The hospitality industry 2.0 … and soon 3.0?
By Jean-Philippe Weisskopf - Assistant Professor of Finance at Ecole hôtelière de Lausanne (EHL) and Philippe Masset - Assistant Professor in Finance at the Ecole hôtelière de Lausanne
10 December 2018
The hospitality industry has been undergoing tremendous changes and disruptions over the last two decades. In this environment, industry participants are trying to understand where we are coming from and especially where the industry is going. A short survey was conducted in autumn 2018 among EHL faculty to discern the trends that have reshaped the hospitality industry over the past 20 years as well as their vision regarding the evolution/revolution that this industry is likely to experience in the future.
The TEN trends that have reshaped (and are still reshaping) the industry
Virtual community: social networks and in particular TripAdvisor have had a profound impact on customers. This has led to more transparency and, overall, to an improvement in the quality of the services provided by hospitality companies.
Collaborative economy: Airbnb represents a major disruption in the hotel industry. The competitive landscape is tougher than ever. The latter is further reinforced by the fact that lodging properties listed on Airbnb do not necessarily have to comply with the same rules and regulations than traditional hotels.
Online Travel Agents (OTAs): they have had at least three major impacts on the hospitality industry. First, they have altered distribution channels and consequently taken value away from hoteliers. Second, the notoriety of brands owned by Booking Holdings and Expedia are such that these companies have almost replaced hotel brands. Third, they have built solid relations with travellers. Now, hoteliers have to pay to get access to these customers, thereby leading to a thinner profit margin for the former.
Digitalization: Apps, in particular, are increasingly important in the way hoteliers manage the services they provide to their customers. The latter can now control many aspects of the guest cycle and experience.
The boom of global tourism: low cost carriers enable more people to travel the world at a reasonable price. Moreover, several emerging markets have seen their GDP increase at a rapid pace, thereby enabling their citizens to travel the world. Customers from South Korea, China, India, and others, now constitute a large body of potential travellers. Their demand, of course, has a big impact on the offer.
Experience economy: customers request extreme personalization, unique experiences, and so on. As a respondent said, this leads to "the death of the travel agent and the rise of the independent traveller".
Asset management practices: the asset-light approach has become the prevalent model in the industry. The separation between the management of operations and real-estate assets allows hospitality companies to concentrate on the core business and thus to be more efficient. It, however, induces additional complexity and potential agency problems. This explains the emergence and progression of asset managers.
Professionalization: as stated above, new job profiles have emerged following the increasing complexity of the hospitality industry. In parallel, the need for quantitative competencies (for forecasting, budgeting, etc.) has also increased.
Generations Y and Z: these new generations have different requirements and needs compared to older generations. A respondent said "Older generational think about hotels and car rentals. Younger generations think about Airbnb and Uber."
Sustainability: people are becoming increasingly sensitive to ecological and social issues. A respondent said that this "has to be considered in branding, but take care, because guests and consumers are now well-aware that window-dressing exists, and they will not buy in."
Today - The hospitality industry 2.0
The interviewees were also asked to formulate their opinion about the future of the hospitality industry. To a large extent, the answers suggested the need for hoteliers to properly understand the consequences of the above changes and to adapt to them. We hereafter outline six main dimensions:
- "Standardization can no more be the norm": it is becoming critical to personalise and tailor the services to the needs and preferences of the travellers.
- "To create value, focus on niche markets": more customisation and specialisation may enable to increase value creation for hospitality companies. But be careful, as a respondent said, this requires to genuinely think about the value proposition of your offer and not "simply branding and rebranding".
- "Exploit technology as an accelerator for business": technology will be at the core of the hotel experience both in room, before and after the trip. This will lead to the development of new concepts and more innovation in the industry and contribute to the emergence of an ever more individualised offer.
- "Social responsibility is a moral and an economic obligation": the impact of global warming can today be considered a major risk for both corporations which may lose in revenues and profits and society as a whole. It is thus critical for governments but even more so for corporations to become more sustainable: "not just green, but real sustainable business models".
- "Develop more responsive and resilient business models": the positive effect of an increase in the number of travellers around the world is accompanied by negative side-effects. "Tourism despite ever growing flows of travellers will become riskier and more prone to crises" as all of sections of the population start to travel. This will be accompanied by increased regulation as a response to a disproportional increase in tourist flows in some places (e.g. Venice or Barcelona).
- "Manage talents actively": the times of employee loyalty over 40 years and passive, hierarchical management styles are definitely gone. "Attracting, developing and keeping the right talent into and within the hospitality industry continues to remain a core challenge"
Tomorrow - The hospitality industry 3.0?
While, as seen above, some respondents outlined the need for the industry to evolve in order to better adapt to the current environment, some were more 'extreme' and suggested that hotel rooms, as we know them today, "will become a thing of the past".
These respondents refer to the impact of the sharing economy and the tendency of today's customers to avoid traditional hotels. They believe that adjustments in the offer, like the ones listed above, are not sufficient and that the industry has to truly reinvent itself.
This standpoint is reinforced by the increasing importance of technology in the hospitality industry and the power that technology firms are acquiring. A respondent elaborates on this: "the major technology firms will replace most hotel brands, because they can offer technology solutions and create markets to attract customers. So the traditional hospitality industry will evolve into niche markets (serving specific types of customers), or extremely luxury sector (so they can afford to pay their staff reasonable salary). Those who can't identify their niche will become the money machines for technology companies. Some brands big enough may survive, but their business will get tougher."
This article shows how dynamic and uncertain the environment, in which the hospitality industry operates, has become. While respondents are more or less alarmist as to the future of the industry, all nevertheless agree that it has to evolve and reinvent itself in order to exploit the opportunities and cope with the challenges it faces. The only question remaining is up to which extent this transformation will have to take place.