This article discusses the different market segments and the breakdown of where hotel demand comes from and followed by an example of occupancy penetration through the different market segments.

Introduction

The basis of appraising a hotel or conducting a hotel feasibility study is to understand hotel demand in the market. For the purpose of demand analysis, the overall market is divided into various segments - commercial, meeting and groups, and leisure/wholesale - based on the nature of travel. The purpose of segmenting the lodging market is to define major types of demand, identify customer characteristics, and estimate future growth trends. A fourth segment, extended stay, is included in demand analysis when the market requires hotels that are able to service guests that stay for five nights or longer.

In smaller secondary and tertiary markets, in spite of hotels having different product offerings, they may compete fully with each other as long as they have similar market segmentation. This is apparent when a limited service hotel and a full service hotel both attract guests with similar needs. By analyzing demand in these three or four segments, hotels can determine how they can compete with existing hotels in their market and strategize accordingly.

It is important to note that a hotel in any given market does not compete with another based solely on market segmentation; other factors are involved in analyzing a competitive set. Furthermore, understanding a hotel's market segmentation and that of its competitors is imperative since it affects occupancy penetration, average daily rate positioning, and potential revenue generators.

Commercial

Commercial demand consists primarily of business travelers. However, in major cities this also includes high-volume corporate accounts. Hotels located in close proximity to the corporate office of a major technology company, for example, would try to negotiate a contracted rate whereby that company exclusively uses that hotel and by extension, that brand.

By negotiating a contract, the hotel offers a favourable rate in exchange for the potentially large number of room nights a corporation may bring in over the course of a year. Travellers then use the "preferred" hotels because their company has negotiated a good rate thereby leading to brand loyalty. Another factor in guaranteeing corporate accounts for business travellers is location and convenience with respect to the hotel's surrounding businesses and amenities.

Commercial demand is strongest Monday through Thursday nights and is relatively constant throughout the year. When examining a market and projecting future growth trends, a substantial commercial demand base is critical since it is the most recession-proof of the three segments.

Other corporate travellers include government accounts, which are more apparent in government cities, and airline crew with corporately negotiated contracts. In respect to rate, these contracts may bring in many room nights but have a lower average daily rate. Transient travellers generally fall into the leisure segment however many hotels associate the best available rate or BAR under transient which may have a percentage of corporate travelers that do not have a pre-negotiated rate and book rooms on an as needed basis.

Extended Stay

As mentioned previously extended-stay demand consists of individuals who require accommodations for more than five nights; typically, the length of stay ranges from ten to fourteen nights, but can stretch to a month or more. This segment is identified in appraisals where the subject hotel, whether proposed or existing, is an extended-stay hotel.

The majority of extended-stay demand is business-related including hospital research, insurance companies use for insurance claims, large-scale construction projects, or corporate projects. Extended-stay demand tends to be an extension of commercial demand as it has a direct correlation with longer term corporate activities occurring in the area.

However given extended-stay hotels offer kitchens and larger living spaces, there is a small portion of leisure demand which includes guests visiting relatives in long term care facilities or home renovations that would take an extended period of time. These hotels typically have limited meeting space if any, and depending on the market, popular with families in the leisure segment.

Meeting and Groups

The meeting and group market includes meetings, seminars, conventions, trade association shows, and similar gatherings of ten or more people. Peak convention demand typically occurs in the spring and fall. Although there are numerous classifications within the meeting and group segment, the primary categories considered in this analysis are corporate groups, associations, and SMERFE (social, military, ethnic, religious, fraternal, and educational) groups.

Corporate groups typically meet during the business week and these groups tend to be the most profitable for hotels as they usually generate ancillary revenues including food, beverage, and banquet revenue. SMERFE groups are typically price-sensitive and tend to meet on weekends and/or during the summer months or holiday season, when greater discounts are usually available.

Although meeting and groups may be high revenue generators, hotels that rely too heavily on this segment may be vulnerable. The downturn in the economy proved that in addition to job cuts, corporations cut group and incentive travel and found ways to conduct business remotely in an effort to reduce costs.

In addition to inducing meeting and group demand into a market area, a hotel's meeting space and facilities will have an impact depending on the existence of a convention centre. If a market has a hotel with a conference centre attached, or thousands of square feet of meeting space, an analysis of meeting demand is important to see whether building a new hotel with additional meeting space will induce more meeting and group demand or if the current meeting space is sufficient.

In the latter, a new hotel may not want to compete on meeting and group business but focus on the commercial or leisure demand that may be leaking from other hotels.

Leisure/Wholesale

Leisure demand consists of individuals and families spending time in an area or passing through en route to other destinations. Travel purposes include sightseeing, recreation, or visiting friends and relatives. Leisure demand is strongest Friday and Saturday nights and all week during holiday periods and the summer months. T

hese peak periods represent the inverse of commercial visitation trends, underscoring the stabilizing effect of capturing weekend and summer tourist travel. Future leisure demand is related to the overall economic health of the region and the nation. Trends showing changes in provincial and regional unemployment and disposable personal income correlate strongly with leisure travel levels. In this segment, high unemployment and difficult economic times have a negative impact.

Furthermore, conducting a proposed hotel feasibility in a highly leisure market may be seen as a riskier investment to a lender.

As discussed previously, transient includes discount or packaged rates. However, the remainder of best available rates that are not attributed to commercial demand can be attributed to leisure demand. Room nights booked through Internet sites such as Expedia, hotels.com, and Priceline have become more prevalent as price conscious travellers search for the best deals on travel. Another major component of this segment is tour groups which can be seen in major cities, markets with gambling establishments or a major tourist attraction, Niagara Falls for example, to draw tour groups to the area.

Occupancy Penetration

What do the various market segments mean in projecting hotel occupancy? A hotel's competitive penetration level is calculated based on each hotel's fair share which simply equates to a given property's room count divided by the market wide room count.

Thus, if one hotel's penetration performance increases, thereby increasing its achieved market share, this leaves less demand available in the market for the other hotels to capture and the penetration performance of one or more of those other hotels consequently declines (other things remaining equal).

Market share represents that portion of demand actually accommodated by a particular property, either by segment as shown below or overall, divided by market wide demand. Therefore we can analyze which competitors have above their fair share in each segment.



Hotels with higher commercial penetration are typically branded driven by corporately negotiated contracts.



Hotels with high meeting and group penetration either have large amounts of meeting space within the hotel or in close proximity, sometimes adjacent, to a convention centre.



Determining which segment a new hotel may be able to steal market share is shown in Figure 3. This proposed hotel is in close proximity to many local leisure demand generators.



Conclusion

Determining market characteristics and projecting future demand growth is imperative in hotel appraisal and feasibility as it is the foundation of market analysis.

The performance of individual new hotels has a direct effect upon the aggregate performance of the market, and consequently upon the calculated penetration factor for each hotel in each market segment.

Segmenting a market allows us to analyze where demand is emanating from within a market and the direction in which the market is headed.

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