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MKG Group survey

French hotel supply needs to innovate in order to develop

The financial, and now economic, crisis, sparked by the failure of Anglo-Saxon banks, has had a heavy and brutal impact on all hotel consumption, in 2009 and 2010, in all categories, in France.

Over the last 15 years, hotel demand (number of overnight stays) in France has evolved faster than supply (number of rooms on sale), with the exception of two recent periods struck by the crisis: 2009 and the start of 2012. The recovery, since the start of 2010, shows that the fall was only a short-term phenomenon. The revival of demand has been driven by midscale clientele, whose expectations are higher; thus the constant renovation of the “hotel product” is so important. The new fall in demand observed since the start of 2012 is mainly due to the fall in hotel consumption of domestic French customers and their turning away from an aging sector in certain French regions.

Between 1997 and 2001, the evolution of hotel demand has kept a steady rhythm, which sparked an increase in supply with a delay of two to three years. The phenomenon is more linear in the mid-scale hotel sector, and on the other hand more dynamic in the economy sector in response to a never-weak rise in demand.

On the other hand, the first severe shock was noticed in the midscale and particularly upscale sectors following the 9-11 attacks (Graph II). The phenomenon deepened and was prolonged by the fall in international travel provoked by the SRAS crisis and the second Gulf War in 2003. The slowdown of evolution of demand remained for almost five years below that of the increase in supply resulting from projects initiated during the more prosperous years. Since the first signs of recovery around 2006, hotel supply in the midscale and upscale sectors has evolved modestly with a restructuring of supply and smaller establishments, leaving little room for a rise in net capacity.

Much more resistant to international circumstances, the domestic market resisted well during the 2000s and consumption of overnight stays increased very regularly, until the peak in 2008, a year of strong growth, which preceded the subprime mortgage crisis (Graph III). This progression was systematically accompanied by new supply by economic hotel chains. It is this that prevented the two curves for the ensemble of hotel categories (Graph I) from crossing, even if the gap between them significantly narrowed.

The financial, and now economic, crisis, sparked by the failure of Anglo-Saxon banks, has had a heavy and brutal impact on all hotel consumption, in 2009 and 2010, in all categories (Graphs II and III). It was the first time in 12 years that the evolution of demand underwent an important stop. This is reflected in 2009 by occupancy rates inferior to those of the base year 1997 (Graph I). The consequences are double: a stop to development projects on the hand of developers and a drying up of credit available for these. Since around two years ago, the hotel chain supply curve resembles a flat encephalogram.

It is nonetheless clear that the economic cycles have come close in the last 15 years. Consumer reaction is much faster, whilst the delay period for new supply is almost impossible to compress. Mid- and upscale demand is driven by the growth in new foreign clientele and the depreciation of the euro with regards to other major currencies. And yet supply is hardly evolving at all.

The fall in domestic hotel consumption which has plunged since the announcement of new austerity measures could be worrying in the short run. However, the analysis of long-term trends shows that the fall is a temporary phenomenon and that it is possible, from today, to anticipate the revival through the evolution of hotel products proposed by brands.

“The saying ‘demand creates supply’ is always observed in the hotel industry, especially when it comes to renewed supply which keeps track of the evolution of needs,” explains Georges Panayotis, President of MKG Group. “Over a long period we can see how hotel supply in France has always lagged behind the evolution of demand. Little by little a shortage detrimental to the growth of the market has set in. The banking crisis has provoked a stop by making it difficult to finance viable projects and property speculation in urban zones hasn’t helped. These are two barriers that need to be urgently broken in order to immediately launch programs which are going to stimulate a revival of consumption, favouring the emergence of new concepts in all hotel categories. As is the case in the whole industry, the lifecycle of the product subsides if it is not innovated. Beyond the creation of original supply, it is just as urgent to accelerate renovation works and upgrades to meet new expectations in order not to create the feeling that the hotel sector is moving at two different paces.”

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Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.

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