Taking The Temperature

-- Hotels, 6/1/2008

In the June issue of HOTELS magazine, industry leaders discussed the state of hotel operations and development around the world. With such an overwhelming response to the editor’s query, here are some more comments and opinions from hoteliers—both on the record and anonymously.

Anonymous hotelier based in southern California:

“The snapshot really is that the luxury traveler is still out there and if you are positioned at that level one has a better chance to weather the economic uncertainty/airlift turmoil. No doubt, however, that it is tougher out there with the narrow-minded drastically dropping rates as a means to encourage demand. All that accomplishes is cutting profits for those who play that game.

“Food costs are rising and one cannot simply pass that along to one’s guests ala American Airlines charging US$15 for the first bag checked—that is similar to charging for orange juice at Sunday brunch. It is not a time to nickle and dime consumers who are more and more value driven. Menu engineering, purveyor pressure and better waste management (yield) are key.

“Development: In a nut shell, return hurdles are higher now than in the past”

Michael O'Hare, managing director, Horwath HTL Hungary & Russia:

The hotel market in Russia and CIS continues to flourish, particularly so in Russia where it appears to be pretty cocooned from the credit crunch being felt in the United States and increasingly so in Europe. I believe that the second half of the year will see a lot of tightening of credit lines in Central & Eastern Europe.

Costs are still reasonable in the region and particularly again with respect top Russia in terms of energy costs. Food costs do continue to rise as reflected in the price increase in restaurants in the region.

We are expanding—doubling the size of our team in Moscow this year as we do not see a slow down in the market for consultancy services. All major hotel groups are pressing ahead with their expansion plans and the vast majority of hotel-related projects are 100% equity financed.

In Central and Eastern Europe and, in particular, Kazakhstan, where there is a lot of development credit—the rate of expansion is increasing in Russia with no sign whatsoever of a lessening of interest. In fact, consultancy firms and hotel companies are building up there representation in Russia by moving staff from London and Paris as they see this market very steadily moving forward.

Niki Leondakis, chief operating officer, Kimpton Hotels and Restaurants:

“Hotel performance in first quarter 2008 was strong. Our RevPAR index came in at 110.2%, a gain of 2.3% over the total U.S. index, which was up only 1.9%. Our occupancy also grew 4.6% in the first quarter, which put us at 108.7% index. Forecasts for the remainder of the year are currently underway but we are bracing for a less optimistic second half. Our industry is constantly in flux and subject to varied market conditions, which requires a nimble approach of constant monitoring, evaluating and revising our strategies to achieve continued success. 

“As a leader in environmentally friendly practices, we are always looking for new solutions to business challenges. Our pioneering eco-efforts have led to significant energy savings and lowered operational costs overall, which helps greatly during a time of higher fuel costs.  To combat these rising fuel and food costs we have identified strategic actions such as basic cost reduction, including controlled inventory management and re-engineered menus, including a combination of price increases and low cost options.
 
“We employ various tactics as needed that include delayed hiring of open positions, transitioning management from those properties that are management heavy to others in need, and suspending large purchases of supplies such as linen, uniforms, etc. We have not had layoffs to date.

“Despite the current credit crunch, we have been able to raise capital and, in fact, recently announced the close of our third institutional real estate fund. Kimpton has raised US$246 million—over 50% more than the amount raised in the first KHP Fund three years ago—with the goal of acquiring more than US$800 million worth of hotels over the next three years. These funds will be used to acquire, develop and redevelop boutique/lifestyle hotel properties in select major U.S. metropolitan cities and resort areas across the country.”

Jonathan Langston, managing director, TRI Hospitality Consulting. London:

“Consensus forecasts are predicting annual UK GDP growth of 1.7% in 2008 compared to 3.1% in 2007. Provincial hotel performance is primarily influenced by domestic economic conditions and we envisage some reduction in domestic corporate travel and accommodation budgets and cutbacks on conferences as UK-based companies trim their costs in the second half of the year.

“Overall provincial RevPAR growth is likely to be weak and below the current and forecast level of consumer price inflation. Inevitably some markets will perform better than others.

“The London hotel market is strongly reliant on inbound tourism, with overseas visitors accounting for more than half of hotel bed-nights in the capital.

“We expect European inbound tourism (London’s largest inbound market) to hold up well in 2008. The appreciation of the Euro (up by 14.3% in 12 months to April 2008) against the pound and improved access to London and the UK via Eurostar’s move to St Pancras International are favorable influences on inbound Eurozone tourism.

“However, London’s official tourism body VisitLondon, recently announced its overall visitor forecasts for 2008 of 0% to 1% growth. This compares to inbound visitor growth to London of 12% growth in 2006 and 3% growth in 2007. It said that the slowdown was from a position of relative strength.

“London’s already extremely high occupancies mean that there is minimal scope for average occupancy levels to increase which in turn puts greater emphasis on rate performance. We expect to see a shift in business mix from full-rate toward group/tour business which will slow down the growth of average room rate to 4.8%. We believe further room rate growth is achievable because demand for quality hotel accommodation in London will continue to exceed supply. With no change in occupancy compared to 2007, rooms RevPAR will increase accordingly at half the level of growth enjoyed in 2007. Our RevPAR forecast for the full-year follows: 

“In the UK, the weaker pound has driven up the cost of European imports. Food inflation plus higher excise duties on alcoholic drinks have had their impact on hotel profitability. TRI’s unique full profit-and-loss HotStats database of more than 2,000 hotels representing some 290,000 guestrooms, shows that in our London sample in Q1 2008 rooms department operating profit increased by 3%, but food and beverage department operating profit was down by 10%. In the Provinces rooms department operating profit dropped by 3%, but food and beverage department operating profit, again, took a much greater hit, down by 11% compared to Q1 2007.

“The profitability of budget hotels is less exposed to food and drink inflation, but we expect all operators will be looking more stringently at managing their operating costs in the face of rising food and fuel prices over the coming months.

“In the face of a slowing economy, companies naturally start to explore possible cost-cutting measures. At its preliminary results for the year ended 28 February 2008 “Whitbread, the owner of the UK’s largest budget hotel brand Premier Inn, announced it would save £25m annually from 2009 onwards from combining its hotels and restaurant management teams and outsourcing its logistics division. 

“At unit-level, laying off staff is likely to be a mistake in a tougher trading environment. Maximizing revenue capture opportunities will be the focus for most operators.

“In the wake of the credit crunch the Government’s house-building drive has fallen by the wayside and developers have become more responsive to the opportunities for hotel development, as opposed to residential and commercial property. As a consultancy, we are busier than ever. Most growth in the UK is coming from the budget hotel sector and four-star boutique hotels.

“Premier Inn has announced the goal to increase its UK estate by 53% to 55,000 bedrooms by the end of 2012. Travelodge has a target to reach 70,000 guestrooms by 2020 and says it has a pipeline of 205 hotels sites already in place representing 18,500 bedrooms. 

“In addition to the market leaders, Jurys Inn has 10 sites currently under construction, and Hampton by Hilton plans to open 20 hotels over the next five years, with its first UK property due at the end of 2008.

“The credit crunch appears to have had no effect on budget hotel development in the UK with supply growth in 2008 expected to exceed 2007 levels.”

Jean-François Pelouard, general manager, Baglioni Hotel & Ràcz Thermal Spa, Budapest:

“With the Baglioni Hotel & Ràcz Thermal Spa opening in the course of 2009, we consider the rising cost of utilities and food as increased costs that will impact the operational results knowing that only part of these increases will be factored in the rates and prices.

“For the future we anticipate more price adjustments of gas, water, electricity and food commodities with operating costs getting progressively closer to those of the Western European Hotels. At this pre-opening stage of the Baglioni Hotel & Ràcz Thermal Spa a particular attention is being paid to the selection of the most effective equipment in terms of energy saving and protection of the environment.

“With the increased operating costs faced by up-market hotels of Budapest we see a need to be even more dynamic commercially by offering unique experiences to guests that should be supported by upgraded infrastructures and services matching those of the main Western metropolis.

“It is observed that the credit crunch has been affecting both the corporate and the leisure segments from Northern America and the Western European countries at up-market properties in Budapest, highlighting the need for hotels to diversify their marketing by tapping new emerging and promising markets like Russia, China, India, and Brazil.”

Jose Ernesto Marino Neto, BSH International, Sao Paulo:

“Main Brazilian big cities became oversupplied with the condo-hotel boom of 1995-2001. For example, two-thirds of all hotel rooms in Sao Paulo were built under Condo-Hotel system. Once the economy is growing since 2002 sharply the hotel demand in some cities like Sao Paulo, Belo Horizonte and Brasilia grew about 10% per year. Today the hotels are doing well and they are recuperating RevPAR increasing ADR. The expectation is to see continue increase in the demand and there is no new hotel projects today in the pipeline in the major Brazilian cities.

“Once Brazil became self sufficient of petrol and once 50% of all automobiles in Brazil work with ethanol, this fuel costs are not a major issue. Recently the gas price was increased but the tax was reduced and the consumer’s price is the same.

“Money is more available today in Brazil than in the past. There are many private equity funds being formed to invest in hospitality industry. BSH will announce a fund in a partnership with Espirito Santo Investment Bank to invest in Condo-Hotel developments: BSH Condo-Hotel Fund.”

Stephen Brandman, partner, Thompson Hotels, New York City:

“While we see markets in New York and Los Angeles generally getting softer, our properties have not really seen an impact.  For example, in the month of April, Hollywood, California, experienced a 8% reduction in RevPAR. However, our hotel, the Hollywood Roosevelt, experienced a 12.3% increase in RevPAR index. In New York City, the RevPAR index only increased 3.6%. However, 60 Thompson saw its increase by 13.0%.

“As we have always been a company that focuses in on service and consistent delivery of it we have always felt we are less impacted in difficult economic times. When the hotel market softens guests have more choices and we find that the generally choose one of our hotels.

“We are actually in a mass hiring mode as we are opening several new hotels so no staff reductions have ever been discussed.

“Capital markets are clearly getting tougher but based on our business model and the success we have had we still are pursuing new deals. As a matter of fact, I am about to announce a new hotel project at the end of next month which I am planning on signing for and have financing already arranged.”