During the recession of the early 1980s, bigwig corporate traveller Bell Canada purportedly released a statement to the hospitality industry declaring it would not support any hotel that charged its itinerant staffers more than $100 a night. Many, remembers Philippe Gadbois, SVP of Atlific Hotels, acquiesced. And, the fear of bucking the pricing trend began.
“We always blame the competitor up the street who does something for his own reasons and claim we have no choice but to follow,” Gadbois says. “But, in a normal competitive environment, every hotelier should be pricing his own product according to his business plan, as opposed to reacting to what somebody else does. Otherwise, nothing goes up; it only goes down.”
There’s always a danger the traveller will go elsewhere, Gadbois concedes. “But, if we keep ap-plying pressure on ourselves to go backwards, we will never go forward,” he says.
THE RECESSION PIECE
Fixing room rates is “the one piece of the operating statement that we deal with most poorly,” says David Larone, national managing director for PKF Consulting in Toronto. It’s why the subject gene-rates so much dissension in an industry that’s notably struggling to understand how room pricing can influence its emergence from an economic downturn.
This most recent recession hit the hotel industry hard. “It was all about occupancy and trying to get heads in beds,” says Peggy Thompson, director of Marketing for Four Seasons Hotel Toronto. “People were cutting prices just to keep the doors open.” As such, both volume and rates declined in the double-digits. Some four or five years later, volume has recovered, but rate has not. In absolute dollars, the industry is actually charging less today than it was in 2007, says Larone.
Assuming a stable occupancy level, he points out, properties in most markets (particularly those with a high level of unionization) must bump their ADR by at least three per cent to maintain equili-brium. And, if they’re hoping for growth, that bump has to bounce to five per cent. In reality, however, Canadian hotels are barely scratching out a 2.5-per-cent hike. In downtown Toronto this year, half the hotels had a six-per-cent RevPAR increase and half suffered a six-per-cent decline (not including the Ritz-Carlton, Trump, Shangri-La and Four Seasons).
That unbalanced scene, says Larone, is thanks to operators’ fixation on the occupancy side of the equation. “They make themselves crazy if the property isn’t full,” he says, “but they lose sight of what the asset is worth and that [they should be] getting a price for it that reflects its value.”
Michael Haywood, president of the Haywood Group, a Quebec-based hospitality consultancy, agrees. “The ability to raise rates is dependent on breaking through [the existing] vicious cycle through the creation of a more virtuous cycle — one that is based on the creation of meaningful value through what I call ‘inspired hospitality.’” The best way to move forward (and raise rates), he believes, will be determined by how well hoteliers create a differentiating culture that provides a true competitive edge.
THE MID-WEEK MOTIVATION
Experts agree that Canadian hotel operators often fail to see that the opportunity to build favourable revenue dwells in the sweet spot when the property is naturally at its highest occupancy. In most markets, especially those populated by commercial transient properties, the most lucrative business period is mid-week, Monday through Wednesday or Thursday. But Larone believes that a hotelier who consumes himself with the business of occupancy devotes energy to chasing unprofitable business — guests who wouldn’t otherwise be inclined to visit. These guests are attracted by low rates, typically found through online channels and opaque sites where commissions are high. This approach creates undesirable business in a blind scramble to fill rooms with guests who tend to be hard on their rooms and who proceed to post unflattering remarks on social-media sites about their experience. (The vast majority of negative TripAdvisor scores, points out Larone, derive from those erstwhile weekend guests.) “I’m looking at this and saying, ‘Why is this focus on getting occupancy at any cost a strategy?’ It’s a lower-margin business that drags your property down quicker,” notes the PKF director.
Instead, Larone recommends operators run a leaner operation in the need periods (generally low season and weekends) and concentrate on attracting clients during the week, when there’s more opportunity to yield a higher rate. “Chasing business that you can only attract when you’re giving away your property?” he scoffs. “There’s not an MBA school in the country that would recommend that.”
So, if this is the no-brainer it appears to be, why aren’t more hoteliers thinking in these terms? It’s apprehension, but it’s a fool’s game, sums up Gadbois. “There will always be someone on sale for whatever reason, and there is concern that consumers will always gravitate to the lowest-priced product, but that’s just not so.”
HISTORY REPEATS ITSELF
In most markets, travel patterns are fairly consistent, so hoteliers shouldn’t worry about losing business when they raise rates. “You’re going to lose it to who?” Larone sputters. “Everybody else is full. Those guys can mail their occupancy in for next year by day of the week, if they’ve been there long enough. Salespeople talk themselves into this. It’s the craziest thing.”
Indeed it is, agrees Gadbois. On a third Tuesday in November, with no city-wide events in sight, hoteliers have to trust their hotels will be full if they’re typically full on the third Tuesday in November. And, he says, “They must price themselves accordingly.” That’s the key.
WHERE TO START
The solution? According to the Four Seasons’ Thompson, hoteliers should think less about the top end of their room pricing structure and more about the bottom end. By limiting the number of pack-ages it has available, a property’s overall rates are spiked simply because there aren’t as many lower rates available. Enacting this tactic when you’re starting to see some demand is a better first step than automatically increasing your rates, otherwise “you could out-price yourself from the market,” she deduces.
More than that, owners and managers need to focus on rate and revenue management rather than occupancy and competitor activities. It’s a commitment that needs to start at the top so that the soldiers on the firing line can feel comfortable asking for a higher rate from guests. After all, you can’t, as Larone says, “spend occupancy.”
It’s a paradigm shift that’s going to take time to set in. Those with a stake in the game agree that individual operators need to take the lead and hold firm. “The best I can do is talk as a spokesperson to the industry that we should be more disciplined,” says Gadbois. “And, within my corporation, I can apply stringent guidelines as to what can and can’t be done, pricing-wise. Everyone’s got their special cocktail sauce. That’s part of ours.”