Why Wall Street really owns the guest stay

Photo credit: diegograndi//Getty (Publicly traded hotel companies beholden to Wall Street)

The top five hotel companies in the world are all publicly traded, meaning they are able to raise funds through the sale of stock, share risk and, unlike private companies, are compelled to report earnings annually and are open to regular audits. By having this status, these public companies, to a large degree, are beholden to Wall Street, which rewards perpetual growth and robust quarterly earnings and sinks the stock prices of companies that come up short of those pursuits. Like a shark, the companies that constantly move forward are the ones that prosper. 

There is just one drawback to that: it sometimes hurts the very customers these companies serve. Publicly traded hotel companies, in particular, today are licensor intense; a model wherein they allow access to their brands in exchange for a fee. Franchising is a model that Wall Street loves because it obviates the need for debt-heavy expansion and large capital expenditures on things like equipment. In exchange for allowing other parties to use their brand, they are paid a negotiated fee that is normally a percentage of room revenue. A continual fee stream and net-unit growth—that’s what Wall Street likes and what balloons hotel stocks.

Hotels, therefore, are slowly finding new and innovative ways to increase fee revenue—and are taking a page from the airlines, which, from a customer perspective, is rarely a good thing. In 2015, for instance, both Hilton and Marriott updated their policies to eliminate same-day cancellations. Two years later, they moved it out to 48 hours and accessed fees for those who failed to follow the rules. That stinks—though not as bad as what the airlines do, charging triple figures just to change a flight time or date. 

Meanwhile, expect the future of hotel bookings to become even more arduous and similar to what carriers like American Airlines does now: it has six classes of seating, and recently rolled out Basic Economy, which reaching and sitting in is like walking down the row to perdition. Hotels are slowly but surely testing new “flexible” pricing models. On Hilton’s Q2 call, CEO Chris Nassetta said the company was experimenting with these structures that include things like rates where a seven-day-out-cancellation notice is required. “If you can create the right incentive system where you give them an incentive to let you know earlier, it’s good for them because they ultimately probably can get a little bit better deal,” he said, which prompted me to reflect on this comment from a recent article in The New Yorker focused on airline fees by Tim Wu, who wrote… “in order for fees to work, there needs be something worth paying to avoid.” What are you willing to pay for to avoid about your hotel stay?  

On top of fees, have you noticed that hotel rooms keep shrinking. Sure, you have. It’s, again, straight from the airlines’ playbook. Bill McGee, a contributing editor to Consumer Reports, reported that the roomiest economy seats you can book on the nation’s four largest airlines are narrower than the tightest economy seats offered in the 1990s. My knees hurt just from reading that.

Now, I freely admit that hotel guestroom design is a far cry from the garish rooms of yore, but some of the newer midscale product features rooms the size of sardine cans that remove traditional casegoods in favor of open closets, or as I like to call it, air. Sure, hotel companies are picking up on customer trends, that the room is but a staging ground for the experience that awaits in the hotel’s public spaces. “Cozier” rooms though are also a boon for developers, allowing them to build hotels with more rooms, which means more revenue potential.   

I’ve read that when companies are not driven by the profit motive, they cease being customer oriented. I’m prone to think the opposite: when companies aren’t habitually chasing the almighty dollar, their customers actually benefit. Fact is, as the hotel industry continues its march to consolidation, like airlines before, customers could be caught in the jet wash of further fees and shrinking amenities. And Wall Street loves that.