Over the past 20 years, many facets of the hotel industry have shifted to adapt to new technology and changing consumer behavior, which have in turn changed how hoteliers conduct business.
“The lodging industry has changed in several key areas over the past decades and many of these changes have helped hoteliers to enhance their products, attract more guests and create opportunities for expansion,” said Chip Rogers, president and CEO of the Asian American Hotel Owners Association.
However, those changes have also had an impact on the bottom line, which Rogers said has become more difficult to attain and has diminished over time.
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“The availability of internet marketing has led to increased competition and has created pressure on room rates. As costs continue to rise at a higher rate, the net effect on the [net operating income] has overall been negative,” he said. “Profit margins have also decreased because of higher commissions from [online travel agencies] and increases in operating costs such as workforce, and the increased amenities demanded by consumers.”
Even so, hospitality will continue to adapt, said Tom Corcoran, co-founder and chairman of the board of FelCor Lodging Trust.
“Hospitality has been around for a thousand years,” he said. “It will continue to be around for another thousand years.”
The two industry veterans discussed with HOTEL MANAGEMENT some of the biggest changes the industry has seen over the past two decades and how those changes have affected business at large.
Marketing and Distribution
Marketing and distribution costs are the most significant changes the industry has seen over the past couple decades, Corcoran said.
“The delivery cost for getting customers into hotels was changed significantly by the business model, which was primarily based on brand and travel agents that were being paid at a 10-percent rate to the OTAs,” he said. “In addition, the traditional marketing—whether it was billboards, newspaper, television, radio—that hotel companies did has been replaced by digital formats in the form of ads through social networking, Google, etc.”
When third-party intermediaries came on the scene about 20 years ago, they were welcomed by hoteliers as innovative new channels to market hotels and reach guests, according to Rogers. Over time, that relationship changed.
“The relationships between hoteliers and TPIs have created some unique challenges from commission charges, equitable tax remittals and increased market share and reliance,” he said.
Corcoran said one change that relationship has seen is commission rates. When TPIs were introduced, commissions were higher than they are today. But then, the landscape looked different than it does now.
“You had a lower demand going on. You still had remnants of travel agencies that were beginning to slowly disappear, but they were still a bit part of our business back then,” Corcoran said. “A lot of people in the beginning saw OTAs potentially as incremental and not stealing business at the time.”
However, he said that because of their marketing dollars, OTAs had a huge impact that would affect consumer behavior—a belief that guests could get the best and cheapest price if they booked via third parties, helping to fuel OTAs’ market share and bringing the issue top of mind for hoteliers’ wallets.
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Today’s consumer, thanks to online travel agencies and technology in general, are more sophisticated and educated than they were 20 years ago. That sophistication has touched many areas of the industry.
“Twenty years ago, the only travelers that really understood the differences in the brands were frequent business travelers,” Rogers said. “Now with the availability of online ratings and a smaller world footprint, the consumer has the ability to research and very properly understand their options.”
However, Corcoran said consumers are confused as well, in part due to OTAs’ larger marketing budgets that allow them to purchase a lot more keywords than hoteliers. For example, a customer might type in “Holiday Inn Dallas,” a keyword that a third-party has bought. If customers don’t pay attention to the URL, click the link and book from there, they might not even realize they booked with a third party.
“That’s the digital world we live in today,” Corcoran said. And that consumer behavior, the one that sees guests visit as many as seven sites before making a booking decision, has increased the distribution costs of today versus yesterday.
Enhanced consumer awareness has also led to niches within the industry, such as boutique hotels, extended-stay product and a focus on all guest types that has seen an emergence of new amenities, Rogers said.
“Consumers have come to expect more services and amenities at lower costs, and these offerings can often make the difference,” he said. “These demands have led to the prevalence of services such as high speed Wi-Fi, complimentary hot breakfast, expanded in-room technology and entertainment options, and fitness centers.”
Ownership and Assets
The need to adapt to the new consumer saw an emergence of the industry’s current darling, the select-service hotel—and that’s not necessarily a bad thing for hoteliers.
“Select-service hotels can often more easily adapt to consumer needs than larger full-service hotels,” Rogers said. “For hoteliers, it is cheaper and faster to develop and renovate a select-service property.”
Corcoran said select-service hotels have been slowly moving into the industry over the past 10 to 15 years. Within the last five years, the model has been recognized as one that provides benefits without the typical cost of a full-service product, allowing for much higher gross operating profit and yield on invested dollars.
“It’s proven now that they will have ongoing value in terms of capital,” he said.
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Rogers said that some older hotels can’t keep up with the shift due to many select-service properties becoming higher end and providing all the amenities guests want.
“Consumers also drove this industry shift, as fewer guests demanded the presence of full-service restaurants and roomservice, they did not wish to incur charges for the extras that are included on other types of hotels,” he said.
Corcoran said the shift from full to select service happened along with a shift in dining options for consumers. Hotels used to be the place to eat, offering three meal services per day. As fast-food options and other chain restaurants became more available, consumers no longer needed to rely on hotels for foodservice. He said select service will continue to be the industry’s preferred model moving forward because it contributes to higher profit margins and return on investment.
As the hotel industry shifted over the years, it became more intricate to operate properties. The answer: third-party management companies.
“As the technology and internet became more and more part of our society, it became more complicated to operate the hotels so there is a need for third-party operators and good franchisees,” Rogers said. “It impacted the smaller operators but delivered what the consumer was expecting.”
Third-party operators also emerged due to the willingness of investors to pool equity, he said. By having multiple investors/owners, it is simpler and more productive to allow a third-party manager to operate properties and accept a lower return on investment.
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When Corcoran founded FelCor with Hervey Feldman in 1991, he said the duo didn’t want to get into the management game.
“Even before we went public and became a REIT, we decided we’d much rather grow our company through a third-party management company than to start our own management company because we thought focusing on being an owner and being an asset manager versus a day-to-day manager was the right thing for us to do as owners,” Corcoran said.