262-A Squeeze at the Top

The very highest end of Parisian hotels includes such names as the Crillon, the Plaza Athenee and Le Bristol. There are three of these highest prestige hotels in Paris. Their prices start at Euro 750 a night. Average room prices run around Euro 1000 a night. These are among the highest prices for hotel rooms in the world. Still, occupancy rates run around 80%. Even in the doldrums of 2008 and 2009, they fell only to 70%.

Something new is happening, though. The high end of the market is about to see a doubling in capacity as four new luxury hotels open over a three year period. Two are already open and two more will open over the next two years. There is a prospect for even more coming beyond this next two year window, as other competitors mull a market entry.

Many experts believe that prices will hold steady despite the massive influx of new capacity. They cite an increase in demand to support their beliefs. This demand is to come from Chinese tourists upgrading from luxury boutique hotels and from the growth of major conference events.

Really, though, it isn’t the price that is at issue with this new capacity. It is margins. This new capacity, despite being at the very high end of the market, is coming faster than demand is growing. As a result, margins, if not prices, will fall. This margin squeeze has already started. The existing high-end hotels are spending money to upgrade their current offerings with celebrity-chef restaurants, branded spas and upgraded hotel rooms. Even if prices stay the same as they are today, margins will fall until demand fully catches up to this new capacity.

While it is always margins that suffer when the growth of capacity outstrips the growth of demand, I would not want to bet on prices holding as steady as these analysts expect. My guess is that industrial conferences who can afford to place their attendees at the highest end hotels will also be able to negotiate room price discounts over the next couple of years.

Posted 4/26/11

Update:

Most hotels in Paris are ranked on their quality, with rankings from 2 to 5. A few years ago France introduced the Palace rating, the ultimate quality rating for Parisian hotels. The hotels mentioned in the blog are Palace hotels. There are only 11 Palace hotels in Paris. All are booming today, even though there have been new luxury hotel additions in Paris. These are all small hotels, most with less than 150 rooms.  Surging demand is outstripping the room supply at this Palace level of quality. All the Palace hotels are thriving today due principally to American tourists.  High spending American tourists made up 45% of the revenues in these Palace hotels in 2022. Pre-Covid, Americans made up only 25% of room demand in these hotels. These 2022 tourists gladly pay the high prices at these hotels and stay longer than the average tourist. They have more than made up for the losses of Chinese and Russian tourists during 2022.

See HERE for more perspective on forecasting industry prices.

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