Medium term outlook and road map for hotels (Dec. 2011)
(From an international point of view)
We are in the midst (or at the end?) of an unusual severe global financial & economic crisis with most of the world’s economies (generators of domestic and international travelers) in recession (perhaps with the exception of Greater China).
Under these economic woes, we are experiencing a major downtrend in consumer spending with direct impact on the hospitality business. The world wide loss of jobs / unemployment, loss of wealth, depressed stock /equity markets etc… are all negative factors to our industry.
How long will this environment last? Will we see a return to healthy growth from end of 2012? and in 2013? Or in 2014? (2011has seen some small recovery in RevPAR’s and in GOP’s in a number of Asian, Latin America and Continental Europe markets while others are reporting negative growth).
On the basis that people world-wide needs and wants to travel, one can assume that after a couple of difficult years (starting from late 2008), the hospitality and travel industry will resume its annual growth and will continue to prosper. It is expected that the industry will bounce back from recession stronger and smarter.
The present and near future drop (or not growth) in business volume and of profitability in most destinations is of course very painful to the industry. However this could be looked at as a time to reassess how we do conduct our business in particular to assess and act on the industry priorities and plan accordingly. We should also look at this situation as opportunities to adjust more willingly to the realities of our emerging trends in particular the very fast increasing of business originated by the GDS/OTA’s and the cost of those, whatever new trends comes up, the hotel must control its own destiny.
Revenue management becomes critical as the hospitality and travel industry looks at its future behind the present economic environment, it is anticipated that the industry will be faced with unprecedented changes in the market place; demographic shifts, rapidly evolving technology and “true value for money” will influence the industry in future.
Increased levels of experience, sophistication, knowledge and education are redefining the like, dislike and needs of the consumers. The growing number of international travelers (many from new markets i.e.: China, India & others) will be significant factors to consider and respond to their needs. It is time to take China seriously specially by the West.
It is important to plan on how the industry will adapt to meet the diverse and changing needs of its customers around the world. In addition to the new reservation systems, the on-line guest services or the most modern in guestrooms design, the hospitality industry will face new challenges as the current trend towards increasing globalization continues to change the profile and needs of customers around the world.
In an attempt to highlight the priorities of the industry in the short-medium term future, successful hotel groups / chains will be looking at the following:-
- Place the primary focus and action on the consumer needs and less on the physical asset. Pay attention to the changes of customers’ lifestyle demanding memorable stays each time they stay in our hotels.
- Also they expect memorable stays each time they stay in hotels.
- Accept the fact and respond accordingly, that the human element involved in delivering top quality service will not, in most cases, replaced by technology. Customers will always put the human factors above any other elements in a hotel. Our industry is and will remain a people’s business.
- Leisure travels are expected to grow faster than business travel in most part of the world. Also must pay attention to the potential of the “silver” market from North America and Europe at present and Asia in the near future.
- Online bookings, global distribution systems, yield management, and fast customer response will become the most important marketing strategies. Also must have the most up-to-date customer relationship management (CRM) systems, data base and loyalty programs as a means of influencing customer behavior.
- The hotel industry’s sales & marketing has to revolve around the brand and on the power of the web. Influencing the customers’ buying decision is the ultimate objective of marketing and have to adapt to the continuous evolving trends and sale the way the customer wants to buy. Always offer great value propositions and real value. Make use of best practices i.e. effective website, search engine, rate parity, geographical changes, mush know who is your customer and others. Build win-win relationships especially with the OTA’s.
- The development of new hotel brands will be driven with objective to increase market share and meet the evolving needs of the market as a result of changing lifestyles and demographics.
- Growing focus on brand management versus asset management. A strong and consistent brand is the way forward.
- Brand choice as opposed to location choice will lead the way in the future.
- The industry will be increasingly dominated by a few large hospitality enterprises relaying on global growth for expansion. Strategic alliance and joint ventures are expected to be the primary growth vehicle for international expansion.
- There is also potential for the smaller boutique of family-run hotels. However these have to provide that personalized service and service / product uniqueness that large groups cannot provide. It is also strongly recommended that the small hotels are part of reliable world-wide reservation systems in order to reach the potential customers otherwise they will fail.
- Food & beverage facilities are to be developed / renovated for additional overall guest stay experience i.e.: themed restaurants, health food, in-house entertainment, etc. Getting away from the average / sub-standards.
- Sovereign wealth funds, high net worth individuals and institutional investors are expected to be the major investors in hotel assets. Also must consider the potential of the Chinese brands.
- Corporate Social Responsibility (CSR) and climate change will become more and more an important element for the hospitality industry to support and act upon.
- Safety & security concerns will prevail. Whether natural disasters or terrorism, the industry will always face challenges that may impact the performance.
- The hospitality & travel industry will continue to make major contribution to the global economy: At present, the hospitality & travel industry provides 240 million jobs, or 9.3 per cent of total employment worldwide, being the second employer in the world. Also, the hospitality & travel industry contributes 3.8 per cent to the global GDP (based on WTTC Statistics).
Brand Awareness and Loyalty
Branded or non branded hotels? Global or regional?
As the industry has moved towards globalization, companies will be continuously focused on the need to create brand strength and identity as part of the international platform for conducting business. Companies that have concentrated their recognized brands in one country or region, however, often have difficulty in growing their business concepts internationally. In a global economy, companies needs to pursue a variety of strategies, including strategic alliances, acquisitions and joint ventures to continuously increase market share.
Expanding from regional to global coverage, the number of properties in the systems becomes critical to maintaining and increasing market share. Brand presence in the source of business markets is absolutely necessary in the future. Also it is a must to make adjustments to cater to the varying cultural differences.
It is also important to note that the capital market place substantially higher values on branded companies with loyal customers particularly as compared with properties that have little identity or customer following. Hotels should always measure the return guest ratio with objective to continuous improvement.
In a complex world with customer loyalty as a major issue, these companies focusing on brand development and driving it with dedicated customer support will be among to the success stories in this century (millennium).
Growth & Expansion
The successful hotel organizations of the future must be able to respond to the continued increase in worldwide travel. This will require growth and expansion into new markets globally. To be successful, companies cannot remain regional or local.
As hospitality companies strive to keep up with changing lifestyle and demographic factors driving international travel, the ability to expand will become increasingly important.
Pressure to expand beyond traditional / regional boundaries will continue to rise as larger hotel organizations seeks to reach critical mass point as which a network of properties is sufficiently large to satisfy all the travel needs of the company’s most valued customers.
What is more important, the comfort of a familiar and consistent brand or location?
The familiar brand will prevail.
Franchising and Management Agreements
Given the importance of branding and need of globalization, it is not surprising that franchising and management agreements will continue to play a strong role in the future. This formula has been successful for both parties and has created respectability in the industry.
In future, it is expected that franchising will also penetrate into more upscale products. Management agreements will also prosper and fees will be more and more based on performance incentives or IBITDA.
Global hotel chains will keep offering new line of products / services / brands to developers making it difficult for the regional or local operator to respond / compete at the same level.
Product: What We will Built / Develop in Future?
Build it and they will come, no longer applies.
Rapid market changes and the explosion in new technologies not only support, but require in designing the hotel product of the future.
Decision about hotel product must be seen through the “lens” of changing customer’s demands. The focus must be on the customer as the primary asset of a hotel organization. To remain competitive, hotel companies must offer consistent products and services that are perceived to be of high quality and value to the customer.
We cannot get away that, in some cases, hotels are built for different reason and purpose and unfortunately in such cases the customer is not taken into consideration, this is a big mistake. Even small family or seasonal hotels must take the customers’ needs as a base to develop their properties.
Hotels are long term investment and must have the specific objective and product to continuously attract the highest yield business in the market, these are the hotels that will be successful in future.
Financing of a hotel should be based on long term, not based on a few years with objective to an early exit (sale) as soon as there is profit to be made. Sad but in many instances this has been the norm. (Quick profit is very attractive to many.) This has been the problem with the so called “financial sharks”.
We have started the 21st century with some overbuilding in a number of places / cities / countries and in some cases the market has difficulty to absorb the capacity. We have seen this many times before and most probably will see it in the future. Therefore the building of a quality, efficient / functional branded hotel capable to compete in any market situation is the way to go. Extensive feasibility studies / surveys are necessary before embarking on a new hotel project.
We also have seen too many expensive “Full Fledge” 5 star hotels developed in the past. The market may not be prepared to pay for the prices that these hotels need to charge for a decent ROI. Therefore the industry may have to consider developing less expensive hotels in future to respond to the new class of travelers (exceptions of course will always be there).
A fundamental consideration for any hotel developer is the cost of land (regardless if the land is freehold or lease). With an expensive piece of land, it would be very difficult to produce a respectable ROI.
Multi-Purpose Complex Trends
We also have seen the development of multi-purpose complexes consisting of offices, residential, hotels, retail and entertainment. This could be a successful formula however we must look very closely at the supply and demand of all these products in the city / community, otherwise we will have many “white elephants”.
Food & Beverage of the Future
The real money is in the rooms and this will also remain in the future.
Food & beverage facilities are necessary in all star rated hotels. Looking at the future, one sees the demand for more themed restaurants in hotels attracting both the in house customers and the local community. We also will see an increasing demand for quality entertainment and health food. Continuous innovation and creativity on food & entertainment will be critical.
The trend of leasing the hotel restaurants and bars to outside operators will continue.
Temptation to also lease the banquet and function space will be there however this will be a big mistake.
As said before, a complete / full fledge interesting city resort hotel offering a variety of services is the way to go and this type of operation should have all the latest facilities including wellness and providing continuous consistency to a variety of markets.
Market : Mixing Business with Pleasure
We will be seeing more and more that traveling on business is rarely a singular activity. Most business people mix some leisure into business trips, whether by extending their stay for a day of sightseeing or by taking an afternoon for a special interest. One reason for this is the intrusion of technology on the length of the work day. Thanks to modems, laptops, e-mails and others, business travelers are able to work anytime and anywhere (importance of free and wireless internet access in all parts of the hotel). Increasingly, an individual’s office is wherever they happen to be, at home, at a hotel or on the road.
This means spending more money on technology and reconfiguring the traditional guestroom to include the addition of more business related equipment, and this is a continuous evolvements. Nowadays, travelers expect to be connected to their e-mail in their rooms no matter what the purpose of the trip and this also apply to resort hotels.
As demographic trends shift, hotels will be forced to provide facilities and services that cater to several markets: business, conventions, leisure, cultural, etc…. A successful hotel will have to provide the need of all these markets (note the city resort concept).
The so-called city resorts with top of the line convention facilities and lots of activities including wellness and close to a major centre / city may be the right formula for the future as these hotels can provide more facilities than the traditional city or strictly resort hotel.
RevPac vs. RevPar?
In order to become more efficient, new methods of measuring and evaluation management performance will emerge from time to time.
Currently, revenue per available room (RevPar) is the most widely accepted operational measure for hotel success, reflecting the yield from physical assets, i.e.: the combination of rooms occupancy and the average house rate. Industry people / operators are measured by RevPar. It will be a big mistake to only look at the occupancy or at the average house rate, we must look at RevPar.
As the customer more clearly becomes the strategic focus, the industry will find that RevPac (revenue per available customer) will be a more reliable measure of performance.
Successful hotel organizations will not only measure market share (RevPar) but also the spending of each customer (RevPac) giving the operator / owner a much better understanding of running the hotel in a profitable way and to what type of customers they should focus / wants to attract in their hotels and what needs to be done to maximize revenue from those.
Researching Customers’ Needs
The traditional in-room guest comment cards or in house managed research program are in most cases superficial since it is rarely used by those customers with the most important thing to say, negative or positive. These normally produce standardized responses that are influenced by the design of the document and in many cases the comments can be altered / changed.
The industry needs to relay more heavily on third-party market research and on focus groups as a means of assessing guest’s needs and satisfaction in the future. This will require of course expenses but the potential for higher quality information of a critical nature offsets the costs. Selection and compensation to focus groups participants require skilful handling. (Friends or participants interested in a good meal or a weekend stay are the wrong participants for the focus group.)
Cost of Effective Communication
The ability to reach the customers worldwide and influence their purchase decision is clearly the challenge, and its cost continues to escalate year after year. Marketing costs have increased steadily and will continue to increase as franchise fees, reservation systems costs, global distribution systems, travel agents costs, credit cards commissions, media agencies, all contribute to the cost of communicating with the accessing customer.
Also cost associated with loyalty or frequent traveler programs have made marketing communication even more expensive.
For those considering the increasingly expensive outlook for loyal programs, it has to be with mixed feelings. Introduced by the airlines some years ago, these programs have now been adopted by a number of hospitality companies (most of the hotel global brands) either on their own or through marketing tie-ins. But such programs are expensive to administer, and it must be noticed that some hospitality companies, especially top of line brands, have rejected these programs. It is a marketing program that is being questioned in terms of costs and return.
An hotelier has to ask himself a fundamental question: “Is the customer coming to his hotel because of the points he receives or because of the brand?” What is more important to the customer, recognition or hotel points? (A very high percentage of serious frequent travels prefers recognition). Have hotel companies “shoot” their own feet with the points systems? And how to get out? Or how to take full advantage if these are to remain? The industry is over-crowed with these programs.
The Travel Agent
While it has been suggested that on-line booking capabilities could eliminate the traditional middle person, trends indicate that the travel agent will remain an important generator of business for hotels. After the word-of-mouth and direct sales, travel agents are ranked third in booking hotel business. Of course travel agents will need to focus on providing additional value, knowledge and services to the travelers who are not familiar / up to speed with the industry trends and offerings and location of a particular hotel / resort. Specialized travel agents are absolutely critical for the success of deluxe resorts.
Cutting the travel agents is not a smart move; we have to work with them especially for leisure business. Travel agents can also be a good word-of-mouth advertisers, however remember that they have to make profit and do not undercut them or offer the customers lower rates than what was given to the agent. Also it is critical to respect the contracted rates.
It is to be noticed that the hotel industry in general does poor / average job in remitting commissions to the agents.
While decreasing, media advertising remains important for the time being especially for selected targets / industry and for local tactical promotions. It has to be noticed that media advertising is relatively expensive and in some cases hard to justify.
One also has to realize that a large number of publications / magazines (some regional, some global) are after the advertising money of the hotel(s) and sometime it gets a bit complicated in which publication to advertise when and how often. Of course there are media expertise in the market but they also don’t work for free.
Word-of-mouth and direct online bookings are clearly the least expensive to the hotel(s).
In the long term, media advertising will become much less important. A strong PR campaign generating word-of-mouth will be more effective and less expensive.
Internal & External Customers as Assets and Alliances
In the economy of this century, both the internal and external customers will be the main asset.
The external customers (guests) expect value, product, memorable experience, consistency, customer focus activities, value for money and others.
The internal customers (employees) in addition to career and personal growth, they also expect and an interesting place to work and a place that provides continuous learning and a fun place to come to work. They also expect a balance between work and family time.
To succeed in the future, the hotel management must work together with employees and with other business, forming partnerships that seek innovative approaches to attract and maintain guests. Partnership as the building blocks of an integrated, cohesive global hotel product will create a new synergy in bringing economic success.
Working with strategic partners, hotel companies can overcome weakness, reduce costs, create better images, expand capabilities and improve positioning.
This customer focus culture will also lead to the delivery of new products and services to guests through alliances and preferred vendor relationships.
A preferred vendor relationship with a service provider involves an agreement with an external company (such as a telecommunication company, financial services, food chains etc…) in order to provide a service or a product to the guest that the hotel would not otherwise offer (creativity and imagination without spoiling the brand is of utmost importance.
Hotel companies are increasingly pursuing preferred vendor relationship to add value for the customer and to provide an added source of income. This will continue / increase in the future.
The command and control model of leadership is gradually giving way to a focus in leadership in ideas, information, inspiration, vision and team work.
In future, management will rely less on standard operating procedures, and will focus on training and empowering employees and managers, particularly those close to the customer. This movement towards a more “flexible” and “flattened” organization structure will set a foundation enabling hotel companies to respond more effectively to changes and customers’ expectations / satisfaction.
“Rules should serve the business”, not vice versa.
Customers do not like “cookie cutters”. This is a big mistake made by many hotel groups either because of set standards or for saving expenses. Always remember to “manage by revenue” not by cost cutting.
Technology’s impact on hotel organizations of the future will be pervasive, greatly altering how companies organize and market themselves globally. Its biggest impact, however, may be the way in which technology facilitates the delivery of additional hotel products and services to the guest in both physical place and virtual place. In some instances, this century will bring the era of the fully automated hotel, connecting the customer to a universe of diverse product and services offered by an array of providers. In the process technology may ultimately drive change in the very nature of the hospitality industry itself as the lines separating lodging from the office, retail and entertainment sectors continue to become less distinct.
With so much technology made available in the market, hotel companies will need to find / define priorities on what is necessary for their business to remain competitive and what they can afford financially as technology does not come cheap. Quality will require continuous expenses, year after year (see attachment).
Human Elements vs. Technology
It has been proved that technology cannot replace the human element involved in delivering quality services.
The greater impact of technology on the hospitality business, will be its ability to improve the delivery of goods, services, collection of data, surveys, controls, etc.
Corporate offices with multi property hotel and management companies will definitely benefit with advanced technology as information can flow faster, more accurate and there is good chance to reduce operating costs by eliminating work duplication and downsize regional offices (economy of scale) without affecting the customers.
Technology may not replace the meetings and convention business held at the hotels. It may help in some cases with some small size video conferencing, however people prefers to personally meet face to face on a regular basis.
Back to Basics
In this industry, the customers will always first look at the human touch in delivering quality services, then secondly at the technology.
Smart operators will have to maintain a good balance between technology and human touch in interacting with customers.
Sources of Funding
Access to inexpensive capital / financing will not only be one of the defining factors for success in the future, but also one of the industry’s greatest challenge in this century. Hotel organizations will need to work harder to access capital by producing competitive returns. Capital availability in the future will be guided by the ever-more stringent requirements than in the past.
Hotel companies will have to focus much more on the bottom line than in the past. With a constant health bottom line companies will be in a better position than others when it comes to raise funds. A better bottom line means more happy customers versus cutting in expenses.
Also in this century we will be seeing more companies going public in order to raise funds. This of course requires basic fundamentals in terms of a strong and stable management team with lots of expertise in management stability and continuous healthy earnings; these will be the basis for continuous growth and for developing successful business concepts. Ultimately, you have to give the comfort zone and impress the potential shareholders that you know what you are doing and doing it better than your competitors. For this you need a solid and stable team of engaged professionals. Hotels cannot be run by machines.
The hospitality industry will continue to evolve and as we go on, it will experience a profound state of changes.
At the beginning of this millennium, the hospitality leaders will be required to adapt to changes in terms of transforming the marketing of hospitality products, the hospitality organization, the ability to attract capital and the technology revolution.
With the main focus on the customer as the hotel’s chief asset, new industry standards will emerge based on the use of customer information systems, the extension of hotel services into the virtual market space and the embracing of RevPac and other performance measure always based on the customers.
The years ahead will require hotel leaders to handle the labor force as partners in business and make them part of the success: What is more important? A good fully engaged employee or a customer? Smart and successful companies will be going out of their way to continuously motivate their labor force and accommodate their personal and family needs.
Also the years ahead will offer unprecedented opportunities to companies to forge a strategic path in the world economy. Insights concerning a wide array of forces that will shape the future of the industry will be essential to success.
What customers expect from hotels has gradually evolved, so that what was once considered to be a luxury feature, is now considered standard at all class hotels. We must realize that good innovations are copied immediately by the competitors and therefore innovation in any single property is short lived.
We must respond to the needs of the emerging new markets like China, India, the Gulf States and others, these will grow to an unprecedented rate, China in particular.
Ability to consistently deliver the brand promise every time and to every customer regardless of their needs.
Don’t play catch-up with technology, it is expensive but it is essential to remain competitive and technology plays a major role as we proceed in this millennium.
Recognize and reward your customers. This is a major factor to increase loyalty (hotel point systems is not the answer).
Innovate and respond to each market / segment needs, cannot apply same strategy / approach to all markets, nor same standards.
Remember that we are in a business to make profit, don’t manage by cost cutting but manage by revenue, by customer loyalty and by continuously high consistency.
Keep your working place safe and secure at all times for both your customers and employees.
Be a good corporate citizen, give respect to the environment and participate with the good causes.
In conclusion, must remember that in this people-focused industry with a labor intensive situation, the operating expenses will always increase year-after-year (even during recessions), therefore the only way to prosper is to continuously grow our revenues and not only by yields but principally by entering new markets and source of business through new units / facilities.
Growth will provide more opportunity and accomplishments for the work force which in turn will take good care of the customers who ultimately pays the bills and makes us successful.
As the industry will grow, must seriously take into consideration the rise of the value-oriented traveler for both domestic, regional and global travelers. This may mean shorter stays and less extravagance. These may be time-poor individuals who have lots of hotel choices therefore we have to transform our business models and furthering an active engagement with these new travelers (need of new brands / products), also it is interesting to see that some trends do indicate that these value oriented travelers are willing to pay for a fee (higher room rate) to help the local impoverished communities and / or the environment. With this trend there would be a great opportunity to create a platform for strong partnerships to assist the less fortunate and make the world a better place to live in and make money at the same time.