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While there was a lot of political debate over the past few months about whether two consecutive quarters of negative GDP growth — a common definition for a recession — in the first six months of 2022 constituted a recession or not, the U.S. hotel industry did not realize a recession by any measure. Hotel companies are seeing demand rise above pre-pandemic levels, and ADRs are at record highs. This is fueling unrealistic optimism for hotel revenues in 2023 and contributing to a familiar industry habit of thinking that strong current revenue performance will continue into next year.
This optimism was reported in Q3 earnings calls by many travel industry CEOs as reported by Jamie Mageau in her article, “Industry Perspectives: Looking Ahead for the Travel Industry” on November 11th.[1] Below are a few excerpts from hotel CEOs:
We have yet to see signs of a slowdown in global lodging demand. In fact, we’ve seen just the opposite. Booking trends remain very healthy. Given sustained high levels of employment, consumer trends prioritizing experiences versus goods, pent-up travel demand and a high level of consumer savings, travel spending has been incredibly resilient. – Tony Capuano, Marriott CEO
There’s ample room for further growth of travel spend as the underlying behavioral drivers of travel demand are powerful and durable and will, in our opinion, propel travel back to its pre-pandemic share of wallet relative to the broader economy. – Mark Hoplamazian, Hyatt CEO
Discretionary business travel, group bookings and international trips have also shown increasingly encouraging signs, on top of continuing good levels of essential business demand. – Keith Barr, IHG CEO
In contrast, prior to the most recent recession, most hotel companies didn’t believe it was coming.
The usual hotel sector C-Suite optimism trickles down throughout the regions and individual hotels within these companies and in turn applies pressure on the local management of these properties to also demonstrate optimism — materializing in their budgets and forecasts.
Optimism can also start at the hotel level and work its way up. There is pressure for hotel managers to be optimistic about the future, as this makes their bosses happy. When working in my first hotel revenue management job, I went to a regional meeting with my GM. Prior to the start of the meeting, property GMs and DRMs in the region discussed the 90-day outlook over coffee and pastries. The consensus of these casual conversations was that our ability to reach our revenue forecasts was in serious doubt. The Regional Vice President, who had not been a part of our informal discussions, started the meeting by going around the table asking for forecast updates, beginning with my GM who said that he was cautiously optimistic about our ability to not only hit our forecasts, but to exceed them! This set the tone for the meeting. Each subsequent hotel GM echoed my GM’s optimism, and by the time we had gone around the room, the overall sentiment was that every hotel was either going to hit their forecast or exceed it. The RVP was elated that the outlook was so good! In the end, the region did indeed see the revenue shortfalls discussed casually among peers before the official meeting started. I’m sure many hotel managers can recall similar stories in their careers.
This business culture tends to create an optimism echo chamber. No one wants to be the first to point to an economic downturn. The pressure falls onto revenue management strategies and tactics to achieve these optimistic goals, many times doing the opposite as tactics based on incorrect predictions drop realized revenues.
Will the strong current revenue trends continue into 2023? Most large company CEOs don’t think so. In a recent KPMG-conducted survey of 400 large company CEOs, 91% of them believe the U.S. will be in a recession in the next 12 months, and more than a third of them believe it won’t be mild and short.[2] What are the signs of this looming recession?
- Consumer confidence is currently below levels seen during the Great Recession
- Inflation is at 40-year highs
- The Fed has been increasing interest rates all year and have indicated there will be continued increases for the next few months
- Many large companies have started layoffs, cutting significant percentages of their workforces. Most notably[3]:
- Meta (Facebook’s parent company) and Lyft have cut 13%
- Stripe has cut 14%
- Shopify has cut 10%
- Snap has cut 20%
- Amazon is in the process of cutting 10,000 employees, with more to come in 2023[4]
- Quarterly home equity dropped in Q3 by 7.6%, the largest drop since the Great Recession[5]
- Although unemployment rates are low, this is due in large part to historically low workforce participation rates (people without jobs aren’t looking for work) [6]
- After reaching recent highs, U.S. personal savings are now at their lowest levels since the Great Recession
If the above does indicate a likely recession in 2023, what can hotel management do to mitigate the revenue loss?
Start with your forecast. Does it accurately portray what you believe is going to happen in 2023 given the likely recession? If not, create a forecast that does. There may not be an appetite to submit this as a revised financial forecast, but make sure that your revenue strategies are aligned with your best estimate of what is likely to happen in the future. This may mean working from a revenue management forecast that is different from your financial forecast. Revenue management systems only do a good job of optimizing revenues if their forecasts are accurate. Artificially optimistic forecasts will keep future reservation controls too restrictive, as they will be predicting too many sell out dates, causing displacement of predicted higher revenue demand. Additionally, it will inflate price controls for market segments based on the inflated demand. If this demand never materializes, you will have turned away business that would have filled otherwise empty rooms.
Readdress your strategy for market segments that have long lead times, e.g., groups, wholesale, business travel RFP’s, airline crews, etc. If you predict the economic turndown before your competitors, you can book business in these segments and build a strong base of business. Overly optimistic hotels will keep their group prices high and limit availability for group blocks in 2023, believing that high rated transient business will be displaced. By proactively targeting these group leads now and offering comparatively better value through price, relaxed contract clauses, or other value adds in the client’s interest, hotels will capture a greater share of this market segment now at prices that will look comparatively high when a recession hits next year. Additionally, if you were stingy with group block allotments in contracts in 2023, re-evaluate them and see if it makes sense to go back to the client and offer additional rooms. Applying similar tactics to other market segments with long lead times will yield similar results. Competitors who wait until transient booking pace within 90 days to arrival starts showing economic woes will have missed the window of opportunity. They will be competing on the remaining market segments with short lead times. Being ahead of this curve will yield positive RevPAR Index gains in 2023.
A plethora of economic indicators are pointing towards recession in 2023. While this news is disheartening, hotel management companies that act now in anticipation of the likely downturn will win the market share game for next year.
Neal Fegan is the chief revenue officer of Total Revenue Uplift, a leading revenue management consulting firm, and can be reached at neal.fegan@totalrevenueuplift.com.
[1] https://www.hospitalitynet.org/opinion/4113438.html
[2] https://www.cnn.com/2022/10/04/investing/ceos-recession-economy-outlook
[3] https://www.cnbc.com/2022/11/09/tech-layoffs-2022.html
[4] https://www.forbes.com/sites/jackkelly/2022/11/18/a-day-after-amazon-announced-10000-layoffs-ceo-andy-jassy-warns-of-more-job-cuts-to-come/?sh=1f3e1bbc6953
[5] https://www.blackknightinc.com/black-knights-september-2022-mortgage-monitor/
[6] https://www.forbes.com/sites/johntharvey/2019/05/03/if-unemployment-is-so-low-then-why-dont-i-feel-better/?sh=3d635f7f684e