Room rates in Canada’s cities are rising, but still lag behind the U.S. and Europe. Can anything be done?
Whether you’re selling lemonade or 767 wide-bodies, the quickest way to generate more lucre is jacking up prices. But as any kid who’s tried to sell frosty drinks for $100 a cup on a hot summer day quickly finds out, it’s not that simple. Consumers can be both highly predictable and oddly fickle, and of course, 230 years ago that Smith fellow had some pretty solid ideas about supply and demand. There’s a delicate balance at work, and in the lodging game, prices must be adjusted with scalpel-like precision.
“In theory you always want to see rates moving up, but not at the cost of occupancy,” says Eric Barber, Toronto-based senior director, Operations, for Realstar Hospitality, the Canadian master franchisor for Days Inn and Motel 6. “It’s about increasing my franchise owners’ bank accounts, and higher rates are not always the way to do that.”
When looking at hotel pricing, you also have to be careful to compare oranges to oranges, but most industry watchers agree that rates in Canada are low, especially in the eight or 10 major metropolitan areas. “My perspective is that Canada represents a tremendous value — too much of a value, quite honestly,” says Michael Jackson, president and COO of Calgary-based Royal Host REIT. (Jackson leaves Royal Host to become president of both Holloway Lodging REIT and Pacrim Hospitality on Sept. 15). “There’s a bit of a chicken and egg process. To support a higher price point we need to offer more [services], but that costs more, and you can’t afford to do it unless you get more money.”
So why are rates too low? It’s a mixed bag. Barber has heard large travel-management companies say some of Toronto’s room inventory is not as current as in comparable convention-seeking U.S. cities like Chicago, and therefore, not able to command the same rates. And with the current cross-border woes, other once-booming markets like Niagara Falls, Ont., are looking decidedly over-supplied. However some regions — those rhyming with “best” — are not complaining. For example, small and medium-sized Alberta towns, where rooms are going for $130 and $140 per night, are probably well ahead of similar U.S. locations, Barber says.
Along with numerous East Coast properties and a few in Ontario and Quebec, Halifax’s Pacrim Hospitality Services Inc. operates seven hotels in Alberta, including three in Calgary and two in Fort McMurray. And those Alberta locations have seen 10 to 15 per cent rate increases this year, reports senior vice-president of Operations Ian Hurst. Western supply is clearly not keeping up with demand, he says, and even if a company wanted to build a new property, they might have trouble finding staff to run it, or even a construction firm to build it. “We’re seeing moderate rate growth in other markets,” Hurst adds, “but realistically speaking, I don’t know that we have any big leaps to make right now.”
Interestingly, Tony Pollard, president of the Ottawa-based Hotel Association of Canada, has data from the industry organization’s annual travel survey (prepared by Fleishman Hillard Canada) suggesting Canadian hotel guests might actually be willing to part with a few dollars more. “We look at the average daily rate (ADR) in an area, then we ask the public: ‘What do you think you’ll be paying?’ The results vary from province to province, but typically anywhere between 20 and 40 per cent of the people think they’re going to be paying more, even in Atlantic Canada.” Of course, Pollard adds, if one-quarter of guests expected to pay more, three-quarters still thought the rate was about right. “So you’ve got to be a little bit careful.”
“Scientific” is the word Barber uses to describe the process of setting rates. “When looking at your historical performance in a market, you want to know — for every day of the year — occupancy, sources of business, who the guests were, why they came to town and what rate they paid. Then you [have to] consider local events that affect supply and demand.” The other part of the process is carefully assessing what other hotels are doing, and realistically gauging where your property sits in the competitive set. Basically, says Barber, it comes down to heavy-duty computer work, with a dash of art “and some luck. You don’t want to say that, but sometimes it works out that way. Ultimately, it’s something you just can’t wing — there’s too much at stake.”
Similarly, Barber says they also look at business they’ve turned away. For example, did they fill up on tourists while passing on conferences or corporate clients who might have booked meeting rooms and driven F&B sales? That’s when it’s important to look at metrics like “yield per customer” or “yield per room” instead of just RevPAR and ADR, which usually don’t consider add-ons.
Hurst says the true test of Pacrim’s analysis arrives in the form of monthly reports from the field, where the company can see if it’s gaining or losing market share, and if movement is due to occupancy or rate. Head office doesn’t get involved in individual rate decisions, but its macro view and experience with multiple brands often allow it to identify missed opportunities.
Rates set too low are the obvious problem, but not the only one. Hurst recently told one property in a red-hot market that their ADR of $225 was too aggressive. “I was concerned that when the new hotel across the street opens in nine months, customers will remember that (high price). I said, ‘We need to look at building loyalty, and not just go for the rate.’” But more often Hurst will get managers on the phone and walk them through other company’s websites where his team can be surprised to discover their property has been under-charging. “There’s nothing worse than filling up your hotel at a (discounted) rate, then finding out afterward your competitors were filled up two weeks ago and you were in the driver’s seat without knowing it. This doesn’t mean gouging — just closing out your discounts.”
In fact, Hurst believes posting a higher ADR is more about rate management than increasing rates. “When you know you’re going to fill, you [stop] taking staff, trade or AAA rates. You stick to your corporate rates and your rack rate.” However, Pacrim has recently moved a number of properties into the extended-stay market, where dropping ADR to pick up several hundred nights in a single booking gives RevPAR a nice boost.
Setting aside the steroidal growth in the west, virtually everyone expects room rates to grow modestly over the next 12 months — inflation plus a little gravy. But there’s still the matter of catching up to other countries.
“One piece is finding ways to implement ‘service signals’ in operations and guest services — value-adds that come from the staff and don’t really cost any extra money,” says Jackson. “A caring attitude makes people feel… a lot better about what they are getting for the price.” But maybe, he adds, we just need the resolve to say we’re worth more.
