Just a year or two ago luxury hotels were riding at the very crest of the seller’s market, a segment of the hotel industry that many experts believed to be “recession-proof.”
Now, along with so many others, that assumption has been turned on its head. Of all hotel segments, it is luxury properties that are the most challenged these days, not only bearing the brunt of consumer and corporate belt-tightening, but of public controversy surrounding upscale events held during a time of government bailouts and economic crisis.
Not surprisingly, many luxury hotels are now broadening their marketing scope, focusing more on their own geographic regions as well as on associations and other sources of non-corporate group business.
For groups, particularly those not subject to perception issues, there are now unprecedented opportunities to take advantage of attractive rates, value-adds and packages available at many properties that were once completely out of reach. But like so many other decisions these days, it’s a complicated choice.
Market Downturn
Just how tough are times for luxury hotels these days? Data from Smith Travel Research (STR), a Hendersonville, Tenn.-based company that tracks hotel trends, indicates that the first quarter of 2009 has been especially hard for upscale properties.
According to STR figures posted for a week in mid January, average occupancies for all U.S. hotels fell by 12.9 percent over the same period last year, while average daily rates fell 4 percent. By contrast, luxury hotels experienced an occupancy decline of 24.4 percent and a daily rate decline of 8.9 percent.
“They [luxury hotels] are facing far more difficulty than other sectors in the hotel industry,” says Patrick Ford, president of Lodging Econometrics, a global hotel consultancy based in Portsmouth, N.H. “They reflect our culture—we thought the luxury end of the business would survive any economic downturn, and now we know that it’s not true. Tiffany’s has also found that out.”
According to Ford, not all luxury hotels are suffering equally. Within the segment, it is resorts that are facing bigger challenges than upscale hotels located in urban business districts.
“With resorts, you’re talking about incentives and sales performance trips, which are seriously hurting because of perception issues, especially in the case of companies that are laying people off or who have been in the press because of turmoil within the company,” he says. “Because of this, resorts are having the most difficult time and will have the hardest time on the comeback trail. Center city luxury properties will be quicker to respond to economic improvement.”
Mark Sergot, vice president-global sales for Fairmont Raffles Hotels, which operates luxury properties in both urban and resort locations, says meeting business is holding up best at Fairmont’s city center hotels.
“In some cases, we’ve had customers ask to relocate from a resort to a city location because it raises less of a red flag,” he says.
When it comes to a decline in business, some hotel industry analysts believe that perception issues may be an even bigger dilemma for luxury properties than shrinking budgets.
“Money is important, but perception is even more important,” says John Keeling, vice president for PKF Consulting in Houston. “Luxury-brand hotels are having a real image problem right now and even dropping rates won’t solve it. A hotel might drop its rate from $350 to $200 a night, but it won’t sell because the business traveler doesn’t want to turn in a receipt with the brand name on it—he doesn’t want to be in for criticism.”
While leisure travelers are not subject to perception issues as corporate travelers are, analysts say that wealthy vacationers are also a declining market for luxury properties.
“All travel segments are down these days—leisure, commercial and group,” says Stephen Hennis, president of Hospitium, a Denver-based consultancy specializing in luxury hotels. “In the last down cycle for hotels—2001 through 2003—leisure travel held up relatively well and this helped high-end hotels. But this time everyone is being careful with the money they spend.”
Also having an impact on luxury hotel business has been the growth of vacation timeshares at the upper end of the market, notes analyst Jonathan Barsky at San Francisco-based Market Metrix.
“The luxury segment in timeshares is doing very well these days, so this also takes business away from luxury hotels,” he says. “Smart hotel companies such as Ritz-Carlton have seen this and have responded by adding residential components to their hotels.”
However, the fact that many new luxury hotels are part of complexes containing residences also brings challenges. Ford notes that the collapse of the condo market in cities such as Miami and Las Vegas has left some new luxury properties with even more units to fill with transient guests.
“With private residences in a hotel, you have even more difficulty because you may have a lot of residences that have not been sold or where the deals cannot be closed because of the consumer lending problem,” he says. “So if the hotel opens with units that have not sold or been closed on, they end up in the hotel rental pool.”
Hotel Reaction
So how are luxury hotel companies dealing with this challenging environment? While many hotels are reluctant to lower their published rates, having learned from previous downturns how long it can take to get them back up, what they are willing to offer during private negotiations is another matter, according to Barsky.
“Sometimes there may be a confidentiality agreement with the planner—don’t tell anyone abut the rate you got,” he says. “And the hotels are offering value-adds such as three nights for the price of two.”
For some luxury hotel operators, the current economic climate has meant a major marketing shift and an effort to reach out to a wider spectrum of meetings business.
At Fairmont, Sergot says current strategies involve targeting organizations based close to hotels or those who may want to take the opportunity to meet in a destination they would normally be priced out of.
“Some groups are trading up,” he says. “We’ve focused on customers who may have used us in secondary cities and now want to come to one of our major city locations, where they will now find more flexibility in pricing and availability. We’re also reaching out more to customers in our geographic locations. When it comes to perception issues, it looks better to meet closer to home.”
At the St. Regis Monarch Beach Resort in Dana Point, Calif., the site of the AIG meeting last fall that became the poster child for irresponsible corporate spending, the strategy has been to broaden its marketing range beyond high-end corporate groups.
“We’re engaging with markets that we’ve never been fully engaged with before, including California association business and associations for doctors and lawyers,” says Director of Marketing Michael Mustafa. “We’re very active in promoting ourselves in Sacramento and Washington, D.C., these days. Our message is that they can experience a resort that they may not have had the opportunity with before.”
At the same time, he says the resort is working harder to retain its corporate customers as well as help them meet their own challenges.
“We were the first to have the AIG effect, but we’ve cleansed through that and have had no substantial cancellations since the first of the year,” Mustafa says. “What we’re doing with each customer is putting together a solid action plan for their needs, being more creative with the scope of their programs and food and beverage.”
At the same time, Mustafa says the property is not trying to downplay its luxury status.
“We will never apologize for being a five-star, five-diamond property,” he says. “This is the type of service our guests expect—they are coming to us for a reason.”
Similarly, Tom Hubler, vice president of sales-the Americas at Four Seasons Hotels and Resorts, says the company is working hard to sustain its relationships with corporate customers, in some cases “reaching out to see what we can do before they actually cancel a meeting.”
Conscious of the perception problems that a luxury brand name such as Four Seasons can bring, Hubler says the company is working with clients to mitigate these concerns.
“We’re looking at what we can do in terms of cost, the duration of the meeting, whether it needs to be moved to a second-tier location,” he says. “Hotels are also focusing more on their local markets, including social business.”
Groups who don’t normally meet at Four Seasons properties are also being courted, including targeted efforts toward medical, biomedical, high-tech, legal and sports markets.
“We work with a lot of third parties who have a diverse client base,” Hubler says. “We tell them we are open-minded. If you have three- or four-star-level business, we might fit in.”
In Vancouver, British Columbia, the recently opened Shangri-La Hotel Vancouver has been doing well with corporate business despite the economic downturn, according to Stephen Darling, regional vice president for Shangri-La Hotels & Resorts. The 119-room luxury boutique property is one of several that the Asia-based hotel company plans to open in North America over the next few years.
“We’re focusing on regional business in Western Canada and the Pacific Northwest, and we’re particularly doing very well with Seattle,” Darling says. “So far we are not having to discount, and it helps being a smaller property. Some group business is coming to us because we’re the fresh new property on the horizon and this means higher attendance.”
In selling a luxury hotel, Darling says the emphasis needs to be on superior service that will make the meeting a smoother experience than it might be elsewhere.
“The difference is in the small details that directly influence the success of the meeting,” he says. “The speaker doesn’t have to adjust the volume. The technology in the room is tested and checked before the people get there. The more productive we can make everyone’s time, the more successful the meeting will be.”
Taking the Bait?
While it now may be easier for groups to “trade up” to luxury properties, are they, in fact, doing so?
Richard Miseyko, CMP, president of Site Search, in Tampa, Fla., is among third-party planners who say that clients are very much interested in the prospect, despite perception issues.
“I’m seeing that people are savvy, for the most part. They see there are incredible deals out there, and they know the top hotels are hurting, too,” he says. “So I’m still looking at five-star hotels.”
MaryAnne Bobrow, CMP, an independent planner based in Citrus Heights, Calif., with an association client base, says she is now considering a higher level of hotel than she has in the past.
“Because there might be availability and opportunity, I might consider a four- or five-star hotel as opposed to a three-star,” she says, adding that the situation is complicated because, unlike most corporate planners, she is planning on a long-term basis and cannot take advantage of the many offers aimed at short-term business.
Some planners are hesitant to jeopardize their long-term relationships with hoteliers by taking their business to a different level of property. Another concern is that attendees who meet at a five-star property one year may come to expect similar treatment from then on.
“People get spoiled really quickly,” says Melissa James, CMP, management analyst for U.S. Commercial Service, U.S. Department of Commerce in San Francisco. “Once you put groups in a high-end hotel, you will get complaints if the same level isn’t available the next year. This is especially true if it’s a large meeting that happens every year.”
James also believes it is important to be loyal to the suppliers she normally works with.
“I’m hearing a lot from hotels these days who wouldn’t deal with me before, who would never offer a government rate,” she says. “I have a fondness for the properties who have stuck with us, and I like to honor those relationships. If I traded up out of their segment, they would have a right to resent it.”
