The bevy of hotel investors who purchased assets at the peak of the market with the intent of repositioning are now the most vulnerable in today’s economy. This “repositioning” segment of the market is in survival mode, yet creative owners are employing new survival strategies to combat challenges, according to global hotel investment services firm Jones Lang LaSalle Hotels.

Published: 20 Oct 2010

The bevy of hotel investors who purchased assets at the peak of the market with the intent of repositioning are now the most vulnerable in today’s economy. This “repositioning” segment of the market is in survival mode, yet creative owners are employing new survival strategies to combat challenges, according to global hotel investment services firm Jones Lang LaSalle Hotels.

“When the bottom fell out of the hotel market in the fall of 2008, owners and lenders were abruptly faced with net income levels that plummeted by 35 to 50 percent. Their ability to rethink and execute dramatically different short-term operating strategies often became the defining element for survival,” said Amelia Lim, an executive vice president and expert hotel advisor for Jones Lang LaSalle Hotels.

Jones Lang LaSalle Hotels’ Strategic Advisory & Asset Management experts have been at the forefront of guiding hotel owners in survival mode through the past several months. The firm’s market-driven analyses uncovered six points of vulnerability that struggling hotels should avoid to mitigate long-term impacts to profitability, and to maximize revenue and existing customer relations:

1. Buck the Status Quo and Maintain Marketing Resources.

Hotels have slashed sales staff, PR, marketing, often at costs that may not be apparent in the short-term. Given the prevalent thought of “If nothing’s happening in the market and cash flows are anemic, why should I spend on sales and marketing payroll?” – they’ve hit bone.

“Cutting marketing spend is an understandable and immediate reaction in a hostile environment,” said Lim “Declining demand and average daily rates (ADRs) are temporary, as our market research has conclusively shown. However, the level of guest goodwill and market perception of any hotel’s quality profile is just as temporary.”

If a hotel were to defensively scale back on its PR efforts and marketing outreach in a major way, it would be highly exposed to the risk of an opportunistic competitor gaining market share by its willingness to maintain a consistent message to the market. “The resounding message here is: don’t cut back the channel that feeds you. Keep a steady level of promotions out to the customer base, or risk losing customers,” Lim said.

2. Direct Guests to Proprietary Web Sites for Maximum Profit.

Many high-end hotels are resorting to mass-market channels to off-load inventory. “These are very expensive channels of distribution with a 25 percent fee off the top of revenue – so they end up netting 75 percent,” said Lim. “This is often seen with the independents that do not have the benefit of an affiliation with a sales and marketing group such as Leading Hotels of the World or Preferred Hotels & Resorts. Often, the more profitable way to go is to direct guests to your proprietary Web site.” The implementation of a holistic promotion strategy to channel bookings to a profitable proprietary Web site has been successfully executed at many of the hotels which Jones Lang LaSalle Hotels asset manage.

3. Release the Commitment to High ADR Rates and Introduce Variation.

Hotels need a fairly sophisticated analysis of the proper mix of ADR and occupancy to navigate today’s market. This requires market-specific experience and technical expertise. It also requires operators to sometimes relax their commitment to upholding ADRs.

“While a high ADR is a logical objective, hotels often can yield more profit by adopting a savvy strategy that embraces more modest ADR objectives at the right times,” Lim said. “Do you sell one room for $1,000, or do you sell 10 rooms for $100 each? While the RevPAR technically works out to be the same, there’s a lot more to consider in the balance. The answer lies beyond simple math, and calls for an analytic approach that combines quantitative and qualitative measures of success. The equation is further complicated when considering the incremental profits from other sources within the hotel that any one occupied room brings to the bottom line.”

4. Combat the AIG Effect with Creative Customer Solutions.

“There have been anecdotal accounts of guests requesting luxury hotel names not appear on their receipt,” said Lim. “The reported $20 bag of chips from the minibar of Le Uber Luxury Resort really sticks in the craw of public opinion when 3 percent of the company’s headcount has just been impacted by workforce reductions.”

The connotation of the hotel name and its implied positioning are points worth considering in any sales and marketing strategy. Seek ways to offset any resistance associated with extravagance given that austerity is the rallying cry of the day.

5. Explore Brand Flexibility.

Brands are allowing the delay of investment of capital dollars to help hotels ease into new standards while retaining the flag. Good mid- and long-term strategists will analyze levels of flexibility available within existing brand standards. Very often, relationships with the brands and a well-documented case on how guest satisfaction will not be materially impacted even in the absence of immediate implementation can also facilitate the phasing-in of brand standards in a manner that cushions bottom-line impact, yet preserves long-term asset value.

6. Divide and Conquer Roles: Asset Manager and Property Manager.

An asset manager should not be confused with an onsite property manager. The main value that the asset manager brings is not to dictate how to staff the property, or opine on the blueprints of the hotel’s new elevator as a property manager would, but to ensure that these plans fit in to the overall value proposition.

The asset manager is there to ensure that all the overall strategic vision is maintained and monitor operating activity at a high level. The property manager is responsible for the day-to-day and detailed execution.

Understanding and allowing the division of tasks between property manager and asset manager allows the respective areas of expertise to play out in concert, with the effect of maximising long-term asset value.

Jones Lang LaSalle Hotels has advised numerous branded and independent boutique hotels on revenue and structure strategies throughout the U.S. and worldwide. The firm believes that this segment of the market will rebound, and that prospects in the mid-term for truly well-operated and market-justified properties are good, as lesser competitors are weeded during the current recession. The boutique hotel has made an indelible mark on the landscape of the hotel industry by being a remarkable outlier, the cookie-cutter antidote for discerning early-adopters. How better for this segment to continue its trail blazing success than by continuing to deliver “justified indulgences” when vox populi demands Spartan everything?

“Be contrarian – leave that chocolate on the pillow,” urges Lim.