The Economy and the Challenges the Lodging Industry Faces

By Steven Belmonte CEO, Vimana Franchise Systems LLC | January 12, 2010

Most of the industry assessment professionals are in agreement that the current cycle will be far worse than the last two downward cycles in the early 1990's and early 2000. Even those few (and may I add they are in the extreme minority) that still have some glimmer of hope coupled with some capital resources are now stepping back to take a second look at their business missions and future projections. It goes without saying that they are taking the safe road and waiting out the economic storm before proceeding with any development projects. When you are facing a decrease in the key numbers - meaning occupancy average daily rate and revenue per available room - there is very little to be done on the property level except to outperform your competition and contain costs. Unfortunately, many hotels play the rate game and I am sure that is exactly what will happen again, even though history proves that we are all collectively losers when that occurs and that it actually does very little to generate new business. Hoteliers must focus "literally" on stealing more business with value added services, guest service and product amenities. This is where hoteliers need to embrace the mantra, 'out of chaos grows creativity' in order to get through these tough times. Here are a few examples hoteliers can employ to maintain a competitive status:

  • Stay ahead of the marketing curve by creating a strong presence in social networking sites. If you have a presence in the blog, Twitter, and Facebook sites, it shows the younger consumers that you have your finger on the pulse and are in-the-know of the latest technological and communication tools. Hoteliers should be showing off their properties and taking ownership of their local area as the hotel of their city. When consumers search for a certain city's name in Facebook, for example, your hotel's name should show up.
  • Research what local competitors are offering and one-up those promotions. Be bold and creative. Caribou Coffee nailed this on the head the other day after their competitor, Starbucks, announced they were going to stop brewing decaffeinated coffee in the afternoons. Caribou shot back with a promotion announcing that coffee drinkers deserved better and offered a free decaffeinated coffee on a certain day during a limited time window. They took advantage of the market's affect on a direct competitor to win new consumers. I'm not stating that hoteliers should offer free nights but they should have their eyes open for unique attention-getting opportunities.
  • Engage your guests in word-of-mouth grassroots marketing techniques through customer rating sites such as Expedia, Orbitz, Travelocity, and Hotels.com. It's a no-brainer that consumers have turned to the Internet for the inside-track information about properties and they are relying on the experiences of those who have already stayed at the hotels. Whereas good reviews are worth more than an elaborate ad in a national magazine, bad reviews are a guaranteed business killer.
  • Strengthen personalized service. In order to ensure good word-of-mouth recommendations, your property needs to offer top-notch customer service to guests.

Additionally, in these tough times hotel owners should be evaluating their arrangements with their franchisor to determine if that specific franchise affiliation is in fact providing the best return on investment. The truth is that the industry average a hotel owner pays his franchise company is 14 percent or greater of gross room revenue "all in". This term is inclusive of royalties, marketing fees, reservation fees, loyalty club fees, and a host of other costs. If you do the math, 14 percent of the gross revenue equates to approximately 40 percent of the net profit. In essence, the franchisor owns 40 percent of the hotel without making a financial investment. Owners across the country are looking hard at that model and are migrating to viable alternatives such as Americas Best Value Inn in the economy sector and Lexington Hotels in the upper mid-tier to luxury segment, whose combined fees average four percent. In addition to fees, hoteliers need to run a fine toothed comb through franchising agreements to ensure they are provided with resources and protection to not only survive but to thrive during these trying times. Some vital points hoteliers should be on the look out for in their contracts to ensure a financial safety net are:

  • Short-term renewable contracts. In the economic landscape of today, hoteliers need to ensure they are not held prisoner to a franchise.
  • Termination fees/liquidated damages. The last thing an hotelier wants to do is to pay even more money to leave a relationship they feel is already draining their financial resources.
  • Area of protection. There's no question that competition is good but it's detrimental when you're competing against your own brand. Make sure you are the only brand within a reasonable radius.
  • Property Management System fees should be included. The PMS is the lifeline of a hotel's business and franchisees shouldn't have to pay extra for it. To do so is the equivalent of offices making employees pay for their desk and chair.
  • A creative loyalty program and its fees should be included at no extra cost. This is a big issue that can bankrupt a hotel. As many brands are trying to be creative and aggressive in marketing their loyalty programs to gain customers, franchisees are being forced to foot the bill for the extra incentives.

This is also the ideal time for hoteliers to negotiate for smart business, marketing, and IT tools from franchisors. But I caution hoteliers to do their homework and have a thorough understanding of the demographics of their targeted market niche. A franchise may have a very good advertising campaign that are directed at families looking for sunshine getaways, but in that case, your property in Bismarck, North Dakota is not going to benefit from those advertising dollars. I would urge hoteliers to request some support from their franchisor in the following areas:

  • Provide you with AAA and State Travel Guide discounts for placement of your property.
  • Negotiation rights on amenities. For some properties, it doesn't make sound economic sense to have high end toiletries.
  • Offer educational opportunities for you and your staff. This is a great time to learn more about revenue management systems and other programs through a variety of certification curriculums offered by some of the industry's premier organizations.
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Eco-Friendly Practices: Corporate Social Responsibility

The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.