Hoteliers say further price cuts could be a dangerous strategy |
|
Network this!
Text Size 
Hotel room rates in Dubai have come under severe pressure with the decline in business travel and the continuous new supply coming onto the market, which has caused operators to slash rates, industry experts said.
The latest available data from STR Global and Deloitte show that occupancy levels in hotels in the Middle East have declined by 9.6 per cent from April 2008 to April 2009, while revenue per available room (RevPAR), an industry benchmark, has declined by 14.9 per cent.
Sami Al Ansari, Chief Executive Officer of Ishraq Gulf Real Estate (Holding)Ishraq Gulf Real Estate (Holding)
, the company behind Holiday Inn Express in the region, told Emirates Business: "Year to date it's not too bad, the market is averaging close to 70 per cent across Dubai, which is positive in itself. There is huge pressure on room rents, which is driving rates to very dangerous levels. In the beginning of June we saw rates come down even further and unfortunately we have not seen the bottom yet, as it is just the beginning of summer."The Dubai hotel market has become very competitive, especially with new supply coming onto the market. Darroch Crawford, Managing Director of Premier Inn, said: "There is no doubt that in some areas demand has softened markedly, and nowhere more so than in Dubai where new room supply is adding to the problem. More than 1,000 new rooms have opened already this year in the budget sector alone and a further 2,000 are due to open before the end of the year."
Peter Fulton, Managing Director, Hyatt Hotels & Resorts - South West Asia International Operations, said: "The current economic conditions and market sentiment have resulted in a drop in occupancy and rates throughout the world. In the Middle East, especially Dubai, the rates were not sustainable. Revenues have declined, but in my opinion, hotels have undergone a price correction, which will in the long run ensure that we remain competitive on the world stage."
Ansari said: "It is very competitive and the continuous supply coming onto the market has not helped. Many developers who started construction could not stop, and the hotels under construction had to be completed. The additional supply of room inventory has caused huge pressure on operators to slash room rates to achieve volume in terms of occupancy. Then you get into a dangerous situation, where you sell rooms below cost price."
Hotels in Dubai have been cutting rates, despite most operators denying it officially. Ansari said: "Everyone talks against price cuts, but they all do it. So everyone is preaching against cutting rates but they practice it. Sometimes the only way to fill up rooms is to slash rates. But that is a temporary fix."
Crawford said: "In resort hotels, particularly those of the quality available in Dubai, price reductions can be highly effective and drive in new volume. The hotels along Jumeirah Beach have maintained very good occupancy levels so far this year by offering attractive rates and, in doing so, have helped to keep high passenger numbers flowing through Dubai International Airport, which is one of only a handful in the world showing growth this year.
"In more business-orientated properties, however, price reductions mainly increase market share temporarily, and for the market as a whole, can only have a negative effect overall."
Fulton said: "Reducing room tariffs is a common way of trying to maintain occupancy levels, however, this does not guarantee customer loyalty nor does it necessarily grow occupancy levels. Retention of key loyal clients and the enhancing of customer focus is key in these challenging economic times. Hospitality companies need to integrate a strong loyalty programme and initiate more value-added incentives."
Most industry experts that Emirates Business spoke to advised against tariff cutting as an effective strategy.
Ed Fuller, President and Managing Director, International Lodging, Marriott International, said: "Philosophically speaking, in a down market, using significant price cuts as a means to maintain occupancy is a dangerous strategy because the tactic devalues your product and when the economy improves, your customer will be resistant to paying a price higher than what he was paying in the down market."
He said the smarter strategy is to find ways to add value - such as including breakfast in the room rate or offering some other service.
When asked if cutting tariff was one of the ways to keep occupancy up, Apo Demirtas, Chief Sales and Marketing Officer, Jumeirah Group, said: "Yes and no, as the answer is multidimensional. It all depends on the changes in the fundamentals that underscore the declines in occupancy levels in the hotel business.
"Price elasticity of demand measures whether occupancy levels will be responsive to changes in price points. If the answer is yes, diminishing prices will have a positive impact on occupancy. If the answer is no, cutting rates will trade down revenue."
Marko Hytonen, Area Vice-President, Rezidor Hotel Group, said: "Cutting rates is not the only solution when it comes to improving performance and driving more business to hotels and destinations. Instead, we have to find ways of adding value for our guests by creating packages and being competitive with other global destinations."
Crawford said for resort hotels, cutting rates is a viable solution to falling demand. This region, he said, has a large number of fabulous, if not iconic, resort hotels, most of which have been able to charge top-end prices for a number of years. With ever increasing supply and fluctuations in regional economies it was inevitable that at some point the cycle would turn.
"Substantial discounting is possible and over a prolonged period if necessary, without unacceptable compromises on standards. However, staffing levels will need to be adjusted and new disciplines learned," he said.
One of the fallouts of rate cuts, as hotels have a substantial running cost, is that it is not sustainable over a long period. Roxana Jaffer, Resident Director, Holiday Inn Dubai Al Barsha, said: "A rate cut of between 10 and 20 per cent would be sustainable allowing a better cash flow through the summer."
Crawford added that for hotels aimed primarily at the corporate or transient market, the problem is much more severe and harder to solve. As demand reduces one can only try and secure a larger share and this cannot be achieved by price reduction alone. Relationships with bookers become even more critical and consistency in service delivery is a must.
"Customers need little excuse to jump ship for a lower rate or added value. For the present it is the market that is calling the shots," Crawford said.
Another danger to cutting rates below a sustainable level is that service and quality levels will drop, Hytonen said.
What, then, would be the alternatives to cost-cutting as a means to survival when the market is down?
According to Crawford: "The only realistic alternative is to increase marketing spend. However, this is not just about buying media space. In the past, many new hoteliers trying to find a way to fill empty rooms during trough periods created world famous events such as the Monte Carlo Rally and the Cannes Film Festival. Such demand creation requires teamwork and, ideally, co-operation between a number of properties offering a range of price options. Challenging times require creative solutions."
Fulton said changing the market segment mix is a tried and tested approach to discounting, where prices do not necessarily change. Managing account portfolios and distribution of accounts in a particular price band could be another strategy.
Crawford said if it is not possible to increase demand for the destination overall, rate cutting can only damage profitability for the market as a whole. Price reductions can also have a whole range of negative side effects. These can include deterioration in how your product is received, an impression that the product was over-priced before and a reduction in booking lead-time.
"What is also without doubt is that it is harder to put prices up than to reduce them. One has to consider the long-term as well as the short. Major corporate customers of hotels in the region have long been frustrated that at times of high demand their corporate rates were unavailable, or even that there were no rooms to be had. Those who looked after their loyal customers in the past should be reaping the benefit now."
Hoteliers in the region, and in Dubai specifically, expressed their reservations on a price war situation.
Fulton said: "Loss of revenue does not necessarily increase volumes and obviously leads to lower profitability. It may create a price-war situation, which would be quite difficult to control and to recover from. You may alienate your core customer group by attracting a different segment for a short term."
An alternative is enhancing product and service offering and, therefore, increasing the price to value ratio of the products, said Demirtas. However, the concern expressed by hoteliers across segments was that these rate cuts would go straight to the bottom line.
"Traditionally, the rooms department profit represents the majority share of profit so of course there would be a tremendous impact on the bottom line at hotels," said Hytonen.
Crawford added: "Most international brands will not compromise on customer service, so rate cuts come straight off the bottom line unless increased volume is achieved."
By Nina Varghese
© Emirates Business 24/7 2009
Community Comments (0) - 
Comment on this article 
Comment on this article
The opinions of the authors expressed herein do not necessarily state or reflect Zawya. Read our Comment Policy.
Loading ...
Zawya Comment Policy:
-
Zawya encourages you to add a comment to this discussion. You agree that when you add content to this discussion your comments will not:
1.1 Contain any material which is libelous or defamatory of any person, is obscene, offensive, hateful or inflammatory or causes damage to the reputation of any person or organisation.
1.2 Promote sexually explicit material, violence, discrimination based on race, sex, religion, nationality, disability, sexual orientation or age or any illegal activity.
1.3 Be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence.
1.4 Be threatening, abuse or invade another's privacy, or cause annoyance, inconvenience or needless anxiety.
1.5 Be used to impersonate any person, to misrepresent your identity or affiliation with any person, or be likely to deceive any person.
1.6 Give the impression that they represent Zawya.
1.7 Advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse. - The content posted on www.zawya.com is created by members of the public. The views expressed are theirs and unless specifically stated are not those of Zawya. Zawya reserves the right to review all comments prior to posting and edit or delete any contribution, but Zawya is not responsible for and can not be held liable for any content posted by members of the public on www.zawya.com.
- Zawya is not responsible for the availability or content of any third party sites that are accessible through www.zawya.com. Any links to third party websites from www.zawya.com do not amount to any endorsement of that site by Zawya and any use of that site by you is at your own risk.
- By submitting your comment, you hereby give Zawya the right, but not the obligation, to post, air, edit, exhibit, telecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comments worldwide, in perpetuity.
Loading ...
Post Your Tender Notices for FREE
(No Sign-in Required)
Zawya Tenders is a Tender Notices service entirely driven by contribution
from issuers in both public and private sectors. It is not an e-tendering service and is entirely FREE.
As an Issuer, you can benefit from posting an unlimited number of Tender
Notices for FREE and reaching out to an online community of bidders.
The service also offers you a tool to track the interest of bidders to your
tenders 'live' online.
from issuers in both public and private sectors. It is not an e-tendering service and is entirely FREE.
As an Issuer, you can benefit from posting an unlimited number of Tender
Notices for FREE and reaching out to an online community of bidders.
The service also offers you a tool to track the interest of bidders to your
tenders 'live' online.
| Leisure and Tourism Tenders | Due Date |
Community Buzz
Stories
Companies
Most viewed companies by Community in the last 24 hrs
| Company Name | Country | Industry |
| Consolidated Contractors Company | Overseas | Construction and Design |
| Saudi Binladin Group | Saudi Arabia | Construction and Design |
| Saudi Electricity Company | Saudi Arabia | Electric Utilities |
| Saudi Telecom | Saudi Arabia | Telecommunications Services |
| Sharjah Electricity and Water Authority | UAE | Electric Utilities |
| Hyundai Engineering and Construction Company - Saudi Arabia | Saudi Arabia | Construction and Design |
| Al Azizia Panda United Company | Saudi Arabia | General Retailers |
| Qatari Diar Real Estate Investment Company | Qatar | Landlords and Developers |
| Emirates Telecommunications Corporation | UAE | Telecommunications Services |
| Almarai Company | Saudi Arabia | Food |
Projects
Most viewed projects by Community in the last 24 hrs
| Project Name | Country | Sector |
| Takreer - Ruwais Refinery Expansion | UAE | Oil and Gas |
| Al Futtaim Carillion - Marina Hotel (Yas Island) | UAE | Real Estate |
| Emirates Aluminium (EMAL) - Smelter Complex - Phase 1 | UAE | Industry |
| Abu Dhabi DOT - Abu Dhabi Metro | UAE | Infrastructure |
| SATORP - Jubail Refinery and Petrochemical Complex | Saudi Arabia | Oil and Gas |
| ENEC - Nuclear Power Plant | UAE | Power and Water |
| Dubai RTA - Dubai Metro | UAE | Infrastructure |
| Al Safwa - Jeddah Cement Plant | Saudi Arabia | Industry |
| SATORP- Jubail Refinery and Petrochemical Complex - Conversion Unit and Sulphur Package (Part 2) | Saudi Arabia | Oil and Gas |
| Qatar Bahrain Causeway Foundation - Qatar Bahrain Causeway | Bahrain | Infrastructure |