A few decades ago, there were a only a small number of nationally recognized brands, and fewer still were recognized across international markets. This has changed rapidly in recent years with the advent of new technologies, changing travel patterns and innovative new hospitality product types. In fact, the notion of what exactly defines a “hotel” or a “hotel room” has dramatically been altered. There's a revolution going on in the hospitality sector, and here's why.
Why the change?
A number of factors have spurred the change in how we define and choose hotels.
- Digital innovation technology. Digital innovations, such as mobile booking, check-in, payment and in-room service, have become more popular with busy travelers, particularly the younger generation. Easy anywhere/anytime online access has become the expected standard for many, which has changed the concept and necessity of the “front desk” and other service aspects of the hospitality industry.
- Impact of Internet marketing and distribution. The availability of internet marketing has led to increased competition and has created pressure on room rates. In addition, the delivery cost for getting customers into hotels has changed significantly by the emergence of online travel agencies or booking websites (OTAs), which can charge hefty commissions. OTAs do more than just sell hotel and vacation packages; they have significant influence over consumers’ behavior, not only by informing them about travel destinations and hotel brands, but by perpetuating a belief that guests will receive the best price if they book through third parties. Only about 30 percent of all bookings go through hotel websites vs. 69 percent made through OTAs.
- Consumer behavior. Thanks to OTAs and technology generally, today’s consumers are more sophisticated and better educated than they were a decade ago. In the past, the only travelers who really understood the differences among brands were frequent business travelers. Now, with online ratings and ever more international travel, consumers have the ability to research and understand their hotel options. Increasingly, they are looking for a sense of local character in their hotel room and their stay. This trend has begun to redefine hotels away from the brand uniformity of the past, with location, not brand being the focus of the hotel experience.
- Combining business and pleasure travel. “Bleisure” is a portmanteau referring to the practice of taking a business trip and adding a few days of vacation at the beginning or end. Combining work and play is a popular trend, especially among younger travelers who want to spend time sightseeing after their meetings.
- Impact of the sharing economy. Sharing economy or peer-to-peer lodging platforms continue to shape the global hospitality industry for both leisure and business travelers. In 2016, the number of listings on probably the best known peer-to-peer platform, exceeded 3 million globally, in over 191 countries. Increasingly, peer-to-peer players are being subjected to the same rules, regulations and taxes as those imposed on traditional hotels, closing the gap between hotels and alternative lodging platforms. One significant effect of the advent of the sharing economy on traditional hotels is that room rates during high occupancy “compression nights,” when hotels typically make their highest profits, have fallen in recent years in the largest U.S. hotel markets. This is because, when hotels are fully booked, travelers are now tending to book alternative-lodging sources, shrinking demand and making premium pricing harder to hold.
What are these revolutionary new hospitality products, and how do they differ from traditional hotel models?
- Growth of boutique, lifestyle and soft-brand hotels. Enhanced consumer awareness and travelers’ increasing desire for “genuine” local experiences has led to an increase in boutique (independent or part of small groups), lifestyle (nationally franchised) and soft-brand (signature hotels, individually named and branded, but affiliated with a major national franchise distribution system) hotels. These niche hotels have reported some of the highest occupancy, revenue growth and profit margins of any segment of the hotel industry over the past few years. Further, given that most of these hotels are located in key metropolitan areas (New York, Los Angeles, Miami and San Francisco), there is plenty of room to grow.
- Sharing economy meets hotel. Innovative hoteliers are adopting peer-to-peer platforms as alternative distribution channels for hotel inventory. This allows lodging operators to reach new customers while reducing distribution costs associated with OTAs. Further, peer-to-peer concepts are gaining traction in the corporate travel community as well.
- Hybrid hotel products. Hybrid hotel products catering to the hard-to-win-over millennial traveler are entering the market, such as new lifestyle brands, which blend private-rental, hostel and hotel formats in a community living space providing a unique design approach and enhanced customer experience to both townsters (people living nearby) and tripsters (people in town to explore).
Where does this leave us?
It is important during this critical yet exciting time to seize the moment and creatively adapt to the changing concept of hospitality, capitalize on new trends and expand market share. The market disrupters may threaten traditional business models, but they also present an opportunity for innovation. Many hotel companies have embraced the revolutionary concepts emerging in the hospitality sector. And, as in all revolutions, those who embrace change and adapt improve their odds of survival and success. Those who are less accommodating may not. The choice is up to us.
Lynn K. Cadwalader is a partner with DLA Piper in their San Francisco office. She represents clients investing in acquiring, developing and operating hotels and mixed-use projects in the United States and internationally, including Asia, Latin America and the Caribbean. Lynn's practice also includes providing legal and business advice to foreign investors seeking to invest in hospitality and real estate assets in the US, as well as representing hotel owners and developers in structuring investments through the EB-5 immigrant visa program.