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The Discounting Dilemma Hotels lowered rates in exchange for occupancy even as many execs said don't do it. Now, rates may be stuck in the gutter as a result. Wednesday, November 11, 2009 Glenn Haussman

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As the big bad recession starts to abate – that is, depending on whom you ask! – the hotel industry is grappling with the after-effects. And one of the biggest problems of all is the wholesale loss of rate integrity industry wide.

With Smith Travel Research reporting that RevPAR is down as much as 18 percent this year alone, it’s pretty much a foregone conclusion that hoteliers are eating more than their fair share of aspirin and antacid.

Fortunately, as we reported Monday (see article here), demand is starting to surge back. But while it’s usually a surefire sign room rates will soon be on the uptick, it’s expected deep discounting that’s happened during the past year will have long-lasting effects that will hinder overall profits, potentially for years.

Problem is, the hotel industry has trained its guests to expect a sizeable discount. And it’s not something that can be quickly erased from the consumer psyche.

“There is an expectation of discounting in the market,” said Bill Carroll, Ph.D., Senior Lecturer, Cornell School of Hotel Administration, during the Cornell Dean's Leadership Series held Monday morning.  “It looks like, for the near term, discount expectations will occur. The word is dismal but not desperate.

“Economic laws are hard to violate when demand exceeds supply, so price pressure has to be there. But it has been particularly difficult for hotels,” Carroll added.

It’s been particularly rough for hotels as compared to, say, airlines and car rental firms because hotels are essentially unable to reduce capacity.

That’s bad news for “mom and pop” hoteliers here in the United States, but the large hospitality franchise companies will be able to recoup losses here as growth accelerates at a much faster clip in countries such as China and India.

According to Michael D. Johnson, Ph.D., Dean and E. M. Statler Professor at Cornell University, the American consumer has quickly grown accustomed to new spending habits and saving more and spending less. It’s a trend we haven’t seen in decades.

“After decades of spending more and saving less, that consumer trend is switching. It’s more about the overall value proposition,” said Johnson.

Meanwhile, Jeffery H. Boyd, President and CEO, priceline.com, said the problem started as consumer queasiness kicked in when major banks and lending institutions began to fail en masse late last year. It created a situation where consumers started panicking about the safety of their deposits, even if they were in banks that were insured through the FDIC.

“This issue has had serious impact [on travel] that is hard to debate. The good news is, if you look at the way most of us felt on January 1 this year, the expectations were grimmer. Now leisure travel came back much more strongly than we thought,” said Boyd.

Boyd added the resurgence is coming back at a price: a savvier consumer who is looking for a big deal. “This is partly driven by the real desire to find the best value. They have seen discounting and widespread promotions. Also, there is a bit of a trade down, which can be seen in how luxury destinations and five-star hotels are doing compared to lower rated but better performing hotels at the low end of the scale,” he said. 

At American Express, Bill Glenn, President, Global Merchant Services, is seeing the same phenomenon. “The leisure market is showing a willingness to travel, but at the right price,” said Glenn.

That being said, Glenn does note that American Express has seen a stabilization across all segments, but the midscale segment in particular has held up very well. In the airline business they are seeing more first class tickets being purchased but the average transaction is lower than during the economic boom.

Similar conversations were also taking place at this week’s International Hotel/Motel & Restaurant Show. Michael Gibbons, President and CEO of Mainstreet Ventures (a restaurant company) and Chairman of the National Restaurant Association Board of Directors, said consumers are looking for deals and that there is pent-up demand that can be tapped into.

“People are looking for value, but it’s not just the price of something. It can be packaged and attractive - combining hotel and theaters, for example. People are seeing it as a three- to four-hour vacation. We don’t want to see people change their habits, so we are making [eating out] more accessible to people that didn’t think it was before,” said Gibbons. 

Finally Warren Marr, director with PricewaterhouseCoopers (PwC), said maintaining pricing integrity is tough to do in today’s technology-fueled society. “The Internet has added to the challenge and the industry needs to be targeted as to how and why to discount. What is happening now is if I find at 8:00 AM you drop your rate, by early afternoon your competitors will too. That is something you didn’t have to deal with 10-15 years ago,” said Marr.