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Will customers still expect discounts post-recession?

30 September 2009
Will customers still expect discounts post-recession?

Operators are advised to build their brands so that pubs, restaurants and hotels become known for more than promotional deals. Emma White and Gemma Sharkey report.

Discounting across the pub, restaurant and hotel sector has become a commonplace recession survival tool, with even the most luxurious hotels offering up to 40% off night's stays and restaurant chains handing out two-for-one vouchers like they're going out of fashion. But operators are being warned that when the economy improves, their customers may expect the offers to continue.

The Coffer Peach Business Tracker this month reported that the 13 major pub and restaurant companies achieved a collective 1% like-for-like sales gain in July, 0.4% in June and 0.6% in May against last year - thanks to promotions and discounts. But according to Glyn Bunting, a partner in the leisure and hospitality team at accountancy firm Deloitte, operators need to use promotions wisely to ensure they genuinely increase sales and don't "cannibalise" profit margins.

"As the economy begins to emerge from the recession, the key challenge for operators will be to wean their customers off discount vouchers before the expectation gets embedded in their psyches," he said. He advised operators to build their brands so that their pubs and restaurants become known for more than their "cheap meal deals".

"Deals clearly help to buoy up trade while customers focus on value for money, but continuous discounting tends to undermine long-term value creation from brand building. Health, provenance and food miles have taken a back seat recently but these things will come back as the economy picks up so operators should think about what they are offering," he added.

Pub operator Young's is about to launch a couple's dinner for £20 on the back of previous revenue-boosting deals but marketing manager Jayne Nelson believes customers won't expect the discounts to last forever. "It might be difficult for some pubs and restaurants to move away from discounts but at Young's we aren't running deals the whole time because we don't want our customers to automatically expect them," she said, adding: "We also only offer the promotions to customers on our database and we don't advertise deals widely in our pubs."

WIDESPREAD DISCOUNTING

And the picture has not been dissimilar for the hotel industry, with widespread discounting across the board in a desperate bid to retain occupancy to the detriment of room rates. Even the much fêted "winner" of the recession, budget hotel chains, have not enjoyed the predicted success because mid-market hotels have offered such incredible rates that customers have stuck with them instead of trading down.

But, as Robert Milburn, UK hospitality and leisure leader at PricewaterhouseCoopers (PwC), said: "It remains to be seen how long London hotels will be able to continue such heavy discounting."

A recent report suggested that with London hotels performing relatively well in terms of occupancy because of room rate discounts, now is the time for them to increase their rates. But PwC's survey of 1,000 hotel operators revealed that while this is what they are working towards, "now is not the time". The report highlighted the fact that corporate rates have been negotiated downwards since the recession hit and that hoteliers would have to wait at least until the next round of negotiations, in a year's time, before they could hope to push through rate increases.

Independent hotel consultant Melvin Gold agreed that discounting did not look set to stop any time soon, and that consequently recovery would not be quick. "Historical evidence shows that after previous periods of sustained and heavy discounting it has taken at least six years to get rates back to the same starting point. Hoteliers need to wait until the right time in the market, they need to identify when occupancy is stabilising or moving upwards and that will be a signal to start raising rates. They should also try to identify high demand periods around events that create a peak in demand and raise the rates then," he said.

Marvin Rust, hospitality managing partner at Deloitte, agreed with Gold's consensus. He said: "Based on previous cycles discounting has deprived businesses of revenue long after recovery. For example, in London this year occupancy is up by 0.3%, which demonstrates that revpar [revenue per available room] decline is wholly attributable to price reductions.

STRONGER BRANDS

"Inevitably discounting declines gradually during a recovery led, of course, by stronger brands, and independents who build bookings first. But typically it has taken between five and seven years to rebuild in full," he added.

PricewaterhouseCoopers (PwC) UK hotel forecast, UK hotels forecast: Not out of the woods yet, which was published last week, predicted an overall revpar fall of 12.1% this year, with growth rates expected to deteriorate further before Christmas.

Furthermore, Hotels.com's Price Index, which tracks the real prices paid per hotel room (rather than advertised rates) for 78,000 hotels across 13,000 locations around the world, found that hotel prices in the UK fell by 16% from £99 to £83 in the first half of the year as global hotel prices plummeted to their lowest level for five years.

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