This blog addresses questions that confront every vacation rental manager at some point:
1. “How can I compete with hotels, cruise lines and other lodging segments?”
2. “How can I convince community leaders to keep the competitive playing field level?”
Part 1 answers the first question. Part 2 discusses how managers should react to other lodging segments and lists reasons why community leaders should promote a level playing field.
Why Would a Rental Manager Want to Compete with Other Lodging Segments?
The obvious answer: renters of vacation homes also patronize hotels, motels, cruise ships, camp grounds, recreational vehicle rentals, houseboat rentals and B&Bs.
Each lodging segment has unique advantages and core customer groups. But many travelers patronize two or more lodging types. Customer pools for each segment can overlap.
When travel declines, cruise lines and hotels unleash expensive campaigns that could divert travelers from vacation rentals. The vacation rental industry is historically fragmented and has only recently been postured to defend itself with effective national advertising campaigns.
Renters Have Been Inundated With Offers for Alternative Vacation Opportunities
• Cruise packages that include lodging, transportation, meals and entertainment;
• Heavily discounted rates by resorts and four-star hotels offering shops, spas and food;
• Central reservation systems that discount lodging to lure travelers to resorts;
• The dominance of hotels on online travel agency sites:
Hotels have aggressively discounted in response to several years of declining roper room revenues.
Should Managers Defend Against Competitive Assaults By Other Lodging Segments?
This question should be addressed on four levels:
1. Are vacation rentals’ role in the lodging ecosystem threatened over the long-term?
2. Do managers have any ability to counter low-price promotions by other segments?
3. Should managers respond to promotional initiatives by other lodging segments?
4. Do communities have reasons to keep the competitive playing field level?
Vacation Rental Homes Compete Well With Other Lodging Segments in Good Times
Hotels are expensive capital assets that require a return on investment from operations and thus high occupancy rates in the 60 percent range. So developers never intentionally develop enough hotel rooms to accommodate peak season surges (just as airlines wouldn’t intentionally buy enough planes to handle the busiest traffic days if those planes would have to fly half-empty other times).
• By contrast, vacation rental homes can be financially viable with low occupancy rates in the 35 percent range and can serve as the safety nets for local economies that capture dollars spent by visitors whose numbers exceed the bedroom capacity of hotels.
• Investors who own the capital assets in vacation rentals (the homeowners who own your rental inventory) don’t expect to make money from lodging operations. They expect profit when they sell appreciated real estate and negative cash flow in the interim.
• This unique and advantageous investor profile for vacation rentals means that:
o Managers and homeowners may price rental homes below cost!
o Vacation rentals should thrive with lower occupancy rates!
o Vacation rentals should exist and thrive as long as property values at vacation destinations are expected to appreciate over the long term.
Vacation Rental Managers Make it a Point to be Structurally Equipped to Ride Out Market Downturns
Generally, when the demand for hotel rooms pulls occupancy below 60 percent for the industry as a whole, many hotels become nervous and discount room rates to any level that contributes to offset hotels’ large fixed expenses. This is the time when they discount most and/or encourage community restrictions on vacation rentals.
But vacation rentals are well positioned to survive price competition, even if hotels eat first:
• Homeowners, not managers, shoulder the burden when demand dips (subsidizing mortgage and expenses), whereas managers have few fixed expenses. Managers’ largest cost is labor, a variable expense that falls almost in lockstep with bookings and arrivals.
o When rentals dry up, vacation rental managers can lay off staff and hibernate.
o Homeowners survive dips in demand by (a) discounting rents to maximize contribution to expenses; (b) covering declining revenue out-of-pocket; or (c) selling the home to a buyer who can afford it at prevailing annual rents.
• Apart from value, vacation rental homes offer:
o Greater space for families or friends who vacation together;
o Kitchens that extend vacations by lowering food costs;
o Options for every pocketbook, from small or older homes in great locations to luxury homes with home theaters and indoor pools that are destinations in their own right.
• This unique resilience of vacation rentals to market downturns means that, barring another depression, vacation rentals should exist and thrive over the long-term regardless of the level of discounting by competing lodging segments.
Next Blog: Part 2:
• What Community Leaders Should Understand about the Unique and Critical Role Played by Vacation Rentals in Local Economies; and why they Should Promote a Level Playing Field
What defensive actions managers should take to defend against hotels and cruise lines