A good article in the WSJ (Entrepreneurs Take On Tax Man) about how aggressive many small business owners are being about disputing their property tax assessments.  I firmly believe that everyone should pay their proper taxes, but I also recognize that many of the assessments of property are based on valuations from the real estate bubble time that are simply not realistic.

Disputing inflated assessment valuations is exactly what the ’scrappy’ types of operators who will thrive in this environment  are doing.  When times are tough, the smart hotel operators pay attention to the details.  There are not many big advantages to be had, so you have to look for small advantages or opportunities and pursue them.  A little bit here and there can make a huge difference in times like these that separate the men from the boys.

Our COO Taylor Beauchamp has co-authored an article in this month’s issues of Lodging Magazine on the impact of health care reform on the hotel industry.    Check it out at http://tiny.cc/FjtOG

I heard recently about a group of 30 hotels in a particular geography that had RevPAR performance from negative 7% to negative 45% this January vs. last January.  Even in the best of times there is always a big variation in performance between hotels, but this is a massive range.

It is occurring to me that in conditions such as these, it is up to hoteliers to take their destiny into their own hands.

Typically a hotelier gets most of his or her returns from the up-front asset management decisions made in particular:

1.  Location of hotel

2.  Cost per room

3.  Financing strategy

4.  Brand Affiliation

Because these decisions are up-front and drive so much of the ultimate returns, frequently there is not a lot of variation or creativity in the operational strategic plans of hotels.

In most other industries, there is a lot more focus on the classic Michael Porter type of strategic planning where the key is having a differentiated strategy so you can stand out from the crowd and avoid being a commodity.  In hotels, I find that owners overwhelmingly focus on the asset management decisions.  Many times, they largely outsource their ongoing strategic planning on how they will compete in the marketplace to their franchisor.

They may claim to have a strategy but it often sounds very similar to many other hotels around them.  The only differentiation they have comes from their franchise company.

In normal times that might be an okay way to get your fair share since most hotels can win enough business when times are good.  These are not normal times though.  The franchise companies I have worked with all seem to be well intentioned.  In this environment though, they are cutting their budgets for hotel support.  Additionally none of them have ever faced a downturn like this, and none of them is really known for its speed.

That all adds up to it being extremely important for a hotel’s management to take the hotel’s destiny into their own hands.  If you are expecting your franchise company to give you the answer or the tools to make it through this time, you are taking a real gamble.

The solution is Strategic Planning 101?  You need to define a unique strategy for your hotel that is probably not the same one that every other hotel in your market is following.  This could be in the markets you are targeting, in your sales or marketing, in your pricing strategy, or any of a number of other areas.  A good starting point is by focusing on the built in competitive advantages your hotel has in its location, amenities, relationship with the community, management etc.

Now is the time to stand out from the herd.  Everyone will still feel the impact of this downturn, but you need to take as much control of your own destiny as you possibly can.

Start with a fresh SWOT analysis of your hotel today.  This is hard work but you’ll be better positioned vs. your competitors who spend their time complaining about the market.

One of the things that makes business cycles fascinating is the changes to the status quo that come from big economic changes.  Since this is the biggest change of our lifetimes, we will see all kind of ideas turned on top of their heads during this downturn.

In recent history, the prizes have gone to brands that could position themselves more up-market.  Brands like Target have become cultural and commercial icons by riding the wave of mass affluence as they took the most mundane products upscale.

The poster child of mass affluence though has to be Starbucks.  This is a global business that was built on letting anyone live the life of the wealthy for a few minutes at least with their morning cup of coffee.  I have witnessed this first hand by lining up with call centers workers in the Philippines at midnight at the local Starbucks in Manila where I spent a great deal of time.  These really great individuals were often the first in their families to graduate from universities and have real ‘office’ jobs.  Going to Starbucks on breaks and carrying the famous cup around was a way tangible way of demonstrating to themselves and the world around them that they were on their way in the world.

Now Starbucks is really struggling.  The WSJ has an article today talking about how Starbucks is trying to take some of the luxury cachet out of their brand.  In tight times, people don’t want to feel like they are being wasteful with unnecessary luxuries.  The upscale brand positioning of Starbucks has become a anchor weighing the company down and creating openings for Dunkin’ Donuts and McDonald’s.

One of the more interesting pieces in the article is a reference to a December study in Chicago that showed Starbucks to be cheaper than Dunkin’ Donuts for some drinks on a price per ounce basis.  The company’s executives admit that they have a ‘disconnect between the company’s actual prices and consumers’ perception of those prices.’

In response, Starbucks is somewhat desperately trying to move their brand into more of a value positioning without cutting prices.  Most notably, they have introduced their own version of extra value meals where they package a hot beverage and breakfast for $3.95.

Starbucks is such a strong brand that it is hard to imagine this strategy actually working, and it’s easy to see it ruining its entire franchise.  At the same time, that is a long term worry, and in business and life the long term only matters if you can survive the short term.

Most business people are familiar with the concept of economies of scale where unit costs decrease as production increases.  The opposite of this is a concept called diseconomies of scale where unit costs increase as production increases as a company gets too big and bureaucratic and starts stepping on its own toes.

What we have going on with a lot of affluent brands today is the marketing equivalent of diseconomies of scale where the brands need to flee their upscale positioning they have polished for decades in many cases.  I don’t know what to call this phenomenon - maybe ‘brand tarnishing.’  With the potential long term value destruction in the name of short term survival though, it is not for the timid.

For a humorous version of the challenge of up-market brands check out Tom Fishburne’s recent cartoon.

The last week has been a lot of dismal news to say the least.  The massive job cuts that were well publicized last week jolted the stock market and the overall economy a lot.  This week more companies are joining the fray including yesterday’s announcement of a big restructuring by Macy’s which is also cutting 7000 jobs.

On the hotel front, PKF made news last week estimating that RevPAR would fall by 9.8% this year including industry wide occupancy of 57.6%.  That occupancy figure would be the lowest level ever tracked by Smith Travel Research.   PwC this week predicted U.S. RevPAR will decline by 11.2% including an even lower occupancy rate 56.5%.  Starwood kicked off the big hotel company earning season last week as exhibit A of the problem as they reported a shocking 13.2% decline in 4th qtr RevPAR.

My biggest concern in all of this is that the most seasoned brains that I know in the industry have always coached me to be aware when growth comes from rate rather than just occupancy.  As one of them told me a couple of years back when warning me about deals, “That rate can go away quickly.”

The hotel industry is at risk of bleeding rate a lot in the next year.  My money is on both PKF and PwC being too optimitic.  I can forsee a double digit rate decline this year being as likely as not.

As Peter Yesawich indicated this month, their surveys are saying that people intend to travel but people are looking for real deals.  I think it is not dissimilar to the throngs of people who came out before the holidays at my local Circuit City when they could buy things that were crazily discounted.  A lot of people still have a lot of money, but they will only give it up in return for something that is a screaming bargin.

This leads me to PKF’s forecast that 20% of hotels will not generate enough cash flow to cover their mortgage interest this year.  If there is even more ADR weakeness, that number can jump really quickly.  The expectation is that hoteliers will dip into cash reserves to keep their loans current and/or try to negotiate some more leeway from their lenders.  I think that is probably right that a lot of people will have a bad year in 2009 but muddle through even with negative cash flow.

This sets up the really big problem which has nothing to do with this year. What will the start of 2010 look like?  A lot of hotels run very tight cash flow in the first quarter even in the best of times.  If things are not turning around by the start of 2010, there will be some really tough decisions for people who have burned through a lot of cash reserves this year.  Do they continue to throw money into their assets?  How accomodating will lenders be a year from now?

A friend of mine told me years ago as we were evacuating New Orleans just before a hurricane that studies show that most people wait too long to take action when a crisis hits.  By the time that people realize the gravity of the situation, it is often too late to take action that would have been easier to take if they had started earlier.

If you own a hotel, take even more drastic action than you think you need to by assuming the worst.

That means:

1.  Managing costs even tighter than you think you need to

2.  Going to lenders sooner rather than later and negotiating some type of loan forebearance even if it’s only interest only payments.

3.  Building up cash well behind what you think you need

Many fortunes will be made by people who survive this period.

This is more of a quick alert since many business people are not aware that for many employers this will be a ‘leap’ pay period year.  What that means is that many employers who pay their employees bi-weekly will have 27 pay periods in 2009 rather than the normal 26 pay periods.  This has been written about a few other places including here.

Leap pay years happen just like regular leap years because there is an extra day in a year that is not accounted for by 26 pay periods of 14 days each (26X14=364).  Eventually that extra time has to be accounted for which results in an extra pay period.

For many employers that will be in 2009.  This will mainly impact employers who had their first pay day of 2009 the very first week of January.

One way that this will creep up and surprise many employers is that 1/1/2010 is a Friday.  Most companies elect to pay their employees a day earlier if the pay date falls on a holiday.  Companies that follow this protocol will have their final pay date of 2009 hitting on Thursday 12/31/2009 rather than Friday 1/1/2010.

Companies that account their payroll on an accrual basis will still just have their normal payroll expense.  Companies that do not accure their expenses will have an additional expense in 2009.

Big areas that companies do need to montior include employee deductions and matching contributions.  If a company is not diligent it is possible that employees may be overwitheld or overpaid for these areas.

The more likely impact of this is on employees though.  Since virtually every individual is on a cash basis for tax purposes.  This will mean that they will receive more income on their 2009 W2s.  There are all kind of impacts to this including potentially being in a higher tax bracket and having to double check with their employer that they do not exceed the limits on retirement plan contributions, child support payments and the like.

It’s this kind of stuff that makes the world of payroll and HR so much fun.

This is the second in a series of postings on the interviews that Randy Smith recently posted.

This section focuses on the luxury segment but also touches on the potential for  knock on impact into other segments.

No one’s putting on the Ritz

• Another huge difference with this downturn is that luxury is usually the most immune to past downturns.  Not this time.  Luxury was the first to feel the pain and is falling faster than any other segment.
• The luxury market downturn is undoubtedly linked closely with the financial services issues (i.e. the richest people are the one who are suffering the most so the richest hotels are suffering too pretty unsurprisingly.

Perception issues are going to be a huge problem for luxury

• A problem for luxury that Randy did not address is that part of the issue is perception as much as cost.  By this, I mean that with federal bail-outs impacting so many sectors , it is hard for a lot of people to stay at luxury hotels because they are perceived to be wasteful.  Think about the idiotic car company CEOs flying to Washington on private jets or the incentive trips that AIG went forward with after receiving federal funds.  I’m betting that there are not many executives at company’s who are laying off employees who want to be photographed staying at a Four Seasons or Ritz.
• I had a personal experience with this when I was meeting with a team of people I led to talk about the shared sacrifices that we would have to make following 9/11 that was likely to include layoffs.  I arrived after a much delayed flight to my rental car slot to find that I had been upgraded several classes to a Land Rover.  I can still remember arguing with the rental company guard at 2:00 a.m. that I didn’t care if it only cost $44 a day, I could not drive up to my office in that car.  This downturn is so much more severe that the sensitivty is likely to linger for awhile.

Now it’s the hotels that are the ones trading down

• Rates in luxury are plummeting as the hotels trade down.  That crew business or low ticket group business all of a sudden looks pretty good to some very expensive hotels.
• This is interesting because typically the industry’s rate problems start in Upper Upscale or Upscale.  When those hotels start to discount and travelers realize they can trade up to these better hotels for midscale rates, then the midscale hotels have to move downward.
• A question that Randy did not exist that could be very important is this:  Since the downturn is starting up higher up in the rate chain this time, is it going to take longer for the full impact of price cuts to filter throughout the industry.  I certainly hope not because that could indicate a more prolonged downturn.

One of the elder statesman of the industry has put out two short video clips with some great perspectives on the industry.  Like many of you, I have heard Randy speak many times.  Between his sharp intellect, his years, of experience and his role as the ‘godfather of data’ for the hotel industry, he always has an interesting perspective.

I will note some highlights from Randy as well as some questions that I would ask him or my own thoughts in the next two postings.

There is a different pattern to this downturn vs. previous downturns.

• Historically, there has been a lag between what happens in the overall economy and the hotel industry (typically the hotel industry peaks well after the general economy has peaked and the hotel industry recovers  a bit later than the general economy).  This time that has not happened.  The downturn in hotels has pretty much happened at the same time as the downturn in the overall economy.
• A very important question that Randy does not answer is if this means the recovery for hotels will also happen at the same time or will there be a lag.

Supply growth is going to be a HUGE issue for the industry this year.

• People were feeling good throughout a lot of 2008 and that lead to a lot of hotels being started.  Those hotels are coming online this year.
• The really bad thing about this supply growth is that most of it is front loaded this year.  This means that while there may not be a lot more supply growth than last year, but it will have a much bigger impact on trading conditions because the industry will have to carry the rooms the entire year.

Hotel Financing

• Randy does not expect the hotel financing environment to open up until there is a clear and tangible support showing that there is a recovery well under way.
• He expects that will be well into 2010
• A point Randy does not make but is very important is about the impact of all of this on the recovery.  If he is right about the lending markets staying tight, then the construction that usually starts to perk up early in the cycle to test the market will not be there for this next recovery.  This will be a huge boon for that eventual recovery since it means that supply growth is likely going to be very delayed.

Randy’s Advice

• Avoid debt, control costs aggressively,  and conserve cash.  The key is not to put yourself in a position to weather the downturn since that’s what you’ve got to do - weather it.
• Randy notes that 2009 is going to be tough with a challenging economy and a lot of new hotel supply opening.  He says the recovery could be anywhere from 1-3 years away.
• In spite of all of this, he is optimistic.  He notes that the industry has always been very creative and innovative.  He says that new products come out all the time to help the industry cope, and he expects the same thing to happen this time (place for a shameless plug for Hotel Effectiveness ?)

The hotel industry is incredibly cool!  As you will no doubt find out, I am unabashedly biased about this, but I firmly believe that there is no cooler industry in the world than hotels.

There is a lot to unpack about what makes my industry so great:

• Hotels are all about travel , and we humans are wired to love travel.

• Hotels are the ultimate immersion consumer  product because of how much time we spend in them and what we do in them.
• Hotels are the ultimate service experience for most of us since where else in commerce do we arrive to a warm welcome and then have people wait on us and then clean up after us.
• Hotels are challenging to run because of the how much has to go right to run  such a business that incidently has to be up and running 7×24x365.
• Hotels are ultimately all about real estate by nature of its scarcity and leverage and real estate always has inspired some of the most fascinating stories in the world of business.
• Finally (and maybe the biggest point of all is that), hotels generally make money.  That fact by itself helps them to stand out from some other ‘cool industries’ (think airlines, media and entertainment).

It is this last point that this entire blog will be devoted to.  We love to stay in hotels, but what we really love is the business side of hotels.  The complexity of how a hotel gets built and then gets operated and how all that results in a viable business has always been a point of fascination to us.

We started our business, Hotel Effectiveness, for the sole purpose of trying to use our skills to help hotels make more money.  This blog will share some of our insights and opinions about the business side of hotels based on working with hotel owners and managers every day, talking to a lot of industry experts, and finally reading quite widely both inside and outside the industry.  Hotels are a $130 billion+ industry in the U.S., and we don’t think enough time and thought goes into how they make money and how they can make more money.

Our goal is to encourage more discussion about the business of hotels.  We hope to add something to the debate about how to make hotels more successful  businesses.  We do this because it is our fondest desire to see the industry we love continue to grow and innovate.  We know that key for this to happen is for the industry to be successful so it can attract the capital and the talented individuals that will drive its future.