May 2003

Are room blocks history?

Booking outside the block is affecting every industry segment. Show managers face hefty attrition fees. CVBs can’t track group business. Hotels are losing guaranteed business when they need it the most. Housing companies are losing market share. But exhibitors and attendees are winning with cheaper rates. How the industry is solving the housing crisis.

By Danica Vasos

In 2002, the American Academy of Otolaryngology — Head and Neck Surgery Inc. (AAO-HNS) drew about 8,500 exhibitors and attendees to its annual meeting and 75,000 net-square-foot exhibition. Lauren Kramer, Director of Meetings, blocked 4,000 hotel rooms for that show, but the group only picked up 3,400. She didn’t have to pay attrition fees since her group picked up 85 percent. But Kramer didn’t want to take that kind of risk in 2003, so she decided to cut her group’s room block for its 2003 annual meeting in Orlando by 30 percent. “We couldn’t afford the legal exposure,” says Kramer.

After hearing more and more show managers fed up with attendees booking outside the block, Bill Peeper, President of the Orlando/Orange County Convention and Visitors Bureau (CVB), and his team decided to take matters into their own hands. “We didn’t want 30 percent of the attendees who usually book within the block to have to call individual properties to find rooms,” says Peeper. “We don’t care where attendees choose to stay, but we do care about them having an enjoyable experience when they come to Orlando.”

One way to do that is to make it easy for attendees to book rooms. So the Orlando/Orange County CVB put together a package of about 1,000 rooms that the CVB manages. The association still contracts 2,800 rooms at five hotels within the “official” block, but these “preferred” hotel rooms are available for attendees who do want to shop and evaluate a variety of options. “While there’s no contractual obligation from these hotel properties, our commitment is that there will always be inventory at the lowest price on our alternate site,” says Peeper. The CVB developed the software and manages this Web-based system.

This is just one experiment the Orlando/Orange County CVB is trying to help show organizers deal with booking outside the block. With cuts to corporate travel budgets, exhibitors and attendees have turned to the plethora of online retailers that offer discounted hotels rooms, often much cheaper than those offered by show management. In fact, for nearly one-third of association shows, between 10 percent and 19 percent of attendees book outside the block, according to the 2003 PCMA Housing Survey (February 2003). But many in the trade show industry are reporting much higher numbers. Nearly 35 percent of show organizers report that 50 percent of attendees or more are booking outside the block, according to an online poll conducted by EXPO in April 2003.

Everyone in the industry has been affected. Show managers are paying hefty attrition fees from unused blocks — some as high as six figures. Small- and medium-sized association shows have been hit the hardest since they have less negotiating power and rely on comp hotel and meeting rooms at hotels. Larger independent show organizers usually don’t sign hotel contracts with attrition clauses, so the financial risk of attrition fees isn’t their driving motivation. Instead lost revenue from room commissions and accurate event histories are top of mind concerns.

In addition, CVBs can’t track the economic impact that shows bring to town — which could mean a loss of funding in the future if they can’t prove their value to their communities and hotel members. Hoteliers are losing revenue from cheaper rooms booked online at the last minute, leading to lower profits. According to the 2003 edition of “Trends in the Hotel Industry,” published by PKF Consulting and the Hospitality Research Group, hotels have recorded the second consecutive year of declining profits. Housing companies are also losing revenue from commissions on room rates as attendees go direct to the hotel or use the Internet. And exhibitors and attendees complain to show management about higher hotel rates and no shuttle bus service to hotels not within the block.

This “preferred” block solution offered by the Orlando CVB may not offer a long-term solution for the problem, but it’s a start. Are rooms blocks history, or can the industry solve the housing crisis?

Attrition fees
Hoteliers would probably say we brought this on ourselves. About 30 years ago, there was no such thing as attrition fees. Show managers could come to town and hold as many rooms as we wanted for as long as we wanted. Hotels finally decided they didn’t want to be left holding the bag with hundreds of unused rooms when they could have filled them with other business. “There was a time when show managers used to block many more rooms than they needed,” says Jack Withiam, General Counsel for White Plains, NY-based George Little Management (GLM). “That was the beginning of the problem.”

Attrition clauses forced show managers to block a more accurate number of rooms, or pay the price (see sidebar: Formula for Calculating Attrition Fees). Attrition clauses usually give shows a 20 percent cushion — requiring them to fill 80 percent of the rooms they block.

During the ’90s when occupancy and rates were at all-time highs, shows had no problem meeting these requirements. But today a majority of show managers are having a harder time hitting 80 percent on contracts they signed three to seven years ago when attendance was at record levels. As a result, show organizers are racking up hundreds of thousands of dollars in attrition fees. So what can we do?

In the short term, show organizers can adjust room blocks or offer incentives for attendees to book within the block (see sidebar: Recommended Incentives to Book Within the Block). In the long term, show organizers can block fewer rooms or refuse to sign hotel contracts with attrition clauses, or at least negotiate a lower percentage of rooms to fill.

“I’ve never signed a contract with an attrition clause,” says David Audrain, Executive Vice President and CEO for Las Vegas-based ConVexx. “I didn’t when I was at Hanley-Wood or at Miller Freeman.” But that doesn’t mean it’s not an issue. His SEMA show experienced a 25 percent increase in attendance this year, and a 25 percent decrease in rooms picked up within the block.

Show organizers could also wait longer to sign contracts so that they’ll have an accurate number based on the current economic climate. Unfortunately, these options may not work either. When the hotel market turns, show managers may not have enough rooms for their shows, making it more difficult for attendees to get to shows. And just because you sign a contract without an attrition clause, doesn’t mean you won’t be liable.

“Show managers can be held liable for blocks even if there’s no attrition clause in their contracts,” says Heny Schaffer, Partner with Howe and Hutton Ltd., based in Chicago. One show was sued for not filling blocks, even though its contract didn’t have an attrition clause. The hotel ended up losing the case, but the legal precedent has been set. “Show organizers need to make sure that the contract says they have no financial obligation if the rooms aren’t used,” Schaffer says.

And if show organizers wait too long to sign contracts, you may lose the rooms and even the space at the convention center. If you’re not willing to commit, a bigger piece of business that is may get your dates.

Accurate event history
Traditionally, CVBs have evaluated trade show business in terms of the number of hotel rooms picked up on peak night. “Room blocks are not a good way to value business,” says Audrain. “CVBs need to come up with a new way to track the business.”

Surveying attendees on where they stay has been one solution. In the short term, some shows are requiring attendees to indicate where they are staying on registration forms. If it’s not filled out, attendees are required to inform show management when they pick up their badges. But show managers who have tried this say it slows down registration considerably. “Most attendees don’t know where they are staying until after they register,” says Audrain. “So most of them have to wait in line.”

Like many others in the industry, Audrain suggests that the CVB check the registration database against hotel rooming lists. Some CVBs are already auditing rooms, but hotels claim that it invades the guest’s privacy. A third-party audit could solve that issue in the future. “When someone goes outside the block, they usually go to another hotel,” says Fred Shea, Vice President Sales and Operations for Hyatt Hotels. “Show managers can’t control those attendees. People set their own budgets, and we don’t have control of those budgets.”

But many show managers don’t agree and are making hotel audits part of the contract. “We usually don’t sign contracts with attrition clauses, but if we do, we include an audit provision,” says Mike Webster, Vice President, Operations, Advanstar Communications. “At an event in the first quarter of 2003 in Las Vegas, hotels said we fell short of our 3,800-room block by 800 rooms. Our housing company audited the numbers, and we found they had just booked outside the block.”

As an alternative, the Orlando/Orange County CVB has offered to randomly survey attendees while they are waiting in registration lines. “Only two shows have taken us up on the offer,” Peeper says. According to the survey results from one show with nearly 28,000 attendees, 60 percent of respondents indicated they stayed in the official hotel while in Orlando. But 48 percent contacted the hotel directly, 40 percent booked online, and only 12 percent used the official housing form or Web site.

As a result, Orlando, like more and more cities, is loosening its restrictions on peak rooms night to book space at their convention centers. “The model is changing now,” says Cary Roundtree, Executive Vice President of Sales and Marketing for the Atlanta CVB. “We are looking at the pick-up history and the attendance history and evaluating the shows on a case-by-case basis.”

Lost revenue
In addition to attrition fees, show managers are also losing revenue. Comp hotel and meeting rooms can be worth a lot of money. Consider that most shows get one comp room for every 50 reserved. Comp rooms are usually used for staff or other VIPs. “If we have to start paying for those, we will pass along those costs,” says GLM’s Withiam. “We use comp rooms for foreign press and other VIPs. Exhibitors will notice if those people aren’t there.”

Show managers also often reserve meeting space so that exhibitors can’t rent suites at nearby hotels during show hours. If those meeting rooms are available, exhibitors may opt for hospitality suites instead of exhibit space on the show floor. And many show organizers want to control the number of exhibitors and attendees staying at each hotel so there’s a good mix for networking opportunities.

In addition, some shows get commissions on rooms. According to one industry expert, 50 percent of independent show organizers are getting a 10 percent commission for each room rented. If a show has 5,000 room nights at $150 night, that’s $75,000 in revenue. Whether you think room commissions are ethical or not, it’s still lost revenue for shows that have counted on that revenue for years.

Shows also include shuttle transportation costs in room rates. “We are picking up the costs for shuttles to the ‘preferred’ hotels that are not within the official block,” says Kramer. “We’ll be able to recover most of the costs, but not 100 percent like we usually do.” Undoubtedly, the attendees who are staying within the block will be picking up the tab.

What’s ahead?
For Kramer’s show in New York City next year, she’s working on renegotiating her room blocks since these were contracts signed several years ago. “We have no hotel contracts signed beyond 2005, but we have convention center space booked through 2013,” says Kramer. She thinks partnering with Internet-based companies, such as Orbitz and Expedia, may not be too far down the line. She’s made some initial contacts with these companies, and she says they’ve shown some interest. “We haven’t actively pursued it since we were able to come up with a solution for this year’s show.”

Or maybe there will be a day when there are no room blocks. “Room blocks will go away,” says Audrain. “There is no need to protect rooms. It’s not easier for attendees to use our housing. We can’t offer them better rates. And they will always be able to find a room. We should be worrying about how to get attendees to the show, not where they stay.”

In fact, The Super Show has decided to get out of the housing business altogether. For its next show in Orlando, sho management decided not to block any hotel rooms for its 50,000 attendees. The Orlando/Orange County CVB chose to work as a housing coordinator — partnering with The Super Show’s third-party housing company to manage the rooms the show had already contracted.

But the market is sure to turn eventually. Remember the ’90s when it was a seller’s market for hotels? Not to mention there is little hotel construction going on now, so demand may outweigh supply and become an issue in the future. “I think there will always be room blocks,” says Shea. “But each show will have a better handle on how much risk they will take, and they’ll budget for that risk.”

Shea also says he thinks shows will hold more events at hotels to get attendees to stay within the block. In addition, he says hotels are trying to take back control from individual properties that have dumped unused rooms online at heavily discounted prices. “We know the market better now,” he says. “We now have a company policy that says that Internet wholesalers can’t offer a cheaper rate than our company Web site.”

For now, it’s hard to tell how this housing issue will work out in the future. But one thing is clear today — exhibitors and attendees are winning with cheaper hotel rooms. No matter what happens, the Internet is not going away — which means there will always be cheaper and easier means for attendees and exhibitors to come to shows. And at a time when everyone — show managers, CVBs and hotels — is working harder and harder to draw attendees, maybe it’s not such a bad turn of events.

Danica Vasos is Editor of EXPO Magazine. She can be reached at
913-344-1303 or e-mail: dvasos@ascendmedia.com.