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Hotel Room Rates Plummet

DALLAS - The average price of a U.S. hotel room fell 17 percent in just the first six months of 2009 compared to the same period in 2008, according to Hotels.com. "This is by far the most significant change in prices we've seen since we created the Hotel Price Index, which is based on a survey of hotel prices booked through hotels.com in major city destinations across the world. Americans' travel dollars have never gone farther than in 2009," said David Roche, president of hotels.com. "As properties continue to roll out discounts and other incentives to attract guests, the gap between the top star categories has narrowed, giving travelers more value and making luxury more accessible than any other time in the past five years."

The United States followed a larger global trend with room rates around the world down 17 percent in the first half of the year, according to the Hotels.com price index. European room rates were down 16 percent, North America and Asia both declined by 17 percent and Latin America fell 18 percent. Rooms in the U.S. cost on average $115 a night during Q1 and Q2 2009, down from $139 the year before.

Franchisees are struggling to cope, and franchisors are trying to help in various ways.

Vikram Bhartia, a franchise owner of a Super 8 in the twin cities of St. Paul and Minneapolis, says that his motel had been “extremely successful until the end of 2008.” Bhartia stresses how his hotel was ranked among the top percent in sales and excelled at the highest quality levels in system standards.

“But not any more,” he notes. As he observes the Minneapolis market, he doesn’t see a light at the end of the tunnel any time soon. “There’s a huge oversupply in hotel rooms,” he states.

“I see no other choice than closing down my motel because of negative cash flow,” he says. “It’s hard, but I have to make the tough business decision of shutting it down.”

“I have a million dollars in hard-earned money in this business. My blood and sweat runs in the pipes of this hotel,” he continues. Bhartia stresses how it has been a perfect storm for his business. “I’m angry because the government, the bankers and even the franchisor combined to kill my business,” he says. “I didn’t do anything wrong.”

Jay Patel, a regional director for an association that supports hotel franchise owners, the Asian American Hotel Owners Association, thinks that franchise owners want their franchisors to show that they understand their franchisees’ predicament and would like to help. He acknowledges that hotels are in a world of pain.

Patel, who is a franchise operator at Wingate in Savannah, Georgia, says that his hotel has dropped prices as much as it can. Wingate is part of the Wyndham group of hotels that offers premium and executive suites, a hard-hit sector of the hotel industry. In order to weather the storm, Patel is focusing his efforts on gathering guests from non-traditional sources to fill his rooms.

Patel says one way hotel franchisors can show they care is by helping cut franchise costs. “Wyndham hasn’t dropped its royalty fees to help out in these troubled times,” he declares. “Still, they have been more lenient with delinquent royalty payments.” On the downside, Wyndham organized its franchise owners’ conference in distant Puerto Rico this year. “Flying to Puerto Rico didn’t help owners who were already battered with declining revenues,” says Patel.

Despite such small criticisms of a few of Wyndham’s practices, hotel consultant Stanley Turkel thinks that Wyndham, Hilton, IHG and Marriott have turned into some of the most flexible franchisors when it comes to helping their franchisees during these troubled times. Turkel asks, “Can you believe that some hotel franchisors whose agreements are usually extraordinarily one-sided, are exhibiting an unheard-of flexibility in negotiating with their franchisees? Even if the cause is the severe economic recession, it is still a rare and appreciated benefit."

Turkel says that franchisor concessions to stressed franchisees include fee reductions, approved delays in renovation projects and a reluctance to add new service standards.

Accor North America agrees that helping franchisees is critical at this moment. Accor owns many Motel 6 and Studio 6 motels, so it has hands-on knowledge of the hotel business. Dean Savas, senior vice president of franchise, discusses how the hotel firm is trying hard to help its franchisees. “As owner/operators, we are well aware of the difficulties facing our franchisees in these hard times,” says Savas. “We are proactively working on behalf of our franchisees by increasing sales initiatives.”

Accor has hired additional sales representatives to pursue national business travel accounts and it has tried to inspire the network’s full sales force to make 14,000 sales calls in a single day. Savas continues that the company is also trying to help the bottom line of its franchisees by “assisting those who are the most economically impacted; by not developing any new initiatives; and by ensuring procurement provides the best deals possible for franchisees by renegotiating existing supplier contracts.”

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HPI monthly breakdown, Jan 04 - Jun 09

But hotel consultant Turkel stresses that there are franchisors who are bucking this trend. They think it is time for franchisees to invest in boosting their value to customers while all other brands are becoming more flexible. Carlson and LaQuinta come to mind, he says.

Nancy Johnson, Carlson’s executive vice president and chief development officer, told Turkel, “This is the time when you should invest in brand standards in order to prepare to take advantage of market opportunities when they come back. And we are telling franchisees that while we understand the economy right now, this is what you’ll have to do to maintain the brand.”

Turkel states, “Carlson’s hard line makes one wonder if they understand just how difficult it is for owners to pay debt service when their occupancies and average daily rates are dropping precipitously.”

Johnson’s response to the majority of other major brands instituting extended deadlines and curtailing new standards was less than sympathetic to her franchise owners. Johnson declared, “My mother would ask then if everyone jumped off the bridge, would you? You cannot grow a brand and maintain brand values by doing what everyone else is doing.”

Robert Mandelbaum of PKF Hospitality Research observes that this long-term drop in prices had hoteliers cutting their hotel costs as much as they could. Then prices had to fall. “Through the first three quarters of 2008, hotel managers followed proper yield management practices and held their room rates despite declining occupancy,” the director of research information states. “However, starting in the fourth quarter of 2008, market conditions deteriorated so quickly and to such a great degree that hotel managers were forced to discount just to get anyone inside their properties.”

Jay “Jimmy” Patel, interim president of the Owners 8 Association, an independent association of Super 8 franchisee owners, observes that this trend has hit his members hard. He says that budget hotels have little room to maneuver in providing guests with more value in their hotel stay other than price. “Some have tried giving extra frequent stay points, or adding a breakfast or dinner coupon to the local restaurants,” says Patel. “Maybe some extras in room amenities like water and popcorn or fruit and cookies. Other than that, we have very little that can be done to fight dropping rates.”

Mandelbaum expects the travel market to get worse. “Our current forecast is for room rates to decline 10.4 percent this year, the largest annual decline in ADRs by far,” he states. “Our forecast is for another 3.1 percent drop in room rates in 2010. Room rates should begin to rise in 2011, but just 2.8 percent. It will be a buyers market for the remainder of 2009 and 2010.”

That makes sense to Super 8 motel owner Bhartia. Even in 2009, “everybody is fighting to stay open,” he declares. But he also thinks that there will be a lot of franchise closures in 2010 and in 2011.  “The demand in rooms is going down and the situation is not going to change anytime soon.”

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