“We must live with the consequences of our rate strategies for a long time because when the market turns, and it will, those who sold value will win... Gaining market share and differentiating yourself from your peers is paramount to winning in the long run.”
By Robert A. Rauch, CHA
Economic uncertainty, slowing travel demand, shorter length of stays, shorter booking window, increased distribution channels, shift in buying behavior, low average rates, new supply; take a deep breath…it’s not so bad. That’s right. We have hit bottom. And while we may stay at the bottom for awhile, it will not get worse. The housing market is showing signs that it may have hit bottom and the Dow Jones Industrial average is back up to October, 2008 levels. The biggest challenge that we need to overcome is that revenues, profits and values have been “reset.”
Easier said than done? Let’s look at what we have going into summer of 2009. Year to date, hotel revenues have declined by over 20 percent when compared to the first 18 weeks of 2008. Many of us believe that the year over year comparisons will continue to be negative through the balance of 2009. Further, it could be a couple of years before consumer spending really cranks back up.
Structural changes in San Diego’s tourism industry have occurred over the past nine months. Groups have cancelled or postponed meetings; individual business travel has seen a precipitous decline and leisure travelers are shopping value more than ever before. We have over 57,000 rooms in San Diego County and occupancy and rate levels have been reset to levels not seen since 2002.
Basically we have seen demand reductions that are directly tied to our nation’s gross domestic product. Gross domestic product figures released in early May showed consumer spending rebounding during the first quarter after two quarters of decline. Pending home sales and the Conference board’s consumer confidence index improved in April, the second month in a row for those two indicators.
It is not likely that corporate America will be back with a vengeance this summer. It takes time for corporate controllers to loosen the purse strings. But leisure America believes travel to be a birthright. Despite recent surveys showing that more Americans will cancel trips, indications are that value will get them going this summer. AAA just announced that we will see an increase of 1.5 percent in the number of Americans traveling on vacation during the Memorial Day weekend this year compared to 2008.
Where will they travel? They will come to San Diego because we have what they want. Perfect weather, reasonable prices, family values, attractions, arts, sports, beaches and more are available here. We have gaming, wine, restaurants, entertainment, spas and a great culture. This is arguably the best destination in the world….and it is accessible to millions within a short drive. Further, gas prices will likely be significantly lower this summer when compared to last summer!
The San Diego Convention & Visitors Bureau, San Diego North Convention and Visitors Bureau and the San Diego Convention Center Corporation are all working to optimize revenues in our market area here. Customers must buy the destination first…they are not likely to come to our hotels if they have not zeroed in on our destination first. So let’s remember how critical it is for us to have solidarity.
To aggregate the above captioned entities, we have the San Diego Tourism Promotion Corporation. This entity allows us to raise cash to promote San Diego at levels well beyond previous years and beyond most competitors. It also laser focuses on short term needs with emergency marketing funds designed to boost revenues quickly. We have a competitive advantage for the first time in years.
“Happy happens” is the promotional jingle used by the San Diego Convention & Visitors Bureau. At first it was not embraced by the tourism community…but it has caught on as many of us notice the ads when we travel and our competitors have been feeling it. Bookings are up for summer. And people want to be happy! San Diego has additional silver linings. We have a strong convention business that continues to thrive despite the downturn and a very savvy set of marketers who understand marketing in the present and future, not the past. This includes the executives we have at Sandiego.com who basically invented “electronic laser geo-targeting” as well as the aforementioned bureaus.
Plan for the Upturn
How do we know we are at the bottom? We don’t know for sure, but if leisure business carries us through the summer, all we needed is a little bit of business confidence in the fall. Keep in mind that September 2, 2008 is when the market and economy began to fall apart. Matching those last four months of 2008 will not take a strong increase in demand. We should be at or near 2008 levels when the summer ends.
So what is the strategy? According to Stephen Rushmore, president and founder of HVS International, a leading hospitality consulting and appraisal firm, “if loss of travel demand does not put us into bankruptcy, price-cutting will.” Your daily Smith Travel Research report and other market intelligence reports can be utilized to determine your competitors’ rate positions. Let’s face it…hotel rooms are often viewed as discretionary commodities. Pricing this commodity is always important, but in boom times you do not need to get it exactly right. This is no boom time. We must live with the consequences of our rate strategies for a long time because when the market turns, and it will, those who sold value will win.
Additionally, improve your electronic sales strategies that allow guests to book online, know your position on the top search engines as well as how your business is performing vis a vis online travel agencies. Get in touch with all the social media marketing opportunities. Facebook, Twitter and Linked-In are the top recommendations of the day. Make certain that you are utilizing customer relationship management strategies that will allow you to stay in touch with your clients/guests on a regular basis.
We must prepare for the rebound as soon as possible. Gaining market share and differentiating yourself from your peers is paramount to winning in the long run. Building strong relationships with clients and customers adds much more value than a quick win on the Smith Travel Research report that we get each week. Short term, there are a few cost-cutting strategies to cope with the revenue decline. These include tighter expense controls and a view of every line item on a zero based budget approach…if not needed, it’s gone. Try to avoid the mindset of “let’s just cut everything by 10 percent.” That is not targeted enough.
While the underlying market value of hotels typically declines only 20-30 percent at most, there will be some distressed assets that will trade at an even deeper discount. There are two drivers of the low values; one is the hotel finance market and the other is declining net income (NOI). According to HVS, at the peak of the market in 2006, $1000 of NOI created $11,364 in value. That value dropped to $8,850 at the end of 2008, a decline of over 20 percent. In other words, the capitalization rate has increased sharply.
The second part of that equation, net income, is going to drop as well. Hence, lower values will be with us for awhile as capitalization rates will only decline when the credit markets open up. That will not happen until we see movement in occupancy and rate. First quarter net income will likely prove to have been horrific, but could mark the bottom of the current cycle.
This could be a buy opportunity for those with cash and an indication that we might be entering a new investment cycle. Our hotel group sees this as another opportunity to create asset value. At the end of the day, sellers should hold on, buyers can snap up bargains, managers must weather the storm and create value simultaneously and travelers can reap the benefits of the values out there. All of this shall pass and in 2012, another election year, our economy will again be rocketing toward that next peak from 2013-2016. Remember, “happy happens in San Diego!”
Robert A. Rauch, CHA
Rauch is Chairman of sandiego.com and the San Diego North Convention & Visitors Bureau. He serves as a director of the San Diego Tourism Promotion Corporation and as President of R. A. Rauch & Associates, Inc., a hotel management company. He is also general partner of Del Mar Hotels, Inc. and Pikes Peak Hospitality, LLC, hotel ownership entities and teaches a course in “Hospitality Entrepreneurship” at San Diego State University’s School of Hospitality Management.