According to a recent J.D. Power consumer-satisfaction study, the hospitality industry has reached a seven-year low in the key areas of check-in/checkout, services, facilities and food and beverage. It’s within one point of the low for the guestroom itself.
These results were front and center during the opening CEO Panel at last week’s Cornell University Hotel Research Summit, held in Ithaca, N.Y., and although the reasons for the decline are complex, they can perhaps best be summarized by my recent experiences with Toblerones and Snickers.
Every year for the past 11 years, I have attended a conference held at a luxury West Coast resort. It’s not all-inclusive, but some of the minibar offerings are complimentary: soft drinks and beer, potato chips and granola. And candy bars.
From 2002 through the summer of 2008, the candy bar was a small Toblerone. I like Toblerone, and I thought it was a good match for the general level of amenities the resort offered.
In 2009, during my first visit after the economic downturn, I noticed that the Toblerone had been replaced with a Snickers. Fair enough, I thought. Times were tough, especially in the luxury sector, and any money that was saved was likely to reduce losses.
But during my most recent visit a couple months ago, I was still being offered a Snickers, even though occupancy and rates had risen significantly since 2009.
Where’s my Toblerone?
During the Cornell conference, it became clear that the answer lay not in front-of-house, guest-facing competency, nor in the nuts-and-bolts, back-of-house operating procedures. It lies in far, far out-of house changes in the hotel investment environment.
Arthur Adler, managing director and CEO-Americas for the investment banking firm Jones Lang LaSalle Hotels, hinted at this during the CEO panel, and in a presentation later that day titled “U.S. Hotel Investment Market: Defining Forces for the Next Five Years,” he took a revealing deep dive into changes regarding who is investing in hotels and what they expect.
In 1998, he said, among the hotels belonging to the top 10 owners in the country, 41% were in the hands of hotel companies.
Today that number is 4%.
Since 2000, the greatest number of hotels that have changed hands were acquired by private equity companies, surpassing real estate investment trusts (REITs) over the past decade as the most active buyers. And private equity companies are currently sitting on four to five times more capital than REITs have for acquisitions.
Typically, private equity investments are highly leveraged, and firms hope to exit from an investment in four to five years. If, as happened in 2008, they face an unexpected extended downturn, they are under significant pressure to stem any losses while still trying to maximize returns.
My Toblerone/Snickers story, says Stuart Greif, vice president and general manager of J.D. Power and Associates Global Travel and Hospitality practice, is “a microcosm” of how hotel ownership trends can result in guest dissatisfaction. (The equity of my Toblerone-to-Snickers resort is held by a small group of private and institutional investors.)
“During the height of the recession, prices were down, and there were fewer people on property,” Greif said. “Even though staff was reduced, since occupancy was low, they had time to talk with guests about the amenities that were available, and they could upgrade people to nicer rooms and, at the very least, keep them out of rooms that needed renovation. There was no line for the treadmill in the fitness center, no waits at the restaurants. Service was attentive, and rates were low, so the value was perceived as being very high.”
By the time occupancies began to rise, most hotel owners had significantly lowered their cost structures, and their hotels could, by and large, be more profitable at lower levels of occupancy. As occupancy began to rise and hotel owners saw higher profits, they were reluctant to bring staffing levels back
up, embark on major renovations or, apparently, supply complimentary Toblerones in the minibar.
Further, Greif said, check-in lines are getting longer, front desk staff have less time to spend with each guest, and tired rooms are being occupied. At the end of the day, he said, guests feel less valued.
Adler of Jones Lang LaSalle Hotels noted that given private equity’s investment horizon, hotels change hands more often than they used to. During the opening panel, Ted Teng, CEO of Leading Hotels of the World, a collection of mostly independent, family-owned properties, said this level of turnover leads to discontinuity.
“Across the board, many more hotels are changing hands, changing operators,” Teng said, “and earnings are taking a much higher priority than guest satisfaction.”
He noted it was not only private equity, but public hotel companies that “are more preoccupied by driving return on investment and earnings before interest, taxes, depreciation and amortization than [by] guest satisfaction. The window for payoff is fairly short, and all of this has led to a really short-term mentality. I’m not surprised satisfaction is down. We’re not building for the long term. It’s more about the immediate results.”
Panelist Adam Weissenberg, vice chairman for global and U.S. travel, hospitality and leisure at Deloitte, countered that “businesses are out to make money. If you look at statistics, revenue per available room [RevPAR] is up, occupancy is up, profits are up. Things seem pretty good.
“I can understand [Teng’s] point about the short-term nature of the industry, particularly with public companies. But what if they put aside 5% of revenue to really improve quality and technology and customer service, and they get zero benefit? It’s about quarter-to-quarter profit. I get it. You’re running a business every day; you’re going to try to maximize profit, some on revenue, some on cost.”
But he ended on a cautionary note: “At some point, this will come back to haunt people. They won’t have guest loyalty, and when the next downturn comes, [guests] won’t come back at any price.”
J.D. Power’s Greif, too, expressed some sympathy for owners trying to reap the benefits of higher occupancy and rates after years of suffering.
“They have a time horizon, which may have become longer than ideal because of the recession,” Greif said.
But his sympathy is limited.
“Because of ownership structure, there’s now a separation of the physical assets and balance sheet from the brand management,” he said. “There are reasons why that’s done, but in the end there is less ability for management to tell owners, ‘This is the right thing to do.’ Rather, it’s a negotiation. Some [owners] will do certain things to increase the value of the brand, but many decisions will be focused on the time horizon and may actually hurt the brand. If you do things that cut costs in a luxury brand, for instance, you may make the brand less
luxury, but more profitable. It’s a trade-off, but may hurt the brand’s positioning.”
Another CEO panelist, David Peckinpaugh, president of the travel management company Maritz, said there are consequences for hotels that slip.
“J.D. Power says almost every service level has dropped,” he said. “We see this as a key divider about who we do business with and who we do not. It’s not surprising to see those results, given where we’ve been the past two or three years.”
Adler asserted that operations and service are extremely important. He said owners understand that unlike many investments, hotels are an operating, rather than passive, investment, and they also understand that service can drive value.
But, he observed, “This downturn is deep and long. You have to recognize that. RevPAR went down 20% to 30% during the recession, values went down 40% and an above-average number of rooms were added in 2008 and 2009. That has an impact on the ability of owners to invest in their properties. Many were capital-starved. It was a matter of survival for many. And many went into default.”
Greif, however, said there are more opportunities to raise prices than are actually being embraced.
“Average daily rates were up about 4% last year,” he said. “But generally, hotels were happier to put heads in beds than to raise prices significantly. It’s a sharp drop and a slow walk back when you’re coming out of a price war. Still, there’s suggestion that you can price higher. Although the perception of value is down from last year, it’s still significantly above historical lows. That said, if the rest of the guest experience is deteriorating, charging guests more and providing less is not a sustainable business strategy.”
Paradoxically, those who do renovate now are likely to see even lower satisfaction rates due to the inconvenience of renovation, but once renovation is complete, the results bounce back higher than they were, Greif said.
Yet another dimension of lower guest satisfaction, Greif said, results from hotel companies’ compromised ability to shed lower-performing properties, as Holiday Inn did when it was revitalizing its brand.
“What is different is that there used to be concurrent growth in revenue and profit to offset loss of revenue from culling lower-performing properties aggressively. But now they need the revenue and profit from lower-performing properties.”
There is a lot that can be done with properties to increase guest satisfaction that doesn’t also increase expenses noticeably, Greif said.
“A warm smile doesn’t cost $5 million,” he said. “Hotel staffs drive higher levels of satisfaction, particularly at the top end.”
As for Snickers and Toblerone, Greif worries that by saving nickels and dimes “you can so denigrate a brand that it takes that much more capital and energy to reinvigorate it.” He paused. “If you can do it at all.”
Email Arnie Weissmann at [email protected] and follow him on Twitter.