We have repeatedly made the point in this chapter that lodging is capital intensive and cyclical. Because of long lead times, supply often continues to grow even after demand has stopped growing or begun to decrease. As a result, in the 11 years ending in 1993, the lodging industry lost $33 billion while construction continued throughout the period. In 1997, however, hotel profits were once again at a peak.

Securitization is selling an ownership or a debt instrument (such as a bond) in a property through the public security markets. Major developments have included the widening of lodging's access to debt through CMBSs, to equity through IPOs and secondary offerings, and to both equity and debt through REITs. An additional form of financing has involved the public funding through a special tax. The impact of securitization has been to enable a considerable boom in hotel building. Although securitization brings advantages in the availability of capital, it also has the inherent risks associated with a falling stock market.

The hotel investment decision has three dimensions: financial, real estate, and operating. The large amount of debt associated with hotel construction gives leverage, and in the international market, changing currency values can also provide financial advantages. Low interest rates are especially advantageous to leveraged deals. Hotel real estate can provide an inflation hedge, and the speed with which hotel rates can be raised provides flexibility in rentals rates few other forms of real estate offer. Real estate development also offers profits to development companies, including hotel companies 379380such as Marriott, which are active developers. A final means of profiting from a hotel is from its day-to-day operations, although contrary to popular opinion this is not always the largest source of profit.

The tendency toward overbuilding in a cyclical industry is sometimes exaggerated by the segmentation strategies of major hotel companies. Segmentation can lead to a multibrand hotel company seeking to build one of each of its brands in a market. In some cases, the company may feel that being represented in a major market is more important than the short-run profit potential. Building multiple brands can also lead to problems of encroachment where the same reservation network is divided between two or more properties, and in many cases, multiple properties with the same brand in a market can reduce the advantage of a franchise. Management companies have grown up to serve nonoperator owners. In difficult economic times, the services of these companies are especially in demand as lenders become "involuntary owners." These same difficult times, however, often offer those with operating know-how major entrepreneurial opportunities.

QUESTIONS:
1.How does the hotel business react to the business cycle? Explain why hotel building continues after demand turns down.

2.What does securitization mean? How is it affecting the hotel business?

SUMMARY

Our discussion of competitive practices was structured by the model of the marketing mix. Competition should be proactive, not reactive. In each element of the marketing mix, there is a tool for reaching and attracting guests. With the development of databased marketing, moreover, the appeal can be more carefully crafted to motivate our guests and people like them, and even to reach them individually with the appeal best suited to them.

Product is ultimately the guest's experience. Ways of improving that experience include food service, other services and amenities, and systemwide services. Limited-service properties do not offer restaurant service to their "upstairs" guests, but food service continues to be a major competitive tool in reaching the "downstairs" guests in full-service hotels. Food service is difficult to manage, and some properties have leased their food service operations. This solution has built-in problems related to giving up control of the "service department" of the hotel. Other hotels use franchised restaurants to gain a successful food service format, field supervision, and the power of an additional brand. Still others have sought to limit the problems of and skills required by food service by simplifying their food service operations. The problem with most services and amenities is that many are easily copied and so do not offer differentiation. Systemwide services provided by franchisors include quality assurance for the entire system, an international reservation service, and the establishment and maintenance of a brand name and image.

The low variable cost and consequent wide margin in room sales offer many opportunities for special rates. These are extended to volume customers and, during slow periods, to specially targeted customers, such as sports teams. Rates can also vary according to demand as yield management dictates. The practice of yield management runs the risk of offending customers who are charged different rates for the same product at different times. Good practice in yield management dictates full disclosure of pricing to customers and restrictions on rooms sold at lower rates, such as advance purchase or minimum stay.

Place refers not only to the property's location but also to the channels of distribution. Promotion or marketing communication uses mass advertising in the electronic and print media. Brand advertising in large chains involves very large expenditures to establish and maintain a brand name and image. The Internet has become prominent in advertising, and interactive Web sites make the Internet an additional channel of distribution. Although such mass promotion remains important, hotels are moving toward tighter targeting in their marketing, based on databases made up of information on customers and their transactions.

questions::::

1.What are some of the conditions of competition in the hotel business? What is their impact?

2.What is the difference between the upstairs and downstairs markets?