Lessons Learned From a Fallen Economy

(EDITOR’S NOTE: This is the first installment in a three-part series looking at the year that was 2009 and what’s ahead in 2010. Part II Tuesday: The Changing Rules of 2009. Part III Wednesday: The New Normal in 2010.)

When the economy kicked and gasped what would become its last breaths of vitality in the fourth quarter of 2008, some in the hospitality sector called for a “reset,” while others continued business as usual and others still charged headlong into what in retrospect can only be called uncharted waters. No matter the response, all came to the inevitable understanding that what “was” would no longer be.

As in any death, there comes a period of grief and mourning, resolve and lessons learned along the way. In many ways the lodging and hospitality sector’s process of adjusting to new economic norms parallels the stages of grief classified by Swiss psychiatrist Elisabeth Kübler-Ross. Introduced in 1969, what is known as the five stages of grief explains the means by which individuals (and by extension, their companies) deal with catastrophic events—events like the economic tsunami the hotel industry has faced over the past year and continues to face today:

Denial: The ‘Shock & Awe’ of the economic meltdown in the second half of 2008 was quickly met by many with the first stage of grief, the rejection of reality. Many hotel owners and managers, blocking the distasteful truth and not having properly read the warning signs, said, “I feel pretty good, I’m just a little behind last year’s results and I’ll catch up next month, next quarter, next half. Those ‘other’ properties may have problems, but my hotel will be all right because this is not happening to me!” Others may have seen the upcoming problems, but not to the full extent of the severity.

Anger: In the second stage, which followed denial quite quickly for some and took much longer for others, anger takes over, especially in the minds of property owners who directed their antagonism at the manager (or management company). In some instances, this is when lawsuits start. The attorneys are brought in by the condo-hotel unit owner, who is livid at not only the lack of a “return” for his/her investment, but also furious that he/she is being asked to pony up significant additional funds to cover the ballooning mortgage payment. As this exchange is taking its natural course, credit managers and mortgage bankers wait patiently on the sidelines (or perched predatorily, depending on one’s vantage point), ready to swoop on opportunities (e.g., defaults, bankruptcies and properties listed at fire-sale rates) that rise with the surging economic tide.

Bargaining: This is the part of the process where the hotel owner realizes the necessity to bargain with the lender, limited partners, employees or other stakeholders in order to stave off complete collapse. Some will bargain with themselves, cheering the drop off in year-over-year declines at the close of ’09, but failing to recognize that down is down and that the best metrics are set against pre-recessionary numbers that were last seen on a milk carton some time in 2007.

Depression: At this stage nothing seems to work properly and you can’t see a practical solution. You seem to have no control over anything and you begin to understand the true extent of the problem. You feel overwhelmed and just want to be left alone in your misery. And when you think things can’t get any worse, someone at the soon-to-be-bailed-out AIG plans a reward trip that triggers a national-event-as-cautionary-tale and sinks an entire zip code (89109) and sector (business travel) in a single defining blow.

Acceptance: In this instance, acceptance doesn’t mean that you accept the failure of your hotel or company is inevitable, it is the stage at which you accept the existentialist view that “what is, is.” The situation exists and you aren’t going to change the world economy on your own, all you can do is affect those assets over which you do have control. Acceptance is not the end of the process, not unless you’re willing to just sit back and watch your hotel fade into the sunset. Acceptance is the beginning point for the behavior modifications necessary to solving the problem and clawing your way back to a profitable position. And sometimes those modifications mean putting new development on hold and for others it means walking away with whatever fragments of dignity remain.

Despite the devastating reality of an economy gone wild, the authors through a series of interviews did find a cadre of prominent industry players that had in common the expertise, foresight, and in some cases, the temerity to bypass the grief and enter the turnaround processes at the acceptance stage. These trailblazing experts have agreed to examine the effects on the previously assumed “rules of the game,” courtesy of the “economic shift,” and to define which of the changes are lasting and which will go by the wayside as the economy improves. They will also examine the hard lessons that have been learned and measures they are taking to make their operations more profitable and position their companies to take advantage of the expected improvement as it occurs. The experts in our discussion represent a geographically-dispersed swath of the hospitality industry fabric and collectively bring decades of hands-on experience:

• Patrick Lupsha, chief operating officer of Memphis-headquartered Davidson Hotel Company;
• Eric Pearson, chief marketing officer for Atlanta’s InterContinental Hotels Group;
• Jeff McIntyre, partner at Gemstone Resorts & Hotels of Park City, UT;
• Bruce Stemerman, managing director, strategic advisory & asset manager of Chicago-based Jones Lang LaSalle’s District of Columbia office;
• Rob Winchester and Mike Heaton, president and vice president of operations, respectively, at Connecticut-based Waterford Group; and
• Deno Yiankes, president and CEO, investments & development, White Lodging Services of Merrillville, IN.

One of the principal lessons learned is that industry experts differ both in their reactions to the economy and in their programs to counter the downturn. Further, there is a general consensus that what works for one company doesn’t work for all; a lot depends on the company’s sales proposition, market segment, focus and goals regarding perceptions of survivability, opportunities, future direction and other market factors. However, all seem to agree on the necessity to bet on the trifecta of preserving guest satisfaction (delivering on the brand promise), maintaining profitability and preserving market share as key indicators for success, even in the downturn.

Coming Tuesday
The Changing Rules: Those having ridden the economic waves in the past understand the cyclical nature of the ebbs and flows, and braced for worst-case scenarios. “You get smarter every time you go through a downturn,” says Jeff McIntyre, partner at Gemstone Resorts & Hotels. Whether the discussion centers on “Black Monday,” the global stock market crash of Oct.19, 1987, the “dot.com shakeout” of March 1, 2000, the events of Sept. 11, 2001, or the second half of 2008, all of our respondents agreed the impact of this cycle was far more profound and widespread than in recent recollection.

Coming Wednesday
The New Normal: There’s no clear outlook for 2010 or means to accurately predict what the future will look like based on the present state of affairs. Many of the changes forced on the industry by the new economic realities will likely go the way of the overnight shoeshine when the economy improves. However, some changes are expected to become part of the industry’s new “norm.” Newly minted ‘best practices’ will go a long way in smoothing out the year-long learning curve, bringing with it dynamic improvements.

Scott Brush is president of the consulting firm of Brush & Company in Miami and has almost 35 years experience in the hospitality industry. Brush has a degree in hotel management from Cornell University and a Master’s in business from Durham University in England. He is a member of both the International Society of Hospitality Consultants (ISHC) and Cayuga Hospitality Advisors, where he is a regional manager and member of both the Distressed Properties and Asset Management Groups. Email Scott at scottbrush@brush-and-company.com.

Regina Lewis brings 20 years of expertise in public relations to her role as principal of Celsius, a business-to-business communications consultancy based in West Palm Beach, FL. An award winning writer, Lewis is accredited in public relations by the Public Relations Society of America, a founding member of the Chief Marketing Roundtable, and currently serves on the board of NBPRS, a national public relations organization and advises hospitality industry consultants. Email Regina at rlewis@celsiusholdings.com.

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