HOTELS

Laurence Geller

What Inning Are We In?
May 22, 2007

There isn’t a conference in our industry where that question isn’t posed to a panel of cognoscenti (self styled or otherwise). I listen to the all too glib answers and, more often than not, shake my head in bemusement.

Why? Our industry is not a game. It is not simple. There is no one answer. It is a composed of a series of multi-dimensional segments and sectors, each with its own pattern and trend lines. Each geographic region has its own unique characteristics, demand generators, growth, trends, and so on. Each is unique.

Then there is segmentation by pricing—with products ranging from budget to luxury. We all too willingly try to compartmentalize our customers into neat little boxes, and then readily assume they will stay in those boxes and perform like programmed robots. We all too easily ignore the reality that any one guest can have different needs at different times, and one day be a high-end corporate luxury traveler, another a mid-priced without food and beverage when traveling, for example, with his family. The next day our guest could be an upscale group traveler visiting a convention. I’m sure you get the point.

Remember that demand is driven in each of these segments by different characteristics. However, underlying our industry’s demand is this nation’s GDP growth rate.

Simply stated: If GDP is strong, then so is hotel demand. If GDP is weak—well…

So let’s not fall into the trap of being lulled into complacency when seeing our RevPAR grow when GDP for one quarter is dropping or flat. History teaches us that lodging industry demand lags GDP growth by more or less a couple of quarters.

Demand is only one half of the equation. Again it’s relatively simply on a macro basis—GDP. The other half of the equation is supply. What drives supply?

The ease of money for development is a critical feature. Availability of development capital development is the developers’ cocaine, and often overrides logic and common sense. After all, if things were logical, men would ride bikes without the crossbar!

As I look at the supply side of our business, I keep being reassured that we are in a healthy position. Sure supply is up on the past year, or so. However, we have had three or four years of incredibly low supply and we are a long one from being close to supplied—let alone oversupplied.

So don’t be seduced or scared by one of Smith Travel Research Randy Smith’s simple charts showing supply greater than demand for a quarter or even a year. These are snapshots only and ignore the movie! The reality is that most sectors, segments and geographic regions have a very long way to go before being oversupplied.

The real world is a harsh place and its realties are stark. So what are the fundamentals behind new supply?

- Construction costs are high. They are volatile, unpredictable, and depend on multiple, and complex factors: The volatile price of oil and other commodities being only one subset.
- Labor is expensive and in short supply. Benefits are rising and construction unions are not known for being generous.
- Room rates don’t justify new supply in most cases and operating costs in real dollars per available or occupied room are not getting cheaper.
- Our in house operating labor is hard to get and won’t get cheaper.

The combination of this adds up to a very healthy picture as far as supply is concerned.

I can’t predict GDP growth, but am optimistic that the resilience, ebullience, and entrepreneurial genius of this country’s people will preview us being talked into a downtown.

The rate of GDP growth may ebb and flow, but so what? This is a terrific country and full of well trained consumers. We like to spend and we like to travel. Let’s make sure we give our customers the product they want, the marketing that attracts them and the price to value relationship they crave.

One last comment, supply is so benign that if and when a slow down does occur we will not see the propitious spikes that have occurred in previous cycles. The spike effect if often compounded by oversupply. My guess is it will look like shallow curves and we will go in and out of a slow down more like lambs than lions.

So what inning are we in? How do I know? I’m from England. We played cricket!

Posted by Laurence Geller on May 22, 2007 | Comments (0)