hotelAVE’s Michelle Russo talks about how the COVID moment could have been used to improve business models and discusses the state of PIPs, standards and HMAs.
Did the hotel industry learn enough from COVID to make more permanent changes to PIPs, brand standards, HMAs, and generally improve the business model? For asset manager Michelle Russo, founder and CEO of Hotel Asset Value Enhancement (hotelAVE), it feels like a missed opportunity.
“There’s so much more cost that was put in our budgets this year. We fought some of it, but it just feels like a lot of it is just going back to 2019 staffing levels and standards,” she said. “But wait a second, why are we doing that? How should we be doing it better or different? What services and amenities are really important to the guests? What did we learn during COVID about guest preferences? I think that’s something that people aren’t talking enough about enough – how operators reverted back to the old school ways and didn’t really try to challenge the business model and take more learnings from COVID... We could have learned what consumers were tolerant about and what they pushed back on, and then made some real changes. It would have been easier for those changes to stick. Now it’s going to be harder.”
Russo said there has been flexibility in negotiations over capex spending from most of the brands and third-party managers hotelAVE works with, and she points to a new Marriott International program developed during COVID that offered capex relief. One hotelAVE client was able to modify their capex plan with Marriott so they only had to spend a little more than half what they expected. Marriott pushed the other expenditures to the next cycle, allowing the owner to use the next seven or 10 years to build back their reserves and hopefully be in a much better position to renovate again when required.
Bigger picture, however, Russo believes there remains an opportunity to revisit brand standards. “There are things that consumers really want such as awesome bandwidth. Great, let’s give it to them. But if they don’t care about certain things, I don’t know why we’re still offering them.”
While there is plenty of benchmarking data on expenses and FTEs to review with the brands and perhaps get some relief, Russo said there isn’t enough truly useful research available on consumer preferences.
“We could have learned what consumers were tolerant about and what they pushed back on, and then made some real changes. It would have been easier for those changes to stick. Now it’s going to be harder.”
“I’m sure the brands do a lot of consumer research, but they do it from a competitive standpoint,” Russo added. “We don’t do enough of the consumer demand-side research. Even from a development standpoint, should we be building oversized rooms or smaller rooms? Where’s the consumer going on that question? I would be really interested to know.”
Russo points to hotelAVE’s research on turndown service, as an example of discrepancies between owner and operator POVs. They found about 85% of the turndowns in urban market luxury hotels are either being done before a person has checked in or are reject by guests when there is the evening knock at the door. “They don’t value it. But what do they value? The water – they want the water… Why aren’t we figuring those things out? When we do the stay-over cleaning, put a bottle of water in…There are many different ways to get into the consumer research, but I don’t think we do enough as an industry.”
Again, looking at hotelAVE data, Russo said profit margins last year – still during COVID – were higher than the prior peak. But now, they are coming back down because hoteliers are being required to add more labor and bring back brand standards where they previously had relief. “Maybe the standards had a benefit, or maybe not,” she wondered aloud.
“You can see how the labor cost is really increasing on a per available room basis each consecutive month. And it’s more a function of adding FTEs,” she said.
Red zone status
Russo added that brands are no longer being as tolerant of hotels in the red zone and are going to default on those hotels. “And they need to,” she said. “We have two hotels in the red zone, and when the owner made capital commitments the brand said, ‘Ok, we’ll work with you as long as you demonstrate that you’ve ordered the materials and that everything is in motion.’”
Also on the bright side, Russo said she hasn’t heard her team complaining about big asks from the brands for major capex projects such as new lobbies or port cocheres, and there has been some flexibility on hours of operation and menu size in F&B. “Brands have laid low on the brand standards for capex,” she added.
As for PIPs, it is business as usual with ownership changes, while brand-managed hotels can often still work out modified plans, according to Russo.
Russo also said she has seen third-party management fees come down at the base, but increased charges for a la cart services. “Maybe that’s making up for the fact that there’s pressure on the base fees,” she said.
Otherwise, some managers are making changes to force majeure clauses to include pandemics and “reasonably” asking owners to place at least two weeks of payroll in a separate bank account because they were getting stuck with payroll liability during COVID.