Luxury hotels have become less attractive for investments, according to a recently issued paper on the current trends in hotel development by a New Hampshire-based research and consulting firm, Lodging Econometrics. Hotel developers in the United States spend less due to the increasing costs and dropping profits. Compared to 2007’s high rate of $213, the RevPAR at luxury properties was only $202 in 2012, according to STR data.
The report predicts for 2013 the same trend that was observed in 2012, saying only six luxury hotels will open this year. In comparison, 23 hotels opened in 2011, which shows trends of decreasing investment in the luxury market and increasing in upscale properties. With a total of 131 luxury hotels, the American upscale market in 2012 experienced growth of 49%. Of course, we should mention the shifts in consumer behavior before and after the global economic crisis. While consumers would spend large amounts of money on luxury before the recession, they would restrain after it took place.
The report analyzes a trend in the hotel development which however impacts the whole hotel property market in the U.S., as prices in the luxury market have effect on other properties, too. Once luxury hotels start cutting room rates in order to meet consumers’ expectations, three- and four-star properties will be pushed to decrease their rates to be competitive.
While the concept of luxury has always been associated with abundance, today it’s rather linked to true value and quality by consumer’s perspective. At the same time there is fixed understanding and rate for both luxury services and costs, so these properties seem to be in a tough situation. The best solution for revenue managers is shockingly decreasing room rates, as lower as the margin between five- and four-star price point stands. Thus, they will be able to compete with four-star properties, providing luxury value at (almost) four-star prices, as well as reducing them to the upscale category. Moreover, four-star marketing will witness great increase in the supply, consequently lowering rates.
Some five-star properties will be at risk of dropping to the upscale market because they will be forced to cut off certain luxury amenities due to the lowered demand. As a result, the supply of four-star rooms will rise and the prices will drop and while acquiring a market share from luxury hotels may turn out to be positive for some four-star properties, it may also force others to further compressing rates. Managing a hotel in this situation, your best decision is to drop room rates and leave some of the four-star amenities, attracting customers to pick your service instead of the similarly priced property in lower category.
Another strategy for four-star hotels is launching dynamic packages including various promotions, as usually perceived by the customer. Instead of issuing large discounts to attract customers, hotels can give away free champagne and strawberries for Valentine’s Day, for instance.
Investing in small improvements can prove very effective, because customers would often prefer good-looking and re-innovated accommodation compared to a luxury hotel that is simply outdated and seen as unstylish and neglected.
A low-cost fix for four-star properties can also be offering little room upgrades which can easily turn the four-star suite into a real luxury room –seemingly comparable amenities at different prices.
As we have already noted, many four-star properties would have dropped their rates, so three-star hotels can try to offer the same, or similar, services to attract customers. The first and easiest thing to do is improving your marketing materials, or rather updating them in a way to show you as attractive as possible. Start with the pictures and texting on brochures – when everything is done professionally, it will have a positive effect. The focus of your update should not be physical improvement, but improving the impression you leave in the customer.
Hotels in this category should not aim for discounted rates to avoid so low pricing that can lead to null profit. Adding a free, valuable service to your package such as free breakfast, parking or Wi-Fi should be enough to bring the customer to your property. Of course, little updates and improvements can be done in order to be able to compete with four-star hotels.
As a whole, this new trend will have impact on customer behavior, so the managements of luxury hotels, four- and three-star properties should take it into consideration. Generally, we will certainly observe decreasing rates in the upscale category and the winning strategy in attracting customers will be aiming for renovated, polished service and value.