Hoteliers across the nation are adopting a hope-for-the-best, prepare-for-the-worst attitude
From ADR to RevPAR to occupancy, most metrics used to measure hotel performance in Canada have been strong and growing for several years. But as economic conditions in the U.S. deteriorate, with Canada — and possibly the globe — likely to slip as well, there’s now general agreement the industry is heading toward the winter of its business cycle.
“It’s common to think: ‘If I close my eyes problems will go away,’” says Minaz Abji, executive vice-president of Asset Management for Host Hotels and Resorts in Bethesda, Md. “But not being proactive, not looking at what’s happening down here, not planning for it, and thinking you are different would be a mistake.” So with the wounds of 2001 and 2003 only recently healed, hoteliers are adopting a “hope-for-the-best, but prepare-for-the-worst” attitude, applying lessons learned during the tenuous early years of the decade.
The most important lesson — the prime directive of the hotel galaxy — is to have confidence in room rates. Why? Slashing rates just doesn’t increase demand. “It’s too easy to match and all you’re doing is dragging down your revenue stream,” says Philippe Gadbois, Toronto-based senior vice-president, Sales, Marketing and Development with Atlific Hotels and Resorts. “And it takes years for those revenues to come back to acceptable levels. We’ve seen it time and again.” Rena McDonald, vice-president of Finance and Administration and a managing director of Vintage Hotels in Niagara-on-the-Lake, Ont. — a region powered by U.S. car travel — says, “When the leisure market is down, people are not going to come no matter what the price is. Any reduction of $50 or $75 is really right off the bottom line.” And the flipside is those customers who need to travel will continue to pay what’s appropriate, says Neil Labatte, a former senior executive with Fairmont and Legacy.
One way to prop up revenues is acquiring business from new markets, says Gadbois. “See if you can shift some share from one group of customers to another,” he says. “For example, if you’re dependent on U.S. leisure travellers you might be able to attract more European, Asian or Canadian guests.” MacDonald says Vintage has found new opportunities with conferences, which are also the only category where travellers will move on rate. “Group business is strong and quite stable and it keeps the infrastructure of your business strong,” she says.
MacDonald also suggests looking for market segments not as affected by economic ups and downs. “There are people who are above the economic conditions, and we try to find them,” she says. In fact, it’s during slow times that you have to be more creative and focused on sales and marketing. “As demand is dropping is exactly when you need capable salespeople in place to beat the bushes for the customers who are out there,” agrees Labatte.
Even if revenues slip, there are still ways to keep profits steady. “Our single biggest expense is staffing,” says MacDonald. “So how you do you manage [personnel costs] through these periods of fluctuation? We’re a non-union environment so we’re able to cross-train quite a few individuals. In quiet times the bellman could be taking care of room service.” Vintage also employs a full-time core group to meet minimum year-round staffing levels, and fills in from a regular roster of part-time and contract seasonal staff.
The goal, of course, is not to be understaffed, but to run an efficient operation, keeping an eye on productivity measurements. “If revenues are off, it’s better to be lean than to try to [catch up], because it always takes some time to react with staffing levels,” says Labatte. When hunting for savings, Host’s Abji suggests looking at hours of operation for restaurants, and off-peak times in other departments to reduce hours where possible. However, it’s important to remember recessions typically last a year to a year and a half, so you have to consider how you’ll be positioned when business comes back. “If there’s attrition, don’t replace positions; think twice before new hires; see if you can move people around — just keep as many of your staff employed and happy, and don’t do anything you might regret later on,” he says.
When looking for savings, head-office bean counters should also bear in mind that every property has its own needs and circumstances. Abji says Host manages this by giving GMs a set of principles so the on-property team can evaluate what’s best for that hotel and then submit a plan. “As far as regional brands go, if demand falls a great deal they may recommend further cuts based on what the brand wants to do in that market,” he says. “They may tweak or forego standards because demand has fallen a lot, but it needs to be done on a case-by-case basis. You can’t make hard and fast rules because some markets may not suffer at all and you could weaken the property’s competitive position.”
Another mistake that can cause a hotel to lose ground once conditions inevitably improve is letting its physical quality slip during bumpy times. This can even lead to a longer recovery period. “In a lot of ways you should renovate when volumes are lower because displacement is less,” says Abji. “Then, when the market gets stronger you’ve got a competitive product you can raise rates against. I certainly wouldn’t be cutting back on capital spend, and if holding the asset long-term you may even want to increase it. The market is cyclical — it always comes back,” he says.
If despite an organization’s best efforts profits do shrink for a time, how do owners and managers rationalize expectations? “It’s pure communication,” says Gadbois. “Both parties should be aligned in the first place. Ultimately if ownership has an expectation of X dollars, management needs to work toward that goal. There are two ways to look at it: you can have ownership that’s continually pushing for more and more, and has unrealistic expectations of what the business can generate. Or you can have more enlightened ownership working with management to come up with a plan based on a more realistic approach.”
When planning for the upcoming year, MacDonald says, “Look at what the macro environment is telling you, and go through various checks and balances to determine what you think will happen. But it may not be what the owners want to hear.” Ultimately, she says, it means finding the balance between the owner’s needs and what the managers feel they can fulfill.
And the good news, says Labatte, “is that even in rough times, the Canadian lodging industry remains inexpensive relative to product worldwide — and especially the U.S. — so there’s still room for pricing increases. It would be worse if times were going to get tough and we were the most expensive destination around.”
“The last two years have been a harvest cycle with bumper crops, so we got a little fat,” says Abji. “But heading into the winter season is a great item to step back, look at operations and [determine] exactly what customers and associates are looking for.” And the best news of all is that spring is always around the corner.