Las Vegas Sun

April 19, 2014

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Seduction by room rate

Las Vegas’ luxury hotels are using bargains to lure tightfisted tourists. But could the strategy hurt them in the long run?

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Rooms in Aria at CityCenter, which has yet to open, are going for at least $359 a night during the Consumer Electronics Show in January.

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Rob Kronman, who works in finance in Los Angeles, would have been willing to pay at least twice what he spent for two nights at the Encore last week. Thanks to a heated price war in Las Vegas, Kronman snagged a suite at the Encore for $109 per night, with a $50 credit toward resort purchases.

“I’ve stayed at the Hilton and Monte Carlo but this was a whole level above,” he said. “It was an extraordinary stay in what was probably a $400 room.”

Philadelphia schoolteacher Jackie Degregorio, who longed to stay at the Bellagio after previous stays at lower-end properties in Las Vegas, recently jumped at the chance to pay $180 per night for four nights in a room facing the dancing fountains.

“I probably would have paid more, but I felt better about getting the discount,” Degregorio said. “It was definitely worth it.”

They are among many consumers who are reaping the rewards of an unprecedented price war in Las Vegas, where four- and five-star properties are going for two- and three-star rates.

As an example, more Las Vegas properties and especially posh hotels are turning to Priceline.com — which advertises four-star hotel rooms in Las Vegas starting at $90 and three-star rooms starting at $66 — to sell unused rooms at deep discounts.

And business is booming for Internet travel operator Expedia in Las Vegas, the company’s top destination by volume.

Las Vegas bookings through the company’s Expedia.com and Hotels.com Web sites are up in the double digits so far this year versus the same period a year ago.

Consumers who typically booked a three- or four-star room a year ago are now moving up to five-star properties offering big discounts, said Ash Kapur, Expedia’s Las Vegas-based director of market management for casino hotels.

Luxury hotels — which have slashed room rates in this recession — face some of the industry’s toughest challenges.

In Las Vegas, the decline in travel and travel budgets in the poor economy is compounded by intensified competition among high-end hotels. All of the inventory added to the Strip over the past several years has been at the top of the market, with thousands more rooms to open this year at CityCenter. They include 4,000 rooms at Aria, CityCenter’s gaming hotel, which expects to top the market with rooms starting at $359 per night during the Consumer Electronics Show in January. Most rooms at Aria are priced at more than $700 during the convention.

Hoteliers in the major convention cities, including Las Vegas, have turned to tourists to fill rooms that otherwise would have been filled by business travelers who have cut back on trips, said Brian Ek, a spokesman for Priceline.com. This shift, according to hotel insiders, has disproportionately affected deluxe hotels that built posh meeting rooms to lure expense-account-wielding business travelers.

Las Vegas hotel rates been disproportionately hit by the downturn, with rates falling further than those in most other cities, according to local and national travel statistics.

That leaves posh resorts with little choice but to cut room rates to match — or beat — competitors’ prices.

Representatives of hotel companies contacted for this story wouldn’t talk about their marketing strategies.

The steep discounts appear to be working in Las Vegas where occupancy is still at 82 percent — compared to 64 percent nationally, according to data from hotel research firm Smith Travel Research and the Las Vegas Convention and Visitors Authority.

The bad news is that Vegas occupancy was down 7 percentage points in June and the average daily room rate was $84.50, down 26 percent from a year earlier.

Discounting is a risky strategy for luxury hotels, which have the most to lose by lowering rates, travel experts say. Not only is it difficult for high-end properties to raise rates after prolonged price wars, they risk sacrificing brand images they have built up over several years.

“This is a huge issue,” said Jan Freitag, a vice president at Smith Travel Research. “Rates are a signal of quality in the hotel industry.”

Price wars topped the list of concerns of hotel revenue managers surveyed recently by Cornell University’s School of Hotel Administration.

While hotels have been forced to cut prices, they could be more strategic about it, said Sheryl Kimes, the hotel school professor who conducted the study.

“There’s nothing wrong with offering selected discounts but hotels shouldn’t give them away to everybody because their occupancy will still be down,” Kimes said. “With fewer people traveling, everyone is fighting for a smaller pie.”

Another top concern among hotel operators in the Cornell survey was the longer-term effect of discounts on their properties’ ability to charge more in the future.

Although rates at Las Vegas hotels bounced back after 9/11, a more comparable scenario to the present recession might be found in the aftermath of Hurricane Katrina in New Orleans, where room rates are still recovering four years later, said Mehmet Erdem, an assistant professor of hotel operations at UNLV.

Las Vegas gaming hotels can generally offer more aggressive rate discounts than their noncasino counterparts in other cities because they generate revenue from many other sources, including gambling, malls, nightclubs, bars, shows and dining outlets.

Even a hotel room that is sold near what it costs to maintain — which insiders say is $40 to $60 for a high-quality room in Las Vegas — it could be profitable if customers drop money elsewhere in the resort.

Las Vegas hotels can spread discounts around to different parts of the hotel, effectively discounting the room without sacrificing rates — and image.

Hotels constantly tweak these offers — 2-for-1 offers, dinner-and-show packages, airfare and room packages and tours.

Consumers want quality deals rather than those perceived as “cheap,” said Howard Lefkowitz, CEO of Vegas.com. Vegas.com is owned by the Greenspun family, which also owns the Las Vegas Sun.

“There’s been a fundamental shift in the way people spend money that’s different from the go-go days of the past two decades,” Lefkowitz said. “People who have lots of money have become much more value-oriented.”

More consumers are booking travel on the Internet, which enables easier price comparisons and the sharing of information about hotel discounts on message boards and other online forums. Armed with more information, consumers can bargain with hotels for even better deals, according to travel experts.

Web sites also benefit hotels by allowing them to sell unused rooms on demand — even more critical now that many visitors uncertain about their futures are booking rooms at the last minute. Some sites such as Priceline allow consumers to name their own price, effectively disguising steep discounts and enabling hotels to advertise higher rates.

Consultants believe hotels are throwing caution to the wind in their quest for customers.

Hotels might be discounting more than is necessary while alienating regulars and people with higher expectations, UNLV professor Erdem said.

“Not everyone staying at these hotels minds paying $300 for a room but may mind hanging out with the people who paid $120 at the pool,” he said. “Price isn’t a simple matter.”

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