caution from bankers is likely to appear. By Mark Wynne-Smith, European CEO, Jones Lang LaSalle Hotels, London |
Groups are becoming more attractive targets as their yield profile changes. Anne Marie Moayedi, national sales director, ARAMARK Harrison Lodging, Philadelphia, foresees the achieved daily rate (ADR) for group business increasing 4% to 5% in 2007. She credits the new menu of business tools tailored to build yield from group business. Meeting broker hubs speed up client access and request-for-proposal response time. Nichedriven, third-party intermediaries are teaming up with hoteliers to expand incremental revenues by selling day meetings, arranging for “office space” rental in hotels and amping up catering sales.
Go Green
One thing on the minds of many travelers is environmental sensitivity. “Development of environmentally conscious and environmentally sensitive projects will be the biggest news of the year in terms of new concepts,” McManus says.
That does not mean just eco-friendly resorts. Going green will have a marketing bonus that crosses from the leisure to the urban segments, says Benjamin Graves, president, Minneapolis-based Graves Hotels Resorts. More city hotels will look like Graves’ next project, the Graves Uptown Hotel Minneapolis, with its urban courtyard linking the 140-room hotel tower and an adjacent tower of condominium residences, restaurant, an art gallery and a theater, spa-like guestrooms (with a large soaking tub as a focal point) and a serene garden just off the rooftop ballroom. Adds Shepherd, “No longer will companies be able to turn their back on global warming and their contribution to it. Social responsibility will continue to play a growing role in operations.”
Anyone who wants to drive food and beverage profits should be thinking like health-obsessed guests. ARAMARK Harrison Lodging is rolling out menus of “sustainable” foods at all of its conference centers, emphasizing menus’ locally grown foods and health preparation. “Guests will not have the same hamburger in Massachusetts that they had in San Francisco,” Moayedi says. Portions are getting smaller; presentation is becoming more important.
| Doing Deals: North America |
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The deal pace rolls on. With large amounts of capital—both debt and equity—still in the market, 2007’s transaction pace should rival the more than US$30 billion in deals done in 2006.More opportunities mean more opportunity seekers. The range of investors will continue to broaden. Real estate investment trusts (REITs) will play selectively. Watch: HOST Hotels & Resorts, Winston Hotels, Innkeepers USA Trust, Ashford Hospitality Trust. Expect more investment from pension funds and high net worth individuals. Brace for a new wave of international capital—not only from the Middle East and China but also from new European sources such as the Republic of Ireland.Hot markets include: San Francisco, Washington, D.C. (where per diems are increasing and a new convention center is broadening demand), the entire Los Angeles area from Santa Monica to Century City and even “downtown,” San Diego, Houston, South Florida, Charlotte, Boston and Chicago.Big money will be on the hunt for deals of US$500 million-plus. But will there be enough product? By Arthur Adler, managing director and CEO, The Americas, Jones Lang LaSalle Hotels, New York City |
Not surprisingly, spas will be a musthave—not just a few treatment rooms, but a complete spa experience. “The spa industry is exploding,” says Liam Lambert, operations director, Europe, Mandarin Oriental Hotels Group, London. “There are hundreds of highly sophisticated spas opening every year. The challenge is going to be finding the talent to run these very specialized operations.”
Customer Ownership Battle
Whatever the segment, property type or destination, maximizing guest reach and capture and minimizing the costs will be high on hoteliers’ priority list for 2007. “The next hot topic for yield managers will be distribution cost—using all-in booking cost alongside revenue production to get at the true profitability of a reservation,” says Carol Kirby, executive vice president and chief marketing officer, Accor North America, Carrollton, Texas.
David Stein, CEO, The Stein Group, Barcelona, says reservations managers “are becoming yield managers.” He points to the growing importance of new channel management tools such as Rate Tiger and Rate Shoppe. “Consumers are no longer looking to Expedia or Travelocity. They are relying upon hotel Web sites directly for booking their packages or programs,” Stein says.
Online initiatives will be placing more emphasis on a one-to-one customer approach. “One of the biggest influences of this year and into the next will be the power of direct customer interaction,” says Jeff Bzdawka, COO, TravelCLICK. That will spur a shift to visual media and presentations that allow guests to experience the unique look and feel of a hotel’s Web site within a few clicks.
The rate issue is not going away. “We need to embrace the ‘netizens’ who search for the ‘best’ deals,” Logan says. He sees yield managers adopting more detailed channel management strategies to closely monitor best available rate and identify shortterm opportunities. Fast action will be important in 2007 as the booking window shortens. Bzdawka predicts the rollout of “more intelligent tools that can build off business decisions on the fly as contracts change with online travel agents (OTAs).”
| Doing Deals: Asia Pacific |
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Expect another record year. The flow of global capital will impact the pace.Corporate contraction continues in Asia Pacific as elsewhere. Watch niche players such as MFS Ltd. clearing competitors out of markets such as vacation clubs.The epicenters for activity include: China, India, Japan, Thailand and Australia. Vietnam will get more focus with pending World Trade Organization membership.Big names will dominate. Hilton Hotels Corp., Inter-Continental Hotels Group, Accor and Shangri-La Hotels and Resorts are on the fast track. By David Gibson, CEO Asia Pacific, Jones Lang LaSalle Hotels, Brisbane |
The biggest push will center on driving customers to proprietary Web sites as their booking engines of choice. Web sites are taking on a new feel. They are a place to create a “community” as Starwood Hotels & Resorts has done. The goal will be to market in practical ways that allow customers to interact with hotels and with other customers, Bzdawka says.
In the next five years, there will be increasing pressure to reduce travel agent commissions and third-party Web site commissions. “We are moving out of the era of the intermediary,” Conley says. Integration will be a common theme in distribution circles. Look for systems that simplify the business process by offering every hotel a single point of control, whether that is the central reservation service or stand-alone inventory. Chappell also sees hoteliers simplifying their approach to channel management. “There will be a reduction of distribution channels with a focus on the 20% that generate 80% of the business,” he says.
Big News
With hoteliers working hard to keep profitability solid, investors will continue coming to the hotel market with cash in hand. Many regions will see fewer deals in 2007 versus 2006, but consolidation is still a trend. “We may see merger/consolidation of at least three of the top 10 global operators,” predicts David Gibson, CEO Asia Pacific, Jones Lang LaSalle Hotels, Brisbane.
S. Kirk Kinsell, senior vice president, chief development officer, IHG, Atlanta, says 2007 will be the time to become differentiated or be prepared to lose ground. “There are five or six giants, all trading in the same segments. Is each of their brands unique? It will be interesting to see what happens,” he says.
Kinsell predicts that institutional activity will heat up the acquisition pace; so may some brands. Opportunity funds such as Blackstone “could sell off one of its portfolios to a company that wanted to bulk up.” Even the giants will be on the lookout for ways to penetrate markets with high barriers to entry. “It is hard for a small company or an under-penetrated company to compete. We will see more plug-and-play deals, like our joint venture with ANA, and better use of the balance sheet to build a presence in new markets,” he adds.
Direct comments to: mscoviak@earthlink.net
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