Saturday, November 21, 2009

The race to the bottom

A fellow "Motella" sent me an article (appended to this post) last week that appealed to me. We are not sure where this first appeared, however it was written by Dr Anthony Brien, PhD, MSc Hospitality Mgmt who is Senior Lecturer of Business and Hotel Management in the Department of Business Management, Marketing and Law, Faculty of Commerce at Lincoln University, Christchurch.

So, what is the phrase "The race to the bottom" mean?

Wikipedia states: ...Seeking a more favourable outcome at the expense of others by upsetting an equilibrium to their own favour, only to cause retaliation by the other individuals, resulting in all participants having an overall less favourable outcome.
As an industry we spend a lot of time looking over the fence tut-tutting others and widespread discounting appears to be the hot topic at the moment. 

The race for the bottom has an apeal as a dicussion topic amongst accommodation providers, however I would personally rather focus on "the race for the top" and discuss the importance of offering quality product and service. There are certainly good examples of individual businesses in the accommodation industry that are reaping a very good ROI as they continue to invest in quality.

It could be said that consistancy of "quality" is one of the biggest challanges collectively facing the motel industry at the moment and one of the reasons that hotels have supassed motels as the most popualar accommodation choice. There is a sad irony that those that set off on a discounting pathway to attract occupancy will be unable to reinvest and spiral towards economic oblivian.

We were amused to recieve a wordy industry newsletter from Qualmark NZ Ltd that self-describes itself as "New Zealand tourism's official quality agency." Not once was the word "quality" used in the newsletter, however not suprisingly there was ample space earnestly devoted to environmental mantra as the answer to business salvation.

We can't ignore that many accommodation businesses are being drawn into a cycle of deep-discounting that is confusing the market and restricting reinvestment of existing product. We can appreciate the rhetoric used in Dr Anthony Brien's article, so we have reproduced this below in full:

"The majority of commercial accommodation in New Zealand has recently been participating in, and arguably is still running in, the race to the bottom. The world recession has had a major impact on tourism, and within that, all commercial accmmodation has felt the squeeze – with the result being the down-hill discount race in full swing. While this may be an overarching theme for the industry, it is pleasing to note that in recent weeks some bottoming out or a slower glide path, in rate reduction, but nevertheless, the race appears far from being over and the recovery will take a long time.

As a strategy, discounting (lowering the cost) has its place, but is only one tool in the business strategy tool-box. Some have called for less discounting and more added-value – yes, this is another strategy, but begs the questions: “What value were you adding in the first place that did not attract business”? Do you know what value is and what is more value? And remember, adding-value, when you are already doing it, or more if you are, or not – costs. The underlying theme here is cost. Cost for the purchaser and for the supplier; but cost is only one component of the product/service we are selling. What is your accommodation experience value-proposition? Another, critical component of your selling price strategy.

Someone once said, “Knowing only your product/service cost and not its value as well, will not set you apart from the competition”. Quite true. In the manufacturing economy costs can be driven down with aggressive incorporation of technology, but in the experience-economy, the value proposition is critical as it engages so much human interaction. Yes, the punters want the best deal going, but as an operator you can only go so low with the price (cost) before it’s not worth opening the doors, and/or a significant amount of the whole experience is changed to accommodate the new cost. But are we really telling the punters that the experience will be reduced accordingly – present marketing campaigns suggests not. Frankly, the punter knows that they are getting a damn good deal, but their expectations and demands have not reduced. Playing with price and value is playing with a customers psychological price referencing – this can be a dangerous game.

More questions. While you will know the cost of your product/service, do you know the value – in dollar terms, of your product/service – the experience? When did you last check what the value was? Who did you ask? When did it last change? Why did it change – if it changed? If you can’t answer these questions you are not in the experience economy you are just selling a product and competition will be stiff.

Over 65% of New Zealand hotel accommodation is managed by offshore groups who appear to be using discounting to attract a larger share of a shrinking market. Local groups are also discounting, but will probably have a reduced survival rate against such major competition. At present there are not enough customers for everyone, so let’s accept that and drive for value and the price that this really needs to be to deliver it. This is not a story about collaborating to put prices up, it’s a commercial fact that present practice is unsustainable – for many businesses and for New Zealand. New Zealand is promoted internationally as a 100% pure destination with campaigns of late focusing on some form of experience. It is not promoted as a discount destination but in effect, (with a few exceptions), that is what we have become in terms of price, and eventually so will the experience. The laws of economics prove this point.

At the recent Tourism Leaders Forum Tim Cossar ended one of his presentations with the quote “United we stand – divided we fall”. Again, quite true. It will take courage and strong leadership to drive New Zealand out of its present mindset of a cost-driven approach. As a manager, what do you want your legacy to be? Let’s withdraw from the race to the bottom – there is no real winner in this race, and join (or start) the united race to the top, a race which is value-proposition driven, one where we genuinely, independently compete to enhance the overall accommodation experience and New Zealand’s economy."

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