The lodging industry is multidimensional, complex, stocked with myriad stakeholders—and it’s these particulars that are its biggest challenge.
The industry used to be less confusing, simpler to get your head around. Before the likes of Kemmons Wilson and J. Willard Marriott—to name two—ushered in the modern era of hospitality, hotels or motels were erected and normally owned and operated by the same entity. Today, that model has gone the same way as shag carpeting and exterior corridors—which is to say, antiquated.
The large, multi-branded, multi-platform hotel companies have turned to an asset-light approach, particularly in the U.S., wherein they don’t own the asset, frequently do not operate the asset, but rather lend one of their brands to it and collect fees through a franchise model.
And while a lease arrangement is more common in Europe, most hotel companies are leery of the obligations a lease triggers, therefore avoiding them. Outliers are UK’s Travelodge, an entirely leased business, and Germany’s Motel One, which has expanded largely through signing leases.
The master plan—the bifurcation of ownership and management—has roots back to Marriott Corporation’s decision in 1993 to spin-off its real estate holdings into a separate company, creating Marriott International as the operations and branding part and Host Marriott as the real estate portion—what today is commonly referred to as a REIT, or real estate investment trust.
Other hotel companies have followed suit. Most recently Hilton, which in 2017 successfully spun off its timeshare business and its owned assets into a REIT, leaving Hilton as its fee-based arm. Now, hotel companies’ most powerful weapons are their brands and their loyalty programs and vast distribution systems that help drive bookings. And while all hotel companies would love to sell and own every one of their bookings, they aren’t alone in that pursuit.
Rise of Online Booking
9/11 coincided with the meteoric growth of the internet and Silicon Valley start-ups seeing e-commerce as a goldmine. Enter the online travel agency (OTA). Post 9/11 and the ensuing travel shutdown, hotels were in a pickle and needed to fill rooms. In haste, but perhaps out of necessity, they turned to these new-to-the-travel-scene OTAs and it was a seminal moment in the industry: Hotel owners and franchisees could now move product through a channel like Expedia—had brands lost some of their value?
Hotel companies opened the door for OTAs to thrive and more than 15 years later the likes of Expedia and Priceline—which have created a duopoly in the OTA space—are a continual force or thorn (whichever way one views it) in the side of the lodging industry. From a disruptive sense, OTAs were pioneers: They were able to figure out a way to make money by charging high commissions off of real estate that they had no vested interest in. Their biggest ace in the hole: money and marketing. OTAs have successfully convinced travelers that they have the best deals. Hotel companies now, late to the game, are fighting back with direct-booking campaigns of their own, to induce consumers to book through their channels, thus eschewing OTAs. It’s a contentious battle—don’t expect a decisive winner.
If OTAs weren’t enough of an irritant, in the past few years, the lodging industry has been dealt another combatant: the sharing economy. More specific, home-sharing, via the likes of Airbnb (whose implied valuation is larger than Marriott so has the money to buy Super Bowl ads, like the one below) and HomeAway. Their business model is similar to OTAs in that they don’t own any of the real estate they market and sell. In fact, they have successfully monetized a business that is not entirely new: the renting out of property. And while they face regulation hurdles, home-sharing companies have successfully inserted themselves as another means of lodging.
To be sure, hotel companies, even if they might not admit it, have concerns over home-sharing. Some have even taken the tack of, ‘if you can’t beat ‘em, join ‘em,' as evidenced by AccorHotels’ acquisition of UK home-sharing platform Onefinestay. Of course, this was in some way blunted by Expedia’s expensive acquisition of HomeAway. The saga continues.
While the lodging industry is marked by fragmentation, public hotel companies have made concerted efforts to make it more compressed. Marriott International’s blockbuster acquisition of Starwood Hotels & Resorts Worldwide proved just that. By doing so, it became the largest hotel company on the planet, commanding 30 brands and more than 1 million rooms worldwide. By gaining scale, a company like Marriott puts itself in a power position when it comes to things like negotiating OTA contracts—not to mention the now breadth of product it has to offer customers along a spectrum of segments.
Other M&A, such as AccorHotels’ purchase of FRHI Hotels & Resorts, and smaller-scale acquisitions, such as IHG’s buy of Kimpton, prove that bigger is better in the new global era of travel. Consolidation is a natural industry evolution, and the expectation from most is that this will not stop in the coming years.
The Next Big Thing
What, then, will be the next big thing to impact the lodging industry? Technology continues to change and grow at breakneck pace, so hoteliers have to constantly stay abreast of trends and ensure their hotels meet guest expectations. While the lodging industry continues to evolve, the one constant, the one concentration for all companies, is the guest. That will never change and it means hiring the right employees to deliver great customer service. Take it from Marriott founder J.W. Marriott, who famously said: “Take care of associates and they'll take care of your customers.” Now that’s a strategy you can’t dispute.