Introduction to the Hospitality Industry

(GA, Dec. 2015)

Dec. 2015

A.   Introduction:

–              An industry managed by people providing service to people …..

–              A service industry operating 24/7, 365 days per year and never closes its doors.

–              A perishable business (inventory); one available room or one restaurant seat not sold every single day is gone forever as it cannot be stored ……

–              A labor intensive industry providing personalised services to global travellers. A people industry with humane elements.

–              A very competitive industry exposed to external factors; economy, inflation/operating costs, politics, disasters, terrorism, disruptions, local infrastructure etc.… and a business exposed to market cycles.

–              A business where everyone is copying everyone……But a “value-based management” is hard to copy and this is what hotels organizations should be.​

–              A complex and complicated business that is not only capital intensive but also a high proportion of its capital is locked in the form of fixed charges and fixed assets like land and building and it cannot be diverted for any other purpose. Plus the need of capital for periodical product/facilities up-grades. A business that normally will not generate short term returns.

–              A fragmented industry (too many brands/owners) and a seasonal business in most cases. Operating at full capacity (an occupancy of 100%) throughout the year is just not possible as compared with many other industries.

–              The satisfaction of consumers in the hotel industry is a highly subjective affairs. Satisfying the consumer is a most difficult thing since service rendered is highly personalized. Practically impossible to please everyone/everyday….Here where the importance of brand standards and consistency comes into play.

–              Also have to accept that it is a business subject to service gaps as in many cases there is a difference in perception between guests and providers. Management perception of quality of services and facilities frequently differs from the perception of the guests (in particular due to guests’ generation gap/age; senior clientele, generations X, Y and soon Z etc. each with its own expectation/perception….) and also of hotel staff perception that in some cases is not aligned with guests and with management.

–              The hospitality industry is a global business. Hotels are catering to travellers from all over the world and in order to survive and prosper, hotel organizations will need to think and act “globally”. Globalization will ultimately touch virtually all aspects of the hospitality industry.

–              Hotel organizations have to expand beyond national and regional boundaries in order to grow, achieve critical mass and benefit from the economy of scale. As it becomes more and more difficult for small operators to compete in the market, it is a must for small/regional hotel companies to grow their network to a minimum of approx.100-120 operating hotels in order to have necessary funds to support the hotels; Reservation system, Loyalty program, the latest in Technology, sales offices, operating systems, trainings etc…

–              Providing the basic comforts and positive/authentic and long lasting guest “experiences” is and it will remain the priority of the hotel operator. This includes; accommodating staff with positive attitude, competitive physical product, facilities & services. Comfortable rooms with all the guest’s needs, modern bathrooms & showers. Quality food, efficient Wi-Fi/connectivity throughout the hotel, value for money etc…. are some of the basics that the hotels have to provide in order to compete.

–              Customer recognition and loyalty is and will remain one of the fundamental of doing business in hotels. Must have an efficient loyalty program in place as cannot do without it. This is one of the biggest weaknesses of the small/regional hotel operators.

–              Revenue management and efficiency/accuracy of forecasting have become essential for success and compete.

–              The authenticity, professionalism, and actual concern for the happiness and well-being of the customers that is communicated by successful hotels is becoming a clear competitive advantage (brand & image).

–              Finding and retaining talent who understand and who can respond to the market needs-changes, distribution, habits of travellers is becoming very challenging in many parts of the world.

–              Control of operating costs is and will remain crucial on driving profits and must accept that in this industry, costs will continue to increase year after year. It must be offset by increased revenue.

–              Location, brand and value perception have been the most important factors of hotel’s success and for consumers/guests to book hotels.

The Hospitality industry:

–              Tourism has become the world’s largest export industry.

–              Hospitality industry is one of the world’s largest employers.

–              The industry is one of the largest traders of foreign currency.

–              People start viewing travel (leisure in particular) as a right rather than a luxury and consider it an increasingly important part of their life.

–              It is anticipated that the Asian Middle class will soon make-up the largest share of international travel.

–              Travel is as old as mankind, people will always find time and money to travel either for business or for pleasure.

The Hotel Operator (appointment and expectations):

–              For owners and developers selecting the right operator and negotiating a hotel management agreement that they can live with is critical to the success of their investment and to the value of their hotel. Selection is normally based on the ability of the operator to bring business to the hotel, on the operator track record and image, on delivering a range of competitive services (TS, Marketing, SOP’s etc.), on providing own talent management, trainings and employees satisfaction.

–              Also in some cases selection is done on the participation of the operator with key money, loans, equity contribution, performance guarantees. But most important is the ability and commitment from the operator on the delivery of profitability ahead of market average over a sustained period of time (RGI and in particular GOPPAR). All to accept that the operator is “Involved” but the owner is “Committed” and has the final say…..

–              Securing an HMA has become very competitive and it is critical for the operator to have a clear position on some key “basics” as expected by owners;

–   What the brand stands for and how it is applied to the hotels and to the market?

–   What is/are the competitive advantage/s of the brand?

–   Generating business for the hotels under management is a requirement and has the operator the latest/competitive technology, systems, programs, corporate support/talent and strengths/network?

–   Room business generated by the operator is normally measured by the actual room nights production from the web-site, mobile, reservation system, loyalty program, partnership/s and sales offices. Those are priorities to the operator.

B.   Changing Trends (as of Dec 2015)

–              The hospitality industry is constantly evolving and in order to survive, hotels have to respond to the needs of the demanding consumers regardless of their origin, age, culture and expectations. Accept that innovations and technology will reshape the travel experience. Also accept that “face to face” communication is here to stay in this industry.

–              Operators/Hoteliers have also to respond and manage changing industry and market trends in order to progress and have to accept that the industry has become largely a science and not only an art. This is in particular when it comes to distribution and the many new ways/channels available to the consumer to book hotel rooms/services.

–              Life in the very fast lane; today, consumers want convenient, seamless experiences personalization faster than ever before and hotels/brands have to respond to it. “Customer Centric” and follow the way consumers want to buy/book.

–              Driving direct bookings is and it will remain priority. Convince potential guests to book the hotel site and offset some of the fast rising costs of customer acquisition.

–              Working with OTA’s has become a necessary “evil” but objective here is to achieve a win-win situation as OTA’s needs hotels and hotels need OTA’s. Have to find ways to use OTA’s without relaying on them as primary resources. (Will rate parity abolished via court rulings and hotels can offer better deals on their own web-sites?)

–              Health and wellness trends will continue to drive customer’s decisions. Health food options, fitness facilities with the latest equipment, indoor and outdoor swimming pools, specialised saunas-steam rooms, body treatments, air purification, energising lighting, yoga space, vitamin infused shower water, etc….is becoming the norm starting from resort destinations.

–              Niche hotels specializing in quality wellness retreats-sports-health are expected to prosper (immersive travel experiences). Wellness as a lifestyle is huge, it goes beyond the fitness facilities and spa. “Care for the Earth” and “Care for Self” is the new slogan.

–              Hotels will have to consider factors such as cost of servicing, level of spend and average length of stay when targeting potential customers in different geographical markets.

–              Customers (frequent visitors) are getting used to increasing choice of personalization, they want it “their way” and be offered a wide spectrum of service choice. Personalization is the key to make a hotel successful.

–              Innovative technology moves very fast and hotels have no other choice than to invest and adapt. Mobile check-in, seamless connectivity across platforms and devices, mobile apps, e-concierge etc….are here to stay and there will be continuous improvements.

–              Real time marketing is taking over from the traditional marketing activities.

–              The future of knowledge is in digital, not print. Digital marketing dominated by infographics, photos, videos and built around mobile devices. To be noted that China, South Korea, India are the most advanced usage of mobility and mobile devices compared to anywhere in the world.

–              With smartphones, consumers can search for the hotel, make reservation, pay for the room guarantee and for the whole bill without using credit cards. With smartphones a guest will be able to personalize his room in advance, pre-set the room temperature before arrival, lighting, pillow and mattress preference. The content of the in-room refrigerator etc.….

–              Dealing with fragmentation of media and trends to move from ineffective traditional advertising/promotion to online activities.

–              Hotels will need to develop strong social media “listening skills” to understand how customer needs and perceptions of brands and service quality are truly evolving and to develop service prepositions, marketing messages, and pricing solutions that reflect the needs of an increasingly diverse customer base.

–              On-line reviews/reputation management have become very much a basic in hospitality and it is a must for operators to properly manage and respond to all reviews, positive and negatives. Brand image and acquisition of new customers is at stake if not properly handled.

–              Virtual Reality is revolutionising the way hotels (resorts in particular) are promoted to the consumer and to the agents. Use of the VR headsets is becoming popular providing a 360-degree 3D experience.

–              Cloud-based systems; with the ease of access, the ability to up-date in real time and no bulky hardware, cloud- based property management (PMS) are sweeping the hotel industry.

–              The industry is giving lot of attention to ways in answering to the needs of the “millennials” that is one of the fasted growing customer segment. Latest technology and social media is essential for this demographic.

–              More data and fewer people: The hotel industry is looking at new ways of providing standard services to their guests at lower operating costs. In addition to better utilisation of data, the industry is also assessing what services can be provided by technology and also at the gradually introduction of service “Robots” for some basic functions. Finding and retaining talent remains a challenge.

–              Sharing economy and disruption is fast increasing at the expenses of hotels in many cases (Airbnb & Uber are just the beginning). Sharing economy is here to stay. Will Uber become an OTA?

–              Facing the age of consolidation; hotels, airlines, OTA’s…..making life (in some cases the survival) of the small-regional operator very difficult. (Will we see OTA’s buy hotel groups? Or hotel groups buy OTA’s?)

–              Security and terrorism are becoming of serious concerns in particular by the leisure travellers. Hotels are faced with increased costs in this important area. Countries and states with ethnic and religious tensions along with poor governance and weak economies will bread terrorism.

–              Hotels of the future will have less restaurants/F&B outlets but more interesting quality concepts and value for money. Successful food concepts/inventiveness will be a key differentiator in hotels. Consumers are beginning to link their personal identity to the food they eat. They talk about food and post food photos online.

–              Potential of long-term care facilities/hotels (assisted/senior living) in response to the aging population around the world including Asia. “Family concept” is rapidly changing and most older/senior people no longer get support (time) from family/relatives. A complex and labor intensive business and important to differentiate “assisted/living” from the “nursing facilities”. Need economy of scale.

North America is the most advanced on providing those facilities. In the contest of Asia, Thailand, Philippines, Malaysia and Indonesia could/are ideal for this business attracting both the Asian and western clientele.

C.   Growth and development trends:

–              Every hotel group wants and needs to grow/expand by adding new hotels/number of rooms in their inventories, creating new brands in response to new market needs and in order to have a wider presence in key destinations.

–              Asset light (inside rich) has been and continues to be the preferred way of expanding by most operators, large and small.

–              In some cases, the “owner/operator” formula has done well in the past but listed hotel companies with large assets in their portfolio are encountering difficulties on generating acceptable ROI for their shareholders and with direct negative impact in the value of the listed shares. This situation is expected to continue in the future.

–              At present, developing a stand-alone hotel project, land-building & others (green field) is in general not financially viable. A multi-purpose complex of housing/real estate, commercial and hotel, can generate better financial returns.

–              Hotel Management Agreements and Franchising has been the vehicle for expansion by most. It is anticipated that Franchising will be much more in demand by owners in future as compared with management agreements.

–              Competition to secure new hotels/deals will continue to increase. Fees to the operators will reduce/not increased and incentives/key money/loans will be provided by the operators in order to secure new deals and respond to the competitive situation. Leases are also a consideration.

–              In addition of a well-known brand, the strengths and advantages of large operators is and remains their large loyalty/customer data base programs, their distribution/reservation systems, the volume of business generated for the hotels under their brands, their operating systems and employee programs to attract and retain talent.

–              Small/regional operators will face increasingly difficult times to compete with the large operators and have to invest in new and advanced technology in order to compete.

–              With the expansion/growth behind their boundaries, hotel companies must have the resources and capability of introducing their business concept/culture in different environments/countries, in order to support their hotels.

–              Hotel companies that wish to attract investors will need to demonstrate that they can offer above average returns and performance. And hospitality companies that want to trade in the financial markets will need a business concept that is relatively easy to communicate and comprehend.

Success/Failure of newly developed hotel projects (recent world-wide industry survey)

It is estimated that over 50% of all new star rated hotels developed/opened during the past 10 years are not generating the anticipated ROI and this is of a serious concern for the industry in general. Key reasons for those failures can be attributed to:

–              Inexperience of people/decision makers in the projects. (Some focused more on “Return on Ego”)

–              Not paying attention to the market cycles, entered at the peak and faced limited growth.

–              Not understanding of the location/market/demands that can weaken over time.

–              Relaying too much on rosy/unrealistic financial projections done by the agents/banks.

–              High cost of land and of building not justified for the location and business potentials.

–              Weak project management, contractor/s and consultants. Costs overruns and delayed openings.

–              Cost cuttings, due to overruns, in public areas/guest’s facilities with direct impact on image.

–              Wrong market positioning/poor management resulting in less revenue/profits.

D.   CSR

–              Sustainability and resource constraints; Eco-friendly practices are becoming the norm and most hotel organization promotes it. To be noticed that travellers expect hotels to have efficient environment programs in place. Critical resources such as water and power are under increasing strain leading to price increases, volatility and even shortage in some places. Global warming and energy use are affecting how we consume and live in a societal scale.

–              Renewable energy resources and innovative projects will shape the future of resources use.

–              Wind turbines, photo-voltaics (PV) solar panels, e-glass for windows, VRF zooming air-conditioning, computerized building automation system, Leed certified buildings, energy efficient lighting & LED, waste management system etc…. are all very important factors to put in place/implement.

–              Global warming and natural disasters are a serious threat to the hospitality industry, in particular to isolated resorts/destinations.

E.   Recap

A fast changing industry; we are seeing unprecedented changes in the way business has to be conducted in order to create growth and value.

Embrace evolution and avoid stagnancy. Ideally a successful hotel needs a sustainable advantage that creates emotion and enhance guests’ experience. Hotels need to innovate to meet the changing demands of the modern consumer. Look at innovation as a continual practice that improves the brand as cannot afford to relay on past success.

One important factor that goes in favor of the Hotel industry is that beside the new technology, distribution and sophisticated reservation channels, the basic fundamentals will not change very much and this is based on what the hotels are selling, in this case a good night sleep (importance of the bedding), a strong shower, a sound-proof and clean room, fast-latest communication-entertainment, privacy, safety and a good meal, breakfast in particular, all at a sustainable price. Therefore the architects, designers, operators and naturally the developers have to ensure that those specific services/facilities have to be top of the line, practical-easy to use by all and with no compromises. Travel trends are changing but hotel business is still effectively the same, providing experiences.

In a world moving more and more towards globalization, hotel organizations will need to communicate more quickly, operate more productively, offer their employees greater opportunity and deliver their customers enhanced benefits. Those companies that address these issues today will be better prepared for the global marketspace of tomorrow.