1.       The Numbers Don’t Lie?  Once again we are faced with an incredible array of numbers coming out of respected professionals who are trying to figure out the impact of the National recession.  The problem is that the numbers can be made to say anything, but a careful review will show that no matter whose numbers are used, the picture is not rosy.  Take for example the Gross Domestic Product (“GDP”).  The Government released figures in January showing a decline in GDP for 2008 of 3.1 %, the worst in over a decade, clearly signaling the fact that the recession was worse than most economists had predicted.  On February 27th, after the markets closed, the Government revised the GDP loss to a whopping 6.2 %.  Stocks world-wide are tumbling on that piece of bad news, in fear of a longer recovery period.  The downward spiral seems to continue with the report that even revered investor Warren Buffet lost $11.5 billion in the net worth of his Berkshire-Hathaway Corporation. 

2.      What is the impact on the Inn Business.  First, it is hard to get numbers for the Bed and Breakfast Inn business separately.  Smith Travel Research (“STR”) is the most respected source of historical numbers for the Hospitality Business, but does not collect data from small properties (under 50 rooms).  One data release from STR shows that New England seemed to be holding its own relative to the US National data.  For example, December, 2008 results for New England included a drop in occupancy rate of -2.1%, while Average Daily Rate (“ADR”) decreased by -3.6%.  This resulted in a huge decrease in Revenue Per Available Room (“REVPAR”) of -5.7%.  The National figures during the same December period showed larger decreases in Occupancy of -6.8%, in ADR of -3.2%, and a REVPAR decrease of -6.6%.

For the Year 2008 as a whole the figures are also instructive.  New England showed a decrease in occupancy of -2.8%, but an increase in ADR of 1.9%, resulting in a miniscule decrease in REVPAR of -0.9%.  The National figures for 2008 were far worse, with a decrease in occupancy of -4.2%, but an increase in ADR of +2.4%, resulting in a decrease of -1.9% in REVPAR. 

The numbers from STR show that, until about September, 2008 was a growth year with higher occupancies that dropped precipitously in the 4^th Quarter.  Rates were still climbing in December, as the Hospitality Business seemed to lag in discounting.  Overall, 2008 would be a down year, but only in comparison to the strong growth in the prior three years.

3.      New England is not the same.  One interesting thing that jumps out of the results shown by STR is that the New England States are not homogeneous.  In fact, it was clear in both the December and National results for 2008 that Northern New England (Maine, New Hampshire, and Vermont) fared much better individually than the Nation or their Southern New England counterparts.  For example, for 2008 as a whole, Vermont showed an increase in occupancy of +1.9%, an increase in ADR of 4.8% along with a REVPAR increase of +6.8%.  While the results in Maine and New Hampshire were more consistent, they were slightly worse than New England as a whole.   The bottom line was that overall, 2008 was a non-growth year, with a really cloudy picture for 2009.

4.      The Real Data comes from Sales Tax Revenues.  Another well respected source of industry research comes from Atlanta-based PKF Hospitality Research (“PKF”).   Utilizing results of sales tax collections in Maine, PKF reported that September lodging sales in that state dropped by -12% from 2007, and continued to drop by -2.6% in October on a year-to-year basis.  While Maine finished the year 2008 slightly ahead of 2007 (+0.7% growth in revenue), this came after 6% annual growth in the preceding three year period.  PKF is projecting as a whole a -7.8% decline in REVPAR for Maine in 2009, which would make it one of the steepest declines in recorded history since the 1930’s.  PKF also predicts that Maine will not fare as worse as others, because of its relative low cost and its rural location which fosters escape from the big cities.   Presumably this would apply to all of Northern New England with similar characteristics prevalent throughout the region. 

5.      Summary:  Batten Down the Hatches!  No one likes to consistently hear bad news, but there is little about the economy that seems to be saying that things are going to get better soon.  Predictions for a recovery in late 2009 and early 2010 are all that we have to go on, but most economists are hedging on those dates.  Similar to the broad-based declines in 4^th Quarter, 2008, retail spending, the American consumer seems to have switched to a survival mode, and this does not bode well for discretionary spending at least until there is some better news on the horizon.  We have advised our consulting clients of the following:

          a.       Budget for a decrease in revenue of about 10% for 2009, adjusting expenses as much as possible to that revenue;

          b.       Increase spending in Marketing, particularly electronic marketing to capture market share;

          c.       Neither increase or decrease overall rack room rates.  Develop packages with adventure travel features which show good overall value.  Up-sell rooms whenever possible, and include value-added options with all room rates.  Partner with local businesses and cross-market as much as you can. 

          d.       Hold discretionary spending to a minimum and build cash wherever possible in the event that this recession lasts longer than expected.  Do not defer necessary repairs and maintenance, but this is not the year to spend money on capital improvements. 

          e.       Remember why you came into the Hospitality Business. It is all about the guests and not the Innkeepers!

          f.        This too shall pass.  Look to the future, because the past is gone forever.

We spent some time over the Holidays with our family outside of Boston.  Rather than displace some of my nephews, we tried the closest hotel.  This was a large chain hotel on a major route west of Boston with a huge shopping center across the street.  While there were several small (3 room) bed and breakfasts nearby, we thought we should see what the hotel industry was up to.  What a mistake!

First of all, we should say that the room itself was newly redecorated, fairly large and well furnished.  The bed was a new pillow-top king-size, and the furnishings were standard up-scale hotel furniture.  There was a very large, new flat-screen TV with Hi-Def capabilities.  There was also free wi-fi and good desk space with plenty of lights and a.c. outlets.  It contained the typical business set up with desk and swivel office chair in addition to two other upholstered seats.  The heat was the ubiquitous through the wall air conditioning/heat unit, but with a more modern temperature control on one of the walls.  The bathroom was standard size, but upgraded with a stone countertop, tile floor, and bowed shower curtain rod, giving the appearance and feel of a larger bathtub.  In short, this was a fairly up-scale hotel room, the same to be found in most cities of the Country.   What it lacked in charm, it made up with functionality; or so we thought. 

We were using reward points left over from the corporate world for one of the two nights of our stay.  This is where the trouble started.  We had paid for our second night as a deposit, with the first to be paid for by the reward.  The cost of the room was quoted as $99 plus tax.  When we checked in, however, the desk clerk advised us that we would need to check-out and then check-in again on the next day.  They said that they could not guarantee that we would be able to stay in the room, as room assignments for check-ins are made each morning.  We advised them that they needed to figure it out, but we were not moving rooms.  The next day we did, in fact have to check-out and then check-in again, but somehow they managed to keep us in the room.   We then went to breakfast in the dining room.  This was a holiday, so they were not serving a buffet.   We were seated, and then waited about a half-hour for a server to bring the menus and coffee.  Overall, the breakfast was sub-par and the service very poor.   When we finally checked out, the desk clerk told us that since we stayed in the same room, which apparently was a higher level than the rate quoted us, we had to pay an additional $50, despite the fact that our written confirmation was clear.  We, of course, refused to pay, and the desk clerk said she would discuss it with the manager.  After we left, they just charged the difference to our card anyway.  We are still waiting for the credit that they promised, but the credit card company will reverse the charge if the hotel does not do so.

The long and short is that in the battle between hotels and bed and breakfast inns, we win, hands down!  It is not about luxury rooms, amenities, or discounted rates.  It remains true that personal service, quaintness, and charm will win out every time.  It is not just about the room.  While our room was perfectly adequate, and in fact, in some respects a clear upgrade, it was sterile, lacking any “charm” or individuality.  This room could have been found anywhere in the United States.  Close your eyes, and you may not know where you are for a minute.  One of the things about old house syndrome at bed and breakfast inns, particularly those in older, historical buildings, is that the sounds of the Inn at night, the groans of the boiler or creaks and pops of the radiators, can impact your sleep, at least on the first night.  Well try those hotel thru-wall heaters which make a huge noise as they cycle on and off all night.  I’ll take charm every time. 

The most important thing that we have to offer in our small part of the Hospitality Industry is the personal service that our innkeepers give to their guests on a daily basis.  This is what clearly sets us apart from the much larger hotel business, and the one thing that will help us survive the tough times to come.   The more the economy gets worse, the more respite, peace and good old fashioned hospitality will be needed to provide our guests with a retreat to recharge their batteries.   Do not ever underestimate what we have to offer the traveling public.  It is something that hotels can never supply, no matter how many concierges they have.  The hotels of the world will compete by price to stay alive.  The bed and breakfast industry has a magic wand and can better compete with hospitality, charm, and personal service.  For all times, this is what differentiates us from the hotel business, and what will continue to make us successful in the years to come.  What we need now is to spread the world that we are open for business as usual, and that means “Hospitality” with a capital “H.”

The most recent news from the Hospitality Industry is not good for Innkeepers.  Hotel REIT giant, LaSalle Properties announced it was cutting 20% from its hotel staffing (mostly run by large hotel management companies) and has rescinded its 2008 guidance to the stock market.  LaSalle reported that its Revpar (revenue per available room) decreased by 11.4 % in October; a huge drop!  While the Innkeeping Business does not use Revpar as a measurement, it is fundamentally the same as saying that average daily rate and occupancy combined dropped by that amount.  LaSalle is an important bell- weather for Inns because it is comprised of mostly luxury and higher-priced hotel properties.  For the full story, please see:   LaSalle Orders 20% Cut in Hotel Staffing – WSJ.com.

We hear anecdotally that many Inns and Bed and Breakfasts across the Country have had good years in 2008, at least until the end of October.  Now is not the time for Innkeepers to rest on their laurels.  A sea change is coming, in the form of a recession, the likes of which we have not seen in our lifetimes.  This is also not the time to just burrow in fear of what is to come.  As we have said many times before, when there is a downturn, those Inns at the top of their game can improve market share as against the competition.  A bigger piece of a smaller pie may save the day after all.

So this is the time to be countercyclical and increase your spending on marketing, especially electronic marketing through your website, blog, and by email.  Create attractive packages rather than discount, and spend all of that extra time you have due to declining occupancies to come up with creative and imaginative ways to get your repeat and referral guests to the Inn.  Most of all, just lowering the price will not work, and may make things worse in the long run (see previous article on Discounting).

Most of all, have heart.  The biggest reason that they come back to the Inn is because your have created a refuge and a respite from all of the problems the guests face at home and in the real world.  Remember that this is exactly what the guests need in these troubled times, and they will pay you for this experience.

In troubled times like today, Bed and Breakfast Innkeepers have an overwhelming feeling that the best way through this downturn (say recession!) is to put their room rates on sale. Isn’t that just what the retailers do at Christmas time to survive a bad season? The answer is that discounting in the travel business not only does not work, it creates a pattern of customer behavior that will last for years, even when times are better. Let’s look at the specifics.

Following 9/11, the Hotel Industry reacted to the basic loss of corporate business by deeply discounting their rates and putting large blocks of unused inventory on third-party web sites. The result was $50 a night rooms on sites like hotels.com which set up a huge expectation with consumers that this was the right price to pay for hotel rooms, no matter what the differences were in quality between each hotel. Many subsequent studies showed that the hotels basically killed their business for several years after the original reason for the discounting had gone away. The PAII Industry Study for 2002 and 2004 shows clearly that while occupancy at bed and breakfast and country inns decreased somewhat over the same period, rates did not go down significantly. Innkeepers knew the value of their product and held their rates. The result was that the Inn Industry basically avoided the meltdown that the Hotels suffered during that time.

By the end of 2007, rates for both Hotels and Inns were higher than in 2001, and occupancy rates had climbed back for the most part to 2000 levels (the best year to date in the Inn business). It is hard to tell where we will end up in 2008, but it clearly will not be a growth year. More important, where will we be in 2009?

Let’s put this into perspective. What would be the impact of your Inn business if revenues declined by say 10%? For an Inn grossing $400,000, that would mean a decrease in sales of $40,000. If the Gross Margin for that Inn (net cash flow/gross revenue) was an efficient 46%, then the net cash flow will also go down by 10%. In this example, the net cash flow would decrease by $18,400 from $184,000 to $165,600. The expenses also have to decrease, and there clearly can be cost reductions since many of the Inn’s expenses are variable and related to occupancy. In other words, as occupancy decreases, certain expenses like housekeeping, amenities and other costs related to occupancy levels will decrease as well. Added to this are the discretionary spending that can be reduced or deferred, all of which leads to the conclusion that even a 10% decrease in revenue will not result in a calamity for a well-run Inn business. It is more like something that needs to be weathered.

Most Innkeepers have a good sense of what the true expenses of operating the Inn are, and can find the ways to reduce costs. More important, most of your personal expenses seem to be interwoven in the Inn’s finances as well, providing a really sound way of reducing expenses. Knowing what is the real cost of the Inn gives you a better way of knowing how much you have to charge in rates to make an adequate return on investment (i.e. to pay the mortgage and have some for yourself) at any level of occupancy. Once you do this, you do not have to discount, you need only charge a fair price to achieve a fair rate of return on investment.

The real concern then remains this nagging feeling among Innkeepers that the only way out of a downturn is to discount. This should be avoided at any cost, because, as described above, once it is done, your guests will never again feel like paying your full rates. It will take many years to climb out of that hole. A better approach is to sell well priced packages and have value-added specials to supplement your rates. This has always worked well for our Industry, and will work again.

Finally, a word about cutting costs. Marketing and maintenance are the two areas that are easy to cut, but have the longest negative affect on your Inn business. This is the time to do what you can to increase marketing, because while the overall travel business may be decreasing, by great marketing you can stabilize or even increase your market share of the business that exists. Deferring maintenance is also something that comes back to bite you, since the cost of making repairs will always be more in the future if something is deferred.

The long and short is that you can favorably impact your results, even in bad economic times. Have faith that this too will pass, but in the interim, cut costs and market, market, market!