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Wed 15 Jul 2009 04:00 AM

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Dealing in a buyer’s market

As competition heats up and buyers snatch the power, hotels must up their game, explains Vision Hospitality Asset Management regional director Middle East and Asia Nigel Teasdale.

As the economic crisis continues and consumer confidence remains at low levels, hotels must be savvier to capture diminishing demand. While cost control is of the utmost importance during an economic downturn, there reaches a point where even the most radical plans will not deliver the required owner's returns if the top-line revenues drop so dramatically.

Typically, a hotel operator will choose either a price or volume strategy. This decision is generally based upon whether to maintain a strong room rate, with the knowledge that occupancy may well be lower, or to offer lower rates in order to boast higher occupancies. In the current market, this decision becomes relative as the downward pressure on room rates continues.

The market has shifted very quickly from a supplier's market with rate growth, to a buyer's market with a great deal of negotiation taking place, with extreme pressure on rates. Even if they have the funds, everyone wants a deal.

As strict corporate travel policies result in smaller or non-existent budgets for corporate travel and meetings for the region, many hotels are turning to other market segments they may never have targeted previously. While this can offer some additional revenue opportunities, a careful review needs to be undertaken to ensure that these new segments will not damage the hotel's reputation with its existing clientele.

Previous downturns in other markets have proved that falls in room rates can take many, many years to recover. The concept of ‘value adds' whereby additional services are provided inclusive of the rate to increase the perceived value, is an often used way to avoid room rate reduction, however as the market remains unstable and more hotels offer such ‘value adds', they then become expected and the pressure on price returns.

As ‘value adds' become ubiquitous, hoteliers must find other ways to increase demand while not damaging their long-term rate prospects. This can be achieved via ‘closed' rates that are either packaged with other elements or conditional on defined requirements easily understood by the market.

A result of the tighter corporate travel budgets and targeting new market segments is the increasing costs of capturing these bookings. Commissions continue to climb while room and delegate rates are negotiated downwards. Contracts are taking longer and longer to sign as potential clients know they will get availability and avoid cancellation fees.

The shift to find business has resulted in complete reviews of the sales effectiveness, from collateral to sales processes.

The hotels that are succeeding in maintaining or improving their market share are being creative in their strategies and activities, reacting quickly to changes in consumer behaviour. In markets that have only experienced continued growth, it is perhaps even more challenging to evaluate whether the right strategies and activities are in place. An open dialogue between the investor and operator is a key to identifying successful strategies.

The increased competition for guests has amplified the focus on sales effectiveness and the value of alternative distribution channels. In recent years, the focus had been more on revenue management. With falling occupancies, the opportunities for yielding have become rare.

Distribution channels can create a whole new market for a hotel. For instance, the third-party, internet booking companies have not traditionally been relied upon to drive volume in the region. Many hotels are now scrambling to set up deals with these companies as they see competitors replace some of their lost demand through these channels.

The internet sales techniques have changed radically in the last few years and ensuring your hotel has the optimum exposure has become increasingly complex. No hotel can afford not to be using this sales tool, but effective investment can often require a great deal of expertise.

Due to the intangible nature of hotels, market positioning must include the type and level of services provided to guests. An intelligent, well thought out cost-containment plan is imperative to prevent the deterioration in perceived value of a hotel stay, despite the price paid. Without the necessary understanding of what is important to the hotel's clients, a cost saving-plan may result in less profit for the investor due to further declining revenues.

It is absolutely vital for the investor to understand the intricacies of hotel sales and marketing in order to ensure the continued viability of their investment. It is essential that the hotel has the correct market positioning from both a physical product and a brand perspective, as well as within the increasingly competitive hotel market.

Nigel Teasdale is regional director for Vision Hospitality Asset Management. Contact: nigel.teasdale@vision-am.com

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