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  • The drop in Rack Rates in 2008 verifies European hoteliers’ concern. The global decrease in the European Union remains moderate (-1.4%), but is striking compared to the steady growth recorded over the past years. Upscale hotels are particularly hit hard and have to review their pricing policies, while economic segments still sustain positive growth.
  • France remains one of the few EU countries with an increasing rack rate in 2008. Upscale hotels are unable to offer similar rates as last year during the Rugby World Cup, while the midscale and economic segments appear more resilient to the economic slowdown.
  • In Germany and the United Kingdom, where the hotel industry is particularly dependent on business tourism, operators adapt pricing policies to the economic slowdown.
  • The world economic crisis further impacted Italy’s and Spain’s existing fierce price competition in the upscale hotel segment.

Rack Rate and Average Daily Rate variations in the European Union – 2002-2008

The world’s economy slows down, impacting hotel industry rack rates. A primary basis for pricing policies, rack rates are a strong indicator of the current state of the hotel industry and of the operators’ forecasted activity for the coming months. The annual rack rate compilation by MKG Hospitality at the end of 2008 confirms European hoteliers’ concerns and the various strategies implemented to cope with the economic slowdown. With less demand, hoteliers offer more attractive tariffs. In 2008, the drop reaches 1.4% on a European level and seems even more important when comparing to the growth recorded in 2006 and 2007, +2.8% and +3.5%, respectively.

The upscale category is expecting to see their clientele particularly affected by the economic crisis, evident in cancellations and late bookings. Accordingly, hoteliers have utilised their pricing policy flexibility to adjust their tariffs (-3.8%). Among all clientele segments, MICE should be worse hit in 2009, for several reasons: uncertainty regarding the allocated budgets, uncertainty regarding the number of delegates to meetings, and PCOs anticipation of a drop in prices by hoteliers.

While upscale hotels enter an unavoidable period of decline, economic segments show continuous growth in rack rates. Hard Budget, Budget and Economy categories remain dynamic. Heavyweights in these segments, such as French-based Ibis and Premier Inn in the UK, continue developing their supply. Meanwhile, B&B launch their new concept, Econochic, whilst several economic brands, such as Accor’s hotelF1, Louvre Hotels’ Campanile and Première Classe, as well as German-based Motel One are all adapting their products to suit clients’ evolving needs. These developments allow the economic segment to justify an increase in pricing strategies. Furthermore, these segments benefit from a domino effect. Considering that their traditional clientele will also be hit by the crisis, hotels with a good price/quality ratio hope to compensate this loss by a transfer of clientele from segments above. Thus, a slight increase in tariffs would be almost undetectable for these new customers.

Similarly, the midscale segment could also benefit from a transfer of customers from the upscale category. However, considering their positioning between the economic and upscale segments, midscale hotels adopt a cautious pricing strategy (+0.9%). Rack rates in double rooms see a slight drop due to more properties offering double occupancy at single room prices. This deliberate action proves that this segment has room for improvement, attempting to better position itself between the economic and upscale segments. The slight growth in price confirms their intention to attract a more affluent clientele, and sacrifice a slight drop in occupancy rate in order to support RevPAR growth. Will this strategy pay off?

In spite of this difficult situation, France seems to resist much better than most EU countries. The country’s rack rates show a growth of 4.1%, reaching 117 Euros. France shows tenacity in the upscale segment, even though it does no longer benefit from the Rugby World Cup. The decline in rack rates in the upscale category remains contained compared to last year (-1.2%). Contrary to most of European countries, the French midscale segment continues to support growth by an ambitious tariff policy. The increase in rack rates (+7.4%) is almost equivalent to those of economic categories. With increases between 6.8% and 8.0%, the economic categories demonstrate their resilience to the economic situation.

Change in rack rates by country – 2007-2008 (all categories considered)

France clearly distinguishes itself compared to the rest of Europe. Neighbouring countries, Germany, the UK, the Netherlands and Belgium all show decreases between 0.4% and 2.0%. In all of these countries, the upscale segment drags average rack rates downward. This drop reflects the tense economic situation. Hotels in London, who heavily depend on the financial community, do not anymore have the same leeway as in the past. Although Germany has made progress, especially due to hosting the FIFA World Cup in 2006, the upscale category has also experienced a tariff drop.

More alarming are the two most popular tourist destinations in the Mediterranean. Deeply trapped in the crisis, Spain struggles with a tariff war among upscale hotels. This negative spiral flows onto the midscale segment. A similar story is noticed in Italy. Prices are currently the highest in Europe and need to be adapted in light of the economic situation.

Particularly dependent on international clientele, the Czech Republic will adapt prices in order to stop/control the drop in occupancy. Other Eastern European countries seem to be more resistant, for example Poland with an in increase of 2.5%.

Forecasts for 2009 are not optimistic. The decline in rack rates in 2008 is the most significant since 2000. The upscale segment should continue suffering during the coming year, with little hope for reversal anytime soon. The budget hotel segment, which is still in a growth phase, cannot totally compensate the drop in the upscale category on a global level.

About MKG Group | Established in 1985, MKG Group has built a reputation for solid business expertise and substantial know-how in the fields of tourism, lodging and food service. MKG Group meets the needs of each of its clients by providing the valuable analytical and decision-making skills necessary for success.

Methodology & Innovation | With a team of over 60 experienced consultants, as well as advanced research and analytical tools and applications, MKG Hospitality provides unique savoir-faire in four major areas of expertise: Market Research; Financial Feasibility Studies; Consulting; and Sector publications.

MKG Hospitality is a global leader in tourism, hotel and catering consulting, with the largest database in the world (outside the US), representing all segments from budget to upscale hotels. MKG’s customised database, Hotel CompSet, contains a sample of over 200 brands and 11,000 corporate chain hotels, representing more than one million rooms. Hotel CompSet provides daily, monthly and yearly monitoring of hotel indicators and analyses of its sample. .

Together with other specialised brands, MKG Qualiting, OlaKala, Worldwide Hospitality Awards, Global Lodging Forum, HTR Magazine and Hotel Restau Hedbo, MKG Group supports investors, hoteliers and key tourism players improve performance, boost productivity and achieve optimal results.

Georges Panayotis
Hospitality ON