Starwood Preferred Guest’s Stealth Devaluation

Starwood Lurker confirmed the rumor today that Starwood Preferred Guest would not be making large-scale changes to the categories of its hotels for 2010.

Each year Starwood has re-categorized hotels based on their average daily room rates. Those categories determine the number of points required for a free night. When rates go down, point requirements go down. When rates go up, the points price becomes more expensive as well.

That’s the value proposition that Starwood has always followed, more or less, since the inception of the program.

Then the hotel industry hit the worst revenue year it had ever seen.

RevPAR decreased a whopping 17.3% in the first 11 months of 2009 as hotel chains lowered prices. This tops the 1.3% decline in revenue per available room that occurred from Jan. to Nov. 2008.

Rates were down close to 20%, Starwood members expected points prices to fall, too. But Starwood apparently had other plans, and tried to spin not raising prices as a huge win for members. ‘We expect hotel prices to go up, but we aren’t going to sock you for that now. Because we love you.’

Categories are determined on a forward looking basis, which led to last year’s adjustment that moved 160 hotels to a lower category. Though rates are expected to generally rise in 2010, we wanted to make sure all of our members are able to continue to take advantage of our 2009 award levels. As a result, categories will not be changing for any of our branded hotels in 2010.

I’m genuinely flummoxed.

Starwood’s excuse for not dropping the majority of hotels a category or more after a disastrous revenue year  is to claim that recategorization is forward looking, rather than backward looking.

But hotel recategorization has always been primarily based on prior year average daily room rate. Claiming that categories have historically been determined on a forward looking basis rather than being anchored to prior year rates is simply disingenuous.  (“We’ve always been at war with Eastasia.”)

The entire reason the re-categorization has been done February-ish has been to allow enough time for hotels to report their revenue data from the previous year, analyze that data, and then listen to appeals from hotels.

It’s true to say that the categories are somewhat forward-looking. Starwood hasn’t gone strictly by prior year rates, if a hotel was a ‘victim’ of extraordinary circumstances that depressed their average rates in the prior year, Starwood was open to that and might give a hotel a higher category based on the argument that their rates are likely to be much higher the coming year. So it’s never been 100% backward looking.

But what Starwood is doing is breaking the value proposition. They’ve come up with a new method, assigning categories based on forward-looking projections of what they think revenue is likely to be (but they aren’t even doing that, they’re not changing categories at all.)

As one fairly prominent Starwood member said to me, “They look into their crystal ball, and based upon what they see the ADRs are likely to be in the coming year, they adjust the categories. GAAP needs a provision for this approach to accounting!”

Three years ago there was a major devaluation. In 2007 I referred to it as a bloodletting.

In May, 2006 I predicted a 25% devaluation in Starwood points for 2007. Starwood specifically denied a 25% devaluation.

But I then broke the news in November, 2006 that the 2007 devaluation would see a new category 7. Which proved exactly correct, Starwood’s previous denials notwithstanding.  But at least the redemption categories remained tied to average room rates. And now they’ve broken that linkage.

I bet that the Starwood program folks genuinely thought they could spin this positively, “We’re not increasing point requirements even though hotels are recovering!” Well thank you, Starwood!

Flyertalk’s SanDiego1K, who moderates the Starwood Preferred Guest forum, told me “I feel betrayed.” Certainly one of the better-informed of all Starwood Preferred Guest’s members, she said she “truly thought this would be the year we’d see a big drop.”

In a comment to a post about Starwood’s annual category recategorization in February 2008, Ric Garrido made an important point about Starwood’s inflation over the years — while programs like Hilton and Priority Club were boosting point requirements over the years by 15% or 30%, in many cases Starwood was jacking up required points for free nights by as much as 200% and 300%. (Cf. Pulitzer in Amsterdam, Westin Sukhumvit)

Some of these increases should have been reversed — based on the value proposition as Starwood has articulated it — after the worst hotel revenue year ever. But they weren’t. Starwood Preferred Guest is swallowing the difference. And telling you to thank them for it.

Starwood still has a large number of lovely properties, place I actually want to redeem to be at. But their points are relatively hard to earn through stays, and those points are worth less as hotel points prices remain the same but rates have fallen. They seem to be taking the wrong competitive approach, when Hyatt seems to be doing nothing but adding value to its program.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I hate to sound cynical, but did you really believe a hotel program would index to a “deflation”? We all know that the number of points for redemption only goes one way — up.

    We can only hope that, as hotel rates improve a bit this year, they don’t use it as an excuse to devalue next year. Maybe we’ve bought a year or two of breathing room.

  2. Nothing on the internet ever dies.

    You brought up an old comment of mine that has some inaccurate info. The Amsterdam Pulitzer never went to Category 6. I think maybe it was listed incorrectly when the SPG categories were initially published that year.

    This happened with the Prince de Galles last year that was shown as a Cat 7 in the initial release then changed back to Cat 6.

    The Pulitzer has been a Category 5 for several years I think. So the increase from 7,000 points to 12,000 is about 71%, not 300%. (I should have put 200 to 250% anyway. math error)

    The Westin Sukhumvit should state 200% increase, not 300%.

    I also use to confuse my algebra students sometimes when working on the board and making elementary school mistakes in my past life.

  3. Gary, interesting piece on SPG’s decision. i refer to it in my post today on Hotel Check-In. here’s the link –
    USA TODAY’s Hotel Check-In

  4. Its all funny money with no rules, regulation or common sense to dictate what happens except for voting with your feet when a program decides to devalue. Which is hard to do objectively while sucked into the game with huge personal balances.

    This is Rule #1. Earn and burn immediately. But this is easier said then done.

    Kudo’s to Gary for trying to sort this all out for us!

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