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Capping city hotel rates: Does it work?

08 May 2015 - {{hitsCtrl.values.hits}}

Accusations of undercutting of room rates among star hotels in Colombo, with claims that it adversely affected smaller hotels, compelled the government to enforce a compulsory minimum room-rate structure for city hotels from November 1, 2009. Under this scheme, five-star rooms go at US $ 125, four stars at US $ 95, three stars at US $ 75, two stars at US $ 55 and one star at US $ 45 (rates for accommodation only and subject to taxes and service charge).
What exactly is the purpose of the minimum rate net cast over the city hotels? Is it to protect the buyer (consumer) or the (seller) hotel operator? The writer doesn’t see the hotels complaining so the writer guesses they are all for it. In fact, one recalls a leading hotelier defending the action with plaudits such as: ‘All prices are affordable, travellers now have a choice in deciding which category would suit their budget and pick accommodation accordingly’, ‘there is absolutely no overpricing where the city is concerned’, ‘the minimum rates help the country to a great extent by enabling city hoteliers to carry on their businesses successfully’ and minimum rates most importantly, allow staff to get a reasonable monthly service charge’.
My take on this: What we see here is a type of price gouging- which is a term that is not in widespread use in mainstream economic theory, but is sometimes used to refer to practices of a coercive monopoly, which raises prices above the market rate that would otherwise prevail in a competitive environment. Supporters of anti-price gouging laws when that happens will argue that it is morally wrong for sellers to take advantage of buyer’s vulnerability and increased demand. The buyer has no choice but to agree to pay the seller’s asking price. However, let the jury come out with a verdict.
The cap on Colombo’s hotels room rates is somewhat akin to what occurs in the world of retail, where a ‘one size fits all’ pricing system has been the accepted norm for decades, but why is this? When you pause and think about it, every sales transaction is in some way unique, whether it’s because of fluctuating demand in the marketplace, individual consumer status or the relative shelf life of that product. As far as shelf life goes…hospitality services, similar to haircuts and dentists appointments cannot be inventoried. Seats on an airplane, hotel rooms or rental cars perish the moment an airplane is airborne, when night turns into day and the hotel room remains unsold, or if the car is still parked in the yard.
The key marketing challenge for all hotels is that the ‘product’, in this case the hotel room, is perishable – in other words it has a very brief shelf-life - in fact, just 24 hours. For many consumer durables, the shelf life is considerably longer than a day, like for example a mobile phone. However, a mobile phone that remains unsold for a long period of time, will either become yesterday’s outdated model or no longer fashionable. When that happens, for most products, there is the second-hand or discount option to fall upon to move unsold stock. Unfortunately, the ephemerality of the hotel room’s shelf-life makes such alternative sales strategies virtually non-existent.

Airbnb threat
Those involved in the sale of hotel rooms are aware that rooms have varying values depending on demand patterns. The same room can sell for widely different rates depending on the day of week and season. Not for the Colombo hotels, where the minimum room rate requirement has reduced hotel sales persons, especially those in the newer or newly refurbished hotels to merely ‘taking orders’ rather than being pushed to demonstrate superior sales skills - something which is required, say, in a buyer’s market.
The enforcing of a minimum room rate is in effect a kind of strategy to ‘reduce’ demand. Here, the obvious (or is it the devious?) goal to discourage customers whilst simultaneously increasing revenue, is to put the room rates up with the full force of the law behind hotels. This seemingly irrational course of action can best be described as taking advantage of making money from fewer guests in auto-pilot mode.
So, what other options are there for the majority of travellers who wish to stay in less expensive hotels in Colombo? Except for a constellation of guest houses, Bed and Breakfast establishments masquerading as hotels or type-casting themselves as boutique operators, growing haphazardly, undetected and outside the framework of government scrutiny - for now, not too many, one might say.
Hold that thought… as a bigger threat looms ahead for our hotel industry. Airbnb is a website for people to rent out lodging. It has over 850,000 listings in 33,000 cities and 192 countries and is headquartered in San Francisco. The New York Attorney General in 2014 released a report on four and a half years of Airbnb activity in New York that used the short-term rental site’s own user data to argue that the majority of its revenue in New York is generated by illegal activity.
The Attorney General’s report, which looked at Airbnb bookings from the start of 2010 to June of last year, says the vast majority of the site’s listing is not private citizens monetizing a spare room, but lessors renting out multiple apartments at a time. Specifically, the Attorney General’s office found more than 100 landlords who used Airbnb to rent out more than 10 apartments each.
These owners alone accounted for 47,103 reservations and took in almost US $ 60 million in revenue. One particularly ambitious landlord accounted for 272 unique listings and made US $ 6.8 million off 3,024 reservations. The N.Y. AG also complained that Airbnb users rarely, if ever, pay the city’s 14.7 percent hotel occupancy tax and the site has not tried to collect that tax from any of the transactions reviewed by his office.
There is a boom in construction of high-rise apartment blocks in Colombo. Precisely what laws are in place to prevent residential buildings from being turned into unregulated hotels apart from violations of building and safety codes? Unless we address this immediately, the threats posed by not regulating the informal sector combined with the likelihood of apartment owners falling into the abyss of the informal economy, by converting their overpriced housing assets into unregulated ‘crash and cash pads’, will eventually deliver a ‘double whammy’ to the hospitality industry. How then, will our city hotels protect their ‘turf’?
(Shafeek Wahab has an extensive background in hospitality management spanning over 30 years. He is a customer experience transformist, helping organisations improve business results by changing how they deal with customers. Whilst focusing on corporate education, training, consulting and coaching, he is passionate about identifying emerging best practices and helping companies become more customer-centric. He can be contacted at [email protected]. Website: www.in2ition.biz)

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Capping city hotel rates: Does it work?

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