July 30, 2009 - Hotel suppliers, although hungry for business bookings at a time of depressed demand, may offer some resistance to buyer demands for additional rate decreases during upcoming 2010 contract talks, and any indication of economic recovery could afford hoteliers the opportunity to raise rates.
"Our desire is certainly to get more revenue on our rate," said Hilton Hotels vice president of business travel sales and strategic partnership accounts Denise Lodridge-Kover, noting that hotel operating costs are rising. "We want to ensure that we are able to operate all of our outlets and operate them in an efficient manner."
Kimpton Hotels and Restaurants vice president of sales Christine Lawson said that because rates had already decreased significantly, "the travel managers aren't going to have a lot of wiggle room" to ask for even lower pricing.
But many will try. "We have already seen about a 10 percent to 15 percent decrease this year when we did renegotiate rates for 2009," said Dave Zalewski, supply chain management and procurement services manager for Metavante Corp. "I don't know if we are going to see a decrease that large again, but I am hoping that we can see maybe a 3 percent to 5 percent decrease in rate for 2010."
Mark Vilcsek, senior purchasing manager and travel services for National Semiconductor Corp., said that being able to deliver what was promised to preferred hotels this year would "set the stage for negotiations in 2010," and lead to additional savings through further reduced room rates.
But much depends on macroeconomic conditions generally and business travel demand trends specifically. "The market is so fluid right now that I don't know if the hotels want to lock in rates, because they think the economy may start to improve in 2010," said Bob Brindley vice president of BCD Travel's consulting arm Advito. "I would expect 2010 rates to come in trending down slightly compared to 2009."
More Rate Reductions Likely
Noting a "bleak" outlook for the lodging industry and "steep discounting" in the market, Smith Travel Research predicted that average daily rates in the United States by year-end 2009 will be down 9.7 percent versus 2008.
While less severe, PKF Hospitality Group's projection of a 6.4 percent year-over-year drop in ADR still would be "the largest annual decline observed" since the firm began tracking such data in 1932. The current lodging industry downturn, PKF said, would be "deeper and last longer" than previously predicted.
Marriott International Inc. reported that first-half 2009 ADRs across all North America properties dropped 10.3 percent year over year, to $126.71. "Unfortunately, we aren't yet seeing more corporate travelers and business meetings returning to our hotels," said CFO Arne Sorenson.
At Starwood Hotels & Resorts, first-half ADRs declined 16.2 percent year over year, to $157.58, and occupancy fell 7.9 percent, to 60.2 percent. "The fact that rate trails occupancy is fairly typical for what happens at this stage in the cycle," said CFO Vasant Prabhu. "What is hard to pin down is the pace at which rates with stabilize. History would suggest that it would be one or two quarters after occupancy does.
"Corporate room nights are down, leisure room nights are up, but, in our early indications, the corporate business is slowly coming back," Prabhu continued. "But so far this feels like a slow recovery [rather] than a sharp pick-up in pent-up demand."
Focusing On Share
Hotel companies expect a scramble for market share as many organizations consolidate purchasing with fewer preferred suppliers as a means to improve their negotiating leverage and contain costs.
"There will be less pieces of pie to go around. No matter how large the company, there will be less preferred hotels than we have experienced in the past, so some of us are going to be left out," said Kimpton's Lawson. "This is going to be one of the more rigorous and dynamic RFP seasons that we have ever had. It is going to come down to who is really spending time doing homework and making sure that we are offering the best deals possible above and beyond rate."
Said Best Western International managing director of worldwide sales Wendy Ferrill, "Our entire focus is moving market share because there's no new business in the marketplace."
Extending Existing Agreements
Committing to share targets is one way corporate buyers can secure extensions of current contracts into 2010. For many, lengthening deals can mean maintaining rates that would still be favorable should the market regain traction sometime next year. It also reduces the hassle of the RFP process this year.
Lengthening contracts "has to be a mutual win," said Hilton's Lodridge-Kover. "We have to be cognizant of our profit margin, and we also have to be cognizant of what [corporate clients'] costs are. If you have a strong relationship with your customer and there is trust and there is integrity, we all can work together through any market condition that exists."
Dynamic Pricing Returns?
Widely panned by corporate buyers in past years,
dynamic pricing may resurface as an option for buyers and suppliers.
InterContinental Hotels Group is particularly keen, according to recent comments by senior vice president worldwide sales Stephen Powell.
"A dynamic pricing scenario may make the RFP season easier to negotiate for everyone involved and that would be welcome on all sides," said American Express Business Travel vice president of innovation Frank Schnur.
But Corporate Solutions Group partner Bob Langsfeld alluded to the budgeting challenge that floating rates pose when he said that "one of the biggest threats to the buyer in managing their spend is going to be dynamic pricing."
