REPORT FROM THE U.S.—While the aftermath of Superstorm Sandy is still being felt along the East Coast, hoteliers in the region are under scrutiny for price gouging during the disaster.
Cases throughout New Jersey and New York are being brought by the states’ attorneys general to examine exorbitant rate hikes for everything from gas to hotel stays during the storm. New Jersey prohibits price hikes of more than 10% in an emergency. New York’s law is more ambiguous, denying unconscionably extreme increases. In fact, most states have anti-gouging laws in place in case of emergency situations.
Price gouging occurs when businesses charge more for goods and services than the regular selling price during periods of unusually high demand or emergencies, such as natural disasters, according to USA.gov.
“Most cases are clear,” said Vijay Dandapani, president and COO of Apple Core Hotels, which has five hotels in New York. If a hotel charged 100% more with an existing contract already in place, that’s a violation of price-gouging laws, he said.
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Vijay Dandapani Apple Core Hotels |
But for hoteliers, distinguishing between price gouging and effective price yielding amid spikes in demand can be difficult.
Even if hoteliers are not violating the law but still are raising rates egregiously during crisis events, that might mean “you’re at risk of losing customers,” Dandapani said.
Pricing ambiguities
Dandapani said the problem with anti-gouging laws is they can violate basic economy principles.
“If demand changes, we should have the right to change the price,” he said. “We don’t do that as much because you don’t want to be accused of price gouging though it’s kind of ambiguous.”
“It’s supply and demand,” Dandapani added.
By law, depending on the state, hoteliers have to post cards on the back of the door that specifies the range the hotel can charge,” Bonnie Buckhiester, principal of revenue-management consulting firm Buckhiester Management Limited, said. Most hotels work off best-available-rate pricing, she said, which is basically derivative pricing.
“The most (hoteliers) should be charging is their highest rate of their price structure,” she said. “Any hotel worth its salt, they should be putting price strategies in place in advance.”
Jeff Good, president of Good Hospitality Services, which manages 24 hotels, has hotels in Super Bowl locations and in cities where natural disasters occurred. He knows that each event requires different yield strategies.
For example, a hurricane several years ago in Clearwater, Florida, caused significant damage to the area.
“We were one of three hotels that still had power,” Good said, and “we were basically charging a reasonable rate of $109, and normally we’re $90,” he said. “The state of Florida had deployed people to come to the hotels and sent out letters and emails to make sure that (hoteliers) weren’t opportunistic.” If they were, the state took criminal action against the hotel, he added.
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Bonnie Buckhiester Buckhiester Management Limited |
“Any hotelier stupid (enough) to price gouge in a difficult situation” will see that come back to haunt them, Buckhiester said. “The ability to post a review online and so many different places is extraordinary today.”
Good feels price-gouging stories are sensationalized by the media.
“It always amazes me how easily we are scrutinized more so than other industries that operate the same way,” he added. “The airlines do it in the seasonal months for flights from cold weather climates to warm weather climates, and we tend not to hear about that.”
Special events versus natural disasters
Last February, the Super Bowl was held in Indianapolis where Good has four hotels. During the years leading up to the major sporting event, he jumped through all the hoops presented by the NFL.
To avoid price gouging, hotels have to give rates four years in advance, when the city is bidding on the game, to the NFL. The NFL comes back and re-negotiates the rates, especially if the organization thinks they’re too high. Ultimately, “the NFL takes our rooms, and we commit to a certain percentage of rooms,” he said. At the 92-room Homewood Suites by Hilton in downtown Indianapolis, “we only had nine rooms we could sell ourselves” that weren’t a part of a NFL package.
“Big events are slightly different. There’s a law against raising prices from natural disasters,” said Dandapani, but those rules don’t apply to special events where charging 100% more than normal rates can be deemed acceptable.
For the turn of the century in 2000, Dandapani said some New York hotels charged 500% more and people paid that in advance.
“The issue of gouging is not entirely clear, especially in terms of special events,” he said.
Yet, when alleged price-gouging circumstances arise, hotels will be held accountable for violating contract agreements.
Recently, the Tiger Hotel in downtown Columbia, Missouri, was accused of price gouging during the first football weekend at the University of Missouri. After numerous consumers complained they booked rooms months in advance at lower rates only to have the hotel contact them requesting higher rates, the attorney general took up the issue. Management eventually agreed to refund guests and honor the original contracted price, according to reports. Several calls to the Tiger Hotel were not returned by press time.
“Contracted amounts are never going to be raised. No one will be able to do that and get away with it,” Dandapani said. “That’s violating a contract, and that’s important.”
Yet sometimes the reverse can happen. During the Republican National Convention in Tampa, Florida, this year, Good “had a contract (with the RNC), and six months before, they came and they wanted to re-negotiate the package and room rates lower,” threatening to take their business elsewhere. But Good, along with the convention and visitors bureau in the city, stood firm and ensured the contract was honored.
Smart pricing strategies
Brands are wary about yielding prices, Good explained. From their perspective, they don’t want to raise rates too high because “then they take the black eye so they police it very much,” he said.
Paul Wood, VP of revenue management at Greenwood Hospitality, which manages eight properties, said the company has no ceiling on average daily rates but focuses on total demand event compression to dictate rate sets.
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Paul Wood Greenwood Hospitality |
In July of this year, people in the Charlottesville, Virginia, area lost power for several days. Greenwood’s property did not gouge guests through rates, Wood said, but managed inventory and gave a fair rate, which cost the hotel in gross operating profit per available room.
“We knew we could generate more revenue, however, our team was absolutely confident in our decision to help opposed to making more profit,” he said. “We also know the actions we took at the time will come back to the hotel in future business.”
Today, Buckhiester said, the consumer is in control. “If a consumer said they’re getting a raw deal, they’re going to make it public pretty quickly,” she said. “Instead of just telling their friends and family, they’re going to put it online, and hundreds of thousands will see it. The impact of the hotelier is magnified; it’s exponential.”
Hoteliers “may make a few extra dollars during a crisis situation, but they’re going to lose terribly down the road; they get a reputation as a price gouger,” she said.