City hotels during the pandemic: should they remain open or closed?
The reasons are well known: restrictions on international travel, reduction in flights, cancellation of events, closure of attractions and entertainment venues, etc.
In this article we will present some considerations on the 2020 performance of hotels located in major Italian art towns or cities that are both business-oriented and leisure-oriented (Rome, Milan, Florence, Turin, Naples, etc.) along with some projections for 2021, attempting to answer the question raised by many city hoteliers: that is, should hotels remain open or closed and, in case of closure, when should they reopen.
We must start by stating that hotels, unlike other commercial activities (restaurants, bars, cinemas, theaters, museums, gyms, etc.) were never legally required to close. Therefore, the decision to close always hinges on personal or economic choices, never legislative.
THE SITUATION IN 2020
First of all, in order to get a general overview of just how the pandemic has affected hotels in art cities such as Rome, Florence, Milan, etc. it would surely be enough to look over the figures reported by Federalberghi (the Italian hoteliers association), which reveal losses between 80 and 90% compared to the previous year and occupancy rates that even in the summer amounted to between 10% and 20%, despite the virus being under control, the restrictions relaxed, the European borders reopened and the majority of flights reinstated.
These statistics, as is the case with all aggregate data, provide a partial overview of the situation, especially when it comes to data and averages based on a sample which is quite extensive from a quantitative standpoint and quite generic from a qualitative standpoint, grouping together 3- to 5-star hotels, properties that remained open all the time, properties that closed for a period of time or that always remained closed, properties with an excellent online reputation (8 and higher on Booking.com) and properties with a medium to low reputation (8 and lower), properties that apply revenue management and properties that do not, etc.
Moreover, as evidenced from the data provided by ISTAT (Italian National Institute of Statistics) on the number of arrivals and overnight stays in Italy, it is undeniable that a remarkable recovery occurred during the summer. As illustrated in the graph below, while it is true that in March, April and May arrivals and overnight stays fell by more than 90% compared to the previous year, from mid-June to October (thanks to an improved health situation and an easing of restrictions) there was an exponential growth in demand.
Certainly, not at 2019 levels, but with a sharp increase that narrowed the gap in July, August and September.
While it is true that this increase in arrivals and overnight stays (mostly Italian and, to a lesser extent, European) mainly flowed towards seaside, mountain, and lakeside properties, it is likewise true that the recovery of tourism also involved, albeit to a lesser degree, art cities (thanks to a significant increase in demand from other European countries, which accounted for about 50% of total arrivals in cities).
However, the expression of this recovery was not evenly distributed across all city properties.
While the aggregate Federalberghi figure can certainly provide useful information to gain an overview of the impact of the pandemic on art and bleisure cities, by breaking down the data and analyzing it at a granular level it is possible to obtain additional information and understand that, in truth, during the summer some hotels were registering an occupancy rate hovering between 60 and 80%, thus managing to preserve between 50 to 65% of revenue, by comparison with the preceding year, others that remained at a standstill with an occupancy rate hovering between 10 and 20%, and other hotels that, instead, generated no revenue and sustained losses of 100% year-on-year because they remained closed despite the easing of mobility restrictions and the marked improvement of the health situation.
The chart below focuses on a limited sample of a hundred properties (3- and 4-star) located in major Italian cities (Rome, Milan, Florence, Turin, Naples, etc.) that remained continuously open for business during the pandemic, that have an excellent online reputation (8 or higher on Booking), and that apply revenue management techniques (data sourced from revenue management software Revolution Plus on a sample of hotels currently enlisting the consultancy services of Franco Grasso Revenue Team), showing occupancy and RevPAR trends also in relation to the preceding year.
As the graph shows, after the collapse of March, April, and May, which coincided with the total nationwide lockdown, from June onwards there was a huge recovery for these city hotels, followed by a new decline from the second half of October, when Europe experienced the second wave of Covid-19. Yet, the decline from October onwards, however dramatic, was not as devastating as the one experienced during March, April, and May, not least of all because the restrictions were certainly less severe than the spring 2020 lockdown.
WHAT ARE THE RESULTS ACHIEVED
There are two specific points that we would like to stress.
The first is that the excellent (notwithstanding the pandemic) summer results for hotels in the sample examined enabled these properties to generate the necessary profits to cover most of the losses incurred during the first and second wave, thus closing the year with a positive GOP or close to balance in their operating costs/revenue.
The second is that properties were moving at different speeds during the summer recovery.
There are some properties (those with excellent reputation and online visibility, that remained open for business always or almost always, that applied revenue management, reinvented themselves and adapted to the pandemic by targeting new segments) which essentially limited damages and managed to gain significantly higher market shares compared to other properties that instead remained static and stuck in 2019 (and 2019 rates), did not have an excellent online reputation (something which became even more vital during the pandemic), that reopened for a short time at the end of the summer and then closed again immediately afterwards, at the beginning of the second wave, or never even reopened.
In the most critical periods of the pandemic, during the first and second wave, we encountered closure rates which were as high as 30-40% (one can view Booking.com to have an idea about how many hotels are open and bookable in a given city).
On the topic of opening/closure, STR itself, the largest benchmark company in the world, highlighted how those properties that remained always (or almost always) open for business during lockdown were the same ones that during the summer (with the end of restrictions and the resumption of leisure tourism) recorded far better performances compared to those that opted to open only when the lockdown was lifted.
There may be several reasons, but there are essentially two reasons which have significant impact, and they are interconnected.
First, for cities such as Rome, Milan, Florence, etc. there is a constant demand all year round, 365 days a year, and this truth remained valid even during the pandemic.
While it is true that the leisure segment, albeit the most important and profitable of all, only made an appearance in the summer when the various travel restrictions were eased, in every other stage of the first and second wave, a number of segments remained unscathed, all of which were non-leisure but nevertheless important for cities. This refers to people who continue to travel and to move about despite the pandemic and restrictions, because they must and are authorized to do so.
Clearly, this refers to the typical business customers who travel from Monday to Thursday, generating very high occupancy rates on those days (customers who have offices in certain areas or who need to attend face-to-face work appointments not replaceable by the digital platforms that are currently quite popular on account of the pandemic), this refers to workers who must carry out work on specific construction sites, traveling journalists, “day use” customers who need a room for just a few hours for several reasons, smart workers who cannot work from home and require a suitable environment to work, people who need to undergo medical examinations of any kind, or healthcare workers. We could go on to expound this further, as there truly is an abundance of possible reasons. It is not only about tourists.
And they need to stay overnight in a hotel, thus generating a demand that must be effectively intercepted and capitalized on.
In such a scenario where there is a constant demand, which is primarily expressed through online channels, not being visible and available for bookings is, in any case, a disadvantage that negatively affects a hotel’s conversion rate and therefore the online channels algorithm which determines the visibility level. Conversely, remaining visible and available for bookings and obtaining reservations (therefore conversions), possibly accompanied by excellent reviews that raise the online rating, enables a property to improve its positioning and visibility even in the medium/long term.
Another reason, which is closely interlinked, has to do with the so-called corporate or regular customers, that is, those customers who spend a fairly constant number of nights in a particular hotel for work purposes mainly. When said hotel decides to close for COVID-related reasons, its regular customers who still require overnight hotel accommodation (regardless of the pandemic) could clearly seek lodging in other open hotels, and if their accommodation experience is good or even better, they just might choose to stay long term and no longer return to the previous one.
Of course, when analyzing the segments that generated demand for hotels both during the Spring lockdown and in November and December (as well as in January of this year, as shown in the chart below), in the midst of the second wave, there are some questions that need to be asked.
Is this demand of such magnitude that it is likely to generate profits and average daily rates comparable to pre-COVID levels? Obviously NOT.
Is this demand enough to cover part of the fixed costs and survive, while waiting for better times ahead? Absolutely YES.
Provided, however, that one has – on the one hand – a valid strategy to optimize fixed and variable costs, expertly managing internalizing and outsourcing operations and – on the other hand – a sales, revenue management and marketing strategy aimed at intercepting said demand. Possibly adding to this a range of features and/or services that can help boost the materialization rate, also thanks to specific search filters (e.g.: excellent brand reputation, 8 or higher, even better 9 or higher, good WiFi, excellent cleaning, restaurant service, room service or, alternatively, adequate spaces for the consumption of food and drink given the closure of restaurants due to COVID, suitable workspaces, parking, etc.).
If it’s true that in normal market conditions the demand, before Covid-19, was so high to be equally distributed across all the properties, in periods of low demand, and rates being more or less similar and competitive, the properties with higher rating reviews and better services will inevitably be more visible and desirable, thus capturing much of what little demand exists.
AND THERE CERTAINLY WILL BE BETTER TIMES AHEAD
There will be periods of time when mobility restrictions will necessarily be eased.
Both on account of a welcome improvement in the health situation and a slowdown in the virus circulation (as a result of vaccinations and the natural immunity of those who have already contracted COVID, a number significantly higher than official figures), and because restrictions extended over excessive lengths of time would lead to health damages (as well as social and financial damages) far worse than those caused by the virus.
And as soon as restrictions are relaxed, borders are reopened and flights resume with some regularity, the tourism and leisure recovery is quite swift, as we saw last summer. The desire to travel is directly proportional to the time spent confined at home.
As reported in another article, the signs for cities are quite encouraging from May 2021 onwards.
In addition to Europeans, Americans also have started booking again with a certain degree of regularity.
On scheduled event dates on the second part of the year, with large conventions and international trade fairs set to take place, we are registering bookings at extraordinary rates, a sign of a possible strong recovery of the MICE sector.
So, there will be a recovery without any doubt, but not everyone will benefit from it in the same way, and with the same momentum and intensity.
The hotels always open will be the first to benefit from the recovery.
Therefore, one should be prepared with the right pricing, sales, and marketing strategy.
Now that we have seen all this data, let us revisit the initial question.
Assuming that the correct sales strategy has been adopted and that the right characteristics are in place, is it worthwhile for city hotels to remain open during the pandemic?
The answer is YES.
Today, a year after the start of the pandemic, we can say with a reasonable degree of certainty – financial statements and budgets at hand – that closing would certainly entail more severe losses. As well as damaging positioning, conversion rate and online visibility. So, ultimately, damages in the short, medium, and long term. Damages that increase even more the longer the period of closure (and therefore online invisibility).
Closing means having the financial and mathematical certainty of incurring losses, because revenues are eliminated whilst expenses are not. Conversely, by remaining open with the proper strategy, one can aim to reach break-even, at the very least. And as we saw in 2020, as difficult as it all was, some city hotels were able to pull it off.
Clearly, given that we are in the midst of a pandemic, those who have decided to close their businesses for personal, psychological and emotional reasons (e.g.: fear of infection and related consequences and troubles) have every legitimate right to do so.
However, from a strictly economic, financial, and commercial point of view, we can affirm today, data and statistics in hand, that for those hotels with an excellent online review score and an effective sales strategy, remaining open is the best possible choice.
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