You probably know that, in the world of hoteliers, the word "key" can be used as a synonym for "room," and "flag" can also mean "brand." You may have heard a general manager use the word "bones" to describe a property's basic physical structure. But do you know what hoteliers mean when they talk about "compression"?
Compression describes a desirable consequence that occurs as a hotel fills up on a given date. Meetings and conventions business has become essential for large hotels to create compression. Though rooms that event planners block are usually paid at negotiated rates, below rack, what's important for hoteliers is that the room block reduces supply, making the remaining rooms a scarcer commodity. Conditions are then ripe for demand to exceed the remaining supply, an environment that enables rates to rise.
But even the best-laid plans of supply and demand can go awry. A few weeks ago, a general manager of a well-known luxury brand in the heart of a major meetings destination confided to me that compression just isn't happening as it should nowadays. At least, he said, not in the luxury sector.
"We call it the 'AIG effect,'" he said, referring to the insurance giant's much-criticized $440,000 post-bailout meeting at the St. Regis Resort in Monarch Beach, Calif. "Companies, especially public companies, don't want to be seen as splurging on luxury during tough economic times."
Appearances, he said, are everything. "One company that canceled a meeting with us forfeited a $250,000 deposit, and we're going after them for another $150,000 that they contractually owe us," he said. "For them to walk away from $400,000 and get nothing in return is not exactly fiscally responsible. But then again, that's not really what it's about. It's about what shareholders see."
As with so many aspects of our current financial crisis, this should not be happening. Two and a half years ago, when luxury brands were expanding rapidly, I asked former InterContinental President J.T. Kuhlman, then president of the luxury resort group OneandOnly, what would happen to luxury brands when the economy inevitably pulled back. Those who position at the very top will do just fine, he said, noting that Ferrari sales never waned in bad times.
But it would appear that in the present climate, a prudent CEO would garage the Ferrari and be seen arriving for a shareholder meeting in a Prius.
Conventional wisdom has always held that brand strength is a valuable asset in tough times. But we now discover that, surprisingly, if your brand is equated with high quality and great service, your brand reputation can actually be viewed as a liability. Right now, it's hard for any corporation to justify staying at luxe brands and, ironically, the stronger the brand, the more likely it is that a watchdog shareholder will recognize it.
Although Smith Travel Research notes that average daily room rates actually rose, on average, 3% in September, the GM I spoke with said it's not happening in the luxury sector. "We have traditionally set our lowest rates right where the next level down, the upscale hotels, set their highest rates," he said. "When an upscale hotel in our market is not working to maintain rates, and they lower them substantially, that affects us. We cannot allow that gap between their highest and our lowest to widen."
I asked how low his lowest rates were.
"It embarrasses me. It's $200 a night. Can you imagine?"
Even without the AIG effect, the luxury space can be a painful place in a down cycle. Horst Schulze, who played a leading role in the expansion of Ritz-Carlton and now leads the group that is deploying the Solis and Capella brands, once told me that in the dark days after 9/11, he went into the lobby of a luxury property and was surprised to see an empty vase where there typically had been an enormous display of flowers.
"I asked the GM why, and he told me that their occupancy was only 70%," Schulze said. "I asked if he was trying for 50."
The GM I was speaking with more recently said that current conditions are, in economic terms, worse for him than the post-9/11 period. "Travel was down then, but a significant number of people were still traveling, and it was almost patriotic to spend money in support of the travel industry."
As Sarah Palin recently learned, we've entered an age when it's unseemly for anyone in the public eye to be too closely associated with luxury brands. This situation will ease with the passage of time, but some of the fallout might never go away: I'm willing to bet that the term "AIG effect" has entered hoteliers' lexicon on a permanent basis.
Contact Arnie Weissmann at [email protected].