Hotels and tourism on the sticky wicket around high prices

Hotels and tourism on the sticky wicket around high prices

When it comes to recurring business in tourism, word of mouth about value for money is the key.

When returning to their home countries after a visit abroad, most travelers usually focus on three things – the weather, what they did and how expensive it was or not – when telling others about their holiday experience.

So when it comes to recurring business, or referral business run by word of mouth, what visitors experience about the cost is extremely important.

According to Fáilte Ireland, the country has done quite well in this regard in recent years, with 8% of tourists reporting that they received poor value for money and 80% saying that they experienced good value for money.

But as the organization’s CEO, Paul Kelly, told an Oireachtas committee in recent daysthe early indications are that these scores are likely to deteriorate over the summer.

In recent weeks, anecdotal stories have abounded about obvious “twitching fees” and “price reductions” of hotels, car rental companies and other tourist services here and will quickly define the outside in view of our tourist economy.

Anecdotes are never the best information to base assessments on, but it is clear that the sector is facing a growing perception problem.

Hotel owners on the offensive

The Irish Hotels Federation (IHF) went on the offensive during the week in an attempt to counteract part of the increasingly negative narrative – a narrative that in the age of social media can quickly spread abroad.

In essence, its argument is that high prices reported by customers are the result of a significant imbalance between supply and demand in the hotel sector, particularly in Dublin.

As a starting point, it claimed that the number of available hotel rooms in the city (which have historically been underserved by hotels in recent years) is 3,000 lower than it would have been if the pandemic had not disrupted construction.

Of the stock of 22,492 registered rooms in the capital that are available, the IHF says that only 82% are actively used as hotel accommodation.

A further 15% is used for government activities such as housing Ukrainian refugees, and the remaining 2% are out of use due to staff shortages, or because they are used to house staff or are being renovated.

On the other hand, the IHF claims that demand has returned much stronger than expected, giving Dublin the highest occupancy rate of any city in Europe at 83.6% in April.

But with this hotel scenario, which is also replicated over car rental, the tourism industry ends up on a sticky wicket.

The hotel sector has a business model similar to that of airlines, where groups of seats – or in this case rooms – are sold at a certain price, and when everyone is gone, some more rooms are released at a higher rate.

This process continues until only the last rooms are available, usually at a much higher cost than those in the first group placed on the market.

So in a normally functioning market, where supply can keep pace with demand, you would expect there to be a reasonable supply of rooms offering value, until you get much closer to the chosen date of stay, unless it is a large one. events on or any other reason why the rooms are sold out early.

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But in this country right now, according to the IHF, a low supply combined with a strong demand has led to the majority of the available rooms being sold much earlier than normal, leaving only a small pool at the upper end of the price continuum.

To illustrate its point, the IHF says that in June, 80% of available hotel rooms for the month had been pre-booked, up from 65% compared to the same time in 2019.

The situation is further complicated by how some of the major booking engines work and what they require from hotels that use them.

And it is the overall unusual dynamics, it says, that have seen potential visitors faced with a limited range and prices per room in many cases around € 300 per night or higher for one to four star hotels when they have visited popular booking sites looking after a room in the coming weeks.

A reasonable explanation?

On the surface, it is a reasonable explanation, based on fairly basic market principles for supply and demand.

We may not like it, but the industry has the right to adopt any business model – it is a model that has been used for quite some time and has not only been introduced to take advantage of current circumstances.

Although it could be argued that in the light of these unusual circumstances, hotels should consider overriding the standard model by dropping the last sections of rooms at more “normal” average prices to increase perception of value.

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The IHF and tourist leaders in general do not question the fact that there are some operators who deliberately use the situation to raise prices – but they claim that the numbers are small.

They say the evidence for this can be seen in data compiled independently of STR, which shows that average prices in April were € 154, lower than in London, Rome and Amsterdam, with indications that it will be around € 177 in May – around 15-16% higher than the same month pre-pandemic.

This is not an insignificant increase, but must be seen in connection with the sky-high costs for energy, food and materials, as well as staff shortages that lead to higher wages.

All in all, it is not an explanation that consumers necessarily want to hear – after all, no one likes to feel cheated, for whatever reason.

And it provides a good feed for tabloid headlines and indignant politicians who are trying to get points with the voters in Leinster House.

Car rental companies have faced similar criticism

But with this hotel scenario, which is also replicated over car rental, the tourism industry ends up on a sticky wicket.

Rising prices and staff pressures actually mean that other tourist-focused companies such as restaurants and pubs are also facing growing questions about value for money and service standards.

The industry can not do much to combat this perception, as many of the factors driving supply, demand, pricing and labor market dynamics are beyond its control.

Yet, by taking as pragmatic and innovative a pricing approach as it can, it must raise its stakes on service and bend backwards to provide value for money in the coming months.

Because if it does not take decisive action, the sector risks significant damage locally and internationally, at a time when it is already struggling to get back on its feet after Covid’s ravages.


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