Get ready or go under: how hotels cope with the credit crunch

28 August 2008 by
Get ready or go under: how hotels cope with the credit crunch

With an unstable economic future looming, and corporate spend taking a definite hit, Emma Allen looks at how hotels are coping with the credit crunch

Corporate spend is expected to fall significantly in the coming months, and hotels must have a strategy in place to deal with the effects - or, better, to attract new forms of custom

For hoteliers struggling with the prospects of spiralling costs and a fragile economy, last month's forecast report by PricewaterhouseCoopers (PwC) no doubt made a gloomy summer read.

The report, UK Hotels: Early Check Out for Good Times, predicts that although British hotels have largely enjoyed positive trading in the first half of the year, the next six months will bring about a significant downturn as the credit crunch bites further.

As a result, it says, operators will be forced to target alternative markets, typically at lower rates, and fierce price competition will begin to affect revenues and profits.

In short, it's hardly good news. However, looking across the UK, it's a mixed picture. Broadly, London has felt less of the squeeze so far compared with the rest of the country, with rates in the capital generally holding firm and revpar growth of 5.2% this year, says PwC.

Elsewhere, according to Gavinder Singh, senior consultant at business adviser PKF, new developments in cities such as Manchester and Liverpool have created a slight oversupply. On the upside, many seaside resorts have enjoyed a renaissance this year, with Britons choosing to stay at home rather than holiday abroad.

How are hoteliers being affected? Michael Shepherd, general manager at the five-star London Hilton on Park Lane hotel, believes that, so far, the capital has managed to ride the storm, partly due to the positive effects of traditional events such as the Chelsea Flower Show, Farnborough Air Show and Wimbledon, which have all helped to draw high-spending visitors to the country this summer.

"There is anxiety, obviously, but on the whole we're trading well," says Shepherd. "We're seeing a 6-7% growth rate, which is perfectly acceptable, and our occupancy levels are around 80%, which is the same as last August."

One clear area of concern is the continuing decline in the numbers of US visitors, put off by the weak dollar and economic uncertainty at home. But Shepherd believes that London hotels are well placed to benefit from emerging markets such as BRIC (Brazil, Russia, India and China), which might help to offset some of the downturn from the USA. Figures from the Office for National Statistics show that inbound traffic last year from these markets increased by 7%.

So much quieter

However, the effects of the credit crunch are starting to trickle through elsewhere, as consumers begin to feel the pinch in their pockets via fuel price hikes and rising bills. In Chester, Jonathan Slater, managing director of the five-star Chester Grosvenor and Spa, says that passing trade is slower now than it was a year ago, simply because the city centre is so much quieter.

"You've only got to look at the number of cars being parked in town to know that volumes are down significantly," he says. "We're definitely feeling it. On a corporate level, you also know it's pretty drastic when your customers are issuing ‘essential travel only' mandates."

The answer, Slater believes, is an "aggressive" sales and marketing policy that covers every angle of the business. "We're leveraging every opportunity at the moment," he says, "from looking hard at third-party providers to see where we can increase sales, to creating out-of-the-box packages. The key is to be entrepreneurial and push like crazy. If you sit back and do nothing, you'll get nothing."

Equally, he says it simply makes good business sense to minimise costs and cut unnecessary waste in areas such as utilities, food and staffing. Cross-training F&B staff to work across each of the hotel's outlets has boosted efficiency, for example, while adjusting last-order times on quiet weekday nights has produced payroll and energy savings.

Reinvention and investment is also a crucial part of the mix. The hotel is undergoing a £3.5m refurbishment, upgrading meeting rooms and private dining areas, and is to relaunch its Michelin-starred restaurant in September - all of which, Slater says, will give the hotel a competitive edge and significant added value for guests, not to mention valuable PR.

"Clients will pay more, even in this market, provided they can see the justification," he says. "The minute you stop investment is the minute you're in trouble. You will not compete - it's as simple as that."

One main cause for worry, at all levels of the industry, is the anticipated fall in corporate spend over the coming months. Company cutbacks on staff travel, reduced lead times for corporate bookings, fewer residential conferences and more clients holding meetings in-house are all likely to have a significant effect.

Already, there are clear differences in the corporate market compared with six months ago, according to operations director Douglas Waddell at four-star chain Hand Picked Hotels. "Clients are much less willing to confirm pieces of business, and lead times are getting shorter and shorter," he points out. "There are companies out there which are still doing well but, generally, people are watching their costs. They want value."

Build loyalty

In response, the group has recently launched its "escape the credit crunch" promotion, which incentivises conference and event bookers with discount vouchers. Rather than cutting rates, Waddell says that the aim is to improve conversion rates and build loyalty among bookers.

Similarly, at Thistle Hotels, chief operating officer Chris Gillett says that clients are looking for good deals at the moment and feels that the MICE (meetings, incentives, conventions, exhibitions) sector in particular has taken a hit in recent months. The group has seen a 10% reduction in MICE spend since March this year as more companies cut back on areas such as training staff and entertaining.

For Gillett, savvy pricing and promotions are more effective than bringing down rates, which can have long-term effects. "It's not about discounting, or a slash-and-burn policy," he explains. "It can take a very long time to build prices back up again, and we don't want to corrupt the brand."

Like Slater, he also points to the need to reduce costs elsewhere in the business, rather than pass on rising prices to customers. "It's a question of looking hard at how we operate," he admits. "Headcount-wise, it's definitely not a cull situation, but we're looking at whether we actually need to replace a vacancy when one comes up. And, like all operators, we're watching our purchasing costs and trying to get the best deals from suppliers."

Perhaps unsurprisingly, one area of the hotel industry that appears to be more resilient to the crunch than others is the budget sector. At Travelodge, Paul Harvey, managing director of international development, won't confirm occupancy rates but says that levels remain strong and that, even now, there are opportunities for growth.

"It's important not to overegg it," he says. "We're not resistant to recession but we are in a stronger position than others."

Pricing, obviously, is key. The brand is offering more than 2,500 roomnights at £29 or less this summer, making them an attractive option for deal-conscious corporate clients and consumers anxious not to break the bank.

Discounting rates

Offering such low rates clearly also prevents midmarket brands from impinging on the budget market, should those brands start discounting rates down the line. "It will be very difficult for competitors to reduce their prices to our levels, and we will respond if they do," Harvey says.

Looking ahead, his view is that the credit crunch is likely to accelerate the polarisation of the UK's hotel market. "In difficult economic times, the budget end will benefit the most and niche luxury hotels will do well," he says. "It's the midmarket that's going to be squeezed quite badly, particularly in unbranded properties."


The consultant's view

The last thing hotels want to do right now is to cut sales and marketing spend. Evidence across all economic cycles shows that those who invest in these areas will come out first.

However, hotels need to bring in fresh thinking on how to spend money wisely - namely, analysis, pricing and strategic thinking.

One key area is market research. Nobody markets to 65 million people across the UK - it needs to be broken down so you can properly define your customers, then understand how to reach them.

Don't cut the budget on this - invest in a qualitative database or yield management programs to help with profiling. Lots of hotels don't put these tools in, but they are essential if you are to survive.

Stuart Harrison, principal, Profitable Hotel Company

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