The End of The Luxury Market?
RevPar Guru
Friday, 3rd May 2013
A very interesting article was recently released by Bloomberg News, about the trends in hotel development that we are currently experiencing.

The report said that US hotel developers are investing less in luxury properties, as the cost of providing high-end amenities rises and profit margins shrink. According to STR, the RevPAR at luxury properties was $202 in 2012, down from the 2007 high of $213.

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According to the report, only six luxury hotels are expected to open their doors in 2013. That number is consistent with the results seen in 2012, as a total of six properties opened that year. Unlike 2012 and 2013, development in the luxury market during 2011 was high with 23 hotels opened during the year. These declining numbers demonstrate an ongoing trend away from investment in the luxury market, and the growth of upscale properties. In 2012, the upscale market in the US increased by 49% (131 hotels).

This trend reflects the changes in consumer behavior post-recession. Before the recession, consumers were willing to pay high prices for a five-star luxury experience, but since the financial fallout, most consumers have a maximum room rate in mind, that they won¹t exceed, no matter how luxurious the property.

Now, you're probably thinking: "All of this info is interesting but how will it affect me? As a revenue manager, I have nothing to do with investments or hotel developments."

In actuality, this news will have a significant effect on all three-, four- and five-star properties in the US. Because the five-star, luxury properties are being forced to decrease their room rates (to suit consumers¹ new booking habits), three- and four-star properties will find that they must compete against a more superior product at a more affordable price (than in the past).

Five-Star Properties

Luxury has always been defined by excess, but today's consumers are mostly looking for value. A significant amount of these consumers won¹t see the value in paying a higher room rate to have fresh flowers in their room or be greeted personally and escorted to the pool. Of course, excess means excess expenditures so five-star properties are in a tough spot, as their amenities and costs are already fixed.

Revenue managers at five-star properties should be decreasing their room rates to the lower end of the five-star price point, in order to compete on a financial level that will attract more customers. By decreasing their rates (and competing with the four-star properties on the high-end of their price point), five-star properties can offer a great deal of value: five-star amenities at a four-star price, dropping them into the upscale category, further increasing the supply in the four-star marketing and compressing rates.

Four-Star Properties

The decreased demand for luxury hotels will force some five-star properties to discontinue offering certain amenities, which may drop them into the upscale market, further increasing the supply of four-star rooms available and compressing rates. Some of the four-star properties will benefit from taking market share from the luxury hotels, while others may find themselves lowering rates to steal market share from the lower class. I would suggest the latter, as this strategy provides the customer with greater value and will encourage the consumer to pick your property over a similarly priced three-star property (that does have the amenities that you are able to offer).

As consumers are looking primarily for value, four-star properties can also consider offering dynamic packages. For example, hotels can include free champagne and strawberries for the Honeymoon Package or free theatre tickets for the Broadway Package. Often these packages will actually cost the hotel less money than the perceived cost by the customer, so this strategy is a highly effective one for hotels who don¹t want to rely solely on deep discounting to gain market share.

Another easy fix for four-star properties is to enhance the ‘cool' factor of their property. By making a small investment in some contemporary enhancements, such as updating the paint color, or adding new linens or décor items, a hotel can change its image drastically (in a customer¹s mind). In many cases, these small modern touches will incentivize customers to book with your property instead of a luxury property with old-fashioned décor.

Finally, four-star properties should consider offering room upgrades whenever possible. The standard room in a five-star property could be very similar to a suite at a four-star property, so this can be a great way to entice customers to book with you instead of paying full-price for the actual five-star experience. An added perk to this strategy is that it is very low-cost for the hotel to offer free upgrades, but has a very high perceived value among consumers.

Three-Star Properties

While three-star properties will never be able to compete with five-star properties (without a drastic renovation), they can offer very stiff competition for four-star properties. As four-star properties will have decreased their room rates to the low-end of their price point, it brings them closer in price to a higher-end three-star property.

A very important (and cost-effective) way for three-star properties to stand out is to update all of your marketing materials, in order to portray your property in the best possible light.

Of course, I'm not suggesting hotels should mislead customers about what the property offers; instead, consider hiring a professional photographer to find the best lighting and angles to capture your property's unique features; update the wording and font on your website to be more modern; and minimize the emphasis on being a ‘budget hotel'. Make sure that your OTA listings, website and marketing collateral are offering the best possible first impression to potential customers.

While you may not have the budget or the amenities to match, three-star properties need to remember that they are ­ now more than ever ­ competing with the ‘big boys' and they need to re-act accordingly.

Three-star properties should not be discounting in order to compete, because eventually, it becomes a race to the bottom. Today's consumers want value so if you can offer a good price for a good (three-star) room, as well as a value-added service (like free breakfast or free parking), your property will be able to compete more effectively with four-star properties.

Finally, like four-star properties, a little updating can go a long way towards making your property more desirable to potential guests. It's a very low-cost, quick fix that could have major impact on your revenues.

Overall, five-, four- and three-star properties will all need to take note of this new trend and how it affects consumers' booking patterns. While prices will be compressed throughout the upscale category, hotels should also be focusing on adding more value and better services for the price, as that will be the key in attracting new customers in this new market.

Hoteliers, how will you react? Post your comments below and share with others in the industry your personal insight.


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