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MISTAKES IN GOOD TIMES COULD
LEAD TO TROUBLE IN THE FUTURE

The hospitality industry is experiencing record numbers. Convention Centers are full, transient occupancy is booming, group average rates have increased, catering revenues are up, meeting room rental is being generated, hotel average rates are at record levels, occupancy levels are exceeding projections, and sales managers are hitting their quotas.

So what's to worry? Demand is surpassing supply, owners, REITs, and management companies are happy, and all is well...or is it?

As we travel throughout the field, we have observed and number of malaises that exist that are indicating that a red flag should be going up warning us of times that are about to change in 1997 and beyond.

While many of these malaises are being economically induced, we have also observed a number of self induced conditions that could have catastrophic ramifications next year.

Let's begin with the condition of Convention Center occupancies and the success of Convention & Visitors Bureaus. Most CVB's have seen their projections met or exceeded since 1994 despite having their budgets, in many cases reduced. As a result, many Convention Centers are at or near maximum occupancy through the year 2000 and cannot book many more city wide or center use events. While the typically, high rated city wides benefit the entire community, CVB's cannot book any more since their space availability is now limited.

As a result, hotel communities are asking CVB's to concentrate on "in-house" bookings and CVB's have been re-directing their efforts. However, red flag number one, hotels are reportedly slow to respond to CVB leads since they are experiencing such strong occupancy and high average rates. More than one Bureau CEO has been heard to say that they cannot get hotels to respond to their leads in a timely manner. Further, hotels have reduced the blocks that they will extend to CVB leads since their own customer base is so strong.

The second condition that should be of concern is the boom in transient demand. Transient occupancy is far ahead of past years' which is what is driving the increase in average rate. This is terrific, but how we handle this boom is what needs to be examined.

As transient occupancy increases, the need for group bookings decreases. Why should group sales displace higher rated transient business just to meet their quotas? Group sales is being far more selective with the groups they book and are able to ascertain higher average rates and demand more meeting room rental. Classic supply and demand. This is smart business and in good times is required to maximize revenues.

The red flag goes up when group sales managers turn down potential business. Specifically, the red flag goes up not when a group is turned down, but how they are turned down.

It is understood that groups that cannot meet the perimeters of a hotel's needs should be turned down, but far too often we are observing sales managers simply quoting rates with a take it or leave it mentality. Can groups consider alternate dates or alternate time frames? Is there a potential volume that a group can bring to a hotel that may justify some type of discount? Could a group evolve into a long term relationship that could last through good times and bad? Can a sales manager develop a relationship with a potential customer for future use, even though the group may not fit the hotel's current profile?

This is particularly alarming among less experienced sales managers who have never been through a lengthy slow period. Their superiors are simply evaluating the profitability of the group and not the long term ramifications so if the group doesn't meet the hotel's short term needs, sales managers are instructed to turn the group down, thanks but no thanks. Are today's sales managers guilty of order taking?

Another condition that has evolved as a result of the transient boom is the dumping of volume accounts. Major red flag here!

A some point in time, management made a decision that certain volume rate, or corporate accounts made economic sense. They decided that the volume the account generated justified the discounted priced that would pay. In bad times this made good sense. However in good times, management has made the determination that these volume accounts are displacing too much higher rated business and have instructed Directors of Sales and sales managers to discontinue the agreements or at the very least, limit the number of rooms that are made available to the account.

While perhaps making sound economic sense, the decisions to "blow out" volume rate accounts has destroyed the relationships that may have taken years to develop. Again, the biggest concern is not so much the blowing out of the account. By the way, good luck re-landing the account next year when you need them back. The biggest concern is the method in which the account is being told they are no longer wanted. "My General Manager has told us that your rate is too low so unless you can pay more we can no longer work with your people."

These are all self induced conditions that while in good times may not be too harmful, but beware the turn in the economy.

So what does the economy hold for the future. While only a crystal ball can be 100% accurate, let's look at what the experts are predicting.

1995 ended with a national occupancy rate of 65.5% according to Coopers and Lybrand. This was up by 1.2% over the 64.7% in 1994 and 3.5% from the 63.2% in 1993. At the same time the national ADR grew 4.8% from $64.24 in 1994 to $67.34 in 1995. During the same period, according to Smith Travel, room supply increased 1.8% while demand increased 3%.

In California, statewide the occupancy exceeded 70% in 1995, which according to Coopers and Lybrand was a 2% increase over 1994. During the same period ADR climbed to $86, a 4.5% jump over 1994.

By 1998, Coopers and Lybrand is projecting a 67% national occupancy which is an increase of only 1.3% from 1995. Sited as the main reason for the flat occupancy growth is that in 1995 81,900 new rooms were added to the national inventory. This represents the most new hotel rooms introduced in a single year in the last six years. Further, this number will increase each year to 92,400 new rooms by 1998.

While many experts concur that the state of well being in the hotel industry will continue through 1996, no one is predicting the same leaps from 1996 though 1997 as were realized in 1994 through 1995.

Hotel management companies, publicly traded hotel companies, and Real Estate Investment Trusts, (R.E.I.T.'s) have experienced outstanding profits since 1994. According to Real Estate Investment Forum, the stock of hotel R.E.I.T.'s has increased in value by 11% since 1995 and publicly traded hotel companies have seen profits soar. Hilton Hotels has seen their stock move from $60 per share to as high as $122 per share since September of last year.

According to Hotel and Motel Brokers of America, the average sale price of a hotel room was $22,627 in 1995 which was a 18.6% jump over 1994 and a 29.9% increase over 1993 which was a record low $17,411 per room.

Hotels selling in 1995 for over $1 million showed that in the Mountain and Pacific States 118 hotels changed hands at an average of $60,005 per room.

Make no mistake about it, the hotel industry has experienced an enormous recovery since 1993 in both terms of value and profitability.

According to the May 1996 issue of Real Estate Investment Forum, while many experts believe there is still room to grow as new buyers put fresh capitol in and take hotels up another level, things are going to very shortly become a lot tighter. They believe that the recovery will flatten and while the industry will remain healthy, the boom is over.

Improvement in occupancy and ADR will not grow as rapidly as in 1994 and 1995. Further, while the overall market may maintain its' current levels, individual market segments may suffer. In particular, the economy / budget sector could see a sharp downturn as evidenced by the 62% national occupancy they experienced in 1995. This was the lowest occupancy of any market segment. If this market continues to decline might we see the beginning of renewed price wars that could trickle up to the midprice, upscale and luxury hotels?

All of this economic data is based on a stable economy performance through 1998. What happens if after this year's Presidential Election, or at some point in the near future when the Fed's raise the interest rates as predicted, the economy experiences a slowdown?

Historically, when the economy takes a turn for the worse, the first budgets that are cut are travel budgets. So long transient occupancy boom. Good bye mid-week sell outs. Thanks for the memories city wide block pick-ups.

Will price wars again rear their ugly heads? Will the need for an increase in your percentage of group bookings versus transient occupancy occur? Will we once again have the need to extend volume rate and corporate rate accounts the run of the house? Will we kick ourselves in the tail for not responding to those "worthless" CVB leads? Can your hotel take the chance?

Make no mistake about it, times are good right now. If the economy continues to chug along with moderate growth for the next few years, your quotas should be safe. However, if their is a turnaround of supply and demand whereby supply begins to outweigh demand, we could return to the early 90's and this should be cause for alarm!

What can you do now to safeguard against this malaise? The remedy is less painful than you might think.

Begin by evaluating your volume rate and corporate accounts. Do you really need to "blow" them away completely thereby ruining the relationships that you have spent years developing? Instead could you meet with these accounts, explain the economics of your situation and negotiate a new arrangement. No one denies your right to have the highest average rate possible, but couldn't you raise your corporate and rack rates first thereby protecting the good customer relationships?

Respond to those CVB leads. When you fail to respond to Bureau leads, you not only embarrass the Bureau salesperson who has spent time developing their relationships with the customer, you ruin the chance to book the group over time frames that your hotel needs the business. If you don't ever speak with the customer, how do you know they aren't flexible with their dates? Can they move to one of your downtimes in exchange for financial considerations?

Resist the temptation to make price the only component of your presentation to groups requesting space. If all you do is offer the take it or leave it mentality, you will never develop any relationship with the customer or their account. Do they have other groups or business, can they select alternate time frames, is there a frequency that may merit financial considerations? If all a salesperson does is quote rates, they will never ascertain this critical information that could lead to a new and profitable account.

Remember, customers are experiencing the good times right now also, but they still have a fiduciary responsibility to their attendees, company, etc. They will remember who has been naughty and who has been nice when the bad times re-appear.

Do not take the shortcuts that the good times camouflage. Salespeople still must learn about the group's or account's needs. Why are the considering your area? What is the nature of the conference, event, or long term booking? How will the decision be made? What other areas or hotels are being considered? If we can't work out this specific booking, could we still meet to discuss any other business that you may have in the future? Are your dates flexible?

In good times it may be even more critical than in bad times to insure that you are the best salesperson you can be. Maximizing profits is still priority number one, but please do not forget that developing and maintaining relationships with your existing and new potential customer base is a very close second.

Not reprintable without written permission from Steinhart & Associates.