Stay smart – how to improve your hotel buying strategy for 2016

Travel buyers are in the middle of negotiating their hotel deals for the year ahead. But is the lengthy process of putting together an annual accommodation programme still worth the hard work? And if it is, how can you deliver better value?
Written on 01.09.2015, 00:00
Stay smart – how to improve your hotel buying strategy for 2016

Move to two-year deals
Negotiating hotel rates through an RFP (request for proposal) process usually creates substantial savings for corporate buyers. But RFPs require intense labour, from issuing tenders to negotiating backwards and forwards on price and then, once the deal is done, overseeing rate loading and ensuring the correct rates are applied at point of sale. “You can spend many hours on a contract for just 100 room nights,” says Søren Schødt, managing director of TravelpoolEurope. It all adds up to hundreds of hours of time and, often, significant cost, for example in fees for data analysis. And it can easily take until the end of February for all rates to be loaded, after which the deal has only ten months to run anyway.

One simple way to cut out much of the work is to move to two-year agreements. TravelpoolEurope has approximately 50 per cent of its preferred hotel spend on two-year deals. Not only do two-year deals save time, they help keep the preferred programme consistent for travellers and hold rates lower. That’s because it is hard for the hotel at the end of the two years to raise rates by a higher percentage than on their one-year deals. It means buyers effectively face a rate rise only one year in two instead of annually.

Another advantage of two-year deals is that they help to include more spend within negotiations. For example, TravelpoolEurope makes 45 per cent of its conference bookings the year before they take place. With a two-year deal, those room nights can be counted more easily towards meeting volume targets with the supplier.

As a result, some hotels resist moving to two-year deals, but, says Schødt, they normally agree in the end for their best-performing clients. “We sell the idea to them as a way to grow loyalty with their customers,” he says.

Move to no deals (dynamic pricing)
An even bigger time-saver is to have no contracted rates with hotels at all. Instead, the customer and chain (or individual hotel) agree a fixed percentage discount off the best available rate. However, moving the entire hotel programme to dynamic pricing is generally considered a step too far. It would fail to tap the buying power of hundreds or even thousands of room nights at companies’ top destinations.

There are other reasons for retaining negotiated rates. A preferred rate programme is a useful guide for travellers, who can understand instantly what is an acceptable price (the negotiated rate or lower) to pay in a city and what is not. A preferred hotel also tells travellers the property has been vetted, both in terms of safety and security, and that it is chosen for its convenience, e.g. proximity to the local office.

Preferred deals also give buyers certainty. Dynamic pricing makes it very hard to budget costs. Even so, dynamic pricing is increasingly accepted by buyers for cities where spend is moderate or low.

Introduce city rate caps
Another purchasing strategy is to set rate caps for the maximum travellers can spend in each city. One way to set the cap is to take the average rate paid over the previous 12 months and add a small percentage to it – say 10 per cent. Or, if your company has a negotiated rate in the city, that can be set as the cap for all other properties. Conversely, once you have a rate cap, that can also be applied to negotiated deals. Tell suppliers you can only sign agreements for rates that do not exceed the cap. However, rate caps are used mainly in cities where buyers do not have enough volume to negotiate discounted corporate rates.

Remove the most expensive and cheapest properties from your programme
There is an even quicker and more effective way to reduce rates than all the options set out above. Most hotel programmes still have too many preferred properties in them. Try removing the most expensive and also the cheapest hotels in each city. It can easily save 10-20 per cent by not only getting rid of the priciest hotel but concentrating spending power with fewer suppliers and also giving travellers a narrower range of price expectations.

Enforce last-room availability (LRA)
Preferred hotel agreements usually should include LRA, which means the client is allowed to book at the negotiated price so long as there is still a room in the hotel which has not yet been sold. Unfortunately, hotels do not always honour LRA clauses. Make sure you monitor the situation. If you find examples where travellers have been told the negotiated rate is unavailable even though rooms are still available through the hotel’s website, show the evidence and insist on compensation.

The TravelpoolEurope perspective – one size does not fit all
A tiered strategy is the way ahead for today’s corporate hotel programmes. For your biggest destinations, continue with negotiated rates (ideally through two-year agreements) but be prepared to switch to dynamic pricing or rate caps where the investment of time cannot be justified. And check you are getting the best out of the programme you do have: limiting the number of properties per city and holding hotels to account for not honouring LRAs are both very effective.

WHAT WILL HAPPEN TO HOTEL AVERAGE DAILY RATES IN 2016?
Advito (anticipated price developments in local currencies)

North America

+4% to +6%

Europe

+1% to +3%

Middle East

-1% to +1%

Africa

+1% to +2%

Latin America

+4% to +6%

Asia

-2% to 0%

Southwest Pacific

0% to +2%

Global

+3% to +5%

Source: 2016 Industry Forecast, Advito

GBTA Foundation/Carlson Wagonlit Travel (anticipated US$ price developments)

North America

+4.3%

Western Europe

+0.7%

Eastern Europe

+2.0%

Middle East/Africa

+1.0%

Latin America

+3.7%

Asia-Pacific

+3.0%

Global

+2.5%

Source: 2016 Global Travel Price Outlook, GBTA Foundation/CWT

 

According to both GBTA Foundation/CWT and Advito (the consulting wing of BCD Travel), there will be both upward and downward pressures on hotel rates in most markets in 2016. The upward pressure is a continuing increase in demand during a period of very limited new supply. This is particularly true in the US. The downward pressure is lack of business and economic confidence. Concerns about issues such as economic slowdown in China and problems in the euro zone are making hotels cautious about raising rates too fast outside North America.

As always, however, market conditions vary country by country, so it is important to look behind the headline figures. In Asia-Pacific, for example, China not only has economic clouds gathering, it also has an over-supply of new hotels. GBTA Foundation/CWT tips rates in China to grow only 0.3 per cent in 2016, while Advito forecasts they will fall by 1 to 3 per cent. Another Asian country where rates have fallen sharply is South Korea, hit heavily by the MERS virus outbreak earlier in 2015. On the other hand, Japan is booming, with an improving economy and limited room supply leading to fast-climbing rates – likely to rise 3.6 per cent in 2016 according to GBTA Foundation/CWT and 3 to 5 per cent according to Advito.

FOUR HOTEL TRENDS TO WATCH OUT FOR IN 2016
According to GBTA Foundation/CWT, four trends to keep an eye on in 2016 are:

Higher ancillary fees – Hotels are trying to earn more money from extras, including WiFi, minibars and room service. Hotel fees and surcharges in the US rose 5 per cent to a record $2.47 billion in in 2014, according to New York University.

Tougher cancellation policies – Hotels are lengthening the period before arrival when guests can no longer cancel free of charge. Travel managers can sometimes negotiate successfully on this issue.

Increased dynamic pricing – Hotels are trying to move some corporate customers from negotiated rates to discounted best available rates.

Rise of the sharing economy – Some companies are experiencing a significant increase in travellers wanting to stay in sharing economy (such as Airbnb) properties instead of conventional hotels in the preferred programme.