Why Hotels Are Raising Rates and Tightening Contract Terms

Planners are frustrated with hotels. More than 55 percent grouse about higher rates and F&B prices, according to the latest Northstar/Cvent Meetings Industry PULSE Survey. And 48 percent complain about inflexible contract terms.

Like it or not, these are the realities of doing business today, and they’re not likely to change this year. Hotels, venues and other hospitality suppliers are struggling to recover from an intense Covid hangover. To survive persistent financial woes, they need to raise costs to survive, and they have to minimize the risk of lost business.

For a deeper understanding of hotels’ current plight, we spoke with Ben Johnston, COO of Kapitus, which provides financing for small- and mid-size businesses.

What is driving costs up in the hospitality business?

Everyone is grappling with inflation, which stems from underlying issues that are important to address. Certainly, coming out of the pandemic, demand has increased. But the supply of labor coming back into the market has not increased at the level required to meet that demand, which is ultimately creating wage inflation.

I think that's especially difficult for seasonal businesses, and for businesses that require staff at nontraditional hours — and the hospitality industry has a lot of demand in those areas.

Why are food-and-beverage costs rising, too?

In addition to wage inflation, hotels and restaurants have faced real challenges getting a steady supply of the basic foods they need to provide their service, which has inflated the cost of goods. That is compounded by variable demand. The pandemic ebbs, and everyone rushes back. Then there's a new spike, and suddenly demand fades away.

How does compression factor into negotiations?

Significant supply has been taken out of the market, and there are significant costs to reinstate operations for a hotel that was shuttered or has scaled way back. As the manager of a venue, you're going to say, “If I'm going to hire back all these people, and if I'm going to make all these improvements, I can't have you cancel two weeks before the event.”

Are more hospitality businesses seeking loans?

Yes, but there’s a caveat here, too: One key tenet of inflation is rising interest rates. The Fed has signaled that interest rates will be rising this year, and that will ultimately increase borrowing costs. Meanwhile, businesses in the hospitality sector might be looking to borrow money to hire additional staff, make improvements or expand their facilities, and to procure the goods required to reopen or grow. We expect to see long-term borrowing costs go up for them during the year because of higher interest rates.

What would you advise hotels and venues to do as they ramp up again?

Businesses need to be very attuned to how demand is changing coming out of the pandemic, and tailor their services and their future investments to meet the demand that they're seeing — not the demand that they had in 2019.

How can planners be supportive in working with suppliers?

Try to be as flexible as you can around the number of staff that you require. It might not be possible for a hotel to offer all the amenities that required humans in the past. You might need to be prepared for more bare-bones service. I think many consumers will be fine with that. Personally, I don't need my room cleaned every day when I stay at a hotel.

And when it comes to procurement and supply-chain issues, make sure you have a plan B. Supply-chain disruptions will likely continue for months, if not for the rest of the year.

Do you expect the business-events sector to recover fully?

We're really optimistic about venues and conference spaces in the long run. That said, I think it will be rare to see people jumping on a plane to fly across the country for a one- or two-hour business meeting. People have found Zoom meetings to be highly effective and highly efficient. So I think there will be less demand for business hotels and business plane tickets, but — especially with so many people working from home — there might be greater demand for conferences and networking opportunities that bring businesspeople together.