Here's What You Need to Know About the Business Cycle
By Jordan Hollander
Last updated April 26, 2022
3 min read
Every business goes through a natural cycle of economic growth and decline. Typically there are four phases to a business cycle: expansion, peak, contraction, and trough. There’s no set intervals for each phase, but there are signs that can tell you which phase you’re in – and help you predict when there will next be a downturn.
The expansion phase occurs between the trough and peak. On a macro-level, this is when the economy is growing: the GDP is increasing at a healthy two to three percent, unemployment is low, and inflation is around 2%. Expansion is the goal of any healthy economy, but eventually the economy “overheats” meaning the GDP growth rate moves above 3%, inflation is higher than 2%, and investors are too bullish, creating asset bubbles like the housing bubble of 2008. Then, the economy enters peak phase: this is the month during which expansion transitions into contraction.
After peak phase, the economy starts to contract. The contraction phase takes place when GDP growth falls below 2%. If the economy contracts too much, it can cause a recession. Unemployment rises and investors may sell off their stocks. When the economy hits bottom, this is the trough phase, the fourth and final phase in the business cycle. Trough phase is the month when the economy transitions from contraction to expansion.
How long each phase in the business cycle lasts depends on a variety of factors including:
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Supply and demand
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Monetary policy
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The availability of capital
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Consumer confidence
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Fiscal policy
For hotel businesses, the industry cycle typically lasts 7.3 years. The hotel industry acts as a canary in the coal mine for the overall economic cycle: the hotel industry leads peaks by roughly nine months on average and leads troughs by around six months. As a result, hotel owners don’t have the luxury of watching the economy dip and reacting accordingly. Forward-looking hoteliers must prepare for natural peaks and troughs before anyone else.
How can savvy hotel owners read the signs? Supply and demand is a key indicator that many business owners rely on to signal an economic downturn. In the expansion phase, consumer demand indicates financial growth. Consumers are confident in the economy’s strength, using their disposable income to travel and book hotel rooms. When supply is outpacing demand in your market, it’s likely you’ll hit a recession sooner and that it will be more aggressive.
But, shifts in price elasticity and new competitors like Airbnb entering the market can make it hard to read the signals in the noise. Price elasticity measures how changes in supply and demand impact an item or service’s price. The availability of substitutes is a key factor in price elasticity: for example, gasoline is relatively price-inelastic, given that there are no substitutes for powering our vehicles. Your hotel room prices, on the other hand, have many substitutes: Airbnb and other competitors with the same star rating, amenities, price range, location, and brand identity are abundant substitutes. This environment makes understanding where you stand in the supply and demand curve that much more complex.
How to prepare your hotel business for an economic downturn
Hotels that don’t invest in the right technology will suffer the consequences of poor preparation. As we witnessed the tragic collapse of Thomas Cook, we learned some key lessons from their failure that can be applied to the economic cycle. Hotel owners must implement the right technology to diversify their channel mix, maximize revenue from existing guests, optimize their direct channel booking experience, help their sales team succeed, and bring back repeat guests.
One stark lesson from the Thomas Cook example: fewer dominant channels dramatically increase risk. Just as a smart investor diversifies their portfolio, so must a hotel owner. How many channels are funneling customers to book at your property? The more sources you can employ to maximize your presence and bring in bookings, the more secure your position in an economic downturn. Metasearch managers optimize your spend so that you can capture bookings without splashing out too much of your budget.
At the same time, your property must maximize the traffic on your website. Demand will drop and along with it, so will web traffic. Make sure that your website is optimized by working with a vendor to ensure industry best practices around load times, SEO, and conversion rates. This will minimize your reliance on high-commission OTAs and help your property survive the contraction stage.
Those lessons cover the revenue side of the profit equation: what about keeping costs down? The saying goes, “If you can’t measure it, you can’t fix it.” If you can’t measure it, you can’t predict it, either. Building a lean budget to outlast the downturn takes having the right data and analytics at your fingertips. Install solutions such as a top tier CRS and data intelligence platform like Parity+ by RateGain to make sure you have visibility into what’s going on in the market.
Lastly, the unfortunate truth is that in a downturn, online travel agencies wield all the power. During the recession of 2008, while hotel sales dropped, OTAs actually saw their aggregate hotel sales climb in 2009. Price-sensitive customers gravitated toward OTAs in search of the best deal. A channel manager like RezGain ensures your property is connected to the proper channels and functioning properly to avoid overbookings or even worse, missed bookings.
An economic downturn is on the horizon – hotels that fail to prepare now are likely to face the consequences of outdated technology.