Hotels are still riding a significant wave of leisure demand growth, but forecasts suggest a slowdown could be looming. Here are the do’s and don’ts of preparing for a downturn.
The World Bank painted a rather gloomy picture in its June 2023 “Global Economic Prospects” report. Its projections anticipate that global GDP growth will slow down to 2.1% this year from 3.1% last year amid continued monetary tightening to curb inflation. It said the United States and the euro area may see growth of just 1.1% and 0.4% this year, respectively, and the world economy will remain frail and at risk of a deeper downturn in 2023-24.
Despite these macroeconomic concerns, there are bright spots. The hotel sector is still thriving, at least for now. "Thus far underlying demand for leisure travel has remained very robust," Tom White, a senior research analyst with U.S. investment bank D.A. Davidson told CNBC in an interview in June. Ratings agency Fitch recently revised its global lodging sector outlook upwards. But the U.S. Travel Association forecasts domestic leisure demand may continue growing at “normalized” rates after the post-COVID surge.
Nobody wants to think about a slowdown given the current strength of leisure travel – except the prudent. Should the wave of leisure demand growth in fact recede, it must find hotel owners well-prepared. Forewarned is forearmed.
Match the strategy to scenario
Not all downslides are the same, but applying lessons learned during past slumps can help get ready. Some consultants have even suggested reaching back to the 2008 recession to explore past tactics, exploring which approaches worked best for different scenarios.
When a slowdown is around the corner, owners must have the flexibility and responsiveness to react to market changes fast. Needless to say, hotels can respond quickly and effectively only if they know their positioning and guest profile and can target customers with razor-sharp precision. Accurately assessing spending patterns has never been more important, with certain customer groups currently struggling with a cost-of-living crisis and potentially revising their spending and budget priorities.
Some properties may be better positioned to withstand market difficulties than others. Luxury hotels, for example, traditionally find it easier to increase room rates as their guests tend to be less price-sensitive. In case of a recession or a slowdown, luxury hotels should concentrate on maintaining the quality of service and avoid compromising it, as many times it is not about price for their clientele.
Specific strategies that may help luxury hotels boost efficiency include better managing labor costs. Reducing overall staff turnover can be one of the most effective tools to increase savings in terms of employee costs, but this is normally part of a more long-term approach rather than an immediate fix.
Short-term solutions include eliminating any overtime and creating more flexible working schedules focused on demand, which can result in reduced working hours and costs. Managing labor costs can be very complex as it may require a balancing act of working within labor regulations and keeping staff members motivated.
Bolstering revenues
Regardless of what which guest sectors they target, hotel owners must have astute revenue management and cost controlling strategies at hand to preserve cash flow in case customer demand decreases. Closely tracking cash flow changes and adjusting revenue and cost plans accordingly is imperative. That’s especially important when a downturn hits overall topline performance, with ADR, occupancy, and RevPAR all dwindling.
On the revenue side, one tool that can help alleviate the unfavorable effects of a slide in general customer demand is the loyalty program. Hotels already operating loyalty programs must make sure that guests actually use them. Implementing new incentives to boost engagement and, subsequently, repeat business should be part of any planning for a possible economic slowdown.
Some of the ways operators can make loyalty programs work better with relatively little effort include offering “astounding” complimentary room upgrades with significant added value to loyalty members, prompting them to book and pay now. Offering member rates and incentives for booking rooms and auxiliary services, such as F&B, wellness, sports and tours, seems to have a marginal effect. I believe hotels can fare better in a market downturn by creating innovative VIP packages that exploit local concerts and entertainment events (especially when they become sold out).
Naturally, resort and business hotels need a different approach given their clientele. In any case, operators must enable fast and efficient engagement by making sure loyalty apps work seamlessly and the booking process is frictionless.
Critical elements in any plan include avoiding reducing room rates . Luxury hotels have to resist any temptation to engage in rate wars started by competitor. Instead, they should focus on winning the race to achieve the best rate strategy instead, partially through implementing the practices already discussed.
It is imperative to truly know your guests so that you can target them with a methodological approach. Guest segmenting makes it possible for targeted hotel benefits to drive value that guests want. Leveraging the right strategy can allow for increasing the rate above that of competitors if the hotel has a tangible value proposition and brand, and it offers unique experiences.
Optimizing performance in a slow down also requires staying away from creating value-added packages, incorporating amenities or providing discounts for extended stays. What past recessions taught a number of players is that cutting or discounting room rates may not generate demand, but will likely increase costs, eat away RevPAR and ultimately deteriorate profit margins and returns.
Nobody wants to think about a slowdown given the current strength of leisure travel – except the prudent.
Roger Allen
Making smarter cost cuts
On the expenses side, hotels usually fall back on conventional cost-cutting strategies when difficulties emerge. Tight cost control and streamlining operating expenses may boost efficiency, but cuts must be carefully analyzed and implemented so as not to compromise the overall guest experience. Going too deep or not being selective when reducing marketing costs can easily hurt general sales capabilities.
One piece of advice hoteliers usually receive for cutting costs is to go through and potentially update existing contracts with suppliers, vendors, franchisors, lenders and insurers. During difficult times, operators must dust off the cobwebs of these agreements and review key provisions, such as those about rights to modify the terms of supply and partnership, pricing and limitations, payment terms, deconversion fees, default and termination clauses, performance test and the liability clauses with a view to limiting exposure.
The lesson many owners learned the hard way during the pandemic is that the flexibility and adaptability of contracts are vital when market circumstances change quickly. This is not about the ability to replace a supplier, vendor or partner with a less expensive alternative but being able to engage and find workable solutions that serve the best interests of the business.
Outsourcing certain cost-inducing activities, like maintenance, IT or accounting, or even the entire revenue management could also be an option, although some owners may consider reduced control over these areas a drawback.
Low-hanging fruits operators often miss when looking for cost-saving opportunities include energy efficiencies, which can make a significant difference if not already addressed in the property program. I often find walking into a hotel at night a true discovery trail for identifying where and how the property wastes energy unnecessarily. One example is the kitchen. It’s surprising to see how long the gas and the ovens stay on when nothing is cooking or baking.
Hotel owners have many opportunities to get ready for a potential market slowdown and avoid going into the next downslide unprepared. But they must think well ahead and be careful not to fall into the numerous traps when drawing up a contingency plan and introducing necessary measures.
Roger Allen is the group CEO of RLA Global, Las Vegas, and board director of the International Society of Hotel Consultants (ISHC).
The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.