A Proactive Approach to Negotiated Rates during tough times

Are we on the brink of the demise of the Hotel RFP, if only for the nonce? The market will bear only what it can bear and no one knows what occupancies and ADRs will look like. For sure, market rates will be lower than corporate rates in the foreseeable future.

The Global Business Travel Association recently endorsed a postponement of the 2020 hotel request-for-proposals process until 2021 because of the coronavirus pandemic and in the process encouraged hotels to roll all 2020 rates for 2021. While this announcement is probably premature, given that the typical RFP season doesn’t get going until post August when the hotel landscape might look different, Business Travel News reported that it also ignited a controversy among procurement experts who see rolling hotel rates over possibly eroding the value of the corporate travel program.

Buyers need to be given a choice. Isn’t that what a free economy is all about?

Static negotiated rates will very likely be higher than spot rates in the market going into 2021, thereby putting the program manager and the travel management company in an awkward situation. When corporate travellers see lower rates on the online booking tool, they will begin to distrust the TMC and the RFP program. RFP contracted productivity in Indian city hotels ranges from 08-20% of bookings and if you roll over RFP rates, given the post-pandemic bleak business forecast, there is a very good chance these contracted rates will look high a lot of the time.

In a static RFP rollover there would be a concern about eroding the value of the corporate travel manager who is supposed to be aligned with their duty to their own companies as they get paid to get the best value for their company. If they just let things ride and not get significant discounts, their bosses would ask them to justify their salaries & existence.

What may happen is that those RFP programs which remain static would be switched to use dynamic rates i.e. LAR (Least Available Rate) on GDS.

In a post pandemic scenario, the Market will necessarily be in the Buyer’s favour for quite a while. Nobody wants to hurt the hotel industry while it is down, but business is business. When was the last time a hotel went to a struggling business and offered more sops and discounts on their negotiated rates until their business bounced back?

Hotels would like to sustain their pre-Covid ADR (average daily rate) for as long as possible, because that was the rate point created at the end of a long growth cycle; but a majority of their clients would see an opportunity to negotiate for lower rates and better terms and conditions.

Many companies are already on a hunt with scythes to lower vendor costs realising they see an opportunity, and are being asked internally by not only their Chief Procurement Officers but also their Chief Financial Officers to make use of the market situation for their benefit. They view this as an opportunity to do the right thing for their company and to obtain better terms and conditions based on the current market.

Static rates will be non-competitive, and hotels may see some clients go off-cycle, reduce the size of their hotel programs, and diversify the program by adding more dynamic rates, thereby quitting sourcing rates everywhere and using rate targets.

With over six months remaining of this year, it is within the realms of reality that Companies may call for lower rates on their RFP program for the remainder of the year. Though this is a time consuming process for the procurement division, the value of savings for the company may be significant enough for it to reach out to all its partner hotels asking for these lowered rates.

While it is still the hotel’s prerogative as to whether they would like to offer discounted rates or not; those that do – could get volume and market share in return.

Today’s Proactive Hotel Manager will have to absorb this reality and strategically see their way through turbulent times ahead.

So, should Hotel companies reach out to their Client Companies before these companies get around to calling the hotel for re-negotiation?

With RFP accounts, experts I have spoken to, advise Hotels against doing so. One has to be careful of setting benchmarks when dropping rates, for this can have a rollover effect and take you years to regain ground thereafter. Hence with RFP accounts, it is better to load lower rates as per the forthcoming business troughs as a Least Available Rate (LAR) on GDS which will achieve the purpose anyways, but with the control on pricing and period within your hands.

In the case of companies with a Locally Negotiated Rate (LNR) however, it is possible that once you have realistically seen the near future and realised that RevPAR is going to drop drastically, you approach these companies giving preference to them on the basis of the Pareto principle.

The advantages of reaching out to their procurement heads to possibly offer special post-pandemic rates are numerous.

  • You make their job of approaching you otherwise, easier.
  • You are showing empathy for their situation even though your industry in all probability is worse hit than theirs.
  • Your approach is proactive and hence open – rather than reactive and hence defensive.
  • The expected business from the corporate will anyways plunge due to the market situation but as a first mover you could vie for additional business normally given by the corporate to your competition, hence filling the forecasted contraction.

Festinger’s cognitive dissonance theory (1957) suggests that we have an inner drive to hold all our attitudes and behaviour in harmony and avoid disharmony (or dissonance). When there is an inconsistency between attitudes or behaviours (dissonance), something must change to eliminate the dissonance… A number of hoteliers I have spoken to are apprehensive of reaching out in advance and offering new rates to LNR companies, yet they want their business to return. While I understand their concerns, we must also realise these are unprecedented times and we have no frame to fit to compare these times to; hence we would need to keep re-inventing the wheel and act decisively to resonate our thoughts with our actions.

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Tips for Hospitality Sales Persons post Covid-19

1. Work on building relationships with organizations. When the outbreak has lessened and customers are considering rebooking, they are going to remember how you treated them. Focus first on maintaining relationships and then on prospecting in the future rather than trying to do any hard sells. Check in on customers to see how they are doing and find out what specifically they need. Focus on what we can control right now. What we can control is having conversations with customers and getting their feedback by asking the right, quality questions.

2. Be aware of new and current opportunities. Airline fares are extremely low right now and people are still taking advantage of that. If you recollect, after 9/11, leisure travel was one of the first segments to come back. People are stressed and they need to get out there and blow off a little steam.

3. Businesses are going to change the way they operate. This is going to be a completely new world that our sales organizations are going to be facing. Some may be naive and say that the virus is gone and it is business as normal, however it’s not going to be business as normal. You are going to have to rearrange your whole sales strategies, your staffing levels, and your business mixes to really recover what you can on the back end of this. As more people are working remotely, it is possible that business travel may decrease, possibly even permanently, but because this crisis has taught us to work more efficiently from a distance, there may be more of a need for us to convene in person at conferences in the future. The possibility of renting out boardroom suites to employees who need a place to focus on their remote work instead of working from home may emerge. Hotel rooms may have to become adaptable to conversion to such needs.

4. We’re in uncharted territory. Some people are predicting that the coronavirus will affect the industry for just a few months, while others have heard that it could last up to a year. This is something different than anything the industry has faced before. It is quickly becoming apparent that this is less SARS and a lot more 9/11 in how it feels. People are scared to fly or they are being restricted to fly. So that’s a different set of changes in demand and hotels will have to deal with that.

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AirBnb’s Financial Drain

Airbnb is losing money at the speed or light and that will only get worse over the coming months. What is the financial future of Airbnb?

Airbnb allows renting of a room online. It’s a very simple platform to connect prospective travellers with room owners. Airbnb’s entire value resides in being an escrow. They provide a layer of trust and handle payments.

For this simple activity of listing rooms and holding transactional payments, Airbnb takes a fee from 20% – 30% of the booking.

As a traveller, you want to have Airbnb as a middleman every single time as you do not want to send cash directly to a stranger in advance.

As a room owner, you want to have Airbnb as middleman as they give you a minimal guarantee and somebody to sue if the property is damaged after the guest leaves.

The two closest businesses are hotels.com and booking.com. They are similar to Airbnb though they rent hotel rooms instead of private rooms. Booking hotels through hotels.com and booking.com makes sense, more so when it comes to business travel or for large hotel chains with customer accounts. These platforms have a bit more focus on searchability, ratings and a seamless booking experience that Airbnb or even regular hotel sites do not have.

As Airbnb grows and gather more and more customers, hotels will start listing on Airbnb and Airbnb will then have to adjust its experience to cater to hotels.

On the revenue front, Airbnb makes US$ 3 billion per annum while hotels.com and booking.com each make up to four times this revenue.

Commission is 20-30% per booking. A bit less sometimes for hotels due to (large) deals with (large) hotel chains. Pretty much all of it is operating margin. It’s a tech company, a simple website. There are no costs like real estate or machinery or physical goods or storage or shipping. It’s all profit hence they’re all very profitable business. More importantly, while hotels.com  employs only 500 employees, Airbnb employs 15000 employees – a single company running a single website!

Airbnb’s strategy has been to burn as much VC cash as possible and hire as many employees as possible – A standard strategy to inflate valuation and raise even more money. Remember as a thumb rule, every dollar of VC funding you use now, you will get five in the next round. The fact is, there is nothing for these 15k people to do. Experts say that Airbnb could operate just as well (probably better actually) with a third of that, or go lean with as little as one tenth if the situation required it.

The coronavirus has cut Airbnb revenues in half. It’s unknown how long it will last but could be years. Airbnb will be haemorrhaging money at an unprecedented rate. Their fixed costs are simply too high. Airbnb will have to cut the fat sooner or later. Meanwhile middle level employees are reportedly being hired with offers in excess of $400k. It’s going to be a rough awakening for employees. Forget about any bonus. Half of the offers were imaginary money in illiquid shares. It’s hard to estimate what shares might be worth at this stage if anything, without knowing the fine print. They’re likely to never materialize, between VC shenanigans against common employee shares, probable lay-offs soon and any prospect of IPOing in the coming years down the drain.

Twitter used to have 4000 employees many years ago. Most of which were doing nothing and notably self-reporting to be playing Ping-Pong in the office waiting to cash on their shares… a typical case of a company inflating headcount to inflate a future IPO, which of course the market didn’t buy. They had to reduce expenses in the following years while increasing revenues. The headcount was frozen for years and it’s hardly bigger now than it was back then.

Rest assured. Airbnb is a solid business that is at no risk of disappearing. They are burning money for the sake of VC growth and valuation. Can they afford to employ evermore thousands of people for up to a half a million dollars each? Expect a reality check as most unicorns playing the VC game get sooner or later.

What if Airbnb were to run out of cash? It’s not a problem because they will be able to get more very easily. The business is extremely solid and sustainable as explained. The brand is strong and well established worldwide.

The only downside is unbelievably high fixed-costs (workforce) in the face of all travel revenues grinding to a halt from the coronavirus. This means a couple of bad years to go through, easily withstandable with cash reserves, debts and cost reductions, in some combination thereof.

There are hundreds of billions in cash sitting idle in the world with nowhere to invest in. Equities are crashing. Bonds have near zero returns. Cash has negative interest.

Airbnb needing few billion dollars in cash is a godsend for an investor on a 5-10 years horizon. It is ripe for an hostile takeover from a Vulture Venture Capitalist. Get as much control as possible, lay off one third of the company, freeze headcount for 2-3 years. It will be printing money soon enough. Alternatively, it could be financed by debt. Banks like Softbank, JP Morgan, Goldman Sachs can arrange corporate loans in that order of magnitude. They do that regularly when financing factories for the oil or car industry for example. Banks are less invasive about how the company is run and don’t try to take it over.

The future of Airbnb depends on how greedy VC and owners are really (normally they are always ruthless by nature). If Airbnb still has billions in cash from their last funding, the company can withstand a bad year or two doing nothing. If not, the company might re-raise money from a VC and it’s likely to impose strong terms to cut the workforce. Either way, the board might self-seize the opportunity to cut the workforce by one third anytime. Lower running costs, no loss of productivity raises a better outlook both in the short and long term.

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Brands with a Social Cause

For so long now we have taken the ability to explore and discover the world for granted. We are already seeing some interesting trends shaping the travel and tourism landscape. Global travel technology company Amadeus declared 2020 the  year of ‘conscious travel,’ reporting that a significant percentage of travellers now factor in sustainability when choosing how and with whom to travel. Meanwhile, Skyscanner’s APAC Travel Trends report revealed slow travel as the type of trip most desired by travellers in 2020.

Amongst the youngest generation of travellers, Gen Z, an even greater sense of ideology is emerging. Dubbed the ‘we generation,’ they are purpose-driven, caring deeply about movements far bigger than themselves. Two thirds are more likely to buy from a company that contributes to social causes, while a third have stopped buying from a  company that contributes to a cause with which they disagree.

Success will lie with those brands that recognize the volatility of the industry – and the world – we live in. They will acknowledge and embrace the huge responsibility we have to create meaningful travel experiences driven by a cause that reaches far beyond our guests, a purpose that goes much deeper than a great breakfast or a comfortable bed.

The future of travel lies with those brands that stand for something, those brands that lay down roots and seek to make a positive and lasting difference in the communities and environments in which they operate.

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