Wyndham Worldwide CEO Stephen Holmes' Remarks at PhoCusWright Conference
First, a quick view of who we are. We are a unique collection of hospitality brands and products that spans approximately 100 countries. We have three businesses:
We are the largest hotel franchising company in the world, with 12 brands and nearly 7,000 hotels. We account for approximately 10 percent of the hotel room supply in the U.S. and are growing quickly internationally. Although our namesake is a strong upscale player, we are most widely known for our economy and mid-priced hotel brands including Days Inn, Super 8 and Ramada, as well as our recently purchased Microtel and Hawthorn Suites brands.
We are the world’s largest vacation exchange network and among the world’s largest global marketers of vacation rental properties. Approximately 60 percent of all timeshare developers are affiliated with our RCI exchange network, and we have relationships with thousands of independent property owners representing a diverse range of over 65,000 properties from cottages in England to villas in Tuscany and campgrounds in Holland. We have recently expanded our vacation rental platform to the U.S. with the launch of Endless Vacation Rentals, or EVRentals.com.
Our third business is vacation ownership – aka timeshare. We have a flexible, points-based product that offers our 800,000 owners a diverse portfolio of resorts and urban destinations throughout the U.S., Canada, Mexico, the Caribbean and South Pacific that they can use on a daily or weekly basis.
In essence, we are a global hospitality leader in three segments giving us tremendous scale, diversity in products and geography. With that as background, let me turn to the current state of the industry.
We all recognize that the U.S. and global economy has deteriorated. Even before the financial crisis intensified with the credit markets shutting down in mid-September, the consumer was showing real signs of stress, primarily due to soaring gas prices, sinking home values and a volatile stock market eroding their savings. We have seen the dissipation of household wealth and hundreds of thousands of jobs shed in the last few months and more cuts are coming daily.
Consumer spending fell for the first time since 1991 in the third quarter, and discretionary spending will be under considerable pressure in the months ahead. It’s not surprising that consumers are anxious and pessimistic and are snapping shut their wallets, conserving cash and cutting expenses wherever they can. If I were to use one adjective to describe the current consumer, it would be “frugal” or maybe a better way to say it is that they are just scared.
There is some good news. Oil prices fell below $50 a barrel, a price last seen 22 months ago. I saw gas prices under $2.00 a gallon yesterday in my home state of New Jersey.
The other good news is prices are going down, not up, on just about everything. Clothes, appliances, cars, electronics, virtually everywhere you look, retailers are out with discounts and promotions trying to get the holiday shopping season jump started. Not a surprise, I don’t foresee any broad increase in rates in the near future in the hotel industry, and the looming question is: How many brands will discount and how far?
Despite the drop in consumer confidence and spending, according to TIA, 71 percent of U.S. adults are reporting that they intend to take leisure trips in the next six months … data that is consistent with the same period last year.
Leisure travel continues to show some resilience, holding up quite well in the early months of the year before stalling and declining modestly during the summer months. While it is expected to be soft in the last few months of the year, we agree with TIA’s view that large declines are not in the making.
This stability in leisure travel is particularly good news for us as so much of our inventory is leisure oriented.
So what are consumers doing in this environment? Many of us remember the aftermath of 9/11 and we are seeing the same old familiar patterns emerging. Americans are in a wait and see mode, booking closer and closer to the departure date, shopping for deals, looking for drive – not fly-to – destinations, staying closer to home, and spending fewer nights away. Until a few weeks ago, the U.S. international gateway cities were crowded with international visitors who found America a great bargain – our increasing dollar will continue to slow that inflow.
With two-thirds of Americans planning to take trips in the next six months, we see that they are spending less, not stopping, their travel. We see changes in the way people are planning, purchasing and actually taking their trips and their pursuit of “good value” is the primary reason why. Just as this conference suggests, people are searching, comparison shopping and then buying, primarily on the Internet.
The latest information I saw from AAA suggests the roads will be filled with about the same number of travelers this Thanksgiving as last year with people traveling to see family, to reconnect, and honor traditions.
With respect to vacation travel, it is no surprise that we are seeing a renewed focus on price and value. People are currently very open-minded about their destination choices, making their decision based on the best deal they can find and the overall cost of the trip, including food, flights or gas, and entertainment. This bodes well for us as we have so many products and destinations to choose from. A good example: People are comparing a weekly rental in a beach destination to an all-inclusive hotel, both of which offer exceptional value, but the one that works out to cost less will likely be the one chosen and either way, they’re staying with us.
Where we see the biggest overall weakness in the market is business travel. With cash as king, discretionary spending is under scrutiny in all businesses.
Given that about a third of all business trips are for internal company business, these trips are the most vulnerable in this environment. The other area that we see weakening is corporate meetings, yet association meetings are staying on the books, though experiencing lower attendance. We think this is largely because in the case of corporate meetings, it’s an expense item, and in the case of associations, it’s a key source of revenue. Big urban hotels that rely heavily on corporate travelers and meetings will need to be more creative to drive business in the days ahead.
As a result of advances in technology, we believe we will see an even greater use of travel alternatives including teleconferencing, video conferencing and of course, Webcasting. In fact we are planning to webcast our annual investor day rather than host an in-person meeting this year. In an environment where we are all being asked to do more with less time and less money, we believe that we will see continued declines in business travel for the foreseeable future.
While this is largely due to the economy, the unfriendly skies are also contributing to a decline in business travel in particular.
We’ve heard a lot this year about the problems in the air travel system. Ironically, we’ve made searching, shopping and buying airline tickets convenient, easy and even fun, however, taking the trip itself has lost its joy.
Travel hassles, long security lines, flight delays, and cancellations caused 41 million trips not to be taken last year, by TIA estimates, including 29 million leisure trips and 12 million business trips. This is a total loss to the travel industry of $26.5 billion: $9.4 billion to airlines, $5.6 billion to hotels, and $3.1 billion to restaurants, as well as a loss of $4.2 billion in federal, state and local tax revenue.
It is in all of our best interests to improve the air travel process. We are all part of this great travel industry, and our success will be that much greater if we work together toward comprehensive reform and a real commitment to build a travel infrastructure appropriate for the 21st century and beyond.
Unlike the airlines, the U.S. lodging industry has been one of the strongest sectors over the past few years but it is not immune to this economy. Recently, the story is declining occupancies reflecting declining demand, but so far, room rates have continued to hold up as hoteliers have resisted major rate cuts. Those of us who remember the aftermath of 9/11 will remember that there was severe rate cutting to try and capture room nights at any price.
This tactic did not succeed in bringing in incremental room nights. To the contrary, it simply reduced revenues without increasing occupancy.
Once the recovery was underway, even with demand on the rise, it was very difficult to raise those rates back up to pre-9/11 levels. We are encouraging all of our franchisees and owners to resist discounting as history has proven that it does not work. So far, we see the industry holding rates but losing occupancy as demand softens. Since the financial success of a hotel is largely driven by the hotel’s ability to “yield manage”, which means balancing price with occupancy, aggressive discounting is not a good formula and often leads to failure.
Most travel pundits are predicting conditions will worsen in 2009. Historically, limited service brands, like most of ours, that offer great value for the money, will continue to do well as both business and leisure travelers seek alternatives to spend less, but not stop their travel. Many people refer to this trend as “trading down”. We prefer to call it simply “smart.”
The fact is, times like these create trial for our brands, bringing in new customers who discover the value this segment delivers. These times also make a franchise brand that much more valuable to hotel owners who need a global distribution platform to deliver more business.
Let me also say a few words about the timeshare industry. We believe in the long-term prospects of vacation ownership because it delivers great value for the money.I should tell you that I am an early adopter of this product, having purchased a timeshare in 1980 and am passionate about the value of this product. This is a highly misunderstood segment of the travel industry and I am going to attempt to explode the myths surrounding timeshare here and now. Today’s timeshare product is not a fixed week at the same place year in year out, but rather travel currency points for pre-paid vacations with maximum flexibility. Just this week I received a letter from a new owner and I want to read you an excerpt of what he wrote. In his letter, he opens with saying that he and his wife made a blood oath that they absolutely weren’t going to buy anything during the sales presentation.
Here’s his letter:
I couldn’t have said it better myself. Our owners love the product, and nearly half of them buy more.
Even in this economy, our business performed well in the third quarter as we reported. Unfortunately, with the tightness in the credit markets, we have had no choice but to resize the vacation ownership part of our business to suit the current environment. As you may know, the development, marketing and sales of new resort inventory is heavily dependent on access to credit markets that provide us with the necessary capital to finance consumer receivables and fund construction projects. We have no choice but to realign our business to suit the current credit environment which means slowing down development, and consequently sales. We have also raised the credit score requirements for our customers, reducing the number of people who are eligible for financing. In the short-term, this segment of the industry will not see the double-digit growth of the last decade, but long-term, we believe that this product will become even more valued by consumers who vacation regularly. This is a great product for people who value their time as much as their money.
So far I have only addressed the U.S. market, and would now like to turn to the rest of the world. As I said at the very beginning, this economic crisis has no borders. As an exporter, we in the US have done a very nice job of exporting our credit crisis. We are seeing similar trends in Europe, most pronounced in the U.K. The good news for those of us in the leisure travel segment is that Europeans get anywhere from four to six weeks of vacation time, and they are likely to use most, if not all, of it.
One of the most popular vacations is renting a home, apartment or even campground for a week or more. We have several companies across Europe that offer these types of accommodations at various price points. Last summer we launched EVRentals.com as a way to bring this business model to the U.S.
In the U.S., the vacation rental industry has been fragmented and poorly defined, creating an opportunity for a well-established company to deliver consumer confidence and reliability to this segment. What people want is a good and predictable experience and a company to stand behind their properties, not just act as a listing service. This year we partnered with PhoCus Wright to scope the size of the vacation rental market in the U.S. and understand what consumers and property owners are looking for. According to the research findings, in 2007 the U.S. rental market was $24 billion and is poised for growth as long as travelers can develop confidence that what they are renting, sight unseen, lives up to their expectations. The internet has given companies like ours a great opportunity to market independent homes, villas and resort condos. What we know from our 40 years of experience in this category is that customers expect dependable quality and someone to stand behind the promise. Our selection of over 65,000 rental locations is amongst the largest and most diverse, and we offer far more than a listing company. EVRentals.com allows customers to search and book online in real time. We also offer a best price guarantee similar to our hotel promise, a 24X7 check-in assistance, 24X7 complimentary concierge service and a hundred percent refund on cancellations up to 3 days before check-in for most of our properties. Yes, you heard me correctly, three days, not thirty days.
What we are doing is leveraging our vast hospitality and vacation rental experience and bringing it to the U.S. market. The internet lets us take full advantage of the market opportunity to make this diverse inventory easily accessible and with guarantees that “smart” consumers want and should expect. In Europe, close to 60 percent of our vacation rental bookings are done online. We believe the U.S. market holds the same potential.
Technological advances have reinvented the manner in which travel suppliers bring their products and services to the marketplace. The internet has become a primary source for planning and booking travel. Consumers today want total transparency and to plan and book their trips on their own, not rely on a reservation agent to filter the offerings. We are investing heavily in this online channel and building virtual tours, photo libraries, mapping and advance search capabilities, with the goal of giving our customers, whether exchanging or renting, the ability to find what they are looking for in a fast and reliable way. With over 65,000 locations to choose from in a very diverse inventory, we know we have a great selection of products and price points, and the internet provides a great channel to communicate all those options and product differences. We have the ability to communicate new properties, prices and features in real time across the globe for a very low cost. Consumers can now compare prices, amenities and other features across different types of properties and vacations and choose the product that matches their budget and vacation vision.
The companies that can respond to market challenges quickly and engage customers consistently by delivering great value for the experience will steal market share and win the wallets of the ever-discerning global traveler.
We believe we are one of those companies and we fully expect to be stronger when the recovery begins. We will continue to leverage our scale and resources effectively, look for new and innovative ways to exceed our customers’ expectations, and be ready to take advantage of an improved economy.
Senior Vice President, Marketing and Communications