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Gateway cities vs provincial cities - Greater resilience over greater growth

Utilising MKG Hospitality’s market monitoring database HotelCompSet, HTR Magazine examines and compares 2009 hotel performance trends in Europe between inner city and provincial locations.

Looking at hotel performance trends during challenging times, there is an all but clear synopsis; inner city markets are a lot more volatile, yet also in a better position to achieve optimal results when conditions are good – provincial markets are somewhat more stable, but also restricted in what growth they can achieve.Key cities in Europe are indeed very dependant on global economy. When conditions are bad, or such as the case recently, horrendous, hotels in these destinations suffer severely. Business demand diminishes – key city locations is where most company and organisational head quarters are based, as well as where most MICE activity takes place – and international leisure arrivals and length-of-stay declines. Furthermore, Luxury hotels (usually located within the inner city) are also first to feel the brunt, and in turn instigate a price war dominoing all the way down the categories. Hotels during this period heavily drop their prices in order to stimulate some sort of demand and maintain descent Occupancy Rate (OR), cruelly affecting RevPAR. In contrast, provincial areas seem to be a lot more resilient, sustained by domestic and to a lesser extent intra-regional demand, and not suffering as much from loosing a major clientele segment, i.e. MICE. Additionally, operational costs, namely salaries and rent are also less.When the economy is growing and conditions are positive however, city hotels are able to capitalise more and benefit from higher room rate increases. Provincial hotels are more limited with rate growth, while demand is gradual.French market sees disparitiesFrance is the perfect example of this clear division between city and provincial, including areas made-up of the country’s secondary cities and regional locations. Q1 through to Q3 2009, Paris clearly suffers, dropping to record low performances; other main cities and regional destinations manage to remain somewhat resilient. As the country’s (and global) economy stabilises towards the end of the year, Paris reverses its situation and experiences much better growth. In October, RevPAR in Paris fell 16%, then drastically improved in November with a decrease of only 3.8% and in December 2.9%. Paris, like most capital cities in Europe should see continued growth as the global economy recovers, with rates increasing and demand returning. Overall, provincial France performed better than the capital in 2009, with RevPAR dropping by 5.5% at years end compared 12.3% (Ile de France fell by 10.6%). This was due to a 7.7% ADR decline in Paris, as opposed to a 1.3% increase for the province, indeed proving to be one of the only regions in Europe to experience a rate growth. A traditional strong domestic market, as well as through-traffic helped provincial markets maintain healthy rates. In 2009, French travellers chose, more than ever, to stay closer to home and save on travelling expenses. At the same time, many European travellers also chose to holiday within the region as opposed to long-haul destinations, with France being a common option.Paris and provinces, both ending the year with a decrease of around 4 percentage points. Globally, France managed to finish off as Europe’s best performing countries, with RevPAR falling 8.5%; the budget category proving most resilient, even managing to record a slight increase.Spain’s situation was also one of inner city hotels suffering more during the crisis, and then experiencing modest growth as the global economy improves.Amsterdam also performed much worse than regional locations in the Netherlands, and then managed to close the gap half way through 2009, spurred by its summer peak, as well as minor improvements in business demand. Regional locations also begin improving towards the end of the year, a good sign that the country as a whole is on the right track.Italy too experienced something similar, although not as clear-cut. For the much of 2009, Italian cities suffered more then regional areas but then recorded better growth towards the end of the year. Overall they also performed better, thanks in large to a major booster during the summerpeak period.A different story however occurred in Belgium, with city and provincial hotels following a parallel trend for the whole year – performances all round were rather erratic.Parallel trends in the UKThe UK is one of the only markets in Europe where hotels in city destinations performed better than provincial areas. Except for a dip in July, London still managed to sustain better RevPAR growth than most, together with Edinburgh and Cardiff.Holiday visits to the UK grew 3% during 2009 with the weakness of the Sterling neutralising the impact of the economic downturn, by encouraging euro carrying travellers to visit London and take advantage of the favourable exchange rate, i.e. for shopping deals and entertainment.An increase in domestic tourism is another key factor, as British travellers chose travelled closer to home, primarily visiting cities within their own country. This helped counter a loss in foreign arrivals, such as from North America, Asia and non-EU Europe. At the same time, provincial locations were not really able to attract new clientele segments to make up this loss.Finally, although business demand still suffered throughout the UK, there was certainly still more activity in city destinations.Even considering the difference between UK city and province in actual value, hotel performance patterns mirror each other. London manages to sustain the best RevPAR performance at -8.9%, ahead of other main cities collectively, including Birmingham, Glasgow, Liverpool, Leeds, Sheffield, Edinburgh, Bristol and Manchester, and also ahead of regional locations (-16%). All however suffered strong RevPAR declines in 2009. Individually, Edinburgh (-5.7%) and Glasgow (-8.1%) were more positive than London.The most significant observation with the UK is London’s powerful developments towards the end of the year, clearly picking-up pace and superseding growth performances of other locations. No doubt a sign that economic conditions are improving.According to CEO of Whitbread, Alan Parker, budget brands have not only been more resilient during the downturn, but have been in a unique position to make the most of lower consumer purchasing power.“We’re not assuming any imminent sharp rebound in consumer spending – things are still very tough out there, he told HTR.“We have seen a huge growth in budget consumption over the last few years – the public has become increasingly savvy when it comes to booking holidays,buying food and staying in hotels. The recession has amplified this trend, with people becoming much more hands-on with their finances/budgets, but it has been becoming generally more pronounced in recent years. Growth, when it does come back, will come when employment improves and business can see more certainty from government and the economic outlook,” added Parker.By year end 2009, London recorded a one percentage point OR increase, whilst RevPAR growth for the last two months of the year reached just over 10% and 11%, respectively.Other cities and provincial UK has also started recording better RevPAR growth, although no where near London’s achievements.Globally, UK RevPAR decreased by just over 10%.Even spread throughout GermanyGermany’s spread of major cities allows the country to post a rather consistent performance between inner city and regional locations in 2009. Key cities across the country followed a similar trend to each other and compared to regional areas.Strong MICE sectors in these cities, as well as city break leisure tourism have no doubt been the main drivers of demand, even if considerably reduced compared to 2008. They are also the main point-of-entry and focal point, therefore generating some demand even when tourists visit regional destinations.“Business and leisure travel in neighbouring countries such as France, the UK and Italy is strongly focused on few main cities, including obviously Paris, London and Rome. In Germany travel is distributed over 8-12 main cities and therefore hotel performances are much more evenly spread throughout the country,” verified CEO, Grand City Hotels & Resorts, Christian Windfuhr.Berlin was one of the most resilient cities in terms of occupancy, managing to remain rather stable at the end of 2009 compared to 2008 at just over 67.8% (-0.9 percentage points). OR also recorded only small decreases in other large cities, such as Hanover (-1.1 percentage points), Hamburg (-2.3), Cologne (-3.1), Munich (-3.3) and Frankfurt (-3.8). Stuttgart was one of the worse-hit, with OR falling 9.4 points. The rest of the country recorded an OR drop of just over 4 points.ADR however was no so optimistic, falling across the country. This decline was most felt in city locations, where hoteliers had to decrease their prices drastically to encourage international demand – business and leisure.According to Windfuhr, although each location’s situation is somewhat different, German cities felt most of the impact in 2009 due to a significant decline in fairs and events compared to 2008 and earlier years.ADR in Berlin fell by almost 9%, over 11% in Hanover, 14.5% in Munich and over 22% in Düsseldorf. Cologne and Hamburg were two of the better performingcities, with ADR decreasing by 3.4% and 5.3% respectively. Of course this decline in ADR affected overall RevPAR results.ADR in regional Germany was much better off, dropping by just under 5%. The main reason for this is fact that these areas did not have to cope with any major loss of trade fair business.Predictions for the year ahead are still rather cautious, with German hotels not likely to see good growth until the economy has well and truly recovered. Modest signs of OR improving are evident in main cities, especially Berlin.“Once the economy picks up, hotels will catch this up-swing, as always, with a slight delay,” continued Windfuhr. “The first half of 2010 will continue to be soft and not much better than 2009. The reason for this is that the commercial sectors (and MICE business) are still saving costs, waiting for the (hopefully) positive development of the economy before committing travel and MICE expenses. Leisure tourism also had a slow start in 2010, due to tight personal budgets, as well as poor weather conditions.” At the end of 2009, RevPAR in Germany fell by almost 13%; the budget segment easily being the best performing of it all. The larger spread of major gateway cities is cerainly a plus for Germany.

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