Hotel contract negotiation naturally becomes a hot topic during a seller’s market, and planners are currently facing the challenge of obtaining their preferred terms from in-demand hotels.
“Strong demand has surged due to a robust economy for most sectors,” observes Donna Wikstrand, CMP, vice president at Conference Hotels Unlimited. “Globally, a movement up to middle class from poverty in developing countries meant an expanding traveling public on the transient side.” That influx from transients often makes hoteliers less willing to bend on perhaps the most basic item of negotiation, the room rate. As Cindy Wheaton, CMP, manager, corporate meetings and events for Grange Insurance, notes, “It’s very hard to negotiate a room rate now because they are selling on their transient business.”
The high demand combines with a low supply that appears to have its roots in the recession of 2008–2009. “During the economic downturn, new hotel projects were scrapped and the lack of new hotel builds in the pipeline meant that demand would eventually exceed supply,” in Wikstrand’s assessment. Now that the industry is in the midst of that situation, planners must be astute in both negotiation and in adjusting the time and place of their meeting (to the extent possible) such that negotiating leverage is obtained.
“The seller’s market is impacting not only pricing and concessions offered, but contract terms, which is disconcerting. …Hotels are less willing to share risk.”
— Donna Wikstrand
One classic strategy is to focus on properties in second-tier cities, particularly outside of peak seasons. But the overall seller’s market is so strong that many second-tier cities are seeing a demand that rivals their first-tier counterparts. “First-tier cities are enjoying the strongest seller’s market I have witnessed in my career, and operating in it is brutal at times,” Wikstrand observes.
“And certain cities are emerging as first-tier cities that not that long ago would have been considered second-tier cities,” she says. “Those cities include Austin and Nashville, to name a couple, which have become extremely popular, and it can be very difficult to place a meeting there that does not match their formula for success. That could mean a program that peaks on a Tuesday night, which is the busiest night in most cities; or a program that requires a disproportionate amount of meeting space compared to the number of required guest rooms; or a program with a light food and beverage budget.”
More often in the current market, a planner’s list of ideal concessions will not match the hotelier’s “formula for success.” Nancy Ryan, manager, corporate meetings and events, in Aon Service Corporation’s global spend management division, has found hoteliers offering less favorable concessions during high seasons. For example, “one per 40 comp rooms used to be the norm, even one per 35 or one per 30 sometimes. But now I’m seeing one per 50, one per 45,” she says.
Wheaton has observed the one-per-50 trend as well, but that should not prevent a planner from requesting a better ratio: “My theory is that the answer is always no if you don’t ask.” She always asks for waived meeting room rental fees, for example, although that concession is sometimes not granted.
Given the rising costs of audio-visual and Wi-Fi, negotiating for discounts on those charges is also wise. “In today’s market, AV pricing for equipment and Wi-Fi in meeting spaces is on average way too high for our event budgets,” says Kim Sky, CMP, manager, strategic corporate meetings and events with CNA Financial Corporation. “We want the hotel on board and leveraging their power with their onsite AV vendor prior to contract sign-off. If you wait to negotiate AV discounts after you sign the contract, then there is no incentive for the hotel to go to bat for you. It is unfortunate that we have to ask for the hotel’s help on securing discounts on AV upfront, but onsite providers have the upper hand after the hotel contract is signed. We would rather not have to decide between feeding our guests or using an LCD projector.”
While room rates and concessions offered (or not offered) clearly impact the bottom line, contract terms such as attrition, cancellation and force majeure policies are at least equally critical in that they manage financial risk. “I personally feel that the most important aspect of the deal is the hotel contract terms and conditions. These can come back to bite much more than the impact of a few more comp rooms, suite upgrades or free easels,” Wikstrand maintains.
And the terms and conditions are also being influenced by market conditions. “The seller’s market is impacting not only pricing and concessions offered, but contract terms, which is disconcerting,” she adds. “Everyone understands the principle of supply and demand and its impact on pricing and the overall deal. But when it comes to contract terms, fair is fair no matter what marketplace we are in. Contracts expose both parties to a degree of risk; that is unavoidable. But this risk should be shared equally and fairly between both parties. Hotels are less willing to share risk in this seller’s market.”
One risk that many groups contend with is attrition, and fortunately the vast majority of hotels in this market are still agreeing to an attrition clause, typically for 20 percent. However, many hotels are not agreeing to the calculation of attrition that most benefits the group — namely, on a cumulative (not per night) basis, including pre and post non-contracted room nights, and reducing damages by rooms resold (the “resell clause”).
“We’re seeing that some hotels are doing attrition on a nightly basis vs. across the meeting. That can play havoc on a meeting. And some hotels are not including pre and post nights,” Ryan observes. “But there’s always a solution. You meet with the internal client and weigh the risks and rewards of contracting less rooms at the hotel where attrition fees could mount in the thousands of dollars, and possibly considering rooms-only blocks at some surrounding hotels as well.”
Nonetheless, the trend toward the nightly calculation of attrition, which prevents overperformance on one night from compensating for underperformance on another night, “is very troubling,” says Wikstrand. “It results in much higher attrition fees for groups, and I push back on this every time it is presented.”
In addition, she has found some hotels unwilling to calculate F&B attrition penalties based on lost profit instead of lost revenues. She explains the rationale for lost-profit calculation: “Let’s say your group ends up being fewer people. You provide lower guarantees to the hotel. They go out and purchase, prepare and serve the food for the lower numbers. They never had to incur the costs of the food that you never ordered. That is why I feel that food and beverage revenue minimum shortfalls should be charged at 40 percent to represent lost profit. Some hotels push back on this while other brands include it in their standard contracts.”
On the rooms side, she adds, “I am not averse to attrition clauses based on revenue and not just on profit, due to the ancillary revenues that hotels lose out on with an empty room.”
Just as attrition is penalized, overperformance in rooms pickup should arguably be “rewarded” by extending the group rate to the new rooms. “We always request that if the contracted room block is exceeded prior to the cutoff date, the hotel will continue to offer the group rate as long as rooms or group rooms are left to sell in the hotel, at least to a certain percentage,” says Wikstrand. “Revenue managers tend to push back on that, but it is possible to negotiate a fair clause to address this.”
Cancellation fees are increasing in many cases, plausibly another symptom of the seller’s market. The penalty is “up to 100 percent when you get closer (to the meeting dates) and I understand that. But when you’re looking at a year out they tend to be going higher,” Wheaton notes.
While the hotelier may not budge on the percentages of the sliding scale, planners may be successful in negotiating favorable payment plans for the penalty. Along with a rebooking clause, Sky asks hotels “to consider billing us for the cancellation fee on a monthly basis. This is better for our cash flow, and then our credit built up with that hotel can be used toward that rebooking. It also works out for the hotel as they still collect monthly payments for the cancelled program so at the end of the rebooking term, if we did not book another event, the hotel already has all their money.”
The timing of the payment of damages can be a “bone of contention” in Wikstrand’s experience. “We request that any damages be paid after the dates have passed and a resell reconciliation has been conducted by the hotel to identify rooms and space resold,” she explains. “Many hotels want cancellation damages at the time of cancellation. But it seems fair to wait because no goods and services have been rendered, and in most cases, the hotel would not have been paid until the meeting’s conclusion anyway.”
As far as the rebooking clause (which relieves a group from paying damages if it rebooks the meeting within a certain time frame), Wikstrand understands the rationale for some hotels to refuse it; they aren’t simply throwing their weight around in this seller’s market. “If a group cancels their existing dates, that space has essentially ‘rotted on the shelf.’ And though the group might return in the future by a rebooking clause, the hotel has still lost the opportunity to sell the existing space, if the group canceled very close to the dates,” she explains.
The content of this clause must be sensitive to the threats of today’s world — including terrorism and communicable diseases — that will compromise or prevent attendance. “I have now updated our force majeure to include situations as a result of the Zika virus,” says Sky. “We host many programs in the Florida area and are in touch with the local officials on how they are managing this situation, but we do need to include it into our agreements to cover ourselves.”
Of course, only contingencies that actually affect performance on the group’s part should make the force majeure clause take effect, and the contract language must make that clear. “Acts of terrorism are now a standard part of a force majeure clause, but getting much more specific is important; for example, an act of terrorism on the West Coast may not excuse performance of a meeting in Boston,” Wikstrand notes.
For insurance and financial groups, a particularly important clause tends to be the noncompete, which restricts competing companies from booking meetings at the same time and hotel. Wikstrand advises that getting the hotelier to accept this clause may be challenging in some situations. “Those clauses can be tough for hotels, and understandably so. A small 20-room group requiring a noncompete clause might find it difficult to get approval from a hotel who has 480 other rooms to sell. In this strong market, hotels are reluctant to limit their opportunities to sell to other groups,” she says.
The change of ownership clause, which allows the group to cancel penalty-free if the hotel comes under new ownership, also may meet a little resistance. “We have tried the change in ownership clause, and they kind of met us in the middle with that,” Wheaton relates. “We can only get out of (the contract) if there’s a decline in the status of the hotel. So they have to maintain their status (for example, remain a four-star hotel). Indeed, the change of ownership might be better (for the guest experience),” she says.
The high demand in today’s travel industry will encourage many hoteliers to add on fees and surcharges without the reservation they might observe in a buyer’s market. “What I’m finding recently is that there are a lot of hidden fees, so the careful reading of a contract becomes even more important,” says Ryan.
“For example, there have been instances where on the very last page of a menu it will say that if you’re planning an outside event you will be charged a setup fee as noted in the group’s schedule of events, even if there is inclement weather and the hotel does not advise having the event outside. That is so easy to miss, and it could run a couple thousand dollars.”
Locating these “fine print” items can be more difficult than necessary. “I have found (stipulations) that are included in hotel banquet menus that I feel should be in the actual contract,” says Ryan. “Another example: When you’re reviewing a 20-page contract, there will be a small sentence that will direct the reader to a website to review additional terms and conditions. That’s very easy to miss, but those terms are very critical to a meeting. And I think that rather than directing someone to a website, the terms should be an actual attachment.”
“A hotspot with a lot of us is the resort fee,” Wheaton adds, and unfortunately a planner may not be able to negotiate it away in the current climate. But Wheaton has a certain preference that aids her budgeting: “I always say, please don’t put that resort fee in the contract, just put it in the room rate. Because if say I need my room rate to be $250 and they say, we got it for $249 but you have a $30 resort fee, I really didn’t get the rate that I needed.”
Long-term relationships with hotel sales reps are invaluable in a seller’s market, but planners don’t always have the advantage of dealing with familiar individuals who will go to bat for them on contract terms. One may end up dealing with a new rep and the relationship must begin on square one. “Sometimes you bring up the group’s history (with the individual hotel or brand), sometimes you don’t,” says Wheaton. “It depends on that person and how much they want to build a relationship with you. I can spot right off the bat when I meet (a rep) whether I’m going to click with them.”
Rather than finalizing the contract with a rep who is being rather inflexible, a planner might try reaching out to a higher-level individual in the hotel company. “When I reach an impasse in a negotiation with a hotel salesperson, I typically request an ‘audience with the Queen’ to address my concerns,” Wikstrand relates. “I find that once I am able to speak with those empowered to make a decision, and I have the opportunity to present my rationales for what I am requesting, we are almost always able to get to where we need to be.
“It is always preferable to negotiate contract terms with hoteliers who are fully knowledgeable and understanding of the underlying principles of their contracts and are able to provide the logic and reason behind them,” she continues. “One of my pet peeves is when a hotel answers a ‘why do you’ question I have with ‘It is hotel policy.’ ” Be it a seller’s market or buyer’s market, “We need more rationale!” I&FMM