Group demand surges while spend still lags

With demand growth continuing to gain momentum in the U.S. on the transient leisure and business travel sides of the business, demand growth on the group side finally started to catch up in the first quarter, according to a forecast released last month by PwC.The uptick in group demand (plus the rebounding economy overall) were the reasons PwC cited for updating its revenue per available room growth forecast for 2014. That forecast now calls for solid 6.5-percent RevPAR growth for the year, accompanied by 5.1-percent growth in average daily rate.

Asked if he thought group had returned to 2007 pre-recession levels, Scott Berman, PwC principal and U.S. industry leader for hospitality & leisure, responded with a two-part answer. “In terms of demand, it’s getting close. In terms of spend, it’s not. We’re still behind in revenue. That’s going to take some time,” he said.

New Group Profiles
The type of meetings driving the surge in demand are smaller, fairly senior-level corporate meetings of up to roughly 100 attendees. “Corporate meetings are good business in terms of their spend, both room nights and catering,” Berman said. “When you see corporate business return, it’s usually the first positive sign group demand is on the rise, because it’s the most profitable. It has the highest yield for the hotel,” he said.

The catering revenue stream is critical. “It’s important because groups typically host receptions, dinners and lunches, not to mention coffee breaks, all of which contribute revenue for the hotel. The revenue is predictable, forecastable and can generate higher margins,” Berman said. Consequently, when you look at the group piece, you have to look at the total package. “While the hotel may be getting transient room nights, that segment may not be spending as much as a group,” he said.

Hotel companies like Hyatt Hotels Corp. and Marriott International also saw a spike in first-quarter group demand. Hyatt President & CEO Mark Hoplamazian spelled out the gains he was seeing in the company’s first-quarter earnings report. Group room revenue at Hyatt’s U.S. comparable full-service hotels increased 9.3 percent in the quarter, compared to the same period last year. Group room nights, meanwhile, were up 5.7 percent, and group ADR was up 3.4 percent in the quarter, compared to the same quarter in 2013.

Marriott’s President & CEO Arne Sorenson reported similarly positive group demand growth, and in a conference call with stock market analysts, put the turnaround in group into historic perspective. “Group always takes longer to come back than transient business. We’re not surprised that the rebound in group has been more modest this time, given that RevPAR—and economic growth itself—are more modest coming out of the last recession,” Sorenson said.

In addition to small corporate meetings, demand is growing for corporate training programs. Ted Davis, chief marketing and sales officer for Benchmark Hospitality International, described the segment “growing with a vengeance,” a reflection of businesses’ growing confidence in the economy. Benchmark manages 14 conference centers in the U.S. and Japan in its conference center portfolio as well as numerous hotels and resorts that also cater to group business.

Market Stars
As with any broad performance metric, some markets are likely to perform stronger than others. Such is the case with the rebound in group demand. “The small corporate meetings that are driving the uptick are mostly going to be in the top 25 markets,” Berman said, citing New York and Orlando as examples.
“It’s generally a coastal trend, meaning Atlantic Seaboard and Pacific Coast,” he said. Davis would add Hawaii to the list.

TravelClick provided occupancy and ADR statistics on one such market: Orlando. The travel software provider compared the group performance of 176 hotels in the market in the first quarter of 2014 against the same period in 2013, finding a 3.5-percent jump in occupancy and a 2.5-percent hike in ADR.
Even before the 2008-2009 downturn, the booking window for group meetings had begun to narrow as businesses increasingly sought to remain flexible as they reacted to quickly changing market conditions. The trend accelerated during the downturn and is only beginning to adjust, now that demand is returning.

“The window has eased up a bit, but is still short-term, nowhere near back to pre-recession levels,” Davis said. The situation can be so extreme at some of the properties in the Benchmark portfolio that they’re referred to internally half-in-jest as “heart attack” hotels. “You can be two months out and have a dearth of group business on the books. Then in those two months, you can book more business than you’ve ever done historically,” he said.

As group demand growth continues, whether companies will have to book further out to get their preferred dates remains the question. “Here’s the poker game going on. Lead times are still very short,” Berman said. But it’s too soon to know if the situation will change. “This is a metric we’re going to be watching closely for the next six months. We would expect the booking window to broaden, but the data up to now isn’t showing that,” he said.

Similarly, the traditional distinctions in availability between high, low and shoulder seasons have blurred, making it more difficult for value-driven businesses to book group events, Berman noted. He used South Florida as an example. “Occupancy in Miami in June, July and August is stronger than in March and April. That’s a complete reversal. It’s also a trend that’s strengthening, and not something anyone could have imagined 10 or 15 years ago,” he said.

With group demand accelerating, hotel companies are feeling more confident about moving forward with the “big box” hotels in their pipelines.
During Marriott International’s first quarter earnings conference call, for example, Sorenson singled out two group-driven, 1,000-room-plus Marriott Marquis hotels for special mention. One is in Washington, D.C., and opened last month at a cost to build of around $520 million. The other is in Houston and broke ground in April. Both also have more than 100,000 square feet of meeting space.

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