European hotel industry trends, the outlook for 2003, cycles and hotel products… all on the menu at PKF hotelexperts annual breakfast debate

Every year, PKF hotelexperts reviews the French and European hotel industry, with the aid of its statistical indicator and the participation of the London and Munich offices.  Moderated by Patricia Le Naour, Editor-in-Chief of PKF’s partner L’hôtellerie, this year’s roundtable of hotel and tourism professionals tackled the theme ‘Cycles in the Hospitality Industry’.  

Although the cycles theme is somewhat controversial, PKF hotelexperts’ observations prove that the hospitality industry is indeed subject to this phenomenon:  whilst occupancy rates are subject to short cycles (short periods of growth and recession) due to their sensitive nature, average rates tend to vary over a much longer period.

During the debate, representatives from the Paris, London and Munich offices presented recent hotel performances in their respective countries, and their views on 2003’s picture.  Key hotel and tourism industry players then shifted the focus to a discussion of product lifecycles.

Parisian Hotel Performances

Recent results posted by four star Parisian hotels clearly illustrate the strong growth of the French hotel market – RevPAR grew by 77% in seven years:  1995 – 1997 saw hotels progressively overcoming the recession of the early nineties, prior to entering a period of sustained economic growth.  However, the events of September 11^th 2001 put an end to RevPAR growth, although this picked up again in 2002.

The outlook for 2003 is unfortunately less encouraging.  The tense geopolitical situation, the fear of a recession, the rising price of oil… the hotel market is suffering.  The French government puts the drop in 2003’s tourism reservations at around 15 – 25% - a trend that was evident as early as February from PKF hotelexperts’ monthly statistical indicator.

The conflict in Iraq had the immediate effect of reducing the number of overseas visitors to the French capital.  Whilst average room rates have not yet suffered (+6% at the end of February), occupancy is taking a nosedive (-10% at the end of February).  However, the impacts of the current crisis are not uniform across all four star hotels:  how, then, is each group likely to react?

First Class and Large Capacity Hotels’ rates are competitive on the four star, European market, rendering them somewhat less sensitive to the international situation and the subsequent drop in long-haul tourists (USA, Japan, Middle East).  Although declining occupancy for First Class units is not yet particularly evident (down –4.3% mid-February), these units are likely to engage in promotional efforts, to fill their large number of rooms in a cautious market.  This will force down average rates.

Deluxe hotels’ rates are higher, and their positioning on the American and Middle East markets render them more sensitive to international events.  Unsurprisingly, occupancy is strongly impacted (down –10% at the end of February, with no rise in ARR).  The year 2003 looks to be a trying time for this group.

Boutique hotels doubled RevPAR between 1995 and 2000, but are the only group to have registered a decline in 2001 and 2002, due to a drop of 11% in occupancy between 2000 and 2002.  Overall, RevPAR fell by 7.5% between 2000 and 2002.  The limited size of boutique hotels, along with their ‘independent’ marketing channels, slowed down their reactivity to market trends.  This, coupled with the downturn in the market, is likely to result in a sharp drop in activity in 2003.  On the plus side, these hotels tend to experience rapid growth in times of economic recovery.

Palace hotels are likely to experience their first bad year since 1995, in 2003.  Strongly positioned on the American and Middle East markets, alternative clientele tends to be hard to come by.  Additionally, the opening of the Park Hyatt Paris Vendôme in the current environment is likely to accentuate the downward occupancy spiral and affect RevPAR.  At the end of February 2003, the 11.3% drop in occupancy was compensated for by a 12.1% rise in average rates….but for how long?

The trends observed in Parisian three star hotels are comparable, although to a lesser extent.  RevPAR grew by an average of 31% between 1997 and 2002 (+19% for two star hotels and +41% for superior three star).  Maximum occupancy rates observed (around 75% in 2002) and price inelasticity limit RevPAR growth. 

As with four star properties, mid-scale Parisian hotels are likely to be impacted by the current political – economic environment in 2003, although more as a result of French companies postponing seminars, than the drop-off in overseas visitors.  Indeed, the conflict in Iraq may lead to the cancellation of trips to the Mediterranean (mostly groups) and more business for destinations deemed ‘safer’.  Since budgets are likely to remain the same, this phenomenon should benefit mid-scale hotels.  At the end of February, RevPAR in Parisian mid-range hotels grew by an average of 4%, although recent events could evidently put an end to this trend.

Regional Hotel Performances

Upscale regional hotel performances clearly demonstrate 

Regional Hotel Performances

Upscale regional hotel performances clearly demonstrate the demand sensitivity of the Côte d’Azur, in comparison with the rest of France (excluding Paris).  Whilst regional four star hotels experienced constant RevPAR growth (+19.4% between 1998 and 2002), the Côte d’Azur’s upscale hotels recorded a sharp drop in 2001 (-9.6%) but a sharp rise in 2000 and 2002 (up 16.8% and 17.9%, respectively).  Overall, RevPAR progressed by 32.8% between 1998 and 2002.

The Côte d’Azur’s upscale hotels were, in fact, the only group to record a drop in average rates in 2001 (-5%, compared with +4.9% in the rest of France), partly since certain hoteliers in destinations like Cannes, began offering lower rates to offset the fall-off in occupancy.  Conversely, other hoteliers began more aggressively marketing to European clients, since France benefits from a domestic or near clientele with relatively high purchasing power.

The Côte d’Azur’s upscale hotels were, in fact, the only group to record a drop in average rates in 2001 (-5%, compared with +4.9% in the rest of France), partly since certain hoteliers in destinations like Cannes, began offering lower rates to offset the fall-off in occupancy.  Conversely, other hoteliers began more aggressively marketing to European clients, since France benefits from a domestic or near clientele with relatively high purchasing power.

The product of these two explanations, is that four star regional hotels are likely to see a slight deterioration of RevPAR in 2003 (down –1.1% at the end of February 2003, compared with last year).  However, this drop may be more significant on the Côte d’Azur, given the destination’s dependence on international visitors and the large number of hotel rooms available.

Two and three star regional hotels experienced significant growth from 1997 to 2002 (up 37.1% and 41.7%, respectively), the reason being that these establishments are more dependent on the domestic market.

The slowdown in economic growth in France began in 2001, and has become more pronounced today (higher unemployment, lower growth rates…).  The dependence of mid-scale regional hotels on the domestic economy is evident in that, contrary to other categories whose performances began to deteriorate after September 11^th 2001, occupancy in mid-range units did not begin declining until a year later.

Given the slowdown in the French economy (accentuated by the conflict in Iraq), RevPAR is likely to decline to a greater extent in 2003 than was the case in 2002, with average rates in three star (but not two star) properties dropping slightly.

At the end of February, mid-scale regional hotels (excluding the Côte d’Azur) continued to record ARR growth.  Yet, the visibility of this market is limited, and this group could be harder hit, should the much-feared recession actually occur or should growth fall to below 1% in 2003, since this will negatively impact rates.

To recap, it appears that the year 2003 will see an across-the-board decline in occupancy, and a drop  in (or at best, a preservation of) average rates.  The year 2003 could be the start of a new period of crisis for the French hospitality industry:  already performances are beginning to decline.  Nevertheless, France is well placed to maintain her competitive positioning, thanks to the wide range of supply and market segments, diversity of modern infrastructure and proximity to European feeder markets.

Opening up the issue to the debate’s invitees, Alain Bouchart, from Envergure’s head office, forecast a maximum drop of one to two RevPAR points for 2003.  Philippe Doizelet, Director of Studies and Statistics for Accor, affirmed that his group’s wide product range would help to alleviate the impacts of the crisis.  Raymond Chigot, President of Development for Hilton International, confirmed that the Paris, London and Rome markets were particularly affected.  What’s more, the group has decided to postpone two of the eight projects currently underway in the Middle East.  Michel Jauslin, Vice President of Hyatt International, admitted that developments are still underway, and the group wishes to rapidly enter new markets that rely heavily on domestic demand (Russia, China), in an attempt to limit the impacts of the current crisis.

Hotel Performances in Other European Destinations

Trends in the UK are similar to those observed in France.  Like Paris, London has experienced difficulties over the past few weeks.  Whilst hotel activity is very cyclical in the UK, this is not the case in Germany, whose hotels have posted constant activity over the past decade.  Occupancy has stabilized at around 60%, although ARR has dropped from 87 € in 1993 to 80 € in 2002, resulting in progressively declining RevPAR. 

Unsurprisingly, impacts vary from town to town.  Whilst Munich hotels experienced rapid declines in RevPAR due to their large proportion of international clientele, hotels in smaller towns or resorts and budget hotels did not feel the pinch.  The year 2003 should see a continuation of this trend, with a possible erosion of average rates.

Hotel Product Lifecycles

In the 2003 edition of their annual publication ‘Trends in the French Hotel Industry’, PKF hotelexperts examined the cycles that affect the hotel and tourism activity.  With the collaboration of the Paris, London and Munich offices, as well as contributions from various industry professionals, the following issues were tackled:

         Cycles and hotel activity:  annual, monthly, weekly cycles according to the destination and its clientele.

         Cycles and hotel investments:  dependent upon land and real estate supply;  the impact of cycles on IRR.

         Cycles and the social / industrial domain:  the shortage of skilled workers in the restaurant industry – is this a cyclical phenomenon?  What are the consequences, and is there a solution?

         Cycles and hotel products:  what is the lifecycle of a hotel product or tourism destination?  Does this vary according to the category or product?  What about cycles and architecture?

This last issue formed the core of the debate, throughout which several trends became apparent.  According to Serge Ragozin, Managing Director, Accor, for instance, hotel products do not have lifecycles, as such, but rather ‘cycles of youth’.  A hotel product evolves in accordance with the market and consumer behaviour, but does not disappear.  Philippe Doizelet affirmed that hotel groups should be attentive to the evolutions that take place in the markets where they operate, since these are the first places were lifestyle and consumer patterns take shape.  For example, in 1967 when the first Novotel room was created, ‘decent bedding and floorboards that don’t creak’ was all it took to satisfy the guest.  The new Novotel room, however, incorporates and optimizes the three fundamental functions of a guest room (sleep, work, relax) to better respond to guest expectations.  For Envergure and the Campanile brand, the strategy is all about not losing consumer reference points – product evolutions must lead to profitability.

A product evolves in response to guest requirements, true, but it also serves to differentiate from the competition.  This is how Hilton’s ‘relaxation room’ was chosen from among three concepts (the two others being ‘high-tech’ and ‘romantic’), after a thorough consumer study.  The new room has already been rolled out in Munich and Frankfurt and will soon see the light of day at Hilton La Défense.  The room is made up of three distinct areas – the office, the bedroom and the bathroom – a trend that is also reflected at Park Hyatt Paris Vendôme.  But for a group such as Hyatt International, whose strategy is to develop innovative and differentiated products for each hotel it develops, the cyclical issue in this context does not really pose a problem, since each new product is ‘an original’.

The architect is the first to observe the phenomenon of product lifecycle.  The architect, Richard Martinet, asserted that he no longer has to respond so severely to a precise rule book.  Nowadays, differentiation (with certain comfort specifications) seems to be the order of the day.

In investment terms, it appears that large hotel groups now have available tools that enable them to identify exactly what type of investment a hotel requires, and when.  Indicators, such as cost of maintenance, clearly reveal the state of the hotel product.  Traditionally, heavy investments took place once every ten years; the replacement of materials, decoration etc. on a more regular basis (three to five years) – the trend observed at present is a shortening of these investment cycles.  Over a ten-year period, hotels dedicate on average between 3 and 5% of operating revenues to renovation, although this percentage can depend on location, seasonality and the property’s age.

Taking the issue further, what role do hoteliers and other tourism operators play in the launching, or conversely decline, of a tourist destination?  The recent crises for West Indies tourism limited the opportunities for hoteliers to renovate their properties, which thus penalised the destination’s overall competitiveness.  This forced operators into a downward spiral, which accentuated the reinvestment constraints.  Within this context, the demands of tour operators are sometimes severe, but at what price?  Bruno Gallois, General Manager of Marsans, who participated in the launching of Cuba, the Dominican Republic, and more recently, Mexico (beach tourism), signaled that he needs to switch hotels every three to four years, in order to satisfy his clients, preserve quality standards, and thus maintain sales.

Consequently, tourist destinations themselves can also be subject to cyclical phenomena.  For instance, Cuba is currently in a maturity phase, and today needs to be re-launched.  The answer surely lies in a strategy of differentiation, and a new beginning….

SARS impacts Asian hotel performance in March

How bad will it get? This is the burning question for many Asian hoteliers in light of the recent combination of events namely SARS (severe acute respiratory syndrome), the war in Iraq and the continued depressed global economic conditions.

‘Pretty gloomy’ appears to be the answer as preliminary figures from the March 2003 Deloitte & Touche HotelBenchmark Survey reveal. Across Asia all hotels experienced a 4.6 percent decline in revPAR (revenue per available room) when measured in US dollars.

Hong Kong and Singapore were some of the regions poorest performers in March with revPAR falling 16.8 percent and 15.4 percent respectively when measured in US dollars, as occupancy levels fell in response to the SARS epidemic. Of the 24 markets sampled on the survey, over 60 percent experienced revPAR declines during the month. Other markets that witnessed double-digit revPAR falls were Penang (10.6 percent), Seoul (10.8 percent), Bangkok (13.1 percent) and Phuket (24.9 percent). Hotels in Bali were the regions worst performers with revPAR down 57.5 percent over 2002 levels. The market is still reeling from the October 12 atrocities and the slowdown in leisure travel caused by poor economic conditions.

Penang and Phuket are generally regarded as leisure destinations and so, like Bali, are bearing the brunt of a downturn in the number of leisure travellers whereas Singapore, Seoul and Bangkok have been hit to a greater extent by both the postponement and/or cancellation of a number of business/conference events, in addition to the loss of the leisure market. Among those events that have fallen victim to the SARS outbreak are the Asia-Pacific Economic Cooperation (APEC) Tourism Forum that was to have been held in Pattaya from April 8-10 (this has now been cancelled) and the 6th Asia Pacific Hotel Investment Conference to be held in Singapore on April 9th (postponed until June 2003).

In Thailand, the Tourism Authority estimate that about 50,000 visits to the country have already been cancelled between April and June, and hotels are experiencing cancellation rates between 5 and 10 percent.

To allay the spread of SARS, a number of airlines have cut their routes in the region. Singapore Airlines recently announced that it has effectively grounded 13.5 percent of all its flights, whilst Cathay Pacific has indicated that it may need to ground its whole fleet next month as declining passenger numbers are making the flights unviable. The International Air Transport Association (IATA) estimate that current bookings to destinations such as Hong Kong are down between 30 and 40 percent.

Fear and panic are exacerbating the SARS problem across the region, as countries adopt policies to try and mitigate its impact. For example, Malaysia, which is currently free of SARS, has put into effect an immediate freeze on visa issuance from countries affected by SARS, with the exception of official visitors, genuine business travellers and investors. In Thailand, people travelling to any of the high-risk destinations are liable to face a prison term of up to six months and a fine not exceeding 10,000 Baht (US$240). Singapore has also taken the decision to go beyond the World Health Organisation’s recommended control measures and is stepping up health screening procedures for passengers arriving at Changi Airport and the Singapore Cruise Centre. Elsewhere, countries like Australia are reallocating their marketing spend to capitalise on opportunities in non-SARS-affected countries.

The timing could not have been worse for the hotel industry as March and April are often peak months for trade fairs and exhibitions. In Hong Kong the week-long Labour Day holiday (from May 1) last year attracted 200,000 visitors from the mainland, however this year arrivals are likely to be severely reduced. Tourism, which accounts for nearly six percent of the GDP in Hong Kong, is heavily dependent at this time of year from visitors from Southeast Asia where many countries, in particular Singapore, have long school vacations around Easter. Figures from the Hong Kong Travel Industry Council suggest that visitors from these areas have already fallen by more than 80 percent, and the Hong Kong Tourist Board estimate that visitor arrivals have fallen 10.4 percent since the World Health Organisation issued its travel advisory on 16th March. So it seems likely that the worst is yet to come with many hoteliers expecting April to be an even quieter month than March.

Surprisingly, given that the first official SARS case was reported in a southern province of China, Guangdong, on November 16th, 2002, the Chinese markets tracked on the HotelBenchmark have continued to perform well. In March, hotels in Nanjing reported a 15.7 percent improvement in revPAR. RevPAR increases were also recorded in Shanghai, up 6.2 percent and Xian up 0.6 percent. However, Beijing saw revPAR fall 3.5 percent - primarily due to a decline in demand which can be attributed in part to fewer international tourists travelling to the region. Hotels in Ho Chi Minh City also performed well during March recording yet another month of double-digit revPAR growth, up 17.7 percent, although this was entirely driven by increases in average room rates, as occupancy fell seven percent.

The short-term prospects for the Asian hotel industry remain challenging, although the longer term fundamentals are sound as, prior to the World Health Organisation travel advisory on 16th March, the industry was showing signs of recovery from the plethora of events that have impacted the region. The industry has weathered five years of troubles - the Asian financial crisis in 1997/8; political unrest in a number of southeast Asian countries; the September 11 attacks and Bali bombing both of which caused a fear of travel; the conflict in Iraq; the SARS epidemic and generally poor global economic conditions – and yet demand levels are still growing as revealed by the World Tourism Organisation which reported international visitor arrivals up 7.9 percent in 2002, catapulting Asia above the Americas for the first time ever. Against this background and the robust performance put in by the industry last year we are optimistic for the medium-term prospects for the region, although clearly the next few months will be challenging, particularly April when the full impact of SARS will be felt, as the March numbers hide the fact that the first two weeks trading prior to the World Health Organisation travel advisory were generally very positive.

Performance of the selected Asian Markets – March 2003
 

Source: HotelBenchmark Survey by Deloitte & Touche

Performance of the selected Asian Markets – March 2003 year-to-date