ANALYSIS: August 13 2009

How the recession has made corporates smarter buyers

If the swift and sudden impact of the recession took hotels by surprise last autumn and early winter, it has been the corporates which have made the most of the changed situation. Whereas in the past, companies were content to go along with a negotiated rate which would last a year, many are now going back three and even four times a year to re-negotiate their rates. At the same time, they are asking for added extras, like breakfast, to be thrown in. In short, the recession has made the corporates smarter buyers.

The recession, the slump in business travel and the many empty hotel rooms in cities across the world has played into the hands of the corporate buyers. Hotels vowed after the almost overnight loss of business following 9/11 that they would never slash rates so quickly and drastically again.

But the ferocity of the recession ended hopes that rates could be held or at worst lowered just slightly. The Hogg Robinson Group (HRG) hotel survey covering the first six months of 1009 was a tale of woe for the hotel industry. In a nutshell it found that rates were still tumbling and there was no sign yet of stability. 

It found, without exception, that in 12 key cities around the world rates fell in both the first and second quarters of the year. This included London, where rates fells 4% in Q1 and 3% in Q2, New York where they fell 20% and 27%, Paris 7% and 14%, Zurich 19% and 27% and Hong Kong 16%  and 24%. Apart from London which seems to be holding up better than most, these are not minor falls but substantial and profit-hitting reductions.

Surveys by other hotel analysts, like STR Global and TRI Hospitality Consulting have made similar findings.  TRI said that European cities had endured falls in room revenue of as much as 27.5% in the first six months of the year while Vienna, among the worst hit cities, saw its revPAR (revenue per available room) plummet by 40%. STR Global said that in June alone, Vienna and Zurich saw their revPAR fall by 40%.

But a significant finding of the HRG survey was how corporates were reacting to this devastating situation.  The TMC said in its survey that its corporate clients were "continually reviewing and consolidating their programmes to secure lower hotel rates by delivering increased revenues to their preferred suppliers.

Margaret Bowler, HRG's director of global hotel relations, told ABTN that negotiated rates were now the "worst" that corporates expected to pay. They were just the benchmark for further discounts.

"We have seen some corporate negotiating continually throughout the year. Some have gone back for a fourth re-negotiation each time coming back with a better rate. We expected this to happen. Last September the rate was flat or the hotel might have wanted a minimal increase. Now the flat rate is the worst rate and the corporates are also getting value added extras like breakfasts."    

Theses negotiated extras which come as part of the negotiated rate also include food and beverage discounts, free Wi-Fi access and reduced parking charges.

But this is not the only inroad that the corpraotes have made into the hotels' once impregnable citadel. In its survey HRG noted: "Significantly, last room availability (LRA) is now considered by many as standard, having only been available at a premium prior to the slowdown in the market."

LRA, as defined by the National Business Travel Association, is an agreement between hotels and a client  "whereby all client negotiated rates associated with a room category are available at the negotiated rate up to and including the last room at a property to be sold in that room category."

In the last two to three year when business has been good, hotels have dispensed with any LRA deals and tried to sell their last rooms at a premium. So this is a considerable retreat and an acknowledgement of how much they need the business from a corporate.

A further change has been how hotels are now prepared to accept a bigger slice of business from a corporate. Ms Bowler said that a company requiring 1,000 room nights a year in London might have used five hotels. This was because the hotels were not prepared to take on more than 200 room nights from one company at its negotiated rate.

Hotels then clearly felt that if the company needed more, they could pay a no doubt higher rate.

What is happening now, Ms Bowler said, was that corporates were consolidating to two hotels and using the extra leverage of 500 room night a year to get good rates.

The one small crumb of comfort hotels can extract from this reversal of fortunes is that they have now managed to make dynamic pricing a fact of life. There have been many debates over the pros and cons of this system whereby hotels set a rate for each night depending on expected demand.

So a Sunday night would be priced very differently from say a Tuesday or Wednesday when business traveller were there in force. And if there was a major conferenc e in town as well, then the price could be adjusted further up. Many corporates did not like this one little bit.

Ms Bowler estimated that 65-70% of hotels were now enforcing dynamic pricing although she said - an indication of how bad things are - dynamic rates were sometimes lower than negotiated rates.

She added: "Corporates still want negotiated rates because it gives them availability 365 days a year.  There is no guarantee of that with dynamic pricing."