Trouble in the hotel industry

By Terrie Lloyd

Rumors of Tokyo’s domestic and foreign hotels having record low occupancy rates have been doing the rounds for several months now. Of course, rumors are inclined to exaggerate the real situation, and while the bars and restaurants of popular locations do seem to be a bit easier to get into on Friday nights, no one in the industry is coming right out and saying things are grim. Nonetheless, the rumors have had occupancy rates at some leading Japanese and foreign hotels, especially the pricier ones, at 50% or less—which I had thought was a bit unlikely.

But it looks like the rumors could be correct.

Recently, the Nikkei released data that it says it collected from 22 major hotels in Tokyo. That data says that in June, the average occupancy rate for the surveyed group was a low 63.5%, the 31st straight month of decline. While the break-even for hotel occupancy in the U.S. is around 65%, the cost of land and employee numbers/costs mean that the break-even point for hotels in Tokyo is probably more likely to be around 70%—so there appear to be a number of operators in town who are losing their shirts right now. Maybe the first closures aren’t far behind?

It looks like most of the blame for the current situation is the dramatic drop-off in the number of foreign tourists coming to Japan. South Korean tourist numbers, the largest sub-group of Japan’s 8.3 million (2007) foreign visitors last year, are down a shocking 49%, which puts a massive dent not only in hotel stays, but in fact in any tourist-related spending.

I think the South Koreans will probably stay away for at least the rest of this year, until the won starts to regain some of the 33% in value it has lost against the Japanese yen in the last 12 months. Further, since the U.S. dollar and other currencies are also reflecting the turmoil in their respective economies, this leaves the Europeans, the Chinese, and domestic Japanese customers to fill the gap—not an easy task, given the cut-back in consumer spending in this country.

Stalwart domestic hotel operator Imperial Hotel was particularly badly hit in May, and the Nikkei reckons its occupancy rate was just 59%, down from about 78% a year earlier. As a result, the hotel is having to fight back by cutting prices. It is doing this in ways that don’t impart a feeling of desperation but none-the-less incentivize loyal customer spending. Among its efforts are family plans with 30%-40% discounts, stepping up its elite Imperial Club Grace business, doing CRM campaigns to its 70,000 other club members, and sprucing up its wedding services business.

The Imperial apparently does more than 1,000 wedding ceremonies a year at its Tokyo and Osaka facilities, and says it plans to increase both the volume and the average spend (upwards of the current 5 million yen per wedding). It has been doing about 1,000 weddings annually for many years and as a result has an impressive contact database.

In 2006 the Imperial decided to capitalize on the data by creating its elite Imperial Club Grace, which is only open to couples who previously were married at the Imperial. The hotel contacted those people marrying within the previous 15 years and surprisingly managed to get 20,000 to sign up as members. The Club Grace members get special promotional deals for anniversaries and childbirths, and according to the Nikkei, this club alone generated an increase of 350 million yen in revenues over the year before—obviously a hopeful sign, and a portent of more similar marketing to come. How about a club for foreign patrons who sign business contracts in an Imperial bar (sort of like getting married!) and who are in need of healthy discounts, then?

The recent success by the Imperial in appealing directly to its customer base, and “working” those customers with promotions and CRM marketing is spawning action by other hospitality companies that are eager to improve their numbers. Looking at the all-important foreign marketing efforts, the Hoshino Resort which operates a hotel in Karuizawa and soon another in Kyoto (late this year), joined the Elite International Hotel Club to become a member of the Small Luxury Hotels of the World network. Seems like an obvious move, but as can be seen from the Rakuten numbers below, less than 15% of Japan’s hospitality operators are apparently ready/able to receive foreign guests.

On to Rakuten Travel, then, the nation’s largest online travel agency. Rakuten currently represents about 23,000 different hotel, ryokan, inn, pension, and other operators. Rakuten says that it has recently tied up with 22 online and physical travel agencies in Hong Kong, Taiwan and South Korea, to sell stays at almost 4,000 of its partner hotels. Rakuten says that next it will expand its marketing to China directly later this year—targeting wealthy travelers who no longer need special visas to visit Japan.

Of course, another valid approach is to just sell those puppies (the hotels), while they are still worth the land they stand on. This is what Morgan Stanley appears to be doing, seeing as it is reportedly selling its Shin-Kobe located Crowne Plaza hotel property to the Thai Charoen Corporation Group real estate fund. No word on what MS will get for the property, although it’s on record as having paid 12.5 billion yen for it 5 years ago.

Oh, and as an aside, about the only hotel sector which is NOT losing money right now is love hotels. Apparently some players have an occupancy rate of 250%—which, given the low cost of operations, this represents turn-over of about 2.5 couples a day… Maybe the big city hotels need to figure out how to adopt the business model?

Terrie Lloyd writes a weekly newsletter for entrepreneurs and business people about business and political opportunities in Japan.

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Latest 15 of 29 Total Comments Show All

Sarge at 10:18 PM JST - 8th August

"Tokyo's ... hotels... having record low occupancy rates"

This is most definitely not the fault of Bill Murray or Scarlett Johanssen.
biglittleman at 08:18 AM JST - 9th August

Klein2,

I also know Hotels that offer human companionship. But it usually for select clientele and on the down-low. My idea involved them openly advertising it. Like any other service or course being sold in the Japanese sex industry or .
Klein2 at 08:20 AM JST - 9th August

Sounds like a business model. Sky's the limit. Why not be the first?
biglittleman at 09:22 AM JST - 9th August

Because first I would need a Hotel. You have one laying a round I could borrow.
Simon_Foston at 09:49 AM JST - 9th August

One big problem is that there are just SO many hotels, especially business hotels. I just fail to see how they could all be turning decent profits, when it's easy to find at least a dozen in a 1km radius in city centres, not to mention construction sites where they're busy building even more of the damn things.
mrhog123 at 04:54 PM JST - 9th August

Stay at one and two star hotels. Never been disappointed.
rajakumar at 05:16 PM JST - 9th August

Economy is down,hotel industry need to change prices to adjust accordingly to economic conditions and make them more affordable.
Himajin at 05:31 PM JST - 9th August

This is what Morgan Stanley appears to be doing, seeing as it is reportedly selling its Shin-Kobe located Crowne Plaza hotel property

Again? It changed from the Shin-Oriental (run by Daiei) just a couple of years ago it seems. What made Morgan Stanley buy it? They had been really trying to drum up business, a Crowne Plaza rep has been to our neighborhood several times a year with flyers advertising dinner shows and events, and our neighborhood signed up for some membership where we get 10-15% of meals at most of the restaurants. They certainly seemed to be trying to turn it around after the last couple years of Daiei's stewardship before it became Crowne Plaza.

You know, I wonder how much these things were thought out before they were built in Kobe...we had Center Gai and Motomachi for shopping (although admittedly some of the shops in Motomachi are really old-fashioned but that's part of their charm) but then they built Harborland and the Shin-Oriental shopping complex, Opa. Then HAT Kobe.

How much of your lifestyle can be based on shopping? OPA is deserted after 5pm, a lot of shops left last year. The only place with customers the last time I walked through was Wendy's. Harborland is dead on the weekdays, and seems to have become a tourist destination...very few people from Kobe go there.

Our son's university shaonkai was held at the Imperial, what a lovely hotel, we decided to stay there because his graduation ceremony was also close by. We enjoyed it, I hope they weather the storm.
pimon at 10:35 PM JST - 9th August

Of course, another valid approach is to just sell those puppies (the hotels)

Terrie Lloyd, did you really need to use the phrase "sell those puppies"? What is this... 1995, and you're writing a newsletter for your sorority?
pimon at 10:39 PM JST - 9th August

Stay at one and two star hotels. Never been disappointed.

Couldn't agree more. The first couple of times I came to Tokyo, I stayed at some of the nicer places (on expense, of course). But you have to put up with all of the pretentious people in those places (the other guests I mean).
sfjp330 at 09:53 AM JST - 10th August

The hotel occupancy rate is direct result of bad economy. Tourist and business related people are just not spending. This will continue until economy picks up in 1-2 years. They are going through difficult business cycle. Hotels were doing fine last year, and two, three years ago, and with the same service as today. Also, currency exchange around 95 yen per dollar is affecting the travelers.
Farmboy at 10:19 AM JST - 10th August

Occupancy has been affected by the economy, the new flu, and the tendency of businesses to use online conferencing in cases that allow it. The economy will eventually recover, I think, and until then, maybe the hotel chains will have a "love hotel wing" to boost income.
realist at 09:40 AM JST - 11th August

Yokoso Japan! Not.
rokudenashi at 01:15 PM JST - 13th August

A very questionable piece based on a lot of unresearched assumptions.

"While the break-even for hotel occupancy in the U.S. is around 65%, the cost of land and employee numbers/costs mean that the break-even point for hotels in Tokyo is probably more likely to be around 70%—so there appear to be a number of operators in town who are losing their shirts right now. Maybe the first closures aren’t far behind?"

A very big difference in US and Japanese hotel revenue is the high percentage the restaurant/banquet/wedding revenue plays in japan, often higher than the rooms revenue. Often japanese hotels can stay in the black with occupancy rates at or below 50 percent.
Klein2 at 12:14 AM JST - 18th August

Rokudenashi... T. Lloyd's assumptions seem reasonable. You preface your last sentence with OFTEN, which makes the statement true, but it is also misleading. T. Lloyd is on target.

If IN THE BLACK means operating profit, ok, maybe, but T Lloyd is obviously including land and interest payments, which must be huge. What I have seen around Japan appears to be cost cutting just to survive. Mostly labor. That might get them to positive cash flow even with lower occupancy, but sooner or later, something has to give because the bank needs to get paid. T. Lloyd made the observation that it was bad before (I have seen graphs showing rampant overbuilding from the early 90s), and the recession and all the rest have just made it worse.

You also note that restaurant/banquet/wedding revs are a big part of total revenues in Japan. Who is to say that those are not getting hit worse than the accomodations part of the business? Restaurants are failing. People are cutting way back on weddings.

So yes. J Hotels CAN stay in the black with low occupancy, but that is not really saying very much. By and large, they don't stay in the black after interest and taxes, and loan service is probably a big part of it.

And BigLittleMan I hope you get a chance to try your idea somewhere. If you looked around a little, I bet you could work something out with a desperate hotel owner. I have seen many business plans stranger than yours.