How Hotels Should Prepare for the Coming Recession - Part 1

How Hotels Should Prepare for the Coming Recession - Part 1

Tony Bodoh Tony Bodoh

Tony Bodoh

Published Jul 9, 2018
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I am normally an optimist, but last week at the 2018 Revenue Optimization Conference economist Bernard Baumohl warned the audience that a recession is looming. He told the audience that the signs are evident and that they should prepare for it now.

“The concern I have is we’re beginning to see the seeds of a much more significant slowdown in 2019 and 2020,”

This is not good news for many hoteliers when considering the robust development pipeline in the United States. In late June, Lodging Econometrics reported that there were 5,255 projects/636,274 rooms in the pipeline. New York, Dallas and Houston topped the list for cities with the largest pipelines. The hotels are being built for a growing market and these investments may not designed to generate a viable ROI during a downturn.

Of course, some will argue that there are signs that the growth is still on the rise. In May, according to HotStats, hotels in the U.S. had their fourth consecutive month of year-on-year growth in profit per room. This drove gross operating profit per available room (GOPPAR) up for a total of an 8% over the last 24 months.

Where are the threats to this growth?

As Baumohl pointed out, we have a possible Constitutional crisis, new tariffs, and higher household and government debt than ever. He admitted that economists do not have the models for this situation.

Have you watched or read The Big Short? In 2006, no one had a model for what was about to happen in the housing industry. Those who did see the inevitable crisis were deemed to be crazy...at least for a while.

If you don't remember the pain the hospitality industry went through (there is a whole generation of newbie managers who were not in the workforce during the Great Recession), consider this statistic from a March 2018 report by Gallop:

"In 2009, the hotel industry in North America dropped 25% in revenue, due to perceived corporate excess during the financial crisis."

Why does this matter?

It matters because also in March, MarketWatch reported that household debt grew the fastest in fourth quarter of 2018 since immediately before the Great Recession:

“Household debt grew in the fourth quarter at the fastest rate since the fourth quarter of 2007”


The level of household discretionary income impacts the hospitality industry both directly and indirectly. Directly, less discretionary income means tighter travel budgets. Indirectly, it means less spending in other sectors which eventually leads to a cut in corporate travel. In other words, some experts are seeing the writing on the wall. It is not a matter of IF the hospitality industry will take a financial hit, but WHEN.

How did hoteliers respond during the Great Recession?

During the Great Recession hoteliers cut expenses and they dropped prices. Neither were effective in preventing a decline, although there were some strategies that were better than others. According to a 2010 study of the Great Recession in the hospitality sector, the luxury market was impacted hardest.

 "Although the pain was felt industry-wide, the luxury segment exhibited the industry’s worst performance in percentage terms with a 23.6 percent decline in RevPAR and a 37 percent decline in GOP (Wilson 2010)."

Studies conducted during and after the recession suggested that price discounting was not an effective counter-measures. The researchers recommend keeping rates up, counter to what typical price-demand economic theory would suggest.

"Enz, Canina, and Lomanno (2009) suggest that price discounting does not always work during recessionary periods because of demand inelasticity. Thus, revenues will decline when prices are reduced and price promotions are insufficient to stimulate demand to generate higher revenues. Enz, Canina, and Lomanno’s (2004, 2009) advice to hotel owners and managers: maintain rate integrity during a recession even when competitors do not"

In retrospect, it seems that two things did distinguish the winners from the losers: Winners only cut their marketing budges by 10.6% vs. losers cut their marketing spend by 17.5%. In addition losers cut sales expenses by 10.5% but, in an act that defies economic theory, winners increased spending for sales by 9.5%. As a result, losers experienced a 34.1% decline in GOPPAR while "winners" only had a 23.9% drop.

Why what we learned won't help us in the coming recession

Before you start preparing for this coming recession, you might want to consider what Baumohl said one more time. Economists don't have a model for what's happening. We are entering into uncharted territory.

Since the Great Recession, we've experienced several new trends. We don't know how these will impact or be impacted by the inevitable downturn. Here are five trends to consider:

  • Growth in the use of smartphones/mobile devices
  • Lack of trust in how hotels protect guest data
  • Growth of digital ad spend
  • Trust in online ads even from well-known brands
  • Growth of access to and trust in online reviews


Growth in the use of smartphones/mobile devices

The iPhone was released to the world on June 29, 2007. It marked a turning point for mobile communications, mobile internet, digital content, and digital advertising. The chart below shows the massive growth we've witnessed since 2010 in smartphone users. This does not include other mobile device users. During the Great Recession hotels did not have nearly the access to consumers that they have today. This will likely create both opportunities and liabilities for hotel brands and specific sites.

Currently brands are investing heavily in technology solutions under the guise of improving guest experiences. Some of these technologies are specifically for the smartphone user. From app-based research and reservations to keyless entry to mobile check-in, nearly every brand has their flavor of pet project that they tell investors will give them greater marketshare. As Jim Price explains in his article, The journey before the journey: How travel marketers establish trust with consumers,

"Today’s typical online travel consumer is exposed to over 38,983 micro-moments in any 60-day timeframe, during which time they visit an average of 18 websites via multiple devices in eight sessions before making a hotel booking."

He goes on to point out that 40% of this activity occurs on mobile devices, but less than 1% of bookings occur on mobile devices. Mind you, this is limited to the direct sites. Data from Criteo shows that OTAs are actually doing far better than direct booking sites in mobile conversion. But, hoteliers often protest that they don't want to pay the commission which can be up to 25% for rooms sold by OTAs.


Lack of trust in how hotels protect guest data

This brings us to the second trend. Guests simply don't trust hotels to protect their personal data. Maybe hoteliers can take comfort in the fact that they are more trusted than airlines or social media companies, but at 11% this is insanely low.

It may be telling that there is an "frenemy" relationship that has developed between the digital empires and hotel empires. At the recent NYU International Hospitality Industry Investment Conference, Marriott International CEO Arne Sorensen said,

"We are in an absolute war for who owns the customer. It's a long-term war, and 'long term' in digital space might be a few years...I think less about Airbnb than I do about Google and Facebook and all these other digital empires who own all of us."

This is a fascinating statement considering that the Marriott is partnering with Amazon to launch Alexa Hospitality. Alexa, the popular digital assistant, will be a standard in many of the Marriott hotels. It takes little imagination to realize that any guests' mobile devices known to Amazon can be easily identified and the data recorded as being in a particular hotel (even room) on a specific date.

Let's look at another converging trend that hoteliers did not have to deal with during the Great Recession. It relates direct to Sorensen's comments.

Growth of digital ad spend

Digital ad spend now makes up over 50% of all ad dollars. In fact, it exceeded $25 billion in the 4th Quarter and $88 billion in total for 2017. During the Great Recession, digital ad spend hovered just over $5 billion per quarter.

While some hoteliers may think this is a golden opportunity because they have more data now than ever before, they need to consider their precarious position. Again, only 11% of consumers trust hotels with their data. The research above was released before the Facebook election data scandal became public. It is doubtful that guests trust hotels more now than this time last year.

Trust in online ads even from well-known brands

There are some other trust issues that need to be considered. Studies show that digital advertising messages are less trusted than traditional forms of advertising like print and tv. The Q1 2015 Nielsen Global Trust in Advertising Survey revealed that every form of traditional advertising was more trusted than every form of online/mobile advertising.

Their survey also showed that traditional forms of advertising resulted in customers taking action at significantly higher rates than online ads. This may be correlated to the lack of trust in the online advertising.

Growth of access to and trust in online reviews

There's yet another trust issue that arises in the digital space. Much of the research shows that brand messages are trusted at a much lower rate than recommendations of family and friends or even of complete strangers who left online reviews. This varies by generation, but the millennials show the greatest gap between the trust given to the brand vs. online reviews. They are the generation that will outspend all others within a few years. They currently make up over one-third of all hotel guests and by 2020 will exceed 50%.

This trend brings us back to the first trend: The rise of the smartphone.

The rise of the online review because of the smartphone and the Great Recession

In 2016, I co-authored a short book, The Complete Experience, (paperback or Kindle) about how companies can use the hidden language patterns in online reviews to improve their customer experience, employee engagement and profitability.

That book was based on our research from 2007 to 2016 of several industries. My experience in leading the guest and meeting planner experience programs at Gaylord Hotels between 2007 and mid-2009 gave me a particular interesting perspective of how hotels navigated the simultaneous downturn in the market and the rise of the smartphone that had instant access to TripAdvisor.com. So we included our observations of the changes that were relevant in our book.

Consider this timeline:

A sobering thought

More than twice as many millennials (40% vs. 19%), who will make up 50% of hotel guests in 2020, trust these millions of online reviews from strangers more than they trust the hotel brand's messages.

As stated above, it is not IF a downturn will happen, but WHEN. And, when it does happen, most of your guests will be online - on a mobile device - being inundated with ads that they don't trust and will likely attempt to block or ignore. If things don't change, they will turn to their family and friends as well as complete strangers to learn how they should spend their limited discretionary income. And, some of these millennials will be rising into the ranks to make the corporate decisions about where the employees of their companies are permitted to spend their travel budgets.

What you can do to prepare for the downturn now

While the outlook in this post is bleak, I will show you in Parts 2 and 3 of this series what some hoteliers are already doing to outperform their competition.

Part 2 will focus on how hoteliers are delivering 5-star experiences on a 3-star budget so you can win in the OTA world or rank highly when guests are researching on sites like TripAdvisor so they decide to book direct with you. I covered some of this in my new book, Prophetability where I examined the TripAdvisor rankings in five of the largest cities in the United States.

Part 3 will take you into the online marketing that is winning for direct sellers in the hospitality sector so you can avoid the OTA fees.

******

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