HENDERSONVILLE, Tennessee—The ongoing macroeconomic deterioration causes a number of our clients to scrutinize our data more intensely to see what trends emerge as they “peel the onion” of monthly STR reports. One data series that gets continued attention is the Segmentation Data, which shows the performance of group rooms (sold in increments of 10 rooms or more) and transient rooms (sold in increments of one room to nine rooms). We collect this data for the upper end of the market, and thus this article describes demand and rate premium performance for luxury and upper upscale hotels within those respective segments.
As 2008 drew to a close, the Total U.S. performance numbers of the hotel industry had already slightly deteriorated. However, the real impact of the recession and the dreaded “AIG Effect” really only hit home after Labor Day. Performance in the last four months of the year stands in stark contrast to the beginning eight months. While RevPAR only declined 1.9 percent for the year, it fell 8.2 percent in the last four months of 2008. However, this RevPAR number is a mix of group and transient data points and, as we will show, the actual performance of the transient segment was likely much worse.
When examining demand in the luxury hotel market on an annualized basis, it becomes obvious that the sharp drop in transient demand already started during the summer with a soft slide and deterioration of former robust growth rates from around 3 percent in January to 1.6 percent in July.
But in September, demand grew only 0.6 percent, and for the remainder of the year, the demand for luxury transient rooms was less than it was in 2007. In contrast, group demand was fairly healthy throughout the summer, averaging around 1.5-percent growth, and only dropped off in the last months of the year. The average luxury demand numbers therefore masked a dropoff in individual travelers, who are probably a better indicator of traveler sentiment and overall health of the industry.
It is very interesting to observe the accompanying rate premium deterioration between transient and group rates. Group rooms, bought in bulk and with a longer booking window, often are priced at a discount. The luxury ADR premium between a transient and group room, however, deteriorated as the year wore on. Whereas at the beginning of the year luxury hotels, on average, charged more than US$75 more for a transient room than a group room, this premium declined to roughly US$65 in December. This probably points to the rapid rate discounting of transient rates compared to somewhat more “fixed” group rates.
Upper upscale hotels reported very similar demand patterns with regard to both transient and group demand. Again, we observed a rather sharp decline in transient demand while the group demand growth rate remained consistent, although at a negative level. Annualized demand for group rooms declined every month compared to the same month in 2007. The only positive indicator is that the decline was measured. Transient demand percent change was negative in the last two months of the year. Again, the scale-wide average numbers probably masked the negative reality of decreasing numbers of travelers.
As observed in the luxury segment, the Transient ADR premium for upper upscale hotels also declined, from a little below US$15 in January to around US$9 in December, on an annualized basis. Some markets, however, have already reported that the Transient rate slipped below the Group ADR.
This is troublesome in two ways:
First, consumers who attend group meetings and go online to find a cheaper transient rate will book this, and if this pattern repeats, the room block will not be filled. Then the hotel will try to assess penalties against the conference organizer, despite the fact that the conference attendance goal was probably met.
Second, and maybe more troubling, the current Transient rates are often used as the basis for negotiating group rates in the coming years. Lower transient ADRs today translate into lower group ADRs in the coming year. So, the rate cuts that the industry implements today are probably not easily reversed and may stay with hoteliers for years to come. These are just two of the reasons why transient rate cuts today are not the answer to counter the current economic crisis.
We will monitor the relative rate movement of transient and group rate closely over the coming months and report on any new developments and trends.