What’s wrong with the economy segment?

Wyndham said it expects full-year global RevPAR to range between -3% to -2%, representing a reduction of 100 to 300 basis points from its prior outlook and implying fourth quarter global RevPAR down 7% to down 4% at the low end, assuming roughly 200 basis points of additional softening beyond third quarter results.

This outlook also assumes that U.S. performance continues to lag meaningfully behind Wyndham’s international regions, and that international trends moderate modestly from recent levels.

This ongoing weakness has begged the question more than once: is there something structurally wrong with the economy segment, especially in the U.S.?

During Wyndham’s third-quarter earnings call, President and CEO Geoff Ballotti answered a similarly posited question with a pretty emphatic “no.”

“Despite the softness that we talked about in Texas, California and Florida, we are seeing nothing structural that that concerns us in any leading indicators that we look at daily,” Ballotti said. “Our booking lead times are up 2% over the prior year; our lengths of stay are consistent with last year; our cancelation rates have actually improved over last year, 160 basis points in Q3 versus prior year.”

Ballotti also said they reference demand and occupancy levels when responding to structural questions. “This year, we’re seeing occupancy down across all chain scales year-over-year with the divergence of RevPAR being driven by ADR, with the upscale segments taking rate, while the economy and the midscale, where we’re concentrated, are not.”

Ballotti added that occupancy has not recovered to pre-COVID levels in any segment but said it has, more so, in economy and midscale segment. “If we look versus 2019 STR midscale occupancy is down 5% to 2019 versus upper upscale and luxury – both down 8% to 2019 and 100 basis points worse than economy and 300 basis points worse than midscale.

Wyndham Hotels & Resorts has launched Dazzler Select by Wyndham, a collection brand for independent hoteliers in the economy lifestyle space.

“So, the question you ask – is there anything structural that we’re seeing out there aside from persistent inflation and consumer uncertainty around immigration in some of those states that aren’t helping, the answer is that upscale hotels are able to price more aggressively to inflation than the lower chain scales are where the guest is obviously more price sensitive.”

Ballotti also said that STR rate data for economy hotels is up 11% to 2019 versus +29% in the luxury segment, which he calls “very good news for economy and midscale segments from a pricing power standpoint moving longer term, especially as wage growth continues to outpace inflation, providing upside when that consumer confidence stabilizes, and we get back to that 2% to 3% CAGR.”

Ballotti was also asked about what Wyndham is doing to help franchisees weather the storm.

He said franchisees in the lower chain scales are beginning to discount to capture demand. “We’re helping franchisees where we can and urging them to hold rates where it makes sense, especially on leisure versus the corporate contracted pricing and discounting where appropriate, but not playing heavily in that last-minute discounting on those all-channel sales. We’re trying not to discount last minute because of the long-term value dilution.”

Ballotti added that Wyndham brands are gaining the most share in the midscale, where they saw 160 basis points of RevPAR index being driven by weekdays, which was up 180 basis points. “We’re gaining with more rate index, which our revenue management teams really want to see continue for franchisee profitability,” he said.

We’re contracting with the surveyors from a GSO global sales standpoint and the design firms on the data centers that haven’t even begun. There’s so much early site development... So, it’s really big deal and something that we’re very excited about.

Geoff Ballotti

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Looking further ahead

Looking ahead, Ballotti pointed to the $1.2 trillion infrastructure bill in the U.S. as a multi-year tailwind that’s going to drive more than $3 billion of revenue to Wyndham hotels. “And the 150 basis points of growth that drove for us in Q4 of last year is now more on par with the rest of our portfolio,” he said.

Ballotti hedged a bit, admitting there is a lot of talk about freezing some of that allocated money in certain states and said they have seen some projects paused as priorities shift. But, he added, “the infrastructure spending, over 80% of which is not spent, is going to resume at some point. Infrastructure room nights contracted this year are up two times versus consumed, and they’re pacing well ahead of same time last year.”

Wyndham is also very confident that private investment in reshoring and manufacturing will continue to boom with Ballotti citing data center development, where he said Wyndham hotels in those markets outperform the hotels from a RevPAR standpoint and have gained 500 to 600 basis points.

“We’re spending a lot of time with our teams, and we’ve identified over 150 planned data centers and the Wyndham hotels in those markets that we’re tracking and targeting – from the $1.6 billion Amazon Web Data Center in Canton, Mississippi, to the $800 million Meta data center in Graniteville, South Carolina – they’re seeing traction,” Ballotti continued. “We’re contracting with the surveyors from a GSO global sales standpoint and the design firms on the data centers that haven’t even begun. There’s so much early site development... So, it’s really big deal and something that we’re very excited about.”

Ballotti also reminded the assembled on the earnings call that economy and midscale hotels were the first to recover coming up out of COVID. “We know that at some point, domestic RevPAR is going to return to that 2% to 3% long-term CAGR that it’s always averaged,” he said. “Everything that’s out there from a macro setup on the infrastructure and private investment side, the historically low levels of supply and on the leisure side we have a lot to look forward to next year with America 250 the FIFA World Cup, which is a $20 billion impact... We are going to benefit from that next year.”