Like Jimmy Walker, the luxury side of the hotel business is “Dyn-o-mite!”
But while the luxury segment is still enjoying ‘good times,’ there are of course current and future challenges facing these hotels. And it’s becoming more apparent as the strong hotel economy is ironically making it harder for luxury-focused hotel companies to operate.
Huh? How’s that now?
On the guest side, of course, luxury hotel operators are enjoying pretty powerful numbers. In 2015, the luxury segment’s average daily rate climbed 4.2 percent last year according to STR, while occupancy eked up .5 percent from 75 percent to 75.3 percent. Not bad when you consider just how much it could cost to rent a luxury hotel room for the night. Lucky you, the 1 percent.
In 2016, STR predicts occupancy will rise another 0.4 percent, while average daily rate will climb 4.5 percent and revenue per available room will rise 4.9 percent.
With such great numbers being posted, how could there be any problems?
Essentially it’s consolidation and distribution, two massive issues leaders in this segment are most concerned about.
Wall Street’s rapid rise during the past few years has inflated stock prices and that’s emboldening companies to put their newfound financial strength to use. See the Marriott/Starwood merger for proof!
The topsy turvy financial climate since the top of the year, and future political uncertainty as we decide our next president, is morphing the fundamental backbone of the universe in which these companies operate. And it’s escorting in a new series of challenges and opportunities for this segment, depending on the angle from which it’s approached.
“It’s getting harder and harder to operate and be small today, especially if you are not growing,” said Kevin Frid, president, Americas, FRHI Hotels & Resorts, which operates about 150 hotels under the banners of Fairmont, Raffles and Swissôtel.
That company was scooped up by Accor last December, for example, which gives Frid the chance to market his products to a much more massive database of potential customers. “This is a complement to Accor’s existing brands. The power of their distribution system is tenfold. The power of that is obvious,” he said.
At Lowe Enterprises, which among other holdings has more than 40 luxury properties within the Destination Hotels family, the bigger the company the more they are likely to grow more quickly.
“A bigger footprint leads to more market power, more distribution and then also to more buying power for owners,” said Robert J. Lowe Jr., co-CEO, Lowe Enterprises.
Makes sense. The larger the company, the more easily it can scoop up a new asset as that asset represents a smaller portion of the organization’s total value.
Meanwhile, Montage Hotels & Resorts has about a half dozen super-high-end luxury destinations. Their president & COO, Jason Herthel, said in his universe it’s not about distribution around the globe but capturing the attention of people wanting to visit one of the destinations in which he has a hotel.
“[These guests] are not particularly price sensitive and want a differentiated experience. If we can provide that and continue to provide that, we will be fine. But we have to be highly disciplined where we put product to achieve that,” he said.
That’s an interesting spin on the conundrum other luxury leaders are facing. He’s essentially taking his company out of that mindset by working with laser focus on being the best in any market he is in, which hopefully resonates with customers already predisposed to visit one of his properties. So it’s all about being big fish in little ponds rather than attempting to be a small fish in the ocean.
With a bit fewer than 20 properties globally, Langham Hospitality Group CEO Robert Warman both agrees and disagrees with the other executives.
“We are not certain mergers at the luxury levels drives more customer loyalty. We focus on creating unique and distinct products to sell direct to consumer. Some major mergers we are seeing are designed to build a customer base in different segments. We will continue to grow organically and in places where we think customers will support us and move into,” Warman said.