As any economist knows, the economy is organized so people can extract the maximum revenue and profits from any asset. But, if that’s the case, why are so many hoteliers reluctant, or constrained, in their ability to do so?
A must-read report by the Virginia-based HSMAI Foundation’s, Distribution Channel Analysis called “A Guide for Hotels,” provides several reasons why, these days, accommodation businesses continue to experience declining margins. Primarily, the pressure to keep rates low intensifies as individual properties no longer stand out and become perceived as bland and undifferentiated. When it comes to purchasing commoditized hotel rooms, customers are becoming extremely price-sensitive, often waiting for last-minute deals. Increasingly, the landscape is becoming more competitive, especially as peer-to-peer collaborative consumption (AirBnB and VRBO) gain popularity in more destinations. Increasingly, in some markets, the supply base is growing faster than demand, especially with respect to convention business. This problem is often exacerbated by a misaligned configuration of accommodation assets. In other words, properties not properly conceived or designed to be flexible and adaptable to meet the needs of evolving and different markets, create an overall panic to get heads in beds, pricing rooms as loss leaders.
Hopes of increasing incremental demand and overall revenues by lowering room rates remains an ingrained, but delusionary, option. Because the hotel market is mature, there is insufficient pent-up demand in most markets, even when dictated by generative channel members. Additionally, in the digital age, lag time for competitors to match rates is almost non-existent.
There are also problems associated with the growth of emerging markets. Optimistic outlooks are being thwarted by security and visa restrictions, downwardly revised economic growth forecasts, the expense of building substantial brand awareness, and the dedicated efforts of OTAs, as well as an ever-increasing number of channel intermediaries who are catering to, and capturing, this lucrative inbound demand.
With approximately half of the hotel business (and climbing) now channelled through market-savvy distribution channels, 10 to 20 per cent of room revenue is now being siphoned away. If average daily rates (ADR) were reported as net ADR in inflation-adjusted dollars, hoteliers would quickly realize their ADRs may actually be in decline. In the long run, there are only two sustainable positions — sell less for less or sell more for more.
It’s tempting to think hoteliers can deliver more for less but deleveraging continues. Unless ingrained assumptions are challenged, business models revised and inherent system deficiencies corrected, this option is not viable.
Of course, there is always the option of offering less for more. While it is a great gig, it will never last. Consumers are too smart and (through instantaneous access to information) are getting smarter. In the search for real value, people are savvy in determining what they want compared to what’s on offer.
For some, that means paying less and getting a little less (less service, less quality, less panache) or paying a bit more and getting a lot more (more customized hospitality, more insight, more satisfaction). In either case, hotels and brands have no choice but to stand out from their context. By identifying opportunities for meaningful contrast, creating a “wow” factor and delivering on their passion around these contrasts, hoteliers improve their chances to own the customer. But, accomplishing this task is complicated. It requires setting value, not price, if profit is to be prioritized.
For more than a decade, hoteliers have proven to be extremely resilient as prior F&H Hospitality Market Reports have suggested. But, as last year’s theme, “A New Beginning,” suggested it’s time to move beyond mere resilience. Transformation can’t occur until hoteliers and destinations master the art of resonance — not only with customers and employees, but within their communities. By connecting, engaging and involving customers, hotels are more likely to encourage direct booking and reap the rewards of loyalty.
Hospitality has always been about creating emotional connections through extraordinary experiences. Individual properties have to stand out, though first-time visitors have to be attracted by compelling stories that harness the imagination and activate their dreams.
TRAVEL AND TOURISM
It’s common knowledge that budget cuts to the Canadian Tourism Commission (CTC) and similar agencies have led to a diminished marketing presence and stagnating performance. For example, according to the CTC, since 2000 tourism revenue from outside Canada has dropped from 35 per cent to just below 19 per cent despite exponential growth in world tourism demand. Indeed, Canada’s share of tourism’s ever-competitive marketplace continues its fall — from 3.3 per cent in 1990 to 1.6 per cent in 2011.
Though tourism revenues grew by five per cent to $82.4 billion from 2011 to 2012, the rebound was due largely to domestic growth rather than through international visits, which rose only two per cent to $15.4 billion. For example, recessionary conditions in Europe led to a decline in arrivals from France and the U.K. though these were offset by arrivals from emerging markets such as Brazil and China. Arrivals from the U.S. crept up two per cent from 2011, with receipts up four per cent. But these incremental improvements only depict a trickle towards achieving tourism’s true potential.
With 608,500 jobs at stake, the “Canada-Keep-Exploring” brand lacks sufficient presence and is not resonating as it should. Attempts by the CTC to create an exciting visual story through its “35 Million Directors” project, and to mount a Signature Experiences Collection to showcase Canada’s distinctive tourism experiences, may be praiseworthy, yet the facts suggest, as a place brand, Canada is insufficiently compelling. In comparison, Brand USA has been very effective in regenerating domestic tourism and in attracting a disproportionate number of international visitors to the U.S. Of course, Canada’s tarnished image, because of its cavalier approach to environmental and animal-rights issues, isn’t helping matters.
If audiences are to be engaged and to believe in the Canadian brand, the focus of advertising cannot be just a profile of Canada. Creating desire and then showing how our offerings fill those desires moves consumers to accept our invitations to visit and linger. Our audiences have to become the heroes and centre of our marketing efforts.
Effective tourism marketing, especially with the advent of social media, resonates when it provides confidence, insight, advice, guidance or creates magic. Furthermore, audiences are more likely to overcome their doubts and enter the experiential journey when everyone takes responsibility to stand up, perform and act as advocates, mentors and facilitators.
Indeed, hoteliers are the most influential linchpins and leaders in welcoming guests and sharing their warmth and wisdom. This is an undertaking that cannot be delegated. It works most effectively when it’s performed person by person, hotel by hotel and community by community, especially with the help of more cohesive and bridging networks. We have no option but to up our game and exert influence and collective responsibility to spur tourism growth.
ENVIRONMENT AND CONTEXT
Travel and tourism is sensitive to shifting, real or perceived economic, political and social conditions. The range of problems and opportunities among our varied traditional and emerging markets affect visits and have to be assessed on a case-by-case basis. On the domestic front, though, Canada’s prolonged economic underperformance is worrisome especially when compared to the upsurge in the U.S. economy.
During 2012, real GDP only rose 1.7 per cent compared to 2.5 per cent in 2011. But, even with a BMO Economic Forecast identifying recurring problems, GDP growth in 2013 at 1.6 per cent, a softening dollar, continuing household debt, CPI flirting deflation, low productivity, an over-extended housing market and fading commodity prices — recovery is contingent and likely to be levered by a more bullish U.S. outlook. It’s important to renew our efforts to get Americans fascinated with us.
Of course, hotel performance is linked to regional and local economic conditions. It isn’t surprising to see how the resource sector is fuelling above-average growth in Western Canada. Alberta’s economy is expected to expand 2.5 per cent this year, though it’s down from four per cent in the past two years. British Columbia is expected to hold steady at 1.7 per cent, while Saskatchewan and Manitoba will expand in the low two-per-cent range.
In Central Canada, fiscal restraints and an elevated Canadian dollar, continue to mute recovery. Atlantic Canada’s outlook is mixed. New Brunswick faces net tax hikes pinning economic growth at less than one per cent, while N.L. will see real GDP grow five per cent as offshore oil production rebounds.
But, as the TIAC report suggests, there is no reason to be beholden to economic circumstance. Unless the tourism and accommodation industries act with renewed vigour and resolve, grim circumstances will continue to curtail growth. To lift the veil of obscurity from travel and tourism, the accommodation industry has to exert greater influence nationally, provincially and locally — not only on political and policy fronts, but in bringing channel members on board through their complementary value-creation constellations. There is a real need for hoteliers to become even more adept at responding and catering to the nuanced desires of prospective visitors.
ACCOMMODATION ANALYTICS AND PERFORMANCE INDICATORS
Growth initiatives and achievements stalled during 2012. Overall occupancy only rose 0.7 points to 61.8 per cent (see Exhibit 1), a far cry from the 64.9 per cent achieved in 2007 (see Exhibit 3). ADR managed to advance to $129.37, an increase of 1.9 per cent. But, once the 1.7-per-cent GDP price index is taken into account, it’s as if rates basically remained static — even declining, if hotels reported their net ADRs. With regard to RevPAR, it increased 3.1 per cent to $79.94 in 2012.
As previously suggested, increases in occupancy rates were most profound in Alberta, rising three to four points. Saskatchewan’s hotels in Regina and Saskatoon, however, posted the highest rates of 72.7 per cent and 74.3 per cent, respectfully. On average, though, they declined 0.5 points for the province as a whole. The situation went awry in Manitoba as occupancies dropped 2.7 points. In British Columbia, occupancies crept up 0.2 points to 59.6 per cent.
Occupancies in Atlantic Canada, on average, did not budge from 58.4 per cent as reached in 2011, though, in P.E.I., it fell 2.3 points. Central Canada occupancies averaged 61.6 per cent, up only 0.3 points. Hotels in Montreal experienced a 1.2-point decline due somewhat to political disturbances and scandals, though throughout Quebec the economy remained somewhat flat. The same can be said for Ontario hotels where occupancies only rose 0.5 points to 61.5 per cent. Niagara Falls, Ont., was the only bright spot with occupancies rising 3.9 points but only to 59.3 per cent.
Similarly, increases in ADRs were most notable in Alberta, up 5.3 per cent to $132.24; in Saskatchewan rising 4.0 per cent to $126.79; and in Newfoundland up 3.1 per cent to $136.09. In urban areas, impressive ADR increases occurred in downtown Calgary with a 10.9-per-cent increase to $203.26; Saskatoon was up 5.7 per cent to $140.38; and Ottawa increased 3.2 per cent to $140.70. In resort areas, Whistler increased rates 4.3 per cent to $199.93, and the Niagara Region, excluding Niagara Falls, in Ontario, increased by 5.4 per cent to $98.64. But, in comparison, declining ADRs occurred in such areas as Greater Montreal (-0.6 per cent), and a number of regional cities such as London, Ont., (-3.2 per cent), North Bay, Ont., (-4.8 per cent), Brandon, Man., (-3.2 per cent) and communities in the Greater Vancouver Area.
RevPAR performance stood out in Alberta — up 11.1 per cent to $86.79 — especially Calgary, which is up 13.6 per cent to $110.01; Edmonton, which has increased by 10.0 per cent to $81.41; and other Alberta communities, which are increasing 10.7 per cent. The Whistler Resort Area also boasted a 9.0-per-cent increase to $109.92. In Atlantic Canada, it was St. John’s, N.L., that performed well, up 8.1 per cent to $105.77, though, in contrast, the decrease of 4.2 per cent to $54.41 in P.E.I. reveals significant regional disparity.
In Central Canada, it’s interesting to compare the 11.7-per-cent increase of RevPAR in Sudbury, Ont., with the 17.0-per-cent decline in Ottawa East. RevPAR in Ontario increased 2.7 per cent, though in Quebec it declined 0.1 per cent, due in large part to Montreal, where downtown hotels RevPAR dropped 5.1 per cent to $96.46.
Exhibit 2 reveals occupancies and ADRs by property size, type and price levels. As the number of rooms per property increases so do occupancy rates, from 50.9 per cent for properties under-50 rooms to 69.0 per cent to properties with more than 500 rooms. The point change in occupancies, though, was slightly higher for properties with fewer rooms. Average ADRs for the smallest properties were $98.67 and $129.37 for the largest, though properties with 50 to 200 rooms witnessed a slightly higher rate of increase.
All-suite hotels enjoyed the highest occupancies at 68.8 per cent, while resorts came in the lowest at 52.7 per cent. Differences in point changes were minimal among the types of properties, though the same could not be said for variances in ADR. The variance for full-service hotels only amounted to 1.4 per cent, compared to 4.1 per cent for resorts, 3.1 per cent for limited-service and 3.0 per cent for suite hotels.
When examining price levels, budget properties only registered 53.6 per cent in occupancies, though they achieved the highest point increase at 2.2 per cent. Occupancies were best for upscale properties at 66.4 per cent, but their point change was only 0.2 per cent. Yet their ADRs were highest at $163.05 (a 1.5-per-cent increase), followed by mid-price properties at $116.81 (a 3.0-per-cent increase), and $90.85 for budgets (1.6-per-cent increase).
Understanding the significance of changes in occupancy rates is best appreciated relative to change in the supply of number of rooms as examined in Exhibit 3. There was a slight 0.8-per-cent increase in the number of rooms from 372,100 in 2011 to approximately 375,000 in 2012. This means that the average demand per day improved slightly from 2011, increasing 1.9 per cent to 231,716.
In examining demand through the years 2007 to 2012 (see Exhibit 4), it’s evident the number of room nights increased 1.9 per cent to just a little more than 84 million with room revenues advancing 3.9 per cent to $10.9 billion (calculated only for year-round properties with 30 or more rooms). Finally, room revenues have rebounded to just beyond the overall level reached in 2008.
CONTINUED GROWTH AND PROFIT IMPROVEMENT
Revenue generation and pricing in a changing world are challenging undertakings. In Canada, tourism’s potential growth is being curtailed; product life cycles are shrinking; discounting is not working as a means of generating incremental room revenue; and, studies of distribution channel analysis point to the disturbing fact that hotels are capturing a declining amount of customer room-revenue spend. With industry profits in decline, focus has to shift to dynamic value management.
Whether hoteliers decide to sell less for less or more for more, the perceived benefits relative to price paid have to be higher. This means that success will be determined, first, by the ability to stand out from the crowd. Overcoming obscurity and resonating with guests demands the creation of distinctive differentiation, which in turn requires a thorough understanding of the real and
dynamic attributes driving the choice of destination and hotel and their relative importance to your customers. Only when these attributes are evident through becoming closer to customers, an enhanced understanding of competitors and better integrated product/market/ distribution strategies, will hotels capture value and own the customer.
Growth initiatives and profit improvement, however, require hoteliers to stand up and effectively exercise their influence. On one hand, the issues affecting the industry — nationally, regionally and locally — need to be better framed and articulated. On the other hand, with few companies growing at a rate that will entice investors or ensure long-term survival, more effort needs to be put into creating the right conditions for earnings and growth and persuading others to contribute their efforts to elevate the probability of success.