Sharing Economy – A Hoteliers Comprehensive ReviewBy Robert A. Rauch, CHA - President of RAR Hospitality
The challenges of increased health care costs, minimum wage increase impacts and new supply are not yet critical for the hotel industry but they will become very important when an economic downturn occurs. Further, Airbnb has become a lightning rod for debate and could become one of those aforementioned factors that pushes hotel industry revenue and net income growth into negative territory. So what can the hotel industry do?
With a $25.5B valuation, Airbnb and other short-term rental companies are avoiding taxes and regulations. In addition, Airbnb is big business. According to a recent study by Penn State University, in New York City, 72 percent of the rental units are illegal and in San Francisco, 18 percent of their revenues are derived from "superhosts" who have multiple units. To date, it appears the major cities with significant Airbnb impact are New York, Miami, Boston, DC, Chicago, Austin, Los Angeles and San Francisco.
In these and in other cities, Airbnb also impacts the housing industry, creating both a shortage of housing units and potentially an increase in rents from those units remaining in the normal apartment rental pool. Further, as the economy softens a bit in 2017 after an election year, will Airbnb's supply increase, coupled with the hotel supply pipeline, have a more material impact on occupancy and hence rate? Will corporate users find their way to Airbnb in abundance next year? As a large company, the question is, should we the hotel industry insist on Airbnb paying taxes and managing their "hosts" to avoid illegal hotels?
Rauch's Airbnb Review
On a trial basis, I decided to book an Airbnb rental unit. After booking, I was asked to please not tell any of the other apartment dwellers that I was an Airbnb guest. It is clear that many buildings have a minimum stay of 30 days so my 1-night Los Angeles stay would be either illegal or at the minimum, frowned upon. I received a clean apartment but had no way of knowing whether or not the sheets or towels were freshly cleaned for me as they were not folded neatly as we do for our hotel guests. The arrival and departure process was strange as I never met my host though she was readily available via text/phone. I had access to reviews about the host but not necessarily about that apartment per se. Further, and perhaps most importantly, I was asked by the host to enter the apartment building by following a resident in and following them on to the elevator so that the resident would inadvertently allow me access to the floors. Then the unit I was staying in was unlocked and I was able to access the unit key, access FOB and parking pass if needed.
The truth is, after having heard from Troy Flanigan of the American Hotel & Lodging Association (AH&LA), I am convinced that Airbnb is a big business that in essence avoids the responsibilities of being in business and puts consumers at risk be it in regards to safety, background checks, health or fire standards. Further, while I think we should embrace Airbnb as a legitimate competitor, we are not to be compared to the taxi industry, a group that attacked their new competitor, Uber, at every turn. We should work with Airbnb on solutions for leveling the playing field without antagonizing them. Think of them more as an online travel agency, a combination competitor and ally. The hotel industry is an organized, highly regulated industry with high quality standards and an easy way to determine bad products–poor reviews and franchise removals for a couple of ways along with the highly regarded AH&LA as our main association.
Taxis, Uber and Lyft
The taxi industry is a disaster so Uber trounced them on arrival. In my quest to understand how bad it is, I took two taxi rides, one in Phoenix and the other in San Diego. Neither driver was pleasant and there is no way to review your experience unless you want to send a comment card via mail to the Airport Authority. Further, both drivers asked for cash saying the credit card machine did not work. Really? For those who use Uber and Lyft, we know there are problems (first time drivers who are either lost, not tech-savvy or worse yet, both) but generally, notwithstanding surge pricing, it is a good experience.
In San Diego, Uber is allowed at the airport. In Phoenix, it is not as airport officials claim Uber will not provide background checks on drivers to the airport authority. Uber, along with its main competitor Lyft, is part of the new job creation of "independent worker." Airbnb frankly is in the same boat. Is it a full-time job to be an Airbnb host? Yes in some instances, no in most. How about working for the larger companies that actually run illegal hotels by having say 10 rooms in an apartment? So will Airbnb end up as more of an online travel agency (OTA) or a direct hotel competitor or both?
We probably need new rules for this sharing economy. Labor laws have not kept up with the needs of businesses and employees. In America, you are either an employee or not. With contingent employees from temp firms, part-time employees and sharing economy employees like Uber and Lyft, what we need is a new category of independent worker. According to a study by Harries, Krueger and Cramer highlighted in the Wall Street Journal in December 2015, the "Uberization" of work creates an imbalance of hours worked from week to week. This creates real challenges for everything from health care to minimum wages earned (does a driver get paid for waiting?) and more.
The large OTAs (think Expedia and Priceline) are able to exert significant influence over hotel choices that are available to the customer. Customer ratings can be impacted by our "walk" policies, commission structures and other subjective factors. Airbnb offers a much lower commission rate than either of these two main OTAs. This might get independent hotels and B&Bs to list their properties with Airbnb.
Hotel companies currently need OTAs as they represent 15 percent of the market and that will increase as the economy softens a bit in 2017 after election year economics plays out. The big brands have clout in competing for market share. The Marriott/Starwood merger of 2016 produced another monster entity and we might see additional mergers of epic proportions sooner rather than later. This leaves independent hotels struggling to fight to attract users to their own websites. After all, relying on OTAs increases operating expenses at a time when average rate growth will begin to slow and new supply will enter the equation. Franchise fees are now double digit costs which give independents that slight advantage but they will have to spend those "saved" dollars on marketing.
The Bottom Line
The combination of Airbnb, new hotel supply, an economic slowdown and potential global economic decline put us in jeopardy at the first signs of an event of any magnitude. As individual hoteliers, we must protect ourselves with a powerful digital presence to compete. As an industry, we must strive for a balanced approach to the new realities of mega-companies in our industry. Unless we are Marriott, Hilton, IHG, Airbnb, Expedia or Priceline, we are the little guy. I like our chances of survival and success but it will not come without continued hard work and awareness that this industry is not the art it was but rather the science it has become.
Robert A. Rauch, CHA
Robert Rauch, CHA, is a nationally recognized hotelier and President of R. A. Rauch & Associates, Inc., a leading hospitality management and consulting firm. Rauch has over 35 years of hospitality- related management experience in all facets of the industry. Widely recognized as the 'hotel guru', Mr. Rauch maintains a blog where he expounds upon insights and trends in the hospitality industry at www.hotelguru.com. Along with the blog, he also publishes Hospitality Innsights, an electronic newsletter that is distributed monthly. Mr. Rauch held nearly every position in the hotel business including General Manager of full-service Four Diamond hotels for Hilton and Embassy Suites. His education includes a bachelor’s degree in Hotel Administration from Western International University and a master’s degree in Tourism Administration from Arizona State University. He is a Certified Hotel Administrator and has served as chairman of numerous tourism organizations nationally and in the western U.S. He has been directly involved in developing several leading brand hotels, some of which the firm still owns and manages. R. A. Rauch & Associates, Inc. currently operates hotels in California, Arizona and Colorado with several under development.InnovationGlobal