NASHVILLE, Tennessee—To have a better idea of what a potential downturn could mean for the U.S. hotel industry, it’s worth observing how hoteliers behaved during the last one.
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Carter Wilson, SVP of consulting and analytics at STR, explained during his session “Chaos or control? Pricing psychology in a downturn” at the 2019 Hotel Data Conference that the company has heard frequently from clients that there was always one hotel in each comp set that was quick to slash rates. As a result, others felt compelled to follow suit. (STR is the parent company of HNN.)
Wilson said his team looked for evidence of these “rogue hotels” in 2009 to find out who cut rates by 10% or more first and how long it took for others in the comp set to do the same.
“Big disclaimer: There were no winners in 2009,” he said. “Every hotel lost substantial (revenue per available room); they just did it differently.”
The analysis
U.S. hotel rates plummeted in 2009, Wilson said. The recession created all-time, record-setting losses for both rate and RevPAR, with demand falling off for quite some time across the U.S.
To start the analysis, STR looked at Chicago, a market that lost about the average RevPAR in 2009 as the U.S. as a whole. Starting with one comp set with four competitors, they looked at when one hotel reached the 10% ADR drop threshold after the start of the recession in September 2008 and how quickly it took for the others to drop as well.
“It took about a month for the second hotel to follow and about two months for the fourth hotel to follow,” he said.
In looking at the entirety of Chicago as represented as a four-competitor comp set, the first two hotels to cut rate reacted to each other as did the third and fourth, Wilson said. The first two lost rate by about 20%, but the last two didn’t see as big of an impact. The second property followed in dropping rate after about a month, and the fourth property took 130 days to do the same, he said.
In looking at the overall impact, each hotel sustained losses in RevPAR that were roughly the same, he said. Those who held onto their rates the longest sustained twice the occupancy loss.
“So it’s just matter of the mix of how you want to lose your money: rate or occupancy,” he said.
The chain scales
In looking at how hoteliers reacted by chain-scale segment, it shows another perspective, Wilson said. In the combined economy and midscale segments, the competitors didn’t seem too reactive to each other, as it took 90 days for the second property to drop rate.
Moving up the chain scale, the timing tightened up more in the upper-midscale and upscale comp sets, he said. The upper-upscale and luxury were “very reactive,” taking 24 days for the second property and then 100 days for the fourth.
“The higher the chain scale, the shorter the timing gap, not just to each other, but to the starting one,” he said.
Focusing on Chicago’s central business district, the competitors were reactive to each other, as the second one waited 15 days to drop rates and the fourth took 108 days, he said. The non-CBD comp sets were further spaced out and not as reactive to each other.
What happened in Chicago wasn’t an anomaly, Wilson said. Most hotels can’t hold their rates steady when others in their comp set drop theirs. There are no winners when comp sets start to drop their rate. The downturn in 2009 created significant losses for everyone.
“My advice is you need to create a model and stress test your hotels,” he said. “See what happens when you lose rate and occupancy. Hopefully, we won’t see anything like we saw in 2009. We’re going to find out.”