Hospitality Report

San Diego’s lodging industry leaves a dismal 2009 behind and labors to recover in the coming year (s)

‘Any downturn in the economy forces the creative teams to work smarter and build a better mousetrap,’ says Rancho Bernardo Inn’s John Gates

By Kris Grant

You can almost hear the collective sigh of relief. It’s edged with a special brand of post-traumatic stress syndrome as hotel industry marketers emerge, some still shell-shocked, from the Battle of 2009.
“The year 2009 was the worst without a doubt in the hotel industry. We were very happy to leave it behind,” says David Gerdes, regional marketing director for Destination Hotels & Resorts, which owns L’Auberge Del Mar and Estancia La Jolla Hotel and Spa. “It was demoralizing for a lot of operators; there were just too many red numbers.”
“The majority of operators worked as hard as they ever had in their careers, but felt they just weren’t getting anywhere,” said the 30-year industry veteran. “Many nights you’d just shake your head at the end of the day; you had put the pedal to the floor and yet it just did little to improve on the situation.”
On the positive side, Gerdes says he thinks the industry will look back on 2009 and “we will have learned as much last year as we ever did because we had to try so many things.”
John Gates, general manager at Rancho Bernardo Inn, agrees and, like Gerdes, led his team in coming up with new creative ways to entice group business to the resort. “This wasn’t a short-term recession,” Gates says. “The economy that we’re in today affects what our business will be in six to nine months from now. And any downturn in the economy forces the creative teams to work smarter and build a better mousetrap.”
Gates says Rancho Bernardo Inn took advantage of the slow market in late 2009 to invest $1.5 million into the property.  “The slump in the construction industry also meant that we could negotiate better contracting rates,” he says. “We were then able to market our new enhanced property,” which included renovated greens, a new breakfast café, Café Grenada, and the addition of a fireside lounge to its Veranda restaurant, now the Veranda Fireside Lounge and Restaurant. “We also used the down time to do more training so we could be in a stronger position when we came out of it,” says Gates.
While group business is still the mainstay of the resort, the spending level has gone significantly down. “The expense accounts are down, the meals aren’t quite as lavish and now they start meeting right when they get here,” says Gates.
Rancho Bernardo Inn also turned its attention to the wedding market, booking a record number of weddings, 120, for 2010. “People still fall in love in a recession,” Gates observes. The resort also is pulling out all the stops on its “social catering” — bar and bat mitzvahs, 50th birthday parties, anniversaries.  The resort also introduced monthly “creative and educational” dining experiences called “Dining Odysseys,” where the resort’s chefs are challenged to produce a fun and creative fine dining experience. “We recently did a five-course vegan dinner with wine pairings,” says Gates. “That meant no animal products, not even butter.  It sold out in four days.”
On May 7, the resort will offer a dinner with every course offering some version of chocolate and champagne, such as white chocolate spaghetti and cocoa-dusted venison. “Under good times, we probably wouldn’t have pushed ourselves to come up with this new audience,” Gates acknowledges.
And perhaps he wouldn’t have turned to social media with a Twitter handle of “GMGoneMad.” A recent post: “Missed lunch today! First person to bring me a sandwich gets a round of golf.”
Still, Gates is seeing a light flickering at the end of the tunnel. “The past couple of months we’ve seen a lot more activity and bookings in both group and leisure,” he says. “It’s going up definitely in 2011 and even in the latter part of this year.” Gates says pricing is still soft in 2010, estimating that pricing has gone down by 15 percent last year and currently, but expects pricing to be off only 5 or 10 percent next year.
At Estancia, which has earned AAA’s Four Diamond award, the hotel’s profile has been focused as an executive retreat.  “We are masters in meetings and this slump has taken a bite out of that model,” says Gerdes. And so Gerdes and his team adjusted the type of group business they targeted. “We resharpened our tools. We typically spent a lot of time on pharmaceuticals and financials, but now we’re going after the university business just across the street. (Estancia is located next to the Salk Institute on the former BlackHorse Farms thoroughbred property.)
And the resort has even gone after SMERF business (an acronym for social, military, educational, religious and fraternal meetings). It’s an unorthodox move for a high-end property, but one that Gerdes feels is smart in the current market. “An unoccupied room brings absolutely no revenue into the business,” he attests. “And particularly in North County (La Jolla straddles the fence of North and Central, he says) a lot of resorts have adjusted the price points. The upper end just went away.”
He estimates that prices are off 25 to 30 percent from the highs of 2007 throughout San Diego.
Like the Rancho Bernardo Inn, Estancia and its sister property L’Auberge Del Mar are also hosting more weddings. “We make it a point to try to hold the wedding and reception on property, plus you have the room nights for all the family and friends that will be coming in,” Gates says.
Estancia also is focusing more on individual leisure travelers, which means a greater need to be sensitive to the service levels expected of the leisure versus group markets. Gerdes explains: “Your restaurants have to have longer hours of operation and with individuals coming in at different times, buffets make more sense. You need to staff up your bell staff and valet. When you have group business you can schedule around the group’s schedule.”
In the midst of the downturn, Estancia and L’Auberge reaped some economies of scale and effectiveness by readjusting their sales staff. “We used to have our sales staff assigned to geographic territories, but in early ’07 at Estancia and early ’09 at L’Auberge we decided to go vertically to strategically target certain markets and industries that were having some success,” Gerdes says. “It helped us get through ’09. And now we have combined our group sales efforts for the two properties, something we’d been thinking about for some time but the tough economic times got it to the finish line.”
One PR director handles both properties and in early May the two properties will combine its reservations into one call center.
Gerdes and Gates not only are working internally on their marketing strategies, they also rely on the help of two local convention and visitors bureaus — San Diego ConVis and San Diego North ConVis — to provide sales leads.
Joe Terzi took on the job as president and CEO of the San Diego Convention and Visitors Bureau (ConVis) in the eye of the storm — March 2009 — after the former CEO, David Peckinpaugh, asked to not have his three-year contract renewed. (Can anyone blame him?). Terzi is a hotel veteran who retired from Starwood Resorts on Jan. 1, 2009; he’s been an active member of the San Diego tourism industry since 1995, a longtime member of the San Diego ConVis board of directors and its chairman in 2004.
“I’ve been in the hotel business for 36 years and I’ve never seen what we’re seeing right now,” he testifies. “For years, up until 2005, it was always double-digit percentage growth of TOT (Transient Occupancy Tax). We came to expect that.”
Oh, but reality bites.
San Diego’s tourism tax receipts totaled $150.4 million in 2007, rose to $160.2 in 2008, then plummeted to $136.3 million in 2009. 2010’s total is projected to come in at a meager $134.6 million.
Will it go up in 2011, Terzi is asked. “It better go up,” says a determined Terzi, who feels strongly that the industry has seen the bottom. He projects that the receipts will return to the “mid-$140 millions” for the 2011 fiscal year. “It could grow by 6 to 8 percent on the low end and 8 to 12 percent on the high end, but nobody really knows. We’re in uncharted territory.”
That bottom was experienced by Terzi at Ground Zero in his former post as senior vice president of marketing for Starwood Resorts. “The St. Regis Monarch Beach was one of the hotels I was in charge of and that’s where all the AIG trouble happened.”
Terzi recounts the public drama that surrounded AIG’s corporate event at the St. Regis in late 2008 that included meetings as well as leisure activities such as golf and spa treatments that had been scheduled for a year to reward the company’s high-end producers. The tab was more than $450,000. “Now, incentives are quite common in corporate business,” Terzi says. “It’s standard practice. Qualcomm, for instance, might want to reward its highest producers with golf retreats. But at the time, AIG was getting this huge government bailout and it became the poster child for all that is wrong with corporate America.”
And for Terzi and Starwood, it was a public relations nightmare. The media didn’t let up. “The AIG effect, as it’s come to be known in the lodging industry, completely decimated all hotel high-end business for a year plus — if luxury resort was your property, you were persona non gratis. AIG took the opportunity for those hotels to survive off the table and San Diego has a number of them. There is still a tendency to think that if a property has a resort image, there’s a lot less incentive for corporations to make that commitment, just because they don’t want to be criticized.”
While the effect has since tapered off, it has resulted in many events being scaled back, reduced in numbers of attendees or duration. And the AIG effect hurt San Diego because it is perceived as a resort destination, Terzi adds.
Many properties went into receivership and were sold, such as the Aviara property in Carlsbad. (The former Four Seasons resort is being acquired by Hyatt.)
Gerdes notes that more than 300 properties in California were foreclosed upon in 2009.
Yet the commercial real estate meltdown has not come to fruition in the lodging sector, Terzi warns. “The W Hotel in Little Italy is still owned and operated by Sunstone. But like a lot of other hotel owners, Sunstone paid X number of dollars for the hotel, and the value has been significantly reduced. They’ve gone back to the bank, and presented the new value of the hotel and they’ve been negotiating with the Starwood management.”
San Diego ConVis also has made a major push to some 1,300 local companies to book group business in San Diego for two reasons. “One, the economy is hurting and frankly it’s jobs,” Terzi says. “If we can keep people meeting in San Diego, the city benefits through its TOT collections.  San Diego lost $30 million in value of TOT in 2009 — funds they need for police and fire and libraries. There are a lot of direct benefits to meeting locally.”
Similarly, San Diego North Convention & Visitors Bureau launched a “True North” campaign this March with a Website dedicated to receiving leads from locals for group business. “Tourism ambassadors” who generate hotel room nights for conference or group business will have donations in their name made to “Outdoor Outreach,” a San Diego County charity targeting at-risk youths.
There is some tremendously good news on the horizon for San Diego and the United States, says Terzi, with the passage of the Travel Promotion Act just signed into law by President Obama. The act assesses a fee on visas for people coming into the United States to give the U.S. a tourism marketing fund for the first time in decades — the first year’s revenue is targeted to be $50 million.
“It’s pretty hard to believe but the United States has been just about the only country in the world that didn’t market itself,” says Terzi. “The travel industry has been working on this for years and the money is starting to be collected now.” The funds will be administered by the United States Travel and Tourism Commission, which lobbied hard for the assessment.
Terzi says the U.S. assessment program was patterned after California, which passed a rental car tax four years ago that has likewise generated a $50 million fund for tourism promotion, 60 percent of which is spent internationally. “The rental car companies actually supported the assessment because they knew it would generate more business for them overall,” Terzi explains. “In the end, it’s been beneficial to everyone.”
San Diego ConVis itself is funded from a similar assessment formula. “In 2008, a Tourism Marketing District was formed, with a contract with the city of San Diego to put a 2 percent additional assessment on all San Diego hotels with 75 rooms or more,” says Terzi. “That goes on top of the 10.5 percent TOT that goes to the city.”
Of the 2 percent assessment, ConVis is guaranteed 50 percent; 10 percent goes to San Diego North Convention and Visitors Bureau and the rest, after a small portion for operating costs, is based upon an application process for specific projects, as long as they can demonstrate a return on investment by placing “heads in beds.”
Terzi says a couple of museums, including the San Diego Museum of Natural History, and the Holiday Bowl received grants from the fund of $8 million to $12 million; ConVis received a $2 million grant from the discretionary funds for an Online Travel Agent (OTA) program.
The three principal majors in the OTA business today are Expedia, which dominates the market, says Terzi, then Travelocity and then Orbitz. “Then there’s Priceline and Cheapfares and everything else,” he says. “The vast majority of leisure travelers are shopping and looking at one of those sites. Now whether they choose to do the shopping and then go to a proprietary site is something else. But the reality is that almost no one in the world today isn’t going to the OTA sites.”
But much of San Diego ConVis’s work remains around its core strategy of bringing group business to San Diego. “We’ve continued to work hard to capture our fair share of the group market,” says Terzi, while being quick to acknowledge that the market is soft. “We’ve even increased our solicitations in certain parts of the country and it’s been even more effective in light of other destinations having cut back their marketing.”
In February and March, the bureau conducted an aggressive direct-mail campaign to 5,000 meeting planners that “profiled well for San Diego.” The marketwide promotion included follow-up by e-mail and by phone. The campaign was designed to address the perception that San Diego is an expensive market in comparison to others and it’s hard to find space. “It’s been true in the past,” Terzi admits. “We suffered from our success in ’06, ’07, ’08 and into ’09.”
But today’s reality has changed that picture and the ConVis campaign told planners that now is one of the best times to book a meeting in San Diego. “You can find availability and affordability,” Terzi says, adding that the campaign included an aggressive offer from the hotels of a 10 percent discount off their master bill.
ConVis has continued marketing to the association market and looks forward to welcoming one of the biggest convention planning groups in America, PCMA, back to San Diego in 2012.
But while associations have been strong, Terzi says the bureau hasn’t forgotten about the corporations that are doing business “whether it be clean energy, biotech, health care. Those industries are still pretty strong and moving forward, maybe in a reduced capacity.”
Now the consensus of the marketers is that the recession is over, and recovery is just around the calendar corner.
“I think we’ll return to more of a sense of normalcy as far as the mix of business in 2011,” says Gerdes. “People are traveling more. There’s pent-up demand. Every day there is more positive news coming out of Wall Street, quarterly returns are looking good. “Our psyches are very tender. But there’s some positive momentum building.”