Chicago, May 25 2009Back in March 2006, we crunched some data indicating that the fantastically high booking pace for meetings – which had reached historic levels by 1Q2006 – was coming to an end. We came to the conclusion that in light of the confluence of tremendous corporate debt levels, new construction of meeting facilities(1), and commercial real estate marketplace trends, the meetings industry was in for a correction.
Although we did not anticipate the severity of the current recession, we did publicly forecast that the booking pace would slow by 20-25% throughout 2008 and into 2009. Sorry to say that this is one of those times when we wish we had been wrong about market trends.
This leads us to further prognostication as to when, if ever, this downturn may end. A few factors for hotels and meeting planners to consider:
Group bookings lag into and lag out of major recessions. The reason for this is fairly obvious – meetings take time to source, procure, plan and produce, generally requiring 90-180 days for significantly sized events. Add another 30-60 days for invoice reconciliation and then add time for reporting results to shareholders, and before you know it the major hotel groups are reporting results that are 4-8 months behind the renewed buying activities of meeting planners(2).
Smaller groups pose less risk than larger groups. As business activity returns to healthier levels, small groups that book closer to their time of operation will be able to take advantage of exceptional values. These groups also bear less risk exposure for the hotel, as well as less risk to the planner of internal changes in company direction. It is easier to see the horizon one or two quarters into the future, but far more challenging and riskier to plan three or more quarters ahead in this environment.
Source: FiveThirtyEight.com, Nate Silver Regression Analysis of likely Unemployment Rate(3)A jobless recovery? In the aftermath of each recession since 1990-92, fewer jobs have been created or restored to the US economy. Some jobs have migrated overseas, some have been permanently eliminated, and technological advances have made other jobs expendable. As jobs are shed and surviving workers take on more tasks to fill the void, productivity increases until revenues can grow to permit expansion of labor or new initiatives. Every company goes through this internal review of its staffing needs upon emergence from a recession. This factor suggests a reduction in meeting attendance until such time as customer revenues and reinvestment in a company’s initiatives permits an expansion of its work force and staff.
For many years, many American business leaders have pointed with pride to the USA’s lower unemployment rate as one of the structural benefits of our economy. But as the chart above indicates, the USA has now reached European levels of unemployment, although without European style social safety nets such as healthcare, educational and childcare assistance.When companies are thinly staffed there often exists an urgency of the moment that crowds out strategic initiatives and many incentive travel programs. Questions arise as to the deployment of key staff offsite for meetings and the potential impact of offsite events on daily operations. And in light of a desperate job market, many employers opt to reduce or eliminate travel incentives, reasoning in language reminiscent of a Dickens novel that it should be sufficiently motivational to employees to continue having a job at all. Recent media hysteria and political demagoguery also demonstrates the popular reaction to legitimate corporate events and incentives, even for those companies that have not accepted government assistance. These factors have a dampening effect on the number, scale, and destination choices for meetings and incentive executives responsible for the budgeting and planning of events. We will not debate the wisdom of this mindset here, but it is evident that many non-essential offsite programs have been eliminated and will continue to be downsized or rescheduled until a significant recovery is perceived to already be underway.
What makes a recovery significant? This determination is variable, but on a macro level this normally requires at least two consecutive quarter of GDP growth. Until such time as there is widespread perception of a recovery actually underway and not merely incipient, most organizations will minimize their investment in meetings and incentives. This means fewer meetings, smaller meetings, shorter meetings, incentives held closer to home, and pressure to show cost savings and justification for offsite events.
In other words, events must have an compelling Return on Investment. Meeting Planners will need to demonstrate ROI expectations prior to booking and show the real cost savings that they have negotiated. Hotels that can deliver value, react quickly to Planner needs, make contracting easier, and assist planners with an ROI pro forma will have a marketplace advantage.
GDP Contraction, Growth and the Turning of the Tide. These are real GDP growth rates for Q1 over Q4, not annualized (like we do in the U.S.), for the G7 and the Euro-zone(4):
GDP, Q1 2009 v. Q4 2008 GDP, April ’09 v. April ‘08
* Japan: -4.0% * Japan: -9.7%
* Germany: -3.8% * Germany: -6.9%
* Euro-zone: -2.5% * Euro-zone: -4.6%
* Italy: -2.4% * Italy: -5.9%
* U.K.: -1.9% * U.K.: -4.1%
* U.S.: -1.6% * U.S.: -2.6%
* France: -1.2% * France: -3.2%
* Canada: -1.1% * Canada: -2.3
We postulate a 60% probability of a long L-shaped global recovery or a W-shaped recovery lasting several years, and a 30% probability at this point of a quicker U-shaped recovery by mid-2010(5).
Mergers, Acquisitions, and the Vanished. Thus far in 2009 we have already seen one major pharmaceutical company merger, and more mergers are likely in a number of industries that are key players in the meetings industry. Financial services (no surprise here), insurance, commercial real estate, and automotive have all been downsized or absorbed into other companies, and with the expected bursting of the commercial real estate bubble and pension funds next on the recession horizon, there could be more failures and/or consolidation. This will also play out in the third party intermediary and meetings management arena, so look for some absorption there, too. This trend indicates fewer large players, more small bookings, and slow going until at least 2011.
Commercial Real Estate loan defaults. Unlike home mortgages, commercial real estate loans (such as are often issued to hotels) are typically refinanced every few years. In today’s tight credit market, with many hotels now unable to service the interest due on their loans and refinancing impossible, expect some hotel defaults, many changes of management companies or ownership, and hotels that will shutter or reduce operations. Savvy planners will insert “Change of Management or Control” language into their contracts that permit them to terminate their group contracts in the event that the hotel is re-flagged. Although hotel closures, if it comes to that, will reduce the supply of meeting space in a few markets, the overall impact of any closures will be localized misfortune and will have no impact on demand for meetings.
Look to the credit markets for guidance. If and when credit is again made available to small businesses, and even to many large AAA-rated companies, then 3-6 months later the booking pace will renew. Companies are now very cautious about planning or committing anything more than 90-180 days in the future; not only meetings, but internal staffing assignments, business initiatives, and capital expenditures. When credit is once more available to large companies and to smaller businesses with good records of success, then the recipients of credit will feel more confident about their own futures and will begin to act with more confidence about their future plans. The execution of future plans and business initiatives requires key staff to meet and discuss, plan, and rally around the new team, theme, or product. From where we are in the current cycle, we forecast a 3Q-4Q 2010 booking renewal with operational impact felt in 2011. Until that time, the current market conditions will prevail.
Unemployment and the Stock Market tell us little. The stock market is not the economy. It often leads the economy or acts independently of the economy as a whole. Unemployment has lagged economic recovery as measured by GDP in every recession since the Great Depression. Jobs are the last thing to come back, post-recession. The meetings market booking pace will actually precede a jobs recovery, if one happens. For coincident indicators, look at capital investment and consumer spending increases, especially for durable items. This will tell you when the meetings industry recovery will begin, although it won’t tell you where, how big, or at what price. Those final factors are localized and are market specific.
Innovative Companies will Seize Opportunity in 2010 and 2011. Hotels that become more user-friendly in their contracting and service cultures will gain an advantage for time-pressured and risk-averse buyers. New companies will emerge and become bigger players in the meetings industry, likely in the fields of health care, biotech, energy, entertainment, self-help and education, technology, and finance. Intermediary meetings management companies that can add greater value to the short term bookings of their end user customers will capture new accounts and will be able to leverage buying power and best practices across their customer base.
Group Rates Remain low until 2012. Across the board, price deflation has hit the world economy. All consumer prices except food and some commodities have fallen since 2008, some by as much as 35%. As demand increases, the new baseline for planners of meetings becomes the current deflated 2009 rates. Hotels must budget accordingly, and due to the near-stoppage of group booking pace in late 2008 through 2009, there will be plenty of inventory available for planners with either date or destination flexibility. Our analysis indicates that for some large group hotels there are entire months of space inventory available, almost as if these hotels were re-opening after a major renovation. (See the following chart of 2009 YTD performance of Las Vegas vs. prior years to see how the group segment has fallen off a cliff. Go here for a link to the Las Vegas Convention Authority’s source data.)
There are also several new large hotels coming online in 2009 and 2010, and some of those developments that ceased construction in 2008 will be back with new owners or new financing for 2011 and 2012 openings. This factor will also help to keep prices low, right up until….Inflation Lifts Prices. You knew there would be a catch to this recovery, right? The multi-trillion dollar taxpayer bailout of private banks comes back around to hit us again, this time as inflation. In order to pay down the debt incurred in repairing insolvent banks and shadow bank obligations, the American taxpayer has funded the recovery and also paid for an economic stimulus of indeterminate cost. American taxpayers are now into this recession for at least $11 Trillion in financing and guarantees, between TARP, TALF, stimulus, FDIC guarantee expansion, Public-Private Partnerships to dispose of “legacy assets”, and the coming pension fund bailouts (so our retirees do not become homeless). The debt incurred by the US taxpayer today is expected to be reduced in future years via inflation, so that the future cost of paying today’s debt service will be made in dollars that will be worth less in 4-6 years than they are now(6).
The bad news is that hard assets such as homes and office properties may be unable to keep pace with price and monetary inflation, and wages are also likely to lag inflation. The good news for surviving hotels is that inflation will provide impetus for them to begin to lift their rates to more reasonable levels while some of their debt remains lower due to refinancing. The trick for the Federal Reserve, Treasury, China, the Bank of England and the European Central Bank is to permit enough inflation to pay down the national debt, but not so much as to put us back into the Stagflation of the late-1970’s or even Weimar Republic or Argentina-style hyper-inflation.
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All of these factors taken together lead us to believe that the booking pace for larger groups will increase incrementally in late 2009 through early 2011, then advance more rapidly from mid-2011 into 2012. Large ballrooms will be available to clients for their groups through 2011-2012. Hint to planners: if the hotel tells you that the space you want is already committed, ask them if the incumbent group is deposited. If not, then the hotel may be willing to forgo the risk of keeping the undeposited group and instead taking your group in return for less risky terms. Especially at one of those “no cancellation fee” hotels.
Booking pace for the short-term market will increase in 2009 and then advance through 2010, gathering significant steam in late 2010. This trend will benefit airport hotels, city center properties, and secondary markets.
Domestic meetings and incentives will gain a greater proportion of the meetings planned from US companies due to perception issues, and this same concern will negatively impact the notable 5-star luxury brands. Many glamour destinations will suffer due to perception issues and reputation risk factors largely beyond their control. However, 5-star brands that do not have significant name recognition may still do well based on price flexibility; call this the stealth factor.
Solid 4-star level properties and Conference Centers with excellent meeting facilities and great customer service will earn repeat business, as will those hotels that are prepared to cut multi-property or multi-date bundled deals for any company that is willing to commit. This trend will persist until 2012, when many hotels will then seek a return to premium pricing for major ballroom space and preferred dates.
Planners, until 2012 you are in the driver’s seat. Hotels will need to stay focused on building up their sold inventories once again, step-by-step, day-by-day.
And this is the rosier of the various scenarios we evaluated. You don’t want to know about the others. Feeling brave? Then take a look at this site: http://www.usdebtclock.org/.
But you may still count your blessings, North Americans. Unless you are reading this from the relative comfort of an office in Oslo or Mumbai, or a skyscraper in Shanghai or Seoul, the economy is now worse in most of the world than it is in Canada and the USA.
Tim Brooks is Managing Director of The Austin Group International, a strategic meeting management consultancy that has assisted procurement executives, meeting planners and hotels with the consolidation, negotiation and placement of more than 3,000 group contracts since 1995. The Austin Group also provides hotels with market research, sales training, pricing and competitive set analysis. Brooks is also the Founder and Developer of MeetingTrader LLC and holds USA and EU patents pending on its technology for canceled meetings exchange, meetings procurement/collaboration, and future pricing trends analysis. Profile: http://www.linkedin.com/in/hotelwiz
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(1) MeetingTrader tracks the quantity of existing meeting space and new meeting space in the pipeline for various major meetings markets. Because the supply of meeting space, expressed as total usable square footage, is the most essential ingredient for the placement of conferences, we believe that meetings marketplace pricing trends are better tied to an overall marketplace Rooms vs. Space ratio calculus than they are solely to the quantity of available rooms that may be available in a given destination. Although conventional hotel models for supply/demand forecasting may adequately account for variance in the supply of guestrooms, conventional models rarely account for additional meeting space and large ballrooms that may be contemplated as part of hotel and convention center development.
(2) One notable exception to this reporting methodology is Gaylord Hotels (NYSE: GET), which has for years reported its booking pace and future group inventory booked as part of its SEC filings. Due to the company’s emphasis on the group market, Gaylord believes that reporting its booking confirmation activity provides greater insight for investors into its activities and future cash flows from operations.
(3) USA ‘official’ Unemployment is already at 8.9% of the workforce as of April 2009, reaching this level 60 days ahead of the Federal Reserve’s forecast from December 2008. In the coming months, an even greater number of layoffs resulting from major automobile company restructuring will balloon this figure to 9.5-9.7%. MeetingTrader forecasts an early 2010 peak official Unemployment Rate of 10.5-11%.
(4) Figures are from Bloomberg. Source: www.Baselinescenario.com , economics blog. Wonkish.
(5) Our forecast is consistent with those offered by Nouriel Roubini, George Soros, Robert Shiller, Simon Johnson, and other early-warning economists who forecast the current financial collapse back in 2006 and 2007.
(6)This assumes that investors and Sovereign Wealth Funds (China, Saudi Arabia, Korea for example) still prefer the purchase of US Treasuries and Dollar-denominated securities to other countries’ securities. If the USA loses its status as the safest place to park money, then our debt could go the way of many previous empires such as post-WWII Britain. Good, but no longer the world’s perceived safe haven. China or IMF Special Drawing Rights may be perceived to offer greater returns for many investors in the future.
