HOTEL ROI: Why hotel profitability starts with the state of your asset

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By C. Elliott Mest
@celmest

CHICAGO – Hoteliers put the needs of their guests first, but when they go home at the end of the day they want to be secure in the knowledge that they are making money. With that in mind, an audience of hotel owners, operators, financiers, brand executives and others convened at the Wyndham Grand Chicago Riverfront for Hotel ROI Chicago-Midwest, part of the Hotel ROI series, and held to promote and disseminate knowledge that ultimately leads to hotel profitability.

In a panel titled “Maximizing Revenues: Innovative Ways to Generate More Profit,” three industry leaders discussed the decisions operators could make to expand their opportunities to build on their bottom line. And the moment the discussion began, the concept of “quality” rose to the forefront.

Bob Habeeb

“Consumers get this, but hotels don’t always: quality sells,” said Bob Habeeb, president and CEO of Chicago-based owner and operator First Hospitality Group. “If you have a high-quality asset and product in a good location, you may do well. If not, you may be proud of your purchase price but when the market tightens up you may find yourself in harm’s way. Focus on high-quality assets in long-term markets and you will survive anything.”

While the positioning of your asset is important, it means nothing if the product is neglected. Dan Welborn, principal at hotel branding and design company Gettys Group, said that many hotel operators are resistant to investing in product improvement plans because they siphon capital directly off of their bottom line, but these kinds of investments, when done correctly, can be offset by substantial long-term gains.

“There is a return on investment for owners, and positives for you as a brand, for successfully carrying out a PIP,” Welborn said. “Look at what is best for the owner and the brand, typically those two things align.”

But what makes for a good PIP? Just ask guests what their biggest complaints are: Wi-Fi, lack of easily-reached plugs and systems that aren’t welcoming to guest devices, such as casting technology for the guestroom TV. Also, guests want the option to skip the front desk via mobile check-in, but this is not an excuse to skimp on the front desk.

“Take pods or check-in iPads for example,” Welborn said. “If you have those, create a nice welcome table staffed with a greeter serving iced tea. Have a concierge nearby to assist with the check-in or provide insight on the local area if guests have questions. Leave that zone open so that the technology can evolve around the human element, don’t jump the gun and abandon it.”

Welborn said this message is often lost among the dollar signs operators see as they ponder property improvements, but some aspects of design are difficult to measure in raw numbers. Having a consistent story, and making it a story that begins the moment guests exit their car or cab, can be more meaningful for your personal brand in the long run and lead to increased loyalty, higher rates and even guests willing to market the property for you via social media if the design is striking enough.

“Once you have a strong personal brand… you will have created loyalty through design, social media advertising you don’t have to pay for, word of mouth promotion and a fan,” Welborn said. “If some people hate your design, that means a lot of people love it. You don’t want your hotel to look OK but but memorable.”

Supply Shuffle

Habeeb spoke a little about the stability of the Chicago hotel market, saying that a conference two years ago predicted that by now the level of supply would be so overwhelming hotels would be underwater in available rooms. However, despite an incoming supply surge and a infamous reputation for high crime rates, Habeeb said demand has held up in the city. In his own words, “nothing short of apocalyptic tells us this won’t continue.”

However, Scott Weiss, director of market management at Expedia, has a different reason to celebrate Chicago’s continued development pursuits. At Expedia, every increase in supply is seen as a win regardless of occupancy numbers, and Weiss sees the potential 2,060 new hotel rooms opening in downtown Chicago by the end of 2017 as a gold mine.

“[The industry] is over-saturated in many markets, such as Cleveland, which opened hotels during the Republican National Convention last year but is now in a tough spot,” Weiss said. “[Expedia is] here to stimulate additional demand when the market starts to slow down.”

More to the point, more supply is anything but bad for Expedia’s business. Weiss touted new supply as a boon for Expedia, “it means we have more hotel rooms to sell,” he said.

Statements like this show that Expedia knows its role in the greater hospitality ecosystem, which is why Weiss said the company is evolving to reposition itself for future success within the space. “We are trying to move from a distribution company and become more of a technology and marketing company,” he said, referencing Expedia’s recent decision to allow hotel companies to market their own loyalty programs independently within Expedia’s system.

And in response to Airbnb’s grip on the sharing economy, Weiss pointed to HomeAway. “We are starting to see hotel partners integrate aspects of the home sharing experience into their brands as their own response.” he said. “We have 60,000 HomeAway properties on Expedia as of now, so the trick is to evolve with the market.”

One way hotels can differentiate in a market choked by supply is through strong food & beverage offerings – a tall order for a market like Chicago, which is dominated by an established, thoughtful restaurant scene. Welborn said while many hotels struggle to make grab-and-go eateries profitable there is much profit to be made in a well-placed bar, particularly on a rooftop.

“If you have an outside entrance that is best for business, but if your property has a great rooftop offering people will find it,” Welborn said. “You just need something that feels like its own thing – its own name, own look and feel, and when you do branding for your hotel also do research for its F&B. Maybe they tie into the same story, maybe they don’t but in Chicago if you are doing a restaurant it may be best to partner with someone who can put your property on the culinary tourism map.

The challenge with Chicago is that the market is already mature (“You can’t just drive a keg and some folding chairs onto the roof and succeed,” Habeeb eloquently said), but that isn’t true across the country. The time to learn from the success of culinary superstars is now, and there are rooftops across America preparing to be populated.

Union Creep

While the panel had fun discussing the expanding F&B landscape throughout the country, Habeeb brought it down to Earth with a statement on labor relations and union dealings. According to Habeeb, unions are expected to be very active in the coming years, particularly as they attempt to unionize within smaller select-service properties as fewer big-box hotels open their doors.

“We have to adopt to wage parity in a market like this, and it becomes a question of control and work rules,” Habeeb said. “These changes will be significant, and will add to the cost factor, making managing an asset more difficult.”

Habeeb said that the hotel industry has since embraced the American workers’ fight for wage increases, but continues to reject the shock in jumps as the increase goes into effect. However, Habeeb takes issue with work rules that come with unionization, such as the need to provide a full staff of workers for room service operations rather than a smaller group to manage the reduced orders, preventing operators from making a profit.

“Because union contracts are by position, some hotels have to staff room service with at least six people at all time. It should be a gold mine, but they are losing money because these restrictions impact [operators’] ability to make money,” Habeeb said.

When asked by a member of the audience if unionization comes with any benefits, Habeeb said hotels could benefit from being on union-approved lists, and sometimes unionization affords hotels with leverage when dealing with government agencies, but otherwise he views them as a hindrance. That’s why, in a world where unions are improving their ability to make their way into hotels, Habeeb said the best defense against them is to live up to the promise of providing good wages and opportunities for upward mobility.

“If you treat employees well, that’s the best defense you have,” he said. “And once you have a union in your hotel, you have to make your best deal.”

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