New market entrants: challenging the paradigm

In major markets around the United States, hotel performance is suffering due to a phenomenon that is forever a part of our world: the addition of new supply to our competitive sets.  There is nothing alarming about this fact; as markets grow, demand AND supply grows, and this creates a cycle that is largely healthy for us all.  Every so often, however, these cycles cause us to falter in terms of performance, and we must stop to wonder why.

 By way of specific example, I draw your attention to a particular market that today is running highly respectable occupancy of nearly 80% which is basically flat to last year.  At the same time, this market is running average daily rate figures that vary anywhere from 10% to 25% lower than the same period of last year.  As a result, RevPAR and Revenue are down, and ultimately owner profit is down.  Why is it that a high-demand market can be experiencing such a decline in price?  Is it not a fundamental of pricing that as demand grows or at least stays strong, so too should price remain constant?

 The variable here, the basic reason for strong, growing occupancies along with significantly declining rates is, in a word, us.  We as hotel operators and owners are notorious for responding to the arrival of new competition by lowering our prices.  In the classic “race to the bottom,” we greet newcomers to our comp sets with the very generous notion of lowering our rates out of fear that if we don’t do so, these new competitors will simply steal all of our business.  This is a good news/bad news situation; the bad news is obvious, as rates and RevPAR decline.  The good news may be less clear, but lies in the fact that we as hotel owners and operators have complete control over reversing this negative trend.

 New competition is a reality, and is often good for a market in the long-term.  How we handle the absorption of such new competition is the challenge, and the opportunity for each of us.  Behaviorally, we understand that customers will try new products.  In the hotel space, this means that new properties that appear to be bona fide competitors will (at least temporarily) steal market share from us when they open, as guests “test drive” the latest new product.  While we really can’t control this, we absolutely can influence how that guest behaves after they have tried the new guy.  For some customers, price will always be the primary factor when choosing a hotel.  As a result, if the new guy opens with introductory rates or special offers that are below current market standard, some customers will move in that direction regardless of anything that we might do.  However, many of our customers are influenced by more than just price, i.e. location, amenities, loyalty program, and, yes, SERVICE.  For many customers who try the new competition simply because it is new, our continued commitment to service etc., should play a strong role in their decision to return to us for future stays.  This is particularly true when you consider that newer hotels often still have to work out the kinks when it comes to delivering service; in this case, our existing hotels have a clear advantage.

 Knowing all of this, why is it that we choose to lower our prices when these new competitors open their doors?  From an outsider’s perspective, our actions would seem to suggest that we have no confidence in our location, in our amenities, in our loyalty program, or in our SERVICE.  As a result, we determine that the only way that we can compete with the new kid in town is by lowering our price to get closer to their “introductory offers.”

 We, the hotel owners and operators of the world, have to make this stop.  We work hard to train our salespeople that we must sell from a position of value, and then we turn around in cases like these and sell from a position of price.  It’s fundamentally incorrect, and we all know this!  When Mercedes introduces a new model, BMW does not lower their prices; why do we?

 As always, the devil is in the detail.  A comprehensive strategy to support our position within our marketplaces is crucial, it is not simply a question of holding the line on price.  However, in order to develop such a strategy, we must first believe in ourselves. We must believe that we can successfully survive the onset of new competition by holding true to the principles and strategies that have made us successful in the first place—first, a refusal to waiver or cave to   new entrants and their special offer price cutting strategies; second, revisiting our core competencies on the property level to ensure maximum quality and value for the guest, etc.  Adherence to these basics can reaffirm our customers’ commitment to us, despite the temptation of lower priced new market entrants.

 After all, if we can’t believe in our ability to deliver on our brand promises and commitment to service, etc, how can we expect our customer to believe in us?