The odds of the economy sliding into a recession this year have dropped in recent months, but don’t tell America’s chief executives.
Choice Hotels plans to announce Monday that it’s launching a new mid-priced extended-stay hotel chain called Everhome Suites that it says can perform well even if the economy slows or heads south – a big drawing card for franchisees. The first outlet is scheduled to open in Corona, California, in 2021, and another 12 are set for the Los Angeles and Austin, Texas, areas over the next couple of years.
“It’ll do well during recession,” Choice CEO Patrick Pacious told USA TODAY. Developers – franchisees who each own several hotels – “see the segment as a smart investment at this stage of the lodging cycle,” he says, with the industry’s revenue per available room forecast to soften this year. Extended-stay hotels are geared to stays of at least seven nights.
Some U.S. corporations and small businesses are bracing for the possibility of an economic slowdown or dip by launching more affordable and resilient products and services that can appeal to consumers even during a broad pullback in spending. From facial spas to travel and real estate companies, several are taking such steps early despite improved economic forecasts because their businesses were nearly decimated by the Great Recession of 2007-09, the worst downturn since the Great Depression.
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“Companies need to be able to grow in any kind of environment,” says Greg Portell, lead partner in consulting firm Kearney’s global consumer practice.
There’s a 30.2% chance of recession in 2020, according to economists surveyed this month by Wolters Kluwer Blue Chip Economic Indicators, down from 38.4% in June, a decline that can be partly traced to the recent “phase 1” U.S.-China trade agreement. Yet that’s still historically high. And with President Donald Trump’s wider trade fights with China and Europe still looming, global chief executives still see the risk of recession as their biggest external concern this year, according to a recent Conference Board survey.
Even if the U.S. dodges a downturn, the experts polled by Wolters Kluwer expect the economy to grow 1.9% this year and in 2021, down from 2.9% in 2018 and a projected 2.3% in 2019. Consumer spending, which makes up about 70% of economic activity, is expected to increase more slowly.
There are other factors besides the economy spurring Choice – owner of Quality Inn, Comfort Inn and Sleep Inn, among other brands – to launch Everhome. Although Choice is already a leader in extended stay, with 400 hotels nationwide, this marks its first foray into the sweet-spot center of the midscale extended-stay market with an average daily room rate of $85. That segment has seen no new construction in 15 years, Pacious says. Also, he says, the larger extended-stay category is underserved: Nearly 20% of hotel stays are at least seven nights but just 9% of all rooms are in extended-stay properties.
Yet forecasts for a drop-off in the record 10 1/2 -year-old economic expansion helped attract Everhome developers, Pacious says. During the 2001 and 2007-09 recessions, overall U.S. hotel occupancy rates fell from about 70% to 60% and 55%, respectively, Choice says. Meanwhile, economy and midscale extended-stay hotels maintained occupancies of 70% and 65%.
Both corporate and leisure trips often plunge in a recession, but extended-stay hotels better weather the storm because they typically draw employees on training stints, construction crews and people between jobs or caring for a sick relative, Pacious says.
Like most extended-stay properties, Everhome’s rooms will sport a kitchen, dining table and separate living and sleeping areas. They’ll also include a variable height workstation, full-size closet and refrigerator and dishwasher. But the rooms, gym and other public areas will be smaller, keeping construction costs about 15% lower than upscale extended-stay hotels.
America’s largest retailers also moved to insulate themselves from the next downturn early last decade after losing massive revenue during the Great Recession, says Marshal Cohen, chief industry adviser-retail, for the NPD Group, a consulting firm. Macy’s and Neiman Marcus started discount chains Macy’s Backstage and Last Call Studio, while Saks Fifth Avenue and Nordstrom aggressively expanded their off-price outlets, Sacks Off Fifth and Nordstrom Rack.
To be sure, the chains also wanted to serve consumers who have become more value-conscious even during good economic times. But they were largely looking ahead to the next slump, Cohen says.
“The challenge these stores had was – How do we protect ourselves so that we’re not so vulnerable?” he says. “They hedged their bets.”
Small businesses are similarly launching less expensive offerings to brace for a possible slowdown:
OC Facial Care Center of Orange County, California, recently began offering a 30-minute version of its most popular 60-minute facial. The streamlined service cuts the price to $99 from $130 for members and to $150 from $350 for nonmembers.
Customers of the company’s two outlets in Mission Viejo and Lake Forest have been getting nervous about a downturn and its possible effects on a tony market that already strains household budgets.
“It’s definitely a topic of conversation,” says Daniel Robbins co-owner of the spa, which chiefly caters to people with skin conditions.
“People are scared,” says his wife, co-owner Kate Hancock. “If the economy is going down, can I really afford a luxury” service?
The 30-minute service, which required the couple to buy a new machine, delivers similar results but without frills such as a massage, they said. It already seems to be paying off, with sales up 15% since they started it two months ago. They’ve also begun stocking a $60 skin cream as an alternative to their $140 product.
Experi, a tour operator in Bainbridge Island, Washington, typically raises prices 5% to 10% a year, says company president Rob Rector. But the firm, which is now selling tours for 2021, is holding prices steady or reducing them in some cases, he says.
“We’re working hard to hold the line because you just don’t know what the future is like,” he says. “We have to predict the future.”
He says he’s trimming costs by choosing less expensive hotels or restaurants in French cities such as Bordeaux and Bonne that don’t sacrifice the company’s four-star standards.
Rector learned harsh lessons from the last recession, when his previous tour company suffered significant losses. “It was very bad,” he says.
Ian Framson, CEO of Trade Show Internet, which provides Wi-Fi technology for trade shows and hotel meetings, fears such events will become scarce if the economy sours. So three years ago he started a hotel Wi-Fi service for 300-person meetings that costs $5,000, half the price hotels charge, he says.
If a recession happens, he’ll give companies a “name your own price” option for the hotel service. If the offer lets him earn a smaller but reasonable profit, he’ll accept.
“You need a product that can fit a price point for an economy where people’s budgets are under attack,” Framson says.
Darn Good Yarn, of Halfmoon, New York, sells yarns and patterns to craft enthusiasts who make scarves, hats and other clothing. But CEO Nicole Snow worries the business, a higher-end rival to the Michaels chain, could suffer in a weakening economy, noting her typical packages sell for an average of about $55.
So Snow is working with her suppliers in India to buy their damaged and off-color yarn and sell it at a 30% to 40% discount. She’s also starting up a $5 a month online subscription service that will let customers view patterns and other information without buying the yarn.
If a recession hits, “They may not want to buy the physical product but they still want to stay engaged with the hobby they love,” Snow says.
WeBuyHouses.com was in dire shape during the housing meltdown that set off the last recession, losing 80% of its clients in 10 months, says CEO Jeremy Brandt. The Dallas-based company provides advertising, technology and other services to licensees around the country who buy houses at a discount, do repairs and then sell them at a profit.
But sales dried up during the housing crisis and licensees, who pay monthly fees to the company, shut down, Brandt says. Now, he worries about the next slowdown in the economy and housing market. The company needs lots of prospective home sellers for its business model to work because just 10% of the houses it considers need the repairs that allow licensees to buy them at a steep discount.
So a few months ago, Brandt launched a service called Housing Valet that refers home sellers whose houses can’t be purchased to real estate brokers who arrange sales or hedge funds that buy the homes. Brandt receives referral fees that he shares with his licensees. The company, he says, is now able to earn revenue from half the homes it considers, up from 10%.
“We want to have a strategy in place that’s ready to go if the market slows down,” Brandt says.