Sunday, September 28, 2008

World Hotel Prices are Crazy (Conspicuous Consumption Edition)

Having worked on the front-lines of the hotel industry, and having done my share of world travel, I fully realize that world hotel prices can be rather insane. A flea-ridden hovel in mid-town Manhattan can go for $100 per night while in other world cities one can get a 3 or even 4 star hotel for a small fraction of that price.

Hotels are also excellent rational predictors of financial trends. An unsold hotel room is worth less than nothing. If the room is empty the hotel is still paying for heat and air-conditioning and loan payments on the construction costs. Staff must be trained and available. While the restaurants and bars -- which are necessary to attract visitors to fill those empty rooms -- must be staffed and ready when someone wanders in the street.

Rack rates at the front desk are always flexible downwards if there are empty rooms. You would be amazed what a discount you can get in a major hotel when you stand there with cash in hand a few hours after the expected the big bus tour just got cancelled. The same rates are always flexible in an upward direction if it is Saturday night during the big football weekend or a big trade show is in town.

After a week of reading how Russian billionaires are having to start keeping careful watch over their millions, and how thousands of jobs are disappearing in world financial centres; and after a week where I spent hours watching my own personal investments hit the tank; and a week when every publication and politician is making dire warnings of doom; and during a month when world commodity prices have taken a dive; I sit and read predictions of insanely high price increases.

The first article that I read was a Robert Hughes declaration that the new emperor of art isn't wearing any new clothes at all. (In case you weren't paying attention, people are paying millions of dollars for pickled sharks and cows as long as some guy named Damien Hirst declares that what they are buying is 'ART'. And the darn things are starting to rot!).

Then I read about the opening of the new Atlantis Hotel on Dubai's Palm Jumeirah island. The darn thing has more than 1500 rooms and it cost a million dollars per room to build. This is in a city with practically no historic sites, where drinking of alcohol is highly discouraged and gambling is banned. So what kind of market are they building this hotel in and who do they expect to visit?

That got me poking around in Expedia.com. (The following prices are all in US Dollars and refer to a week in late October this year). Dubai now has 53 Five Star hotels! Many of them are offering rooms for 40 percent lower than the $650 minimum asking price at the new Atlantis. Obviously this place was not opened as an investment. It is no more of investment than a pickled shark in a tank is either an investment or art.

What about the rivals in other world cities?
Well here are some quotes for one person for that same week in October:
  • The Plaza in New York $812 (one of just 5 Five-Star hotels in New York)
  • Trump International $515 (one of 2 Five-Star hotels in Chicago)
  • Trump International $212 (one of 5 Five-Star hotels in Las Vegas)
  • Hotel Scribe Paris $472 (one of 5 Five-Star hotels in Paris)
  • Royal Garden Hotel $248 (one of 52 Five-Star hotels in London)
  • Conrad Hotel $480 (one of 4 Five-Star hotels in Tokyo)
  • Mandarin Oriental $348 (one of 11 Five-Star hotels in Hong Kong)
  • Mandarin Oriental $280 (one of 8 Five-Star hotels in Singapore)
  • The Peninsula $283 (one of 8 Five-Star hotels in Bangkok)
  • Venus Beach Hotel $107 (a Five-Star hotel in Paphos, Cyprus)

So these hotel-builders in Dubai think that they can fill up 53 Five-Star hotels at $600 per night in a city of about 100,000 citizens and a million guest workers? Are the local Arabs going to spend their entire lives staying in these places or do the owners really expect to receive the millions of millionaire tourists that would be required to make these baubles pay for themselves?

In case anyone other than myself was wondering, this is what one can find if you go down a few steps in comfort that same week in October:
  • Two-Star: Hotel Swagat Palace $9 ($17 air-conditioned) in Delhi (price is apparently not a misprint)
  • Three Star: Puri Dalem Sanur Hotel $30 on Sanur Beach in Bali
  • Three Star: Jin Jiang East Asia Hotel $38 in Shanghai (I once stayed across the street from this one)
  • Three Star: President Hotel $44 in Cairo, Egypt
  • Four Star: Swiss Belhotel Plaza $113 in Kuwait City, Kuwait
  • Four Star: Le Meridien Commodore $104 in Beirut, Lebanon
  • Four Star: Sun N Sand $100 in Goa, India
Apparently they don't believe in market research in the Middle East and simply order up the number of hotels, the size and quality that looks good. It is just a game of monopoly. Just like they order automobiles, buy military weapons or building new factories and cities.

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