Issues around competition such as tourism flows, seasonality, marketing, oversupply of accommodation and the resulting price wars were mentioned by two thirds of the interviewees.
Inbound tourism numbers impact strongly on the business coming through the hotels with 54% (Statistics New Zealand, 2006a) of hotel nights in Auckland being international visitors. The fluctuations in the value of the New Zealand dollar, which was strengthening at the time of the interviews, and the impact of escalating fuel prices, were areas of concern as the following quotes illustrate:
• Fuel prices at the moment, impacts everybody else. Airlines, prices will go up, people don’t travel, not just corporates, leisure makes up a big part of the business. All about volume if your hotel is half full you can’t charge as much as if your hotel is 90% full.
• Fluctuating dollar has an effect on the amount of tourism coming into New Zealand.
• Our costs are rising on monthly, annual, basis particularly with petrol.
Similarly, the possible impacts from changes in Air New Zealand’s routes and the code share4 arrangements with Qantas (Air New Zealand was attempting to negotiate a code share arrangement with Qantas for trans-Tasman flights at the time the interview took place in April 2006):
• Air New Zealand is dropping flights from places like Japan which is not always helping.
• Coordinating what some of the airlines are doing and what Tourism New Zealand are doing on some of their marketing.
Enough capacity to get people here.
4 Code share: An agreement between airlines to sell space on each others flights. For example Air New Zealand flight NZ9090 from Los Angeles to Dallas/Fort Worth is
Code sharing allows the airlines to utilise their aircraft more efficiently but may reduce the number of seats available on a given route or increase the cost of tickets.
A related area of concern was the seasonality of business coming through Auckland:
• Seasonality of the market, first quarter high season, fourth quarter shoulder. Auckland as destination in the business mix so busy in the first quarter is due to the combination of corporate and leisure market as well as all the overseas visitors. During the winter relying purely on the meetings market – Auckland does not have a stand alone convention centre so you can’t attract big events.
• When we go through quiet spells, you can't quite work out is the world going into new thing of no travellers coming through or are they all going to your competition or are they just not coming to Auckland, what is the problem. Then suddenly it's flat out busy again and you're fine.
This variation in demand through the year, leads to difficulties in planning in all areas:
• If you were an independent [hotel] and you were a one man band, you'd find winter very difficult to sustain yourself to the next high season
• This week we're very quiet and this weekend we're wondering how we're going to cope.
This does extend beyond Auckland with hotels throughout New Zealand being impacted to some extent:
Seasonality right throughout the country. Queenstown and perhaps Taupo a little have minimal seasonality due to ski business.
This variation in utilisation of the hotels’ resources due to the cyclic, seasonal nature of their business creates problems for planning in terms of staff required and income flow through the year. The first quarter of the calendar year, over the New Zealand summer, is the busiest part of the year for hotels; the fourth quarter with Christmas functions and early holidays is next. The middle part of the year, over the New Zealand winter, for Auckland hotels can present problems attracting enough business to cover costs.
For Auckland, this volatility combines with an oversupply of rooms:
Was an oversupply of accommodation when [we] opened five years ago. Was much of a muchness between four and five star hotels for rates and facilities. Lots of old room stock.
This is true not only of hotels but of the property market in general with apartments being seen as posing a particular threat:
• There is a lot of additional supply in New Zealand - not only hotels, in different markets such as apartments, things like that. Apartment blocks as pseudo hotels, don't have infrastructure we have to have, have some of the legal things, fire etc.
• Someone told me there's 6000 apartment rooms coming on the market in the next six months, that's a 1000 apartments a month that's a big concern for us because people start thinking, especially corporates start thinking, well I could rent an apartment for two or three hundred dollars a week, furnish it, it still works out cheaper than putting people in hotel rooms.
Groups of apartment owners are using property management services to rent out their apartments on a nightly or weekly basis. While they do not offer services such as restaurants and have limited housekeeping, they compete in the same market space as hotel rooms, particularly for the corporate traveller. As they are not bound by the same legal requirements as hotels and have fewer costs they are able to offer lower rates.
All of these factors lead to price cutting and price wars as the following comments indicate:
• Industry as in competition – how people handle competition…
rates are being driven down by market forces through lack of business and through particularly short sightedness of some operators.
• This is what we call our low season. It's when everyone, all the hotels, start dropping rates. Everyone is vying for the business.
• There are a few hotels out there that are slicing the guts out of rates, because they're not doing that well for whatever reason that maybe, and they're out there reducing the market down. And they destroy your yield, absolutely destroy your yield.
• Certainly has driven rate down in a lot of areas. It's started to turn round a little bit now, people have started to realise it and starting to yield manage it a lot better now but it certainly did effect our rate.
Discounting leads to problems with image and future viability:
• Once you've knocked it down it's very hard to put it back up.
• There is the issue of guest perception, if you sell your room for
$99, your hotel in their mind is forever going to be worth $99.
• In OECD, Auckland has the fourth highest hotel occupancy and fourth lowest yield. Says that [we are] not positioned correctly in the market.
• Survive in the here and now and don’t think about the future.
Nevertheless, some of the hotels had been able to set rates and maintain them:
• When we came in we said we can either join the mass or try to create a point of difference. Because of our location, the strength of our brand and our size, we went in and positioned ourselves above all the others
• They didn't fold to the pressure to lower their rate and it's worked for them. It's exactly the way to do it.
Others have had to make adjustments and yield to the rates wars to a greater extent than they would have liked:
[We] dropped rates to get share, the yield in the last six years has moved from $88 to $120 as [we] moved rates back up. Always knew had product but had to get market share to realise the rates.
Most of the GMs thought that this issue was starting to be addressed by the industry in a more appropriate manner:
• It’s started to turn round a little bit now, people have started to realise it and starting to yield manage it a lot better now.
• Rates for 2005 were lower than a decade earlier, last year was a watershed. Everyone decided enough was enough and started moving rates up but when times get tough people swing back to discounting, doesn’t help anyone.
These issues accentuate the usual problems of marketing and mean that a key issue is “what can you do next to get more business in” or, as one GM put it, “bums in beds”.