The Best Of Times?
Hoteliers, analysts and investors predict good times in 2005, with a rebound in corporate travel and occupancy gains that will mean better 4- and 5-star yields.
By Mary Scoviak, Features Editor -- HOTELS Magazine, 1/1/2005
In 2004, hoteliers realized the turnaround
they had been waiting for since 2001. This year promises
more of the same. The pace of performance growth may moderate
somewhat, but not significantly enough to keep average
RevPAR from advancing 5% or more in the United States and
10% to 12% or more in key markets in Europe and Asia. “This year will be
all about cash flow,” says Thomas J. Barrack, CEO,
Colony Capital, Los Angeles. Few owners would disagree.
Capitalizing on the opportunities of an upbeat market and delivering the performance owners expect after a long drought will come down to mastering the challenges of 2005. The factors that could separate the best from the rest focus on how companies deal with issues such as rising costs, especially energy and insurance; rising interest rates; increasing profitability; overcoming potential commoditization; amenity creep; making the most of buying and selling opportunities; identifying the best development targets; and managing yield in the Internet era.
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Hot Deal Pace
This is a year for brand expansion as buyers continue their
global shopping spree for single assets and chains look for
consolidation opportunities. “As the industry recovers
and companies’ EBITDA recovers, people will look to
grow their business, and some of that growth will come through
consolidation,” predicts Robert Morse, COO, Interstate
Hotels & Resorts. “In the United States, most of
the consolidation is likely to occur within the real estate
investment trusts and management companies.” The only
big-headline deal still centers on Starwood Hotels & Resorts’ decision
regarding Le Méridien Hotels & Resorts. Most deals
will look more like the complementary union of Barceló Crestline,
with its international reach, and John Q. Hammons Hotels & Resorts,
with its operational expertise.
Arthur Buser, managing director, Jones Lang LaSalle Hotels, Los Angeles, predicts that with RevPAR growth looking solid for 2005 and better for 2006, no shortage of debt and equity and few defaults to raise risk premiums, the deal pace should remain strong this year and next. The hottest properties, in his view, are boutique and lifestyle hotels. “They have outperformed their branded counterparts—in cases such as the Monaco in Denver by 20 occupancy points,” he says. Not only are individual lifestyle hotels on the market; so are groups. Malmaison’s acquisition of the UK’s popular Hotel du Vin group marked the first real “consolidation” in the lifestyle sector.
 “The tourism side (in the Middle East) is growing, but there is also a lot of business being done.” — Ed Fuller, Marriott International |
With the exception of the UK’s mid-tier and budget sectors, the deal story in Europe will be more about luxury assets. Rezidor SAS Hospitality’s takeover and subsequent rebranding of the Four Seasons Berlin as a Regent and Quinlan Private’s purchase of the Savoy Group and other luxury hotels on the continent, signals renewed interest at the top of the market.
Speaking at Germany’s “Expo Real” real estate exhibition, Henrik Bartl, managing director, Aareal Bank, Wiesbaden, said he would only consider upscale hotels with 150 rooms or more and valuations above US$26 million (€20 million). Rumors suggest that more continental hotel companies (sources hint at Accor) may be following InterContinental Hotels Group (IHG) and readying major real estate placements.
In Asia, all eyes remain focused on China and Japan. “We should see some deals coming up in China, which will be a first, and more trading of assets overall in Japan,” says Robert Hecker, managing director, Horwath Asia Pacific, Singapore. Deal making will be confined mostly to the 4- and 5-star levels, with the exception of Japan, where mid-tier assets could go on the block. Hecker says opportunistic single-asset deals will be scattered throughout the region—Singapore, Indonesia and the Philippines. Japan is the only place to look for portfolio sales.
Consolidation is unlikely to have dramatic impact either in the Middle East or Latin America. The story in South America, says Ernesto Marino, president and CEO, BSH International, São Paulo, Brazil, will be a new wave of Spanish and Portuguese investment capital. The only other movement could come from increasing conversions in oversupplied urban markets.
New Development Targets
Gateways have not lost their luster, but most brands will
be following corporations to secondary locations and emerging
markets. R. Mark Woodworth, executive vice president, PKF
Consulting, Atlanta, sees brands pushing out into secondary
and tertiary markets as major markets become saturated. “Some
of those markets have not seen new products in many, many
years,” he says. Although Tulsa, Okla., may not have
the upside potential of New York City, its lack of a downside
may make it and similar-sized cities prime targets. “Secondary
cities can be a little more secure and a little more predictable.
State capitals and university cities have huge levels of
public employment,” Woodworth adds.
Brands already are responding to that. Hampton Inn created its small town concept to open up opportunities in tertiary markets, says Phil Cordell, senior vice president, Hampton brand management. A decided shift shows the brand opening more Hampton Inns & Suites than Hampton Inns this year, a nod to the public’s appetite for suite and other niche products. Even big brands are launching right-sized product. “We are seeing more interest in smaller hotels for markets such Santa Fe, Houston, Omaha, Whistler and a lot of resort markets. Some big markets just do not have a lot of major development opportunities left,” says Jeff Diskins, senior vice president, Hilton brand management. The next market opportunities may be swept up by mid-tier and budget brands moving in from the suburbs. Adrian Kurre, senior vice president, Hilton Garden Inn brand management, sees pent-up demand making the numbers w7.3.3rk for mid-priced hotels from Washington, D.C., to downtown Chicago and mid-town Phoenix.
 “We are seeing more interest in smaller hotels for markets such as Santa Fe, Houston, Omaha, Whistler and a lot of resort markets. Some big markets just don’t have a lot of major development opportunities left.” — Jeff Diskins, Hilton Hotels Corp. |
International expansion will be a strong trend. For chains such as Marriott International, 70% to 80% of their 2005 growth will be outside of the United States. Asia is the hot market, says Ed Fuller, president and managing director of international lodging, Marriott International. Michael Issenberg, Accor Asia Pacific’s managing director, also sees China as “an absolute priority.” But it is not the only market. He predicts increased activity in Thailand and the Japanese middle market, as well as India, Australia, New Zealand, Kurre, senior vice president, Hilton Garden Inn brand management, sees pent-up demand making the numbers work for mid-priced hotels from Washington, D.C., to downtown Chicago and mid-town Phoenix.
International expansion will be a strong trend. For chains such as Marriott International, 70% to 80% of their 2005 growth will be outside of the United States. Asia is the hot market, says Ed Fuller, president and managing director of international lodging, Marriott International. Michael Issenberg, Accor Asia Pacific’s managing director, also sees China as “an absolute priority.” But it is not the only market. He predicts increased activity in Thailand and the Japanese middle market, as well as India, Australia, New Zealand, Indonesia and Fiji.
The Middle East is also high on most developers’ priority lists. Fuller points out that high-volume business from Europe is creating “fabulous” destinations—not only in the obvious case of Dubai but also in Qatar and Oman. “The tourism side is growing, but there is also a lot of business being done,” Fuller says.
In Europe, Fuller likes the future for “unique locations.” So do his smaller competitors. “Small groups like ours look to be in places where we can be the pioneers. Yes, we are excited about opening in London, but we are also expanding in Tanzania, Dar es Salaam and Zanzibar,” says Christopher Hartley, senior vice president of sales and marketing, Kempinski Hotels and Resorts, Geneva.
Aggressive Yield Management
The one-word operational theme for 2005 is “yield.” Demand
growth for 4- and 5-star hotels coupled with a booking window
that lengthened from autumn 2001’s 2.5-day average
to today’s 15- to 20-day average gives operators the
full complement of yield management tools. Most operators
will raise rates, but gently.
“Rates lowered dramatically after 9/11, SARS, and the Bali bombings can only be restored slowly if we want to avoid losing customer support. It is like living in a parallel universe,” says Andreas V. Koch, general manager, Pacific International Suites, Parramatta, Australia. “Prices go back to the same low level they were at years before. Over time, we get them back to their previous (high) levels, but we never go forward on the timeline to where we should be now.”
 “Travel patterns are indeed shifting. China, India, Russia, the Middle East, South Africa, Australia, New Zealand are the new emerging travel markets.” — Paul McManus, The Leading Hotels of the World |
Halfway around the world, the view from the GM’s desk is much the same. “While some of our difficulties are temporary, most of the challenges we face in the Canadian hotel marketplace come in the form of permanent changes to the business we are in,” says Marina R. Kulba, general manager, Place Louis Riel All-Suite Hotel, Manitoba, Winnipeg, Canada. “It is expected that occupancy rates in 2005 will reach 61% and average daily rates (ADR) will recover to 2002 levels. In absolute dollars, our industry won’t return to 2000’s level of profitability until 2008.”
Hoteliers in cities such as London and New York City will not have such a long wait. They are coming off banner years and should not be disappointed by 2005. But they are not alone. Hotels such as the Kempinski in Kuwait are posting rates around US$300 and can look forward to 90%-plus occupancy for the next four years. The same holds true for uniquely positioned hotels, from established branded properties in the oil-rich regions of western Africa to one-of-a-kind resorts.
In this cycle, yield will have more to do with price-point management than rate increases per se. Avoiding deep discounts will be as important to performance gains as balancing rate and occupancy advances. Watch for value-added promotions to proliferate, especially online. Heightened flexibility in online channels is opening up new potential for yield managing down to very specific business opportunities—perhaps with an offer that requires a minimum stay of two people for two nights or one that requires a Saturday stay. “Hoteliers are not just looking for volume; they are looking for yield and volume together. It is no longer about managing price, but about managing demand and inventory,” says Richard Weigmann, Cendant Travel Distribution Services vice president, hospitality distribution, international.
Partnerships will play a growing role in expanding reach and capture. Now, hoteliers are looking for cross-selling opportunities not only with traditional airline and car rental partners, but also with service companies and retailers as well. “You have to position your brand at the point of decision. That could mean placing your message along with credit card statements because people stop and read their statements. Online, it could mean making sure your brand comes up when someone types in Dallas or Hong Kong,” says David Kong, president and CEO, Best Western International.
Package business should offer good rewards. Spencer Rascoff, vice president, lodging, Expedia and Hotels.com, estimates package business has grown from 25% of these channels’ total bookings in 2003 to 33% last year. He sees even more growth this year and beyond, fueled by heightened interest among leisure travelers. Does that mean the death knell for discounting? “It is not a question of ‘should I discount or shouldn’t I discount?’ It is about what price I should offer to which sector or consumer on which channel at what time,” he says.
The importance of online channel management can only increase as markets become broader and more complex. Hoteliers will be challenged to find ways to access diverse new markets cost effectively without losing high-spend business from Western Europe, Japan and the United States. “Travel patterns are indeed shifting,” says Paul McManus, CEO, The Leading Hotels of the World. “China, India, Russia, the Middle East, South Africa, Australia, New Zealand are the new emerging travel markets.”
Stemming Uncontrollable Costs
Cost control is another issue that is not going away. Labor,
capital expenditures and brand requirements are perennial
but predictable concerns. What is drawing more attention
now is the class of uncontrollable costs: Insurance, utilities,
and taxes or government-mandated expenditures—some
of which have escalated dramatically enough (30% or more)
to erode the bottom line.
 “Customers are tired of a commodity-like experience. They do not want the same bed, the same stir sticks and the same alarm clock.” — Marc Pujalet, Noble House Hotels & Resorts |
Chains are responding with more commission purchases through third-party vendors and the use of specialist third-party organizations for negotiating contract services such as maintenance of energy costs, says Tom Murray, IHG’s chief operating officer, the Americas. Revenue management “universities” are becoming standard coursework within mandated corporate training programs, as are new payroll system programs with labor/management models. “A brand can use its scale and scope to obtain better pricing, but it also has to provide a sophisticated training process that supports and improves its revenue managers’ ability to make the right decisions and do their jobs day to day. That is what will lead to increased return for owners,” Murray says.
Building return also will involve finding ways to offset losses, such as significantly declining telephone surcharges, with incremental revenue streams. Trudy Rautio, Carlson Hotels Worldwide’s president, the Americas, sees corporate hotels borrowing some ideas from their all-inclusive counterparts. “Research suggests that customers do not want to be nickeled and dimed. They would be more willing to pay a slightly higher rate with no extra charges. I recently stayed at a hotel that gave guests the option of paying a single US$3 a day technology charge. Nearly every guest checking in agreed to pay it,” she says. Yes, choice will be important in driving incremental revenues, from options on technology charges to low-carb offerings on menus.
Although rising oil prices and creeping interest rates remain a concern, the cost many hoteliers are watching more closely is the cost of currency—specifically a weak U.S. dollar. Unfavorable exchange rates will keep most U.S. travelers closer to home, which should mean another good winter for Mexico and much of the Caribbean. “A weak dollar makes destinations such as London and Paris frightfully expensive, but it also affects the companies who underwrite overhead and operations costs from the United States,” McManus says. “Nevertheless, we are budgeting a 5% increase this year.”
Luke Bailes, CEO of the Cape Town-based Singita Group, also sees market changes as travelers look for new experiences within the confines of locations believed to be safe and secure. “We are seeing increases in travelers from South America—particularly Brazil—India and Europe who have not been so severely affected by the weakening dollar. Forward bookings for all of our properties are creating good yield forecasts for 2005,” he says.
 “Research suggests customers do not want to be nickeled and dimed. They would be more willing to pay a slightly higher rate with no extra charges.” — Trudy Rautio, Carlson Hotels Worldwide |
How To Stand Out
“Customers are tired of a commodity-like experience.
They do not want the same bed, the same stir sticks and the
same alarm clock. Standardization and efficiencies of scale
are fine behind the curtain. Guests want something unique,” says
Marc Pujalet, president and chief marketing officer, Noble
House Hotels & Resorts. In 2005, Noble House and
the majority of the upper-hotel market will reinvest
in and reinvent their hotels. David Horton, senior vice
president, brand management, Doubletree Hotels, predicts
more emphasis on contemporary/residential design with
accents such as bed throws instead of bedspreads; plush
mattresses, heavier towels and posh linens; customized
bath amenities; and cutting-edge business/entertainment
technology.
Expect to see more product enhancements, not just in design but in services that drive incremental revenue. “When you go on holiday, people do not ask where you are going. Everyone is used to traveling,” says Jaime Puig de la Bellacasa, Sol Meliá’s executive vice president, institutional relations, Palma de Mallorca. “It is not news that you are going to Thailand. People want to know what are you going to do on your holiday. Travelers want new experiences, and we have to offer that, whether at a resort or in a city-center hotel.”
Co-branding with highly visible partners will be one appealing option for getting noticed (while sharing marketing/advertising costs). Morse sees more Starbucks and Caribou Coffee outlets coming into hotels. Sol Meliá is using the Hard Rock concept to create instant brand recognition among leisure and business travelers in city centers from Chicago to New York (opening next autumn) and Madrid (now under way). Concepts such as Nikki Beach Club and China Grill raised the bar for its all-inclusive resorts. In the family-oriented leisure market, watch for more chains to leverage co-branding—whether IHG’s Nickelodeon rooms or Sol Meliá’s Flintstone-themed hotels and rooms. “A hotel does not have to be a 5-star or a lifestyle hotel to carve out a market niche; it just has to be different. That is when you see rate and average spend go up,” Puig says.
Also watch for stricter standards as brands look to clarify their identities. “You cannot allow underperforming hotels to drag down the system,” says David Goldberg, Choice Hotels International’s vice president, corporate and brand strategy and treasurer. “The message will be, ‘Fix up or get out of the system.’”
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