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How can hoteliers survive supply influx, weaker demand?

They have to innovate and up their game to survive in a crowded and increasingly difficult environment.
Thursday, October 6, 2016 - 05:50

NOT too long ago, the idea of hosting our first Asia-Pacific regional conference was mooted. A few potential city locations were suggested by my regional colleagues.

Naturally, Singapore was my choice, as aside from being a staunch home-based supporter, I wanted to show our hospitable side and impress the lot.

When it came to a vote among the key stakeholders, Bangkok ended up being the overwhelming favourite - again! Incidentally, Shanghai was second and a distant third was Hong Kong.

The reasons for the choice of Bangkok are quite obvious. Geographically it stands at the epi-centre of the Asia-Pacific region, with an array of international airlines crossing numerous flight paths with ease of connections for both premium and budget carriers.Those who voted for Bangkok, were lured by the cheaper currency, good food, bargain shopping and famous night life.

The "vibrancy" of a local market is one key point that corporates are looking for. This factor is usually driven by an active local consumption demand, which helps to fuel foreign trade and investments.

People like to attend meetings at places where there is a lively marketplace - it's a "feel good" thing. Forbes, which organises its annual Global CEO Conference in Asia, had hosted its billionaire events in Singapore for many years, but of late had started looking for active non-traditional conference cities such as Bali, Manila and Jakarta.

Coincidentally, these are also vibrant and domestically-led markets with the highest GDP growth rates in South-east Asia.

What is it that Singapore lacks, causing it to lose out to Bangkok and other destinations?

There are many things that we cannot do a whole lot about - such as the strong Singapore dollar (SGD), the dependence on foreign labour leading to higher cost of operation, increasing competition from new hotels, reduced corporate travel spend and the lack of natural attractions.

New supply

Preliminary data from the Singapore Tourism Board (STB) shows that visitor arrivals to Singapore surged above 12 per cent year on year in the first six months of 2016. Yet, surprisingly the rate of growth for the whole hotel industry was fairly subdued. The main culprit appears to be the new supply of hotel rooms coming into the market.

According to Chestertons Hotel Research, Singapore's hotel room supply is expected to grow from 60,800 rooms at end 2015 to 67,470 rooms by end 2017. Last year alone, a record 5,564 hotel rooms were added. The average supply (2015-2017) is around 3,480 rooms per annum.

Overcapacity in hotel rooms will lead to downward pressure on hotel performance, especially in terms of occupancy levels. Chestertons is expecting visitor arrivals this year to hit 15.3 million to 15.5 million, slightly higher than the 15.2 million recorded in 2015.

The bulk of this supply stems from the economy, mid and upscale tiers, where we will continue to see hoteliers adjusting room pricing to protect occupancy levels. The current oversupply is likely to taper off from 2018 onwards. Till then room rates will continue to slide as more hotels open their doors.

Hotels that rely on the corporate dollar are also facing tougher times as companies scale back travel perks and budgets amid global economic headwinds. The STB data revealed that revenue per available room (RevPar) declined 2.5 per cent y-o-y to S$197 in the first six months of 2016. This came on the back of a 3 per cent fall in average room rate (ARR) to S$235, despite an improvement in average occupancy levels - which inched up 0.4 percentage point to 83.7 per cent. Compared to the recent peak in 2012, ARR and RevPar have fallen 10.8 per cent and 12 per cent respectively.

Leisure, China travellers up

The good news is that overall, Singapore tourist arrivals grew 12.5 per cent y-o-y to 8.17 million in H1 2016, led primarily by leisure travellers. A big driver for the rebound came from the increase in mainland Chinese visitors, who have now overtaken the Indonesians as Singapore's largest key source market.

The number of Chinese visitors rose 46.9 per cent (y-o-y) in Q1 2016, thanks primarily to STB's concerted efforts to court Chinese tourists from secondary cities (such as Tianjin and Chongqing) through platforms such as Alipay.

Despite the uptick in arrivals, the room revenue of gazetted hotels grew only by a muted 3.1 per cent to S$1.575 billion while hotels' food & beverage revenue inched up marginally by 1.6 per cent to S$692 million.

The likely causes for the weaker spend include the influx of leisure and Chinese tourists who are more budget-conscious, the currency impact (against a stronger SGD) and shorter stays. Compared to corporate visitors, leisure travellers tend to spend less. The current length of stay in H1 2016 averages 3.5 days, down from 3.6 days in 2015.

What can hoteliers do during "crunch time"?

With a mixed bag of tourism statistics, how should hoteliers react to maintain competitiveness and profitability? It all boils down to streamlining operations, embracing innovation and improving one's offering and service delivery.

Focus on offerings, not just room pricing. A room-price war will lead to hoteliers bleeding. Hotels should focus on providing extras such as free local calls, free Wi-Fi and even simple breakfasts. Upscale hotels can afford to provide car park rebates, free upgrades, designer toiletries, and the like. Many hotels still charge for room Wi-Fi, resulting in guests crowding the lobbies for free Wi-Fi connections. In this Internet smartphone age, Wi-Fi should be automatically incorporated into the room price.

A hotel that charges the same as a competitor or even slightly higher room rates, but includes a myriad of "freebies", including refreshment vouchers, breakfast, evening snacks or hors d'oeuvres, is likely to attract more guests.

Focus on providing proper training. Provide personnel with the ability to service difficult customers and situations. Due to the labour crunch, not enough time is spent on staff training. New employees are often thrown into the deep end to deal with difficult room guests.

The larger international hotel chains tend to do better here, as they usually provide comprehensive, graded training, upskilling and re-training programmes, compared to smaller or independently run hotels.

Focus on technology changes and embrace them. There are many technology advancements which hoteliers will have to keep an eye on. Smartphones and tablets can now be used as boarding passes and credit cards are becoming a significant means of identification in the travel space.

The time has come for smartphones to be used as hotel keycards. Last year, Starwood Hotels & Resorts started a pilot programme to test this at select properties. Technology advances can help to reduce dependence on labour and save cost.

It's the little things that create the most lasting impact. To some guests, it may be the doorman's smile, being greeted by name, or a hotel remembering your birthday or wedding anniversary. These days, it is easy to find out more about your impending guest by searching for your online profiles.

Satinder Garcha who operates Hotel Vagabond in Little India has said in an interview that it is not about plastering the walls with art, but about creating a buzz and an ecosystem with artists living in it. His hotel, for example, offers a little parting gift to guests: a bangle from Little India. Nice touch!

Beware technological disruption. While the likes of Airbnb have not been given the green light to operate here legally, hoteliers must brace themselves for some form of major technological disruption in the near future. Hotel rooms are perishable goods. When the night is done, the ability to sell the room is gone, and with it goes a loss of room and potential F&B revenue.

It is a matter of time before someone develops an external app for last-minute booking, allowing those arriving from the airport late at night or staycationers to book at a much reduced room price.

Another novel way to sell premium rooms is to let potential guests bid for upgraded rooms, similar to what Singapore Airlines does for its premium-class seats for invited guests.

Based on recent historical annual hotel occupancy rates of between 80 and 85 per cent, about 15 per cent to 20 per cent of hotel rooms will remain vacant at all times. It is better to generate some income than none at all.

Large international chains may be reluctant to adopt this practice to preserve the quality of their guests and to protect their room rates. But I reckon this can easily be adopted by the economy and budget hotel segments.

Focus on "wellness" theme. Healthy menus, bikes and ergonomic chairs. These days it's going beyond "a good bed, strong shower and sumptuous breakfast".

Hotels need to develop ways to court health-conscious tourists because these travellers spend, on average, 130 per cent more than standard guests.

Have interesting lobbies. It's the age of the sharing economy, in which the millennial generation prefers to share ownership and use of common space. This has resulted in a phenomenal rise of Airbnb, Uber and co-working concepts around the world.

Due to high real estate land values, many hotels in Singapore are scaling back on guest-room sizes, but are beefing up collective sharing spaces such as main lobbies and rooftop space. This is the age of "great lobbies" with communal tables, coffee, free Wi-Fi, electrical/USB outlets and sometimes spontaneous musical performances.

Emphasise marketing and social media. More hoteliers are employing "experts" in this field to promptly respond to guest reviews and feedback. A bad review if uncorrected or not responded to in a timely manner is going to send future guests straight to the exit.

With more leisure tourists heading to Singapore, we can expect them to be savvy and make bookings directly via hotel or travel websites. Reviews and hotel rankings in established third-party websites such as Tripadvisor.com can play a pivotal part in guests' hotel-picking process.

Stephen Riady, executive chairman of OUE Ltd, once said that hoteliers in Singapore are a lucky lot, because "only in Singapore does the government (via STB) spend money to go abroad to market Singapore. In other countries, hoteliers have to spend their own marketing money to go abroad to actively market their hotels and destination".

Singapore's hotel market is nowhere near dire straits as it has performed consistently well at the top echelon in the Asia-Pacific market, enjoying in excess of 80 per cent occupancy since 2004 (save for a two-year blip during the global financial crisis). It is the envy of most Asia-Pacific cities which are able to garner only 60 to 70 per cent occupancy levels.

But hoteliers cannot rest on their laurels as competition abroad is heating up, with cities building bigger airports, mega convention venues, offering countless tourist attractions and a host of convention incentives.

Hoteliers here need to do more to up their game with existing scarce resources. The operating environment in Singapore can only get more crowded and difficult. With the threat of Zika and the annual haze in our midst, the tourism industry will have no choice but to innovate in order to survive.

  • The writer is managing director of Chestertons Singapore.