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Starwood Chain Offers Huge Room Rate Cuts; Will Other Hotels Follow?

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A Gehry-designed hotel, part of Starwood’s Luxury CollectionThere has rarely been a better time to be a hotel guest, nor a worse time to be a hotel owner.

News that Starwood Hotels and Resorts – owner of Sheraton, W, Westin and other brands – will slash room rates at two-thirds of its properties by 50 percent through October is a boon to travelers, but makes other industry players nervous.

Even though hotel occupancy rates have been dropping at alarming rates over the past year, to a near record low of 55.1 percent in May, most hoteliers feel that the way to woo back customers is by offering perks and value-added services rather than reduced room rates.

They point to the slump the industry experienced after the terror attacks of September 11, 2001, when it took years for rates to bounce back even after sharp discounting revived business.

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Starwood logoIn the current economic recession most hotels are looking to maintain so-called “price integrity,” even if it means more rooms going empty. They say that this strategy may hurt revenues in the short run, but protects the bottom line in the long run.

One critic derided Starwood’s move as “slash-and-burn” pricing that could cause lasting damage to the brand and the industry. Another said it would create a “rush to bottom feeding,” and still another warned of a “death spiral of discounting.”

Starwood logoStarwood countered that the weeklong sale, which ends today, is simply a temporary “stimulus” program to boost its business. They added that the promotion, which offers 50 percent off regular rack rates on rooms booked through October 12, is being offered at a limited numbered of properties and is similar to other promotions they have run during the last four years.

The debate has revealed just how much the hotel industry is suffering during this economic slump. Though some local markets such as Buffalo and Boston are not being hit quite as hard as larger cities, major resort areas like Hawaii, Orlando and Las Vegas are seeing their worst occupancy rates in decades.

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Luxury rooms are seeing steeper declines than other market segments, with a 16 percent occupancy decline in June of this year compared to an 8.7 percent overall industry drop. Along with occupancy drops come revenue declines. Nationally, hotel revenue per room is expected to plunge about 18 percent compared to last year.

Though the figures are dire, many analysts predict that occupancy rates have bottomed out and will slowly start heading back up over the next four years. Revenue is expected to make a similar rebound, with 2010 figures predicted to beat 2009 levels by at least 15 percentage points.

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In the meantime, whether or not Starwood’s price cuts will spark a dreaded price war remains to be seen. Other chains such as Marriott and Fairmont have recently offered similar short-term promotions, but so far there has not been the mass discounting that many have feared.

By Karen Elowitt for PeterGreenberg.com.

Related links: USA Today, HospitalityNet, Boston Globe, Starwood Promos

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