creativity to take advantage of a horrible recession, and it was a
Such a survivor-themed package is apropos for the current
state of the lodging industry. As RevPAR plummets to unprecedented levels, hotel owners have been forced to slash rates
and offer special—some would say desperate—promotions to
lure guests to their front desks just to get through this economic maelstrom.
Not many operators and owners would admit they have resorted
to such tactics, saying only that they try to meet their individual
market in terms of pricing. Nevertheless, the statistics bear out the
reality of average daily rates that
are sinking, well, almost daily.
ADRs are on path to decrease by
8.8% this year. Next year looks a
bit better: room rates are
expected to drop by only 1.8%.
RevPAR is projected to slump by
16.4% in 2009, followed by a
0.7% dive in 2010.
“Everyone is saying they are
not cutting rates…until they have
to,” says Leslie Ng, chief investment officer for Interstate Hotels
in Arlington, VA. “Everyone is finding that, in virtually all markets, they have to cut rates if they want to” remain competitive.
Within Interstate’s portfolio of 229 hotels, RevPAR declined
20.6% year over year, ending the third quarter of 2009 at
$78.28. ADRs fell 12.8% to $119.84 over the same period.
Much of the pressure to scale back rates is coming from
corporate customers who now have the upper hand in negotiations. “They are renegotiating their corporate rates and want
to lock in not only for one year but perhaps two or three
years,” Ng says.
But is reducing rates the way to go? According to a study
released this year by the Center for Hospitality Research at the
Cornell University School of Hotel Administration in Ithaca,
NY, slashing ADRs is an ineffective strategy, whether the economy is robust or stagnant.
The report, titled “Competitive Hotel Pricing in Uncertain
Times,” was authored by Cathy
A. Enz, a Cornell full professor
in strategy and the Lewis G.
Schaeneman Jr. professor of
innovation and dynamic management; Linda Canina,
Cornell’s associate professor of
finance and editor of Cornell
Hospitality Quarterly; and Mark
Lomanno, president of STR
Global, a research firm that
tracks hotel data worldwide.
The trio decided to undertake the study to get a better understanding of average daily rate patterns in the hotel business.
“Not much is known about pricing in the lodging industry,”
Canina states. “One of the common trends is that when things
are bad, hotels tend to discount. But there was nothing written
about whether that is a good strategy or a bad one. Because if
hotels discount and their profits don’t increase, what’s the
point?” Previous studies tended to look at pricing at the macro
level by aggregating data for supply and demand on an industry-wide basis. By doing so, the implication was that lowering ADRs
would increase demand and, therefore, revenues.
However, pricing decisions are typically done in reaction to
what is happening at the local level. In other words, Hotel A
slashes its rates and its competitor, Hotel B, follows suit.
“Hotels either charge more or less than their competitors,”
Canina says. “That gave us the idea of looking at the pricing of
a hotel relative to its competitors at a local level.” Accordingly,
the researchers delved into the pricing behavior of more than
67,000 hotels between 2001 and 2007. During that timeframe,
there was a distinct downturn (2001-2003) and a robust period
(2004-2007), thereby giving a window into what price cuts had
been in both good and bad economic conditions.
The researchers categorized
hotels from 30% below to 30%
above their competitors’ pricing,
Canina details. Then they looked
at their percentage differences
in occupancy and in revenue per
The researchers found discounting ADRs did increase
occupancy, but those extra heads
in beds failed to boost RevPAR.
Conversely, those hotels that
resisted the urge to cut room rates saw higher revenues per
available room, even though their occupancies suffered a bit.
There were some variations based on how much lower or
higher a particular hotel’s prices were compared to its competitors, but the pattern pretty much held true for all lodging
segments and in all economic climates.
“So if a hotel is looking at comparative pricing relative to its
competitors, it’s better off having higher prices, lower occupancy and higher RevPAR,” Canina says. “During good and
bad economic times, the same result holds. So it is not dependent upon the state of the economy.”
Admittedly, when hotels are getting battered as they are
today, it’s hard for an operator to overcome the temptation to
discount. That is because hotels evaluate their performance
based on occupancy, not RevPAR. “So, yes, they will have
higher occupancy, but they won’t have higher profitability,”
If hotels discount
and their profits
don’t increase, what’s the
point of discounting?”
Cornell University School
of Hotel Administration
The only way to keep ADRs
high and increase revenue and
occupancy is to stimulate
demand—a difficult proposition
when people and businesses
don’t have the money to travel.
“That’s not happening now
because a lot of people are unemployed,” Canina explains.
Moreover, wealthy individuals are
also feeling the pinch. “Before,
luxury properties were not as
sensitive to a downturn in the economy as mid-scale and economy hotels,” she adds. “But luxury hotels are being hit quite
hard by this recession.”
Most in the industry agree that luxury properties and resorts
have been hit the hardest, and urban markets are increasingly
competitive. Geographically, formerly high-flying cities such as
Las Vegas and New York have experienced the biggest downfall. “The ones that had the extraordinary gains during the
past several years are having the largest declines during this
downturn, partly because the rates were so high,” Ng says.
Academic studies aside, hotel owners and operators say they
Everyone is saying
they are not cutting
rates...until they have to.”