Arkansas hoteliers scrap for travelers.

A CONTRACTING ECONOMY, PLAGUED BY skittish consumers, changes the rules of game, especially for the hospitality industry, which depends largely on what has become dwindling discretionary spending.

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People are finding it tougher to justify vacations, particularly in an insecure job market, and Arkansas hotels have been forced to adapt their tactics as they battle for every guest.

Gregg Herning, general manager of The Peabody Little Rock, said the battered confidence of companies and consumers has erected "a psychological barrier" to travel that is hammering the hospitality industry.

Although tourism dollars spent in Arkansas were up 3.8 percent in 2008 to about $5.6 billion, industry experts say things are slowing down.

"All of us hoteliers are really facing unprecedented times," Herning said.

Michael Jobst, general manager of the Doubletree in Bentonville, which opened in February 2008, said, "We're seeing a bit of a slowdown, I think just like everywhere else."

"And of course with all the hotels in this general area of the state, everybody's scrapping to get as many rooms as they can."

The recession has affected all three of the usual customer segments of hotels: business travelers, leisure travelers and conventions.

"We've definitely seen a slowdown in our business traveler, which is generally the largest piece of our business up here," Jobst said.

Businesses "are cutting back, and they're cutting back on their travel and expenses," he added.

Doubletree sustained a decline in the number business travelers of between 15 and 20 percent, Jobst said.

Embassy Suites Little Rock is also hosting fewer business travelers, General Manager Larry Farrar said.

Herning said a couple of months ago that the number of business and leisure travelers was beginning to dwindle. Now, Herning said, convention business is subsiding as well.

As businesses continue to pare expenses, some conventions have been canceled and the turnout for those still being held is less than in previous years. Herning said The Peabody is still hosting nearly the same number of conventions, but fewer people are attending, especially conventions for associations.

In addition, negative publicity surrounding corporate bailouts may have led to a drop in convention business.

"The last few months have been pretty hard on the industry, particularly with all the scandals about some of the excess on some of these corporate meetings," Joe David Rice, tourism director of the Arkansas Department of Parks & Tourism, said. "A lot of key convention cities are suffering."

Rice and Herning agreed that Little Rock has avoided most of that fallout.

"There almost seems to be a vendetta against the meeting and convention business right now," Rice said. "And it's pretty unfortunate. Because of abuses of a handful of the fat cats who were clearly taking advantage of the situation, people who normally would be going to regular sales meetings or incentive meetings have been penalized."

Little Rock's affordability and general lack of glitz have spared it from the convention backlash, Herning said.

"Little Rock is not one of those destinations where they would be scrutinized or questioned. We've all heard of Las Vegas. A personal situation we're very tuned into is Orlando, because we have a very big Peabody hotel there. And we have noticed [the effect of such scrutiny] there for sure. That destination is suffering, including our hotel because of that ... fear that they may be scrutinized," Herning said.

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He added that revenue at the Peabody locations in Las Vegas and Orlando has plunged by nearly 30 percent--far greater than the Peabody Little Rock's decline of 10.3 percent.

The Rankings

Despite its downturn, the Peabody, the perennial champion of Arkansas hotels, again topped the list of highest-grossing hotels in Arkansas with $19.3 million in revenue for 2008.

(The Little Rock Convention & Visitors Bureau doesn't separate lodging tax collections from food tax collections, which artificially boosts some of the Little Rock hotels on the list at the expense of hotels in cities that don't levy a food tax, such as Rogers, Springdale and El Dorado.)

The starting five on this year's list are about the same as last year, except that the Embassy Suites in Hot Springs displaced The Doubletree in Little Rock at No. 4 in the state.

The Crowne Plaza in Little Rock boasted revenue of about $6.6 million, jumping from No. 19 on last year's list to eighth place this year. The hotel completed a $12 million renovation in December 2007.

And after being open for a full calendar year since its $24 million restoration, the 135-year-old Capital Hotel has climbed to ninth place on the list with $5.5 million in revenue.

Recessionary Measures

So what are hotels doing to galvanize timid consumers? And, more importantly, what should they avoid?

Several general managers of Arkansas hotels mentioned discounting as part of their strategy. However, discounting can be a precarious tactic that may result in more business but not necessarily more profit.

"It sometimes gives you an immediate fix, but it can become intoxicating," Herning said. "And it can become a detriment because even though you may be having more folks in your hotel, they're at a lower rate and your fixed costs do not go down accordingly with your rate."

Discounting likely won't even get the job done, some say.

"Based on the premise that there's basically a certain amount of inelastic demand, pricing is not going to create and drive demand," said Lana Yoshii, vice president of product development at Smith Travel Research of Hendersonville, Tenn. "If you're not spending money on a vacation, it doesn't matter that the room rate is $30 cheaper than what they normally would charge on the same month during a normal year.

The perils of discounting, Yoshii said, extend to other areas of business as well. Discounting can undermine market demand and, in fact, devalue a company's own product in subsequent years.

"All you're doing is maybe stealing share from somebody else, but it's not doing the market any good because basically you're making the price expectation lower from a consumer's [view]," Yoshii said.

"When the economy starts picking up, you're going to have a hard time convincing people to pay the prices they were paying a year ago. And then they start thinking, 'Well, wait a second, were we paying too much before?'"

"Every hotelier has to look at discounting as a very short-term spark," Herning said. "But it can't become an ongoing strategy."

Instead, many hoteliers have taken to offering more value-added incentives or packages to attract travelers. Such packages avoid devaluing the hotel product while still enticing customers to come through the doors.

Herning added that the value-added package fits with consumers' desire to stretch their dollars.

The Peabody has begun touting its packages more locally. The hotel offered a package a few months ago called the Peabody Park package, which brought in 1,500 more Arkansans than it expected.

Other hotels have also picked up on the "stay-cation"--a vacation spent in one's home city or close to home.

"I'm actually starting to see a little bit of an increase in [value-added packages] as folks are doing probably less vacation, less travel. Lately we've been doing quite a few of our Family Stay-cations," Jobst, of the Doubletree in Bentonville, said.

Herning, a self-proclaimed eternal optimist, maintains that some good will come from the downturn.

"I think there's a silver lining in these down times," Herning said. "It does force you to become real creative, to look closer at what you have and what you have to offer. And you actually do emerge as better operators with better ideas."

By Jamie Walden

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