The BIG Hotel Short

As you’re reading, I’d like you to remember a number – 11.3%. You might get something free in return.

I’ve attended four different in person or virtual seminars where panel members or experts have talked about the future of the hotel industry for 2022 and beyond.  Words like “incredible rate growth” and acknowledgments about hoteliers “finally figuring out that rate reduction doesn’t stimulate demand” warmed my heart.  People all looked so excited.  As my forte is Pricing and Revenue Management, I was excited to see my comrades feel proud about their work.  I honestly looked around several times and saw some boastful smiles.  It was magical.

Most of the panelists and experts fell short of putting hard numbers to their expectations – but man did they use some superlative words.  “Speak it into existence” was a theme at one of them.  “Excitement will only be tempered by forces out of our control” was an actual quote from another.  The rosy outlook seems universal.  As of August 12, STR is projecting a 6% growth in ADR for 2022.  On October 8th, RAR Hospitality made similar claims.  CBRE claims 11.4% (albeit in July so it’s an old forecast).  Three respectable sources.  Three positive outlooks.

At Hotel Compete, we figured out a long time ago that the best indicator of the future of our industry is in the Average Published Rate trends.  What do rates – already published – say about the future?  The rates in place now form the basis of the future of our industry.  Regardless of your business mix, the one thing you can control is the price your customers see.  It’s like the thermostat in your house.  I know what 72 degrees feels like.  I can set my thermometer accordingly.  If I want to feel 65 degrees, my trusty thermometer allows me to adjust.  In a matter of an hour or two I’ll stop feeling 72 and start feeling 65.  Rates are the thing all hoteliers can control most easily.  We can turn them up or turn them down.  Raise them or lower them.  Our actions show immediate dividends.  Nothing changes the “on the books” numbers like a good price change. Yet during all these presentations, not one analyst discussed current published rate growth.  Not one.  No one mentioned how much higher the rates for the next 90 days were versus a previous period.  How something so integral to our industry continually gets overlooked baffles me.  Well here at Hotel Compete, we do look.  We are always looking.  And we have three reasons why we think hotels should also have been looking as we wrap up budget season.

Reason One – Increase Coming from a new Hotel Type

For years, our industry has largely owed its rate behavior to a certain type of hotel.  The big kind.  The full service, ask the concierge, room-service loving hotels that flood our major cities with welcoming smiles.  They were largely the innovators in revenue management and certainly the initiators of most of our rate behavior.  Consider the charts below:

Rate growth trends very nicely from 2016 to 2019, adding 2.9, 2.5 and 4.6 points of index in successive years.  Ignoring 2020, the growth from 2019 is roughly 12.5 points.  A substantial growth pace.  Even if we make the arbitrary decision to “split” that growth as if 2020 was a normal year, we could assume that 2020 and 2021 added more than 6 points per year.  A positive trend no matter how you slice it.

Our concern is that the growth isn’t coming from traditional sources.  Historically Full Service/Luxury segments make up more than 80% of the year over year change.  Simply put, when we see a 5-point growth, 4 of those points came from the impact of the higher service hotels.  2021 is not like that at all.  In fact, it is a total flip.  78% of the rate growth we are seeing now comes from hotels who traditionally don’t provide that kind of industry rate help.  I can’t speak to the sustainability of this trend, but I can assure you that my experience tells me that “new” information needs time to ferment before I call it a fine wine.

Reason Two – Convergence of Hotel Types and Value Proposition

While attending the seminars, I’ve heard a few themes that excite me.  The desire to integrate Revenue Management with Marketing and Sales into a single corporate entity is exciting (although I swear, we were talking about that 15 years ago).  The new tools and data sources that hotels are using are exciting – better data is the foundation of better decisions.  But the lack of discussion around “value proposition” and “relative pricing” terrifies me.  In 2008, Reed Holden and Mark Burton wrote what I consider to be the bible of pricing thought process (you can buy it here – I highly recommend it) and if you take nothing away from the book, take away this – CUSTOMERS UNDERSTAND VALUE PROPOSITION.  When value proposition goes awry, alternatives become more easily identifiable.

To facilitate my point, we are going to set a rule.  Luxury hotels offer more services and amenities than Full-Service Hotels.  Full-Service Hotels offer more services and amenities than Mid-Scale Hotels.  Mid-Scale more than Limited and so on.  I am keenly aware that this progression is a bit fuzzy right now due to the labor issues, but we are thinking in the future so let’s assume the world gets back in order in the near term.   I think most of us think it will, but we have entered uncharted territory, so we have no choice but to assume.

At Hotel Compete, we create what we call “rate groups”.  It’s a relatively simple concept, we take your average published rate for the next 90 days, couple it with a weighted mode rate and remove some outliers and put your hotel into a bucket.  The bucket says, “my hotel in general charges rate X”.   Then you categorize 150,000 hotels worldwide using the same method.  This way we have a profile of your rate behavior.  We have about 30 other profiles for your rate behavior, but those are stories for another day.  Everything we are showing here is for US based hotels, there are more than 55,000 in this sample.

The “All Hotel Types” chart below shows an interesting shift in the price hotels are charging.  The red line indicates the shift from the bottom.  Fewer hotels have a published rate profiles in the “Less than $80” range than ever before.  While the green line indicates a huge shift in price points upwards to the “Less than $200” range.  While much of this can be addressed with the aggregate average price increases, much is also attributed to the contraction between the rates charged by “high service Hotels” versus those with “low service” profiles.  The “Full Service vs. Non-Full Service” chart shows below the dramatic shift in rate grouping for the Non-Full Service hotels into groups directly on top of the Full Service Groupings.

One of two things is going to take place over the next few months.  The first is that Full-Service Hotels will begin to increase rates at a pace similar to all other groups.  Thus, creating a full industry wide shift to a base of higher published rates across the board (making up for the issue in Reason One above).  The second is that Non-Full Service Hotels will retreat their rate growth and create a natural separation fueled by a value-based pricing approach that is suitable to consumers.  I am hopeful that the actual result will fall somewhere in the middle of the two options.

Reason Three — Increases versus decreases

The final area of concern is the trend of rate increases each day versus rate decreases.  As I mentioned, we track a lot of things rate-related.  One very large one is the volume of rate increases and decreases each day from the previous day’s rates.  The past 6 years or so, you could bank on a certain pattern each day of the week.  Mondays are more volatile than most days, Fridays have minimal changes and weekends have primarily increases only.  All that said, on average about 7.5% of rates increase each day and 6.2% decrease.  You can almost set your watch by it (well not your Apple Watch, it sets for you).

It appears though that some magic must have taken place on October 4th of this year.  On that date, the pattern of continuous rate increases suddenly began disappearing.  With it, a significant portion of the rate growth also disappeared.  Rate reductions are at a five year high.  Pushing 9% on some days.  This isn’t a seasonal occurrence either.  Change volumes in October are usually lower than other periods.  Look at the chart below:

Seems to me that the more we change, the more we stay the same.  On this magic date, just about the time we started getting all the rosy projections, we’ve changed our behaviors.  Rate decreases day over day now exceed the increases.  The shocking part is the sudden change.  What happens when rates start decreasing faster than they increase?  Future aggregate rate growth suffers as well.  If it interests you, we have seen future rate growth decline for 33 consecutive days.  Losing nearly 3 full points in the process.

Remember the number I asked you to keep in mind?  That number (11.3%) is the current growth rate of all rates versus the same period in 2019.  A month ago it was 14.3%. In all honesty, when I envisioned this post, I was planning on focusing on the huge growth and joining in on the “the future looks rosy” bandwagon.  Now it appears I can’t.  It bears watching, and watching closely, so we’ve built a US Published Rate Trends Dashboard to allow you to do so.  The tool is free and it updates daily.

You can’t do all the analysis I’ve done above with the free version, but we have solutions to allow you to tailor the view you want available.  Just call us or shoot an email – we are happy to talk. I am personally available at [email protected]