Strategies for Success in Today’s Economic Environment And How Hoteliers are responding to the Financial Crisis

In today’s volatile market environment, even yesterday’s dire predictions seem tame. At present, market analysts are changing their predictions day by day. The latest forecast from PKF Hospitality Research for 2009 is a 9.8% drop in RevPAR, which may still be revised yet again (last month it was 7.8%). PricewaterhouseCoopers LLP recently revised its 2009 forecast to an 11.2% decrease in RevPAR.

As most hoteliers are painfully aware, both ADR and occupancy rates are trending downward. Amid all the gloom and doom, the human psyche is usually either paralyzed by fear or blinded by wishful thinking. Yet, as they say, there is always a silver lining in the dark storm clouds.

The good news is that historical patterns indicate hospitality organizations that make the critical course corrections will not only protect profitability now but benefit the most when economic conditions improve. And there is an emerging consensus that there’s no better time than now to “seize the moment” by taking leadership to fine-tune your business and invest in your customers, rather than hunkering down.

What follows below are examples of how hospitality organizations are pursuing new revenue opportunities and then how they are effectively reducing costs – with some overlap in between.

In Pursuit of Revenue Opportunities

The historic Driskill Hotel in Austin understands how to look for revenue opportunities. This upscale property, managed by Destination Hotels & Resorts, is representative of how operators are finding new customers by going after increased business bookings, meetings and events, as well as leisure travelers. They are also enhancing value, reducing costs and paying more attention to their guests. John Spomer, Vice President and Managing Director, described how they are aggressively managing their business:

“We are auditing all F&B offerings for increased value and optimized costs,” said Spomer. Too often F&B tends to be a loss leader in many markets, so hoteliers often focus on this area when the market is soft. In many cases it makes sense to reduce hours, cater to what the customers really want, and then scale down the rest. The goal is to better utilize F&B to drive traffic to the hotel facilities.

“On the sales side, we’re taking a more aggressive approach to business development by prospecting and developing new customers,” continued Spomer. “It’s also vital to have a real-time customer complaint management system. We personally get back to every guest that completes a survey with a ’less than meets expectations’ rating. We have someone dedicated to this kind of customer relationship management and it makes a difference.”

Looking for the Right Pond to Fish in

The Fairmont Chicago at Millennium Park looks for new business wherever they can find it. Andre Zotoff, General Manager, explains how they target high-end groups to help make up any slack in revenues. That means looking beyond their traditional clientele base.

“These are very difficult times, so we are taking a different approach to business and looking beyond our traditional market,” said Zotoff. “Our strategy is to find out where there are still business opportunities, looking for the right pond to fish in. We’re reaching out to the entire Midwestern region and looking for opportunities in our own neighborhood that we can convert into business. Around 60% of our business comes from high-end groups, and the rest are business and leisure travelers who tend to be transient in nature.

“We’re also offering enticements such as free parking or free breakfasts, special package offers for meeting planners and business groups,” continued Zotoff. “However, we’re also being cautious so that we’re not undercutting ourselves and leaving us at a competitive disadvantage when business conditions improve. And we’re being more efficient so that we don’t wind up making only 20 cents on the dollar.”

A Bigger Piece of the Pie: Increasing Market Share

Marketing and sales often gets the axe when economic conditions soften, which may only compound the misery. Many hospitality executives point out that now is the time when you need to boost these efforts the most (while the competition withers away). They cannot afford not to spend the effort on going after new business when occupancy is down. According to Lou Parisi, Senior VP, Controller and Treasurer for Dolce Hotels and Resorts, that means greater competitive intelligence to go after a bigger piece of the pie:

“Obviously in these times we look for business opportunities wherever we can find them,” said Parisi. “We believe there are additional opportunities in every location where we are at presently. Our big focus is to capture our fair share of the market; we are looking for new business and stealing as much market share as we can. We are keeping a pulse on competition so that we know their weaknesses; then we can exploit any vulnerability and target their customers.”

A Simple Phone Call from Management

“We are very focused on our current customers; we keep in touch with them and stay close so that when things turn around we’ll be first in mind,” continued Parisi. “They don’t necessarily want to be contacted frequently, but if you do it right, it just takes that one phone call from a senior member of our management team. We have found that our customers like to hear from us.”

Many hoteliers stress the importance of paying attention to customers, maintaining service standards and not making cost reductions that result in degradation of the brand prestige. Not only would that negatively impact profitability but set up organizations at a disadvantage when the economy rebounds.

The Zone Offense Approach

There’s no place that is being completely spared from the global economic downturn. Hawaii hotel occupancy is significantly down. But the stunning Fairmont at Kea Lani, located on the pristine Polo Beach in world famous Wailea, Maui, has a strategy for staying profitable and competitive.

“We’re engaged in a zone offense approach to deliver strategies that cover more areas of responsibility with less personnel,” said Scott Ingwers, Hotel Manager for the Fairmont at Kea Lani. “We are also re-working the product offerings to appeal to consumers in a buyers’ market. The other area we consider important is to focus on our colleagues who deliver the product and improve their level of engagement. That’s a critical point of differentiation from your competition.”

Recovered Revenue: Guest & Meeting Planner Feedback Systems

One significant approach to today’s tough economic environment that is gaining traction is the utilization of guest survey analytics to create actionable intelligence. When these data points are correlated with other key performance indicators, hospitality organizations can make meaningful changes that impact the bottom line. They can also scientifically identify those customers that have a high probability to return and recommend the property to others, which lowers the cost of customer acquisition. The critical differentiator for any feedback system is the ability to pinpoint revenue at risk due to dissatisfaction and then provide precise knowledge to make successful recovery efforts in real time. The guests who are most likely to respond to this kind of personalized response are ’convertibles’ who typically fall around the neutral zone of guest satisfaction; they can easily be identified and targeted for guest recovery. Depending upon the amount of effort spent to keep the ’convertible’ guests, the ROI could be as high as 300% on recovered room revenue. This fact alone more than warrants such an investment in feedback systems.

UniFocus conducted research studies at several properties to determine how much revenue was actually at risk. Let’s assume that only 25% of this revenue is recovered at any particular property (a very conservative number compared to historical patterns). Based upon a simple investment in an advanced scientifically-proven feedback system, the return on investment would be 126 times the original investment, an extraordinary ROI by any measure.

According to Dr. Daniel Mount, Associate Professor in the School of Hospitality Management at Penn State University, having a reputable guest and meeting planner feedback system in place is critical for protecting profitability during the present economic downturn:

“The greatest danger to any hospitality organization is a presumption that they know their guests and what they expect in the way of service delivery,” said Mount. “That’s why all of the major successful hotels have some type of feedback system already in place utilizing statistically valid sample sizes. The purpose of this system is to produce genuine research about your guests that enable you to understand what’s important to them and how well (or not) your organization is delivering that level of service, and whether or not your standards reflect those expectations.”

In Pursuit of Cost-Cutting Opportunities

Protecting revenue is only half of the equation for success in today’s market environment. The other component is reducing expenses and in a way that does not diminish the customer experience. Many of the larger brands have already put into place cost-cutting measures throughout their properties; some of these initiatives are obvious and prudent, while other options require closer examination.

Frugality Rules the Day: Major Brands Trim Amenities

According to a recent article in The Wall Street Journal, Ritz-Carlton hotels are reducing hours at restaurants, spas and retail shops; they are also stopping fresh-cut flower displays and setting up apples or potted plants instead. Wyndham Hotels and Resorts are putting fewer towels in rooms. The Courtyard and other Marriott chains recently stopped putting hand lotion in their rooms, while still making it available at the front desk. And many hotels have reduced and refined their F&B offerings.

Winning the Battle: Dollar by Dollar, Hour by Hour

In the words of one hospitality executive, success is literally measured dollar by dollar and hour by hour. David Lund, CFO for the Fairmont Royal York in Toronto, described the kind of intensity and scrutiny that is required to swim upstream and win opportunities in the present market environment.

“What we’re doing in these challenging times is looking at all of our opportunities for revenue enhancement and cost savings,” reports Lund. “What’s different this year is that we acknowledge that the battle is won dollar by dollar and hour by hour. Every transaction counts and if we examine very closely, we can and do find savings, and they do indeed add up. There is no longer any low hanging fruit, so to speak, but there are a thousand opportunities if we’re willing to jump a little higher.”

Controlling the Largest Expense: Labor

It’s no surprise that most operators are focusing on labor first — the largest single expense for running a hospitality business. However, smart managers understand that it’s not just about reducing headcount. The emphasis should always be on the customer and maintaining service standards. Andre Zotoff, General Manager for the Fairmont Chicago at Millennium Park, explains how their system works:

“Payroll can make or break us, so workforce management is very important,” said Zotoff. “Our labor management system enables us to forecast revenue streams more accurately and schedule labor more effectively. Occupancy can range from 2% to 105%, whereas usually our staff capacity is 30-80%. In many cases overstaffing occurs in areas that ordinarily we would never hear about. There are times when we might have a large international group that arrives late, or any other unknown variable.

“The labor management system we use gives us a forecasting capability that enables us to know how guests will arrive based upon patterns,“ continued Zotoff. “For example, our standard for housekeeping attendants is to clean and maintain 15 credit rooms, but actually it’s more like 14.3 due to variances such as extended stay, late arrivals or ’do not disturb’ signs. However, if we have predictive knowledge we can reduce overstaffing and turn the 14.3 into 14.6, making a huge cumulative impact over time.

“Our labor management system recognizes characteristics and past history that you could never identify manually,” said Zotoff. “It considers all the rules, doesn’t forget and compares schedules. It’s very tight and there are no emotions. That enables us to better identify these kinds of situations where one staff member can leave at 8 not 10am. Another area where we have improved is in our F & B operations. If we have 74 covers per hour, we can improve efficiency to 78 covers per hour by having a staff member responsible for three more covers.”

Zotoff believes that the single biggest reason their labor management system works so well is because executives from the operations side meet with department managers every week to compare actual and forecasted labor expenditures and usage. “Every week on a consistent basis we review and compare the forecast to actual numbers and find out why there is any variance. Then we can reduce over-staffing.”

“With the labor management system in place we are not only reducing expenses but improving service to our guests,” emphasized Zotoff. “This comes from greatly improved knowledge about our employees and customers so that we can run our hotel more intelligently and more profitably.” Zotoff estimates that their labor management system from UniFocus generates approximately $500,000 a year in payroll savings.

Time to Re-Examine Every Aspect of Your Business

In response to today’s volatile market environment, many hospitality organizations realize that it’s time for a thorough re-evaluation—leaving no stone unturned. According to Kelly Cosgrove, General Manager for Fairmont Sonoma Mission Inn & Spa, “Current economic conditions require savvy hoteliers to re-examine every aspect of their business. Every potential revenue stream needs to be carefully reviewed, traditional business methodologies scrutinized. Maintaining strong relationships with key partners will prove to be paramount.

“Our leadership team, working with sister properties, is focused on realizing all cost efficiencies and that includes coordinating regional initiatives,” continued Cosgrove. “Further, we have begun the process of renegotiating long-term goods and services contracts.”

Cosgrove also emphasized how important it is to consider everyone’s vested interests: “The Fairmont Sonoma Mission Inn & Spa remains committed to the long-term health and vitality of both the destination and the resort. Our keen focus and diligence will continue to consider all stakeholders.”

One Caveat: Maintaining Service Levels is Critical to Protecting Profitability

Although there is lots of cost cutting going on, one industry source indicated that maintaining service levels is a critical factor in protecting profitability. This individual is the Regional Controller for a major luxury hotel chain and explained that lowering service levels (and sometimes even pricing) would have a negative impact on their reputation in the industry. As an example, they pointed out that while other upscale hotels in their area cancelled their holiday event for clients, they pushed through with theirs.

Like many other hospitality organizations, the chain above is streamlining and improving processes; there are also significant investments being made in labor management systems such as Time & Attendance and Scheduling, which have proven benefits. These systems can positively impact the bottom-line, virtually eliminate over-staffing and actually enable hospitality organizations to improve service levels.

Where Revenue Enhancement & Cost Reduction Converge

Opportunities to pursue revenue or drive down costs are not mutually exclusive. For example, reducing hours or offerings in F&B will not only cut expenses but actually become part of the property’s marketing strategy for driving traffic to the hotel. And a smart labor management system will reduce overstaffing in those areas where opportunities exist, while also ensuring that the hotel is better prepared when high-end business groups arrive. Hospitality organizations must do more than follow a “meat axe approach.”

Conclusion

Historically, there have always been organizations in nearly every industry that prosper, even during severe economic downturns. Although the reasons and circumstances vary, today is certainly no different. Starwood Hotels & Resorts Worldwide, Inc. recently announced the opening of its 100th hotel in 2009 as part of the company’s plan to open 100 hotels this year in diverse markets throughout the world. The Sheraton Atlanta is spending $20 million this year on a capital improvement and enhancement program encompassing all facets of the 760 guest room and conference center hotel. On another front, Wyndham Hotel Group continues to solidify its position as the leading U.S. hotel company in China with the opening of seven hotels in December 2008. These are just a few headlines among many.

The consensus among many hoteliers is that in current market conditions nearly every organization is operating from a dynamic business model. They are managing their spending proportionate to revenue. Even though certain items are budgeted, if the revenues are not there, then they don’t spend the dollars. However, financing technology investments such as labor management systems that deliver measurable ROI are now being prioritized at many hospitality organizations and some major brands as operators become more acutely aware of how they can right-size staffing without sacrificing service quality.

If there is one commonality among successful hospitality organizations in today’s economic climate, it is the intensified focus and leadership of their management teams. As a side note, management consultant Ram Charan advises that this kind of “management intensity” is the key to surviving today’s business crisis in the recently published “Leadership in the Era of Economic Uncertainty” (McGraw-Hill). The author describes this power of concentration as a total immersion in the operational details of the business and outside world, combined with hands-on involvement and follow-through—which, not coincidentally, happens to be the primary characteristic of every hospitality executive quoted in this article. Although there are indeed many ways that hospitality organizations can make headway in today’s economic environment — nothing can replace the drive, determination and leadership of a determined management team that keeps staff engaged and customers ’wowed’ so that profitability is protected.

Finally: some food for thought. This past January at the Americas Lodging Investment Summit (ALIS) at the Hilton San Diego Bayfront, Richard L. Solomons, CFO for InterContinental Hotels Group, said:

“We’re in business for the long term and you have to remember that.”