Savvy travelers with a taste for the finer things may hope the hotel industry’s gloomy outlook will yield some discount deals at the high end.
Sadly, for most, it is still a grit-your-teeth-and-run-the-credit-card era — even in this uncertain economy — as operators do everything to keep their sky-high room rates.
“The industry is hurting … [but] we are seeing continued healthy demand for luxury properties, basically around the world,” Jan Freitag, CoStar’s national director for hospitality market analytics, said while adding that, because demand growth is holding, average daily rates are continuing to increase.
Unlike many chains, luxury operators are more willing to take a hit on their occupancy, as long as they can maintain the price. Lest we forget: This is a strata of travel where the Ritz Paris has an occupancy ceiling so likes of Kim Kardashian and the Fashion Week glitterati can check in whenever they desire.
The question now: How long can these operators wear occupancy softness and still maintain that all-important rate? While we don’t expect discounts coming anytime to the Ritz Paris, not every operator is a 127-year-old doyenne of ultra-luxury fabulousness.
(Photo by Mohamed Masaau on Unsplash)
Freitag suggested that the next phase of luxury demand softening may show up not in base rates but in more subtle perks.
“Will there eventually come a place where luxury operators are saying, ‘Well, how about [a] buy two, get one free?’” he said.
Freitag added that operators may also keep published rates steady while enhancing the guest experience with automatic upgrades or an added food and beverage credit.
Despite an insatiable demand for extraordinary experiences and a seemingly endless supply of consumers for whom money is no object, operators remain acutely aware they can’t rest on their laurels. Discounting rooms is to be avoided at all costs.
Some are already opting to throw an extra night in for free in order to generate value; all are working hard to keep their offerings unique in every way.
“The demand is high, but you cannot get it wrong,” said Alicia Triggs, the executive general manager for sales and partnerships for Australia’s Journey Beyond.
Triggs’s company operates Sal Salis Ningaloo Reef through a lease and management agreement with the West Australian government — allowing it to operate an eco-luxury safari experience in a protected area next to the world heritage-listed coral reef.
“It’s totally unforgiving,” Triggs said. “There’s luxury everywhere, and the competition is fierce.”
(San Salis)
“Chanel handbags never go on sale”
The industry is back to being buffeted by normal macro-economic forces after Covid, according to Richard Clarke, managing director at Bernstein.
“High end is still doing well, outbound travelers from the U.S. and China and places like that are still strong,” he said. “[But] this earnings season, we’ve heard nothing but pretty soft commentary around domestic demand in the US — and demand into the US is also pretty weak.”
However, the luxury travel industry is guided less by economic commentary and more by experiences of the not too distant past. After the financial crisis, the steady flow of the investment bankers who had been filling the Ritz-Carltons and the like came to an abrupt halt, Clarke said.
What ensued was what he describes as an over-focus on occupancy, with luxury hotels slashing prices in order to keep their rooms full, often benchmarking rates to local hotels in the area — regardless of whether they were luxury or not. As a result, these luxury operators lost a lot of pricing power between 2009 and 2019. With that lesson learned, operators are now taking a different approach.
Now the focus is on what their consumer can afford, as opposed to what the local market of the moment is dictating.
For example, the Park Hyatt in Sydney used to benchmark itself against other Sydney hotels but now sets its price against the best hotels in a number of Asia Pacific cities, he pointed out.
Now, eye-popping prices for hotels are certainly far more de rigueur than just a few years ago. As of September this year, there were 91 hotels in the U.S. that had an average room rate of $1,000 or more, according to data from STR.
“They found renewed pricing power, and you saw it through Covid, that they just didn’t cut their prices, even though demand was weak,” Clarke said. “They’ve kind of realized that their consumer is not going to be that price sensitive, and said, ‘Well, look, we’re happy to probably have slightly lower occupancy, but retain the pricing.’”
Baillie Lodges and Tierra Hotels CEO Michael Crawford sums it up this way: “You never see Chanel offering a 20 percent discount on their bags.”
The former Four Seasons Hotels and Resorts global president of portfolio management joined the company earlier this year, tasked with leading it through a growth plan and strategic positioning for ultra high net worth experiential luxury travelers.
Since 2019, Baillie Lodges has expanded to nine lodges across Australia, New Zealand, Canada and Chile. The Clayoquot Wilderness Lodge on Vancouver Island is open May to September, and one of its packages offers a complimentary night on seven day stays, along with a free relaxation massage and 15-minute scenic helicopter flight.
“Even in difficult times, people look for relief. They look to escape reality …We see people coming and wanting that decompression from the anxiety of the world, the tariffs, the political situations, the wars,” Crawford said, adding he is always reluctant to make moves that would “cheapen” the experience.
“Discounting is a strategy that I’d rather not deploy; valuing what we have and ensuring that we’re reaching the right target audience is critical for us.”
(Heidi Fin for Unsplash)
“It doesn’t go on forever…”
A quick peruse online shows a slew of extra night offers available. Rosewood, for example, is running several offers across its global portfolio, including at the Miramar Beach, Montecito, California, where prices can run over $2,000 a night. Guests can get a third night free after paying two nights at a full rate. In London, the brand is offering a “Tale of Two Nights” deal this festive season, which includes a butler service, a Charles Dickens Festive Art Afternoon Tea for two and a private “Literary London” tour.
“It doesn’t go on forever … Someone shifts and says, ‘All right, I splurged and paid $1,000 a night for this hotel in 2024, I’m going to go somewhere else and spend $750 a night next year, or I’m not going to go back because now they want $1,200 a night,’” said Michael Bellisario, the senior research analyst at Baird Equity Research.
But a free night can also pay for itself.
“There is some pricing sensitivity on a rate but, for the most part … Once they’re in, they’re still spending — and frankly, they’re spending more,” Bellisario said.
That has been the experience for Brendan Comerford, the general manager at Castlemartyr Resort in Cork, Ireland. The five-star resort is built around an 800-year-old castle, a restored 18th-century Manor House and a Michelin-starred restaurant, Terre. In September, the hotel was running a three-for-two deal, with some nights in September running over £400 ($540).
“That room can be sitting there unutilized or you can give it to somebody that is going to have a couple of spa treatments, or is going to have a couple of rounds of golf, which is more than going to balance whatever perceived loss of revenue,” Comerford said, adding there is still strong demand coming out of the US.
“Twice this year I’ve been on sales trips to New York, Atlanta [and] Miami. I was at Virtuoso Travel Week Las Vegas, so I’d say in the last four months, I must have spoken to maybe 300 American agents … And the sentiment is positive, they’re not seeing any issues, they’re not seeing any downturn.”
Champagne Moments
Journey Beyond’s Triggs, however, is still hyper-vigilant that demand could decrease at any time.
Along with the Sal Salis Ningaloo Reef, the company runs a series of train rides across Australia, with the premium classes often coming with a 12-month waiting list. One of the offerings, “The Ghan” runs through Australia’s Red Centre from South Australia to the Northern Territory, with an 11-day trip stopping at Uluru, costing up to $14,775 AUD ($9,657) per person.
“That evolution of what luxury means; it used to be white marble floors with chandeliers from the ceiling and a butler and high ceilings,” she said. “Now people want that moment of awe, when you get goose bumps all over your body, and a hit of dopamine … I call them champagne moments, like champagne bubbles are running through your blood, and that’s pure luxury.”
And that dopamine hit is playing out in the numbers.
Through October, the average daily rate for luxury rooms in the U.S. was up 2.9% — outperforming all other hotel price segments.
And the long-term fundamentals are strong too, according to Zach Demuth, who previously served as JLL’s global head of hotels research and is now head of strategic growth at real estate development firm Eight Form.
Demuth said his brokerage’s research indicates that even though high net worth individuals, who are defined as individuals that have a net worth of more than $1 million, comprise only about seven tenths of the world’s population, they contribute about 70% of spending on luxury travel. These individuals are growing in number, as are the number luxury hotel offers, per JLL – but nowhere near at a pace that could outstrip demand, Demuth added.
“The average or annual hotel supply growth globally is only going to be about 1 percent this year, which is about a third of what it normally is. And in the luxury space, it’s even smaller,” he said. “You can literally count on two hands how many luxury hotels are going to get built globally … [so there is] growing demand, no new supply growth, like, literally none — so our belief is that this growth cycle will be a little longer than most.”
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