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Are our hotels overpriced?

26 Jul 2013 - {{hitsCtrl.values.hits}}

By Shafeek Wahab

In 2012, Sri Lanka received a million arrivals. The target for 2013 is to attract 1.25 million visitors. Arrivals in the first half of this year totalled 512,281, which is up 13.1 percent over the 452,867 achieved last year for the same period. The task at hand if we are to meet the set target is to now generate 737,719 ‘would-be arrivals’ during the second half of this year.

In other words, the challenge is to accelerate the growth momentum between July and December this year, to a dauntingly high 33.5 percent over the 552,748 arrivals accounted for the same period in 2012. In this backdrop, the prospect of reaching 1.25 million visitors by the end of the year appears remotely doubtful and the reality of the situation is altogether not lost upon those who wrote the script on tourism.

As reported recently in the newspapers, the Investment Promotion Deputy Minister claims, “The room rates of many Sri Lankan hotels are very high, with some as much as US $ 600 to US $ 800.” Speaking further, he remarks, “The people in the industry should adhere to self-regulatory mechanisms not to overcharge and send the tourists to Thailand and other places when Sri Lanka can be a competitive nation.”

He goes on to lament, “Today, one of the complaints from tourists is that our room rates are very high and that had we provided rooms for US $ 60 to US $ 70, we could have benefited by other means.” Sadly, the Deputy Minister fails to shed some light on what these “other means” are? I guess, he was echoing what the Investment Promotion Minister is reported to have said whilst addressing the media, where he faulted hoteliers for the difficulty in achieving the ambitious target of 2.5 million tourists by 2020, due to exorbitant prices.

In the news release he had also noted, “Hoteliers upped the floor rates of their hotels by 200 percent – 300 percent, making Sri Lanka’s hotels the most expensive in the region and if not for this huge hotel room charges, we could have met the 2.5 million tourist arrivals before 2012.” He opined that under the prevailing conditions, achieving of the target is doubtful even in 2020. So, there it is … the seeds of doubt are being insidiously planted...!

Get Sri Lankaned
Seemingly, coinciding with the remarks made by the Investment Promotion Minister and his deputy, a Sunday newspaper release captioned ‘Sri Lankan hotels pull brakes on price’, states that whilst tour operators believe prices would dip by at least 10 percent – 30 percent for the winter season, the Hoteliers Association President asserts that there is price stabilization and any decision to reduce rates could be taken only by each company and in line with each of its operational costs.

On the other hand, tour operators complain that hoteliers were increasing prices without considering the market conditions or the prices in competitive destinations. The managing director of a travel company is quoted as saying, “Hotels need to be competitive in their pricing” and believed they should take it up and work together and formulate a policy. It is all ‘déjà vu’. Hoteliers think otherwise and believe that tour operators need to work hard to lure the tourists to stay in local hotels, with a chairman of a family-owned group of hotels pitching in “that the right marketing could bring in the numbers to fill in the rooms.”

Does this translate to saying that the marketing done thus far can be better? What happened with all that hype that was tossed around, with the ‘Mega Tourism Road Show’ that all stakeholders embarked upon in March/April? It was kicked off in India with a huge amount of fanfare under the banner ‘Get Sri Lankaned’. If I recall, the initial reaction from Sri Lankan travel agents and hoteliers who attended these promotions was that ‘it was a resounding success’.

At that time, I considered calling it a resounding success, a trifle premature – after all success is measured with results not merely by a flurry of activity and razzle dazzle! Interestingly, as of June 2013 year-to-date (YTD), we had 1,452 less Indian visitors than during the same period last year and mind you, last year several conferences ‘emanating from India were dropped’ as claimed then the Sri Lanka Convention Bureau (SLCB) chief, “due to insufficient rooms, owing to refurbishment of hotels in Colombo, Negombo and Bentota.”

Getting back to the Sunday paper article, I am in sync with the same hotel chairman who explains that those who increase rates without improving on quality were likely to suffer and where he exhorts the travel agents to “stop grumbling, jointly market the destination and have the confidence to market the hotels not just the price.” Quite true, after all it is the hotelier who has put his money where his mouth is by literally spending millions of rupees to build and operate his hotel/s.
In my article ’Sri Lanka’s progress and fluctuating market fortunes’, published by Daily Mirror on February 5 this year, I cautioned that the 2013 target of 1.25 million visitors will be challenging and may prove difficult to achieve unless there is a tremendous cohesion in what all stakeholders say, do and deliver. It does look like the chickens have come home to roost.

This winter of discontent
Where does all this lead to from here? During the media briefing, the Investment Promotion Minister stressed, “What Sri Lankan hoteliers must do is to try and penetrate non-traditional Russian and Chinese tourist markets as they are huge and they are ready to spend an extra buck for their pleasure. We must attempt to increase the income in tourism not through hotel charges alone but from other services such as competitive leisure facilities, inland travel, food and beverages, etc. that will meet the expectations of the tourist.”

Sage words indeed! After all one cannot allow the monkeys to run the zoo. The conclusions one could draw from the underlined message is that hoteliers will need to rethink their pricing – at least the out-of-Colombo local lot! Between now and December, in order to get to that magical 1.25 million visitors, the minister and his deputy knowingly or unknowingly want you to adapt what is termed a ‘Contributory Pricing Technique’.

This is a technique widely used in the hotel sector but equally valid in all markets. In this case, the operator will calculate exactly what the variable costs associated with each sale are. In the case of a hotel room, this might be the total cost of cleaning, linen, towels, amenities and an element for the TV licence, water and electricity and something for wear and tear, etc. Having calculated this, the operator knows exactly how much it costs to operate and service the room, therefore, so long as he covers the costs – he loses nothing!

If, however, the guest who rents the room, eats breakfast, buys a couple of beers, orders food from room service, gives his shirt to launder and hires a surf board from the hotel plus buys some trinkets and takes an excursion or a boat ride, the hotel operator and the community will generate profit from the additional sales at an inflated rate. The extra profit which is generated will then make a contribution (hence the name) to the fixed costs which the hotelier would not have had if he had not sold the room.

This is widely used by hotels to sell rooms at short notice. And with the winter season around the corner- is by far the easiest and quickest way to fill your entire hotel. However, several hoteliers may need to persuade their bank to carry the ‘non-performance’ on the loan (NPL) taken to build or refurbish–until the next season or beyond…!

Those who believe that the single most important criterion of success in any business, including hotels, is profit, might not quite agree with the ‘Contributory Pricing’ technique. Such hoteliers must remember that the basics of pricing come down to understanding the value of a hotel and what consumers are willing to pay. Hotels can influence the customers’ perception of value by modifying the rate, so always keep in mind your price and value relation.
You never want to overprice your hotel for what it is and have a customer come in and expect five-star service at a 3.5-star hotel. Also make sure you aren’t cutting price too much in certain markets. Customers can say what’s wrong with that hotel if it’s so far below the others in price? “Your price and value have to match.”

(Shafeek Wahab has an extensive background in hospitality management spanning over 30 years. He has held key managerial responsibilities in internationally renowned hotel chains, both locally and abroad, including his last held position as Head of Branding for a leading Hotel Group in Sri Lanka. He can be contacted at [email protected])

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Are our hotels overpriced?

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