Data Suggests Buyers Trading Down Tiers In Hotel Programs

Michael B. Baker, Business Travel News, 3/5/2007

Fresh PricewaterhouseCoopers hotel data indicate an increasing willingness by travel managers to trade down in price point within their hotel program in high-volume cities, hoteliers and analysts said, although others see the data as merely signaling that companies are gaining better control over existing programs.

Shifting travelers from upscale to midprice properties for cost-saving purposes is for travel managers a common strategy, albeit at times difficult to enforce, during difficult negotiating climates of high rate growth and limited room availability. Bjorn Hanson, head of the hospitality practice at PricewaterhouseCoopers, said a meeting planner facing rate increases of more than 20 percent, for example, might be looking at it in a city with lower-priced alternatives.

"There's lots of talk in the industry about trading down when prices increase," Hanson said. "It sounds good, but intuitively, it doesn't happen. If you look at the data, it's the first time in all the cycles that I've really seen that, but it's in these higher-demand cities we're talking about."

PwC's U.S. Lodging Industry Report and Forecast showed occupancy in midprice hotels increased at a much faster rate than at upscale hotels in 2006. Midprice with food and beverage was up 1.3 percent and midprice without food and beverage was up 1 percent, while upscale was up 0.6 percent and upper upscale only 0.2 percent. These numbers represent the broader travel picture, not just corporate travel.

Cheryl Davis-West, assistant travel manager for Boise, Idaho-based Washington Group International and a member of the National Business Travel Association's hotel committee, said her company added more rooms at Courtyard by Marriott and Hampton into the program. Other companies reported more aggressive moves prior to this year's negotiations, such as Nestle, which eliminated five- and four-star chains from its transient program in favor of midprice brands.

Hoteliers are noticing a shift too. Dorothy Dowling, senior vice president of marketing and sales for Best Western International, said at a recent National Business Travel Association summit that 2006 was a record year in terms of corporate performance, with about 30 percent growth in the segment. Dowling attributed the growth to travel buyers trading down to mitigate cost increases.

"As rates continue to grow, we do get a benefit," concurred Laura Bates, Marriott senior vice president of extended stay brand management, speaking on behalf of midprice Courtyard. "Courtyard typically does see that when people reach a point at which they feel they're being stretched too far."

Priscilla Campbell, practice leader of hotel advisory services for American Express Business Travel, also noted the strategy is gaining favor in combination with such other cost-cutting methods as consolidation of the program.

"I haven't seen a lot of shift, but there definitely has been some directional change," Campbell said. "It's one of several strategies that we advise."

What's more, some midprice brands are attracting more capital investment interest. Starwood Hotels and Resorts Worldwide's new Aloft brand—designed to compete with such higher-end midprice properties as Courtyard and Hilton Garden Inn—has spawned numerous franchise proposals from developers even before the brand is off the ground, said Sean Hennessey, president of New York-based Lodging Investment Advisors. "It's not what you normally expect in the industry," Hennessey said. "They usually wait until there's 20 or 30 properties before there is such a sense of excitement."

The activity extends to existing brands as well. Marriott is overhauling its midprice brands, particularly the SpringHill brand, for which Marriott recently announced a new design. Other midprice hotels have enhanced bedding and bath amenities, and properties without a dedicated restaurant in many cases have added hot items to their continental breakfasts.

As midprice properties renovate and add amenities, hoteliers said it becomes easier to persuade buyers to use them. "There are certain characteristics of the very high quality midscale products that meet their needs perfectly," said Steven Mogck, executive vice president of select service hotels for Carlson Hotels Worldwide.

Washington Group International's Davis-West said free Internet access, common across most midprice properties but more rare among upscale brands, definitely was a draw.

At the same time, the price difference between midprice and upscale varies from market to market, so trading down does not always reap huge savings. Mark Young, senior vice president for the Ramada brand, part of Wyndham Worldwide, said he had seen little tiering-down activity, particularly as the midprice tiers are seeking aggressive rate increases themselves.

Added LIA's Hennessey: "My sense is that the corporate travel managers have not so much been focused on keeping prices down as trying to maintain the highest-quality environment for the employees. The unemployment rate is so low that it's a competitive advantage if they can promise their employees that they'll travel in comfort and style."