Fight the Economic Storm with Marketing and Sales Strategies: Part 1

If you listen to executives from consumer-related companies in the U.S., they will tell a story of terrible hardship for consumers, of sales that are stagnant or worse, of costs rising faster than they can increase prices, and of consumers retrenching on most types of discretionary spending. And yet the overall economic numbers will suggest a modest downturn in economic activity but not necessarily a true, full-blown recession.

Why the difference? The answer is exports. The strength of US exports, which is related to the weakness of the dollar, has partially offset the considerable weakness of the consumer sector. On the other hand, if the credit crunch worsens substantially, the entire economy may feel the hardship now felt by consumer related industries. Time will tell.

For hospitality companies, of course, the storm that has hit U.S. consumers is what matters. For the foreseeable future, consumer spending will be constrained by consumer income — a novel concept. Spending will likely trail income as consumers pay down debts and attempt to accumulate liquid savings.

Moreover, many aspects of this storm are likely to linger even after the economy recovers from its current doldrums. These include elevated food and fuel prices, troubled credit market conditions, and excessive consumer debt levels. That means that hospitality companies not only have to shield themselves from an economic downturn, they also must undertake measures to adjust to a changed business environment.

Current crunches and their impact
The combination of a housing debacle, credit crunch, and high commodity prices has rendered an economy at or near recession. Employment is weak, real wages are stagnant, and policymakers are caught between a rock and a hard place. On the one hand the Federal Reserve has cut interest rates in order to offset an economic downturn and to stimulate lending in an otherwise weak credit market. On the other hand, the Fed will be concerned that high commodity prices, a weak dollar, and expansive money supply growth could fuel a new round of ruinous inflation. Consequently, it is reasonable to expect that, once the economy starts to recover, the Fed will keep interest rates relatively high in order to quell inflation. This could mean a weak recovery.

As for the weak dollar, although it is potentially inflationary, it does have a few positive implications for the US economy. First, it has stimulated strong growth of manufactured exports. Second, it makes the US an inexpensive place for foreign tourists. Third, it makes staying home an attractive option for Americans otherwise interested in traveling abroad.

The US economy's weakness has begun to weigh on the hospitality industry, despite increased tourist activity from overseas. Overall, the effect of high food and fuel prices has been to push consumers toward discount retailers, toward eating at home rather than in restaurants, toward traveling shorter distances, and toward less spending on non-food and non-fuel products and services. Importantly, the high cost of transportation is having a negative effect on consumer spending on hospitality.

Following strong revPAR growth in 2007 of 5.7%, revenue per available room in the US market has edged up only 1.0% during the first eight months of 2008, according to Smith Travel Research. Further, occupancy rates were down 2.6% from the first eight months of 2007. Preliminary results through early fall suggested that demand was continuing to slow. Despite weakening demand, the supply of new hotels rooms is expected to continue to increase, which should further pressure profits into 2009.

Prepare for a different landscape post-recovery
Recessions come and go. Downturns hurt hospitality companies and recoveries help. Yet when the economy recovers from its current doldrums, things could be a bit different. This means that companies might want to plan not for a strong consumer recovery, but for a modest recovery and a new business environment.

First, there is a good chance that oil prices will again elevate and remain high, if not necessarily as elevated as they were during the summer of 2008. High priced oil, if perceived to be permanent, will alter consumer behavior. They will purchase more fuel-efficient cars, drive shorter distances, and spend less on non-energy products and services. Their vacation behavior could change significantly as well. As for business travel, it too could be stymied by high energy costs, especially as the technology of video conferencing improves.

Second, consumers will not derive wealth increases from their homes anytime soon. The housing market will take far longer to recover than the overall economy. In addition, credit conditions will remain weak for some time to come. Only when there is relative transparency about the size and location of potential losses, and only when the banks have been substantially re-capitalized, will risk spreads decline significantly. Thus, conditions will not be ideal for merger and acquisition activity, especially those deals funded by bank loans. Past experience suggests that full recovery of financial markets could actually take several years.

Third, when the economic recovery comes it may be far more export focused than in the past. Consumer spending will likely grow slowly in relation to the economy. The weakness of the consumer will be related to the housing market, excessive debt, and commodity price inflation. Should the dollar remain weak, this will mean increased inflationary pressures at home and higher costs for Americans traveling abroad.

Last, the overall economic recovery will likely be weak for the first two years as the Fed attempts to rein in inflationary expectations. The Fed is concerned lest a 1970s-style situation unfolds.

The bottom line, then, is that even after the general economy recovers, the business environment will likely contain challenges for hospitality companies that were not present at mid-decade. Below is a discussion of some of the issues facing the industry and several marketing and sales actions — so important to the success of most hospitality companies — that should be considered as a response to these difficult times. While there are other options, including changes in staffing, pricing and property maintenance, that companies have at their disposal to help them survive, marketing and sales offer perhaps the best opportunity to improve both the expense and revenue sides of the ledger.

Re-evaluate Marketing and Sales Functions

Retool and reconnect with the customer
Hospitality companies currently are facing the challenges of overall cost cutting while finding ways to increase demand. Global inflation, a sharp pullback in lending, the weakened US dollar, and higher gas prices all contribute to the current non-typical cycle.

Below is a review of ways marketing and sales functions can not only reduce the financial burdens of hospitality companies but can also lead to stronger customer relationships in the long run. The four key actions that may help hospitality companies navigate through tough times are:

1. Optimizing performance management capabilities
2. Improving spend effectiveness across sales and marketing channels
3. Re-evaluating customer segments and touch-points
4. Focusing loyalty programs on value

1. Optimizing performance management capabilities

Marketing can be one of the most difficult areas of analysis and decision-making for hospitality companies. Why? Because marketing requires mastery of both "soft" and "hard" skills. Although many marketing problems lend themselves well to quantitative analysis, hospitality companies have not traditionally incorporated mathematical constructs to monitor progress toward achieving revenue growth. However, hard times call for both accountability and clear metrics.

One challenge for hospitality companies is to justify their marketing, advertising, promotion and sales budgets for every planning cycle. In other words, they should establish controls and metrics to track progress. While some best-in-class hospitality providers have devised metrics and measurement techniques to help monitor marketing and sales performance, the industry in general has not been as systematic as other industries in the implementation of control metrics. Some key opportunities that can help an organization optimize its performance management capabilities include:

• Develop a budget process driven from top-down targets. For hospitality companies, marketing and sales functions are often excluded from the corporate strategic planning process. While many providers receive goals from the CEO, these goals often do not translate into the development of marketing and sales budgets. This can create a widening gap between marketing and sales budget allocation decisions and targeted growth expectations. Linking marketing and sales budgets to the top-down corporate strategy goals can help narrow this gap, building toward one cohesive overall business objective.
• Build zero-based budgets. People are creatures of habit. In a down market, old habits can be the road block that prevents innovative thinking. Budgets that worked in good times almost never translate into optimal budgets in down times. A zero-based budget process can be effective because it requires securing budget approval annually. This process can help eliminate the notion of entitlement when spending the company's dollars. Marketing and sales organizations should consider using the zero-based budget process and re-prioritizing the marketing and sales spend portfolio annually.
• Measure the results. It used to be said that 50% of the marketing spend was ineffective. However, recent thinking suggests that less than 30% of the marketing spend is effective, in part because of the proliferation of options, including multi-channel marketing, digital medial channels, internet marketing programs, and consumer collaborations. Internet marketing is very special because it often is measurable — something difficult to achieve with the media advertising of the past. Internet marketing can enable hospitality companies to identify potential opportunities, adjust their business activities, and better track ROI against the marketing dollars spent.

Fight the Economic Storm with Marketing and Sales Strategies: Part 2

Fight the Economic Storm with Marketing and Sales Strategies: Part 3

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