In a period of turbulent and uncertain economic outlook, there is growing concern about whether the hospitality industry should be preparing for a coming recession. The problem is that the economic indicators analysts commonly look to make predictions are decidedly mixed. For instance, factors that would tend to indicate a recession is either pending or has already started:
- U.S. consumer confidence is on the decline: Numbers released in March showed consumer confidence declined for the fourth time in five months, due perhaps to weak growth and slower job gains.
- Continuing global instability: Continuing uncertainty around U.S. trade tariffs on Canada, and the trade war with China, rising interest rates, and stock market volatility all pose significant obstacles to continued growth in 2019.
- Household debt continues to rise: According to Statistics Canada, the average Canadian household was using a record 14.9% of disposable income to service debt. This could pose a significant problem for industries like travel and hospitality, which rely on the availability of disposable income.
- Revenue-per-available-room (revPAR) is on the decline: In 2019, a 100-month streak (the second longest in history) of growth in revenue-per-available-room came to an end, as revPAR began to decline.
- Many analysts feel that a downturn has already begun: 46% of respondents surveyed by real estate advisory group RCLCO said they believed a downturn had already begun, or would begin sometime this year.
However, the outlook isn’t entirely doom and gloom. While there are certainly reasons for concern, there are also trends showing a rosier outcome for 2019 than the above trends might indicate:
- CBRE predicts that the U.S. hotel industry will see a 10th straight year of growth in 2019.
- Occupancy rates continue to rise: At the end of 2018, CBRE expected occupancy to reach 66.2% – another record level in five years of consecutive growth. This increase is attributed to demand moderately outpacing the increase of supply.
Still, however bullish some analysts may be feeling, it would be unrealistic to anticipate the ten-year period of growth enjoyed by the hospitality sector would continue without significant turbulence. It’s worth remembering there was concern about a slowdown in advance of the 2008 economic crash, but most believed if a recession happened, it would be mild.
When asked to reflect on the 2008 crash at the end of 2018, Isaac Collazo, VP of performance strategy and planning, InterContinental Hotels Group, made the following observation (emphasis ours):
“As I reflected on what happened 10 years ago, what struck me was (the industry’s) collective inability to imagine/model adequately the impact on the industry of a moderate-to-severe recession. We were so keen on having one (forecast) that we didn’t develop ranges and/or plans for anything but a mild recession. Also, we were rather myopic when it came to economic indicators; our scope was narrow versus broad, so the increasing growth in subprime foreclosures was missed until it became daily news.
“Ten years on, let’s not forget that a holistic plan based on multiple indicators (industry and economic) offers more opportunities than locking into a single one. Hope is not a strategy.”
Given that growth cannot be sustained for perpetuity, it is only rational to take stock and make a strategy for how to survive the coming downturn – regardless if it happens in 2019, 2020, or 2021. As Tea Ross, managing director for Strategic Hotel Consulting, has observed, “it’s better to be preparing rather than to be repairing.”
So, what steps should hotel chains be taking to prepare for an economic decline?
Diversify your offerings: One piece of advice echoed by many analysts: diversify product offerings, amenities and services to cushion the blow of an inevitable recession.
Invest in dynamic pricing systems: As discussed in our previous post, major hotel chains like Starwood Hotels have already made major investments in dynamic pricing systems that juggle hundreds of variables to automatically recalibrate pricing for its rooms across all its properties.
As observed by Bernard Baumohl, chief global economist for The Economic Outlook Group, now is the time to protect margins: “It’s important to renew focus on improving efficiencies on how to operate and improve productivity.”
Cross-train your staff now: Back-of-house efficiency will be key to dealing with whatever may arise in the future. Taking the time to cross-train staff now will give you more options for adapting to less optimal conditions.
Be open and transparent with staff before the downturn hits: While solutions like dynamic pricing systems can help maximize revenue, front-line staffing will always be one of the first areas looked to for efficiencies. However, as your front-line staff are directly creating your customer experience, it’s best to have open and transparent conversations with front-line staff about the economic outlook and what it might mean – since demoralized employees will necessarily create poor customer experience.
Focus on customer experience: Today’s travelers are loyal to experiences rather than brands. To retain market share in a time of recession, hotels need to focus on meeting customer expectations and offering a personalized guest experience. Further, brands that maintain a focus on the customer experience will be well-positioned to dominate the market once the recession ends.
Be digitally engaged: According to Baumohl, hotels need to invest in aggressive and creative marketing, including active social media presences to be equipped to deal with a downturn in demand. Modern travelers expect hotels to be responsive on their preferred communication channels and will take their business elsewhere if they can’t connect with you digitally.
Remember – each recession is different: At the risk of stating the obvious, the hospitality sector has undergone a tremendous amount of change in the last ten years. Online travel sites, travel apps, and companies like Airbnb have fundamentally changed the travel landscape since the 2008 recession. And any plan for weathering a future downturn needs to reflect that change.
Hope for the best, plan for the worst: Above all else,hotel companies need to do their homework to avoid repeating the mistakes of 2008. This means doing serious stress testing and making strategies for a wide range of adverse hypothetical scenarios, so that they can be prepared for whatever form an economic downturn might take. When budgeting cycles happen, they should include contingencies for what happens, for example, if occupancy or revPAR decreases by a given amount.
“Hope is not a strategy”, after all. But prudent planning and preparation can save you from having to play catch-up after business is already in decline, and that may well make the difference.