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Sat 19 Sep 2009 04:00 AM

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Dangerous game

STR Global MD James Chappell warns hoteliers over the practice of slashing room rates in a downturn.

Dangerous game

Knowledge is power and for hoteliers selling the most perishable of commodities — tonight’s guest rooms — up-to-the-minute market information is vital if correct pricing decisions are to be made.

Using such knowledge, branded hotel companies develop revenue management strategies with a fluid pricing model to allow them to maximise return on a room dependent on the market conditions.

In the growth phase of the economic cycle, using price as a means of manipulating demand is an effective tool. Revenue management in a falling market, on the other hand, is notoriously difficult.

The temptation under such conditions is to cut rates, but this can be a dangerous approach that must only be taken when the current market has been put into context.

Following the cycle

Growth in the hotel industry correlates closely with that of GDP and accordingly is of a cyclical nature. The experience of the Dubai market over the last several years perfectly illustrates the specifics of the hotel market cycle. Data from STR Global shows that in late 2002 occupancy picked up, followed closely by average daily rate (ADR). This resulted in a sustained period of growth delivering unprecedented returns for several years.

More recently, but well before the collapse of the world’s financial markets in September 2008, occupancy began to fall followed closely by ADR. The party couldn’t go on forever and in the case of Dubai, more supply arrived on the market just as the world economy started to falter.

As occupancies fall, hotels drop rates in an attempt to stimulate demand — as seen in the Dubai example. Often this will work initially, but if it continues past a point of diminishing return the misery is compounded and hotels double up on the loss, selling fewer rooms at lower prices. Such price-cutting can have damaging long-term effects.

Take the case of the last major recession in New York, which took almost seven years to build its average rate back up to the levels of 2000. The bad news is that this does not seem to be changing. An August survey of attendees conducted at STR’s inaugural Hotel Data Conference revealed that 50.6% of respondents believe that it will take three to five years for rates to reach those of January 2008; a further 24.1% believe it will take between six to eight years.

Reading the numbers

The changes in the occupancy, ADR and revPAR for selected Middle Eastern markets for the year to June 30, 2009 versus 2008 show some startling results, even if one ignores the remarkable change in Beirut’s fortunes. Dubai looks to be suffering terribly with a dramatic 24.6% fall in ADR, especially when compared to neighbouring markets.

But there is more to the bald figures than meets the eye. Dubai’s position needs to be considered in light of the fact that its ADR has fallen from a very high base figure of US $333.34 last year to a still respectable $251.85 this year. Yes, it hurts, but product integrity looks by and large to have been maintained. This is particularly true considering it has kept its second place ranking behind Abu Dhabi in terms of change in occupancy. Abu Dhabi on the other hand has seen only a modest fall in occupancy of 7.1%, reflecting the more mature supply side of this market and a relatively-good start into the year with conference business and a stable leisure trade.

Rates have increased 14.3% with revenue managers appearing to have got it spot on so far. With the expectation that demand was going to suffer in any event, slashing rates was not on the agenda. The traveller to Abu Dhabi appears not to be heavily influenced by the $40 increase in their accommodation costs per night, especially if this is considered in the light of the total costs of flights, transfers, visas and so on.

The experience of Beirut bears this out. The market’s remarkable recovery follows the recent relatively-quiet elections contrasting with past years’ violence when hotels recognised that travellers just weren’t going to come whatever the price. It made sense to maintain rates for the few who did visit. This illustrates a belief in the value of their offer and the ability to stand firm on price when the knee-jerk reaction to a fall in demand was to drop price. Discounting is just one tool in the armoury of the experienced revenue manager and competing on price alone is to potentially store up trouble for years to come. Avoiding this means there is less catching up on rates to be done now demand has returned.

Making effective pricing decisions in a market where demand is falling is a tricky art made that little bit easier by using current data on the actions of specific competitors. Such information is the key to making more right decisions than wrong decisions that, while it is not pretty, must be the minimum requirement to stay in business.

The very different experiences of Dubai, Abu Dhabi and Beirut points to a good understanding of the current market conditions.

Hopefully, this will be maintained and put these markets in a good position to benefit from the upturn, when it comes.

James Chappell is the managing director of STR Global.

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Dan 11 years ago

The case of Dubai room rates is coupled with ALL other price hikes in Dubai. These unrealistic price hikes only result was to price out Dubai from its main revenue and goal: to become a great tourist destination. Tourists (no matter from where) accept having to pay a bit more then the local population. That is common in all tourist destinations. But when you as a tourist feel you’re being ripped off you don’t come back and also tell others not to go there. This happened in Dubai’s case back in 2007. When hotels and shopping in the malls got more expensive then any other place, Dubai started to lose its attraction. Whit ever decreasing service and ever increasing prices (especially when you know what they pay their staff, people are not stupid) tourists started to feel they were getting ripped off. Dubai priced it self out of the tourist market. Most of the prices and occupancy rates mentioned in this article are not real. Now you get two way flights from UK and one week in a five star hotel for as low as 2500 dirham. And they are happy to offer it since most hotels are at best half full. Ok, it’s a little too cheap, but when you a bad reputation, this is the level you’re going to end up with. Now work hard, lower hotel and shopping prices and all other fees to what they were back in 2003 and don’t try to go back to crazy prices and in a few years you will be back as a preferred tourist destination. Because Dubai is a fantastic place to visit.

paul 11 years ago

As Dan points out, this article takes no account of the fact that room rates reached ridiculous levels. It starts with the assumption that the peak levels reached in 2008 are the 'right' level, and any discounting below this is just damaging the prospect of returning to those peak levels. Hotel rates are determined by the free market. To propose that hotels hold off cuts is effectively proposing some kind of unofficial cartel. Ultimately it is counter-productive. If Dubai room rates drop, some hotels won't survive. Bad for those hotels, but good for the stronger ones that remain, as they have less competition and their occupancy will increase. As capacity reduces, supply and demand is better balanced and prices stabilize. Survival of the fittest. It is the same for all kinds of markets around the world, not just hotels in Dubai. The only hotels who would try to engineer a widespread agreement to prop up rates are those with a weak business. The best hotels should be going out hard to slash rates, attract customers and see their weaker rivals go out of business. You don't succeed in business by nannying your weak competitors, you succeed by looking after your own interests and taking share from your competitors.

Sami 11 years ago

As a veteran of 30 years in hospitality, having sat on both sides of the fence as Operator working for some of the well known hotel brands and now as a hotel Owning Company representative. I point the finger of blame to the current low room rates, where one can obtain a 5* hotel room for under AED 400 ($100) on the Operator/Management of the so called brands. Why? Simply operators make the majority of their fees as a percentage of Gross Revenue and Gross Operating profit and subsequently have an interest in generating revenue even if they sell rooms below cost price. Unfortunately, only hotel owners suffer as a result of these low rates as Operators laugh all the way to the bank and owners are left to bear the loss . It will not be long before we start seeing brand names disappear off hotel roof tops.