At the sidelines of the Lodging Conference in Phoenix, AZ last year just before the onset of the financial crisis, many in the industry swore to hold the line unlike previous downturns.

But all that resolve seems to have quickly melted as evidenced by across the board cuts in rates since November last year for virtually all segments of the industry. That can only be negative. And RFP's reflect that with buyers demanding substantive cuts relative to last year.

Previously I have already pointed out the pernicious effects of discounts earlier this year and there seems to be no let up as the recession continues. Similarly situated industries like restaurants are quickly finding out that it is a race to the bottom as this recent article in the Wall Street Journal notes that "deep discounts that restaurant chains have been offering to lure cash-strapped customers out of their kitchens are coming back to bite them."

The article also quotes a wall street analyst as saying that "We've been hearing from a lot of restaurant management teams that discounting wasn't driving the traffic they hoped for," In fact, restaurant giant, Burger King found its franchisees in open revolt over their attempt to ram down the sale of a double cheeseburger for $1.

On the heels of rate cuts are always cost cuts which which invariably end up affecting service levels and eventually the quality of the product itself as this recent news report from Reuters notes that the "latest quarter's cost-cutting could include everything from laying off staff to paring back newspaper delivery... But with less to cut this time the question (is) how deep the cutbacks can go before wounding hotels' core product: service." 

Necessity may be the mother of all inventions but it may not be so when profit margins are eviscerated as the not so ancillary corollary of discounting is noted in this New York Times article which quotes noted Harvard economist Robert Lawrence as saying that "When prices are kept too low, innovation is nearly impossible.

Besides rate cuts and even service cuts, the industry has also been battered by jurisdictions seeking to shore up steeply declining tax revenues. That the empirical evidence (as recently noted in Ocean City, MD) does not support the notion that occupancy tax raises increases municipal revenues is besides the point for most legislators.

However,in the midst of rampant rate cutting it is refreshing to come across a case of some cities raising rates as mentioned in this news item about hotels in Lausanne and Geneva, Switzerland.

Vijay is Chief Operating Officer and part-founder of Apple Core Hotels- a chain of 5 midtown Manhattan hotels offering value and comfort in the heart of the city.Member of the board of Directors - Hotel Association of New York.

www.vijaydandapani.com