The recession’s dead. Now it’s time to bring industry profitability back to life
Q3, 2009. Mark it in your calendars. That’s when Statistics Canada says this country hauled itself out of a crippling recession. Well, technically anyway. With a quarterly GDP growth of 0.1 per cent, it couldn’t have ended by a thinner margin, but at least it ended. The Bank of Canada, which as you may recall prematurely heralded the recession’s terminal breath in a July 23 quarterly report, now says that while the growth realized in Q3 was smaller than anticipated, it is likely to keep its momentum and we are not expected to see a dreaded double dip.
Now that Canadians can — while knocking firmly on the nearest wooden object — begin moving past what has been the most significant business story of the past few years, it’s an ideal time to assess where we stand, and look ahead to what’s on the horizon.
Overall, performance numbers for 2009 were very poor for most of the country. According to a presentation given by PKF Consulting at its annual conference in October, the national occupancy rate was slated to decline by five points to 58 per cent by year-end 2009, and ADR was expected to drop by 4.5 per cent to $125. As a result, hotel profitability was projected to decline by $4,000 per room, or approximately 33 per cent. On a national level, this forecasted drop in income represents $1.5 billion in lost profits.
While that final number is staggering, PKF director Brian Stanford suggests it’s not surprising, considering the widespread rate discounting that was going on. “At the broadest level, rate integrity was a huge issue. A great deal of the loss suffered was a direct function of rate discounting,” he says, pegging it for about one third of the total shortfall. “At the end of the day, holding rate integrity often comes down to the weakest link in any given market,” he says, “and as soon as one big player starts to struggle, a discount is almost inevitable. It’s hard for the rest of the industry not to follow suit.”
In the final analysis, Stanford says the overall loss in cash may well have been unavoidable, but he also thinks the industry as a whole could have let demand drop further and let occupancy numbers lag by another three to four points, while holding the line on rate. In that instance, he says the industry probably still loses the same $1.5 billion, but it would only have to worry about moving demand forward.
Fortunately, according to a number of recent financial indicators, things are looking up for 2010. You’d be hard-pressed to fool yourself into thinking it’s 2007, but comparatively speaking, the first year of the ‘twenteens’ should be a lot better than the last of the aughts.
“Across the board, we’re expecting to see 2.5 per cent growth, and up to 3.5 per cent for B.C.,” says Tony Pollard, president of the Ottawa-based Hotel Association of Canada. “And at this point, any growth is good news for the industry,”
In fact, opportunities for growth are broad-based. The Winter Olympics will be a boon for Vancouver, Whistler and surrounding areas; a rebound for oil prices should help keep properties busy in the West; and in the East, returning conventions — bookings are up for the third and fourth quarter of 2010 — and innovative tourism programs have operators feeling cautiously bullish. There’s good news coming from abroad, too. On an international scale, recent developments such as the Approved Destination Status (ADS) agreement with China, which allows Chinese travel agents to advertise and organize group tours in Canada, is being heralded as a positive step from the nation’s top office. “Approved Destination Status marks a significant moment in the history of our relations with China,” said Prime Minister Stephen Harper. “This new designation will help more of our Chinese friends discover why Canada is one of the best places in the world in which to invest, innovate, work and compete.”
Adding to the benevolent feeling is the fact that government numbers suggest that in 2008, Chinese travellers had the highest average length of stay (28 nights) in Canada and spent more than visitors from any other country ($1,648.51). Further, according to a Conference Board of Canada survey, ADS is expected to boost the yearly rate of travel from China by up to 50 per cent by 2015.
With all of the recent international hype and after such a challenging year, it’s tempting to just relax and wait for the tourist hordes to beat down your hotel door, but it’s an unwise plan, says Pollard. “It’s all about marketing 101. It’s a lot easier and less expensive to hold onto your existing customers, than it is to go out and find new ones. Make sure you know who your existing customer base is, and make sure they’re happy.”
When it comes to acquiring new business in 2010, Pollard recommends an equally grassroots approach. “In the corporate arena, fundamentally, everything that’s within a one-kilometre radius of your hotel you have to think of as your property,” he says. “You own that business, and it’s yours to lose. So do your research, do your homework and get out there. Start knocking on doors.”
And don’t limit yourself to the physical doors in your neighbourhood, either; think of the virtual ones as well. “Who do you have on your staff that’s at the forefront of social media?” asks Pollard. “For today’s business environment and moving forward, social media is absolutely critical. Fifteen years ago it was about getting on board with the Internet. Today, it’s understanding the impact of blogs, Twitter, Facebook, et cetera.”
In terms of hard research data, PKF’s Stanford sees an industry on the ascendancy in the coming years. “Our expectations, literally across all markets, are for a recovery of some of the lost demand and rate throughout 2010,” he starts. “In terms of the length of the recovery, there are significant variations across the country. The West is obviously beginning from a stronger starting point, so we expect they will claw back most of their lost ADR and occupancy over the next three or four years. In Central Canada, where the erosion has been greater, the recovery will be much more drawn out, because some of the problems for the industry [deep cuts in the manufacturing sector, primarily] in that region were already present before the recession, and will remain afterwards.”
With the most recent annual GDP growth rate sputtering just above recessionary territory, it’s safe to say that despite a rosier outlook, consumer and corporate budgets will remain tight for at least 2010’s opening quarter, which means continued rate pressure. What’s a hotelier to do?
“Success without discounting rate is all in the degree to which you can add value; that’s the better strategy moving forward,” says Stanford. “Figuring out ways to add value to your current offering, and then sorting out how to phase out some programs when occupancy improves, is a lot easier than recovering the rate that you’ve lost.”
In the end, surviving the first few post recession months will be nearly as difficult as surviving the recession itself, as many of the same market conditions exist. Nevertheless, if hoteliers can reestablish rate integrity, create loyalty among current customers and build local cachet, better times will be on the horizon; with or without a roaring economy.