Why Can’t Hotels Drive Rates?
The US hotel industry is forecast to enjoy a 10th consecutive year of growth in 2019, according to data from CBRE Hotels Americas Research.
NB: This is an article By Sarah McCay Tams, Director of Content, EMEA, Duetto
The firm has predicted that hotel occupancy in the US will rise to 66.2% in 2019 – a fifth straight record level. That occupancy will be driven by a 2.1% increase in demand, although this will be somewhat rebalanced with a 1.9% increase in hotel supply.
Demand is up, but room rates do not appear to be fulfilling their potential. Let’s take a look at why.
4 Reasons Hotels Struggle to Drive Rate
There are a number of reasons why despite growing demand hotels currently find themselves struggling to drive rate:
1. New Supply
STR’s Hotel Census Database contains more than 190,000 hotels representing more than 17.5 million rooms. And that figure keeps growing. What’s more, the number of new brands entering the market also continues to grow.
In recent years we have seen new brands from Marriott, IHG, Hilton, Melia and many more. For example, in 2018, IHG launched Voco, a new upscale hotel brand that is slated to add more than 200 hotels to the IHG portfolio in the next decade. With these new brands comes new developer appetite.
These new brands have the benefit of large parent company umbrellas to operate under. But new operators have also entered the field. Bringing a digitally-reworked hotel experience are the likes of citizenM, Ruby Hotels and H-Hotels.com – all of whom have seen success in Europe.
2. OTAs and Rate Transparency
Hotels have long been over reliant on online travel agents (OTAs) as a distribution channel. This one-way relationship has given OTAs the power to erode prices and exhort high commissions. If hotels are to start driving more profitability to the bottom line then they need to re-look at cost of acquisition and ensure third-party distribution partners are not undercutting their rates, especially when rooms are being offered in package deals or on the back of flight bookings.
The OTAs have grown to overshadow hotel companies. The market cap value of Marriott, Hilton and IHG has long been overtaken by those of the OTA duopoly that is Expedia and Booking.com. And waiting in the wings we have the next wave of disruptors – Airbnb, Amazon and Google.
Hotels were quick to jump on the loyalty bandwagon, following the airline industry with points-based systems that enabled frequent guests to build up points and redeem them against free stays.
However, today’s traveller is less impressed with a plastic card and a collection of points. They want a personalised experience and are often willing to pay for that. But here’s the problem – hotels are not getting to know they guests as well as they used to. OTAs are the ones fostering relationships with guests, not hotels.
By driving direct bookings and therefore harnessing the power of guest data, hotels can help create a bespoke service that can increase total guest spend.
Hoteliers also need to look inward and place some of the blame for lagging innovation on themselves. The hotel industry is one of great fragmentation – at just one hotel there can be five, six, seven stakeholders involved in the decision-making process.
A hotel can be owned by one entity, managed by another and branded by a third party. At larger, more complex properties, an asset manager is introduced to ensure everyone is operating at peak efficiency. Marketing representation companies like Leading Hotels of the World and hotel associations like the Asian American Hotel Owners Association are often involved.
Added to the disparate industry is a fragmented pool of guest data and the technology needed to access and aggregate this data.
Legacy systems wedded to on-premise hardware continue to be the norm in hotel technology – a far cry from the cloud-based, real-time actions of both the market and its leading distributors – the OTAs. This is stopping hotels from being analytical and targeted in their approach to market.
All of the four above factors – new supply, new distribution, a loss of loyalty and fragmentation – leave the hotel industry open to digital disruption. We have seen this before, in the guise of the OTAs, and we will see it again as Google, Amazon and Airbnb make further moves to enter the hotels and wider travel sphere.
Digital disruption is the new norm, and if hotels are going to compete then they need to adapt. They have to get digital too.
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