The Incredible Shrinking Hotel Industry

By Daniel E. Craig, Founder, Reknown

The hotel industry isn’t known for being quick to adapt and evolve, and it often finds itself scrambling to catch up with changes in technology and traveler behavior.

Online travel agencies are a perfect example. Rather than impede the growth of OTAs by maintaining tighter controls on rates and inventory, hotels threw open their doors and continue to fuel their remarkable growth to this day.

The hotel industry is in a similar state of denial in regard to the latest threat to its well-being: the private rentals sector. And yet the threat is far greater. Whereas OTAs help to fill hotel rooms, private rentals lure travelers away from hotels entirely. And their growth is probably unstoppable.


Growth of Alternative Accommodations
Vacation rentals have been around for decades, but in recent years the sector has moved from niche market to mainstream, expanding into urban markets and attracting both business and leisure travelers. The great disrupter has been Airbnb, which launched in 2008 and now reports over two million listings in 191 countries worldwide.

A recent survey of 4,000 consumers in the U.S. and Europe from Morgan Stanley Research found that Airbnb is “almost double the threat” to hotels than previously believed, with 19 percent of leisure travelers and 18 percent of business travelers having used Airbnb in 2016. In 2017, those numbers are expected to increase to 25 percent and 23 percent respectively.

But we don’t need surveys to tell us that travelers are changing their habits. Simply ask friends, colleagues, family members – even hoteliers – where they stayed on their most recent trips, and an ever-increasing number will cite private rentals.

The growth has been precipitated by digital innovation and transparency. Airbnb alleviates many of the concerns travelers have about staying in a stranger’s home by allowing them to view photos of homes and maps of the local area, compare listings and pricing, check out host profiles and reviews, and book instantly.

Many of the concerns homeowners have about renting their homes to strangers have been alleviated, too. It’s easy to create a listing, and hosts can check out profiles and reviews of travelers before accepting them, implement strict cancellation policies, and take advantage of property damage protection.

Then there’s the user experience, from Airbnb’s sleek, uncluttered website, a breath of fresh air compared to OTAs and hotel websites, to the personalized communications from hosts, to the stay itself—the extra space, free Wi-Fi, kitchen and laundry facilities, and residential touches. All for less than the price of a typical hotel room. 

Many hotel executives insist that Airbnb is not a serious competitor, but they should certainly be alarmed by recent moves by OTAs into the private rentals space.

“We couldn’t be more enthusiastic for these types of accommodations,” Priceline’s executive chairman Jeffery Boyd said last year. Priceline’s Booking.com has integrated 7.3 million alternative accommodations listings into its booking engine.

Dara Khosrowshahi, CEO of Expedia, which owns HomeAway and VRBO, said last year that HomeAway’s inventory “is going to be fundamental to our product on a long-term basis.”

By investing their enormous marketing power in this sector and listing alternative accommodations alongside traditional hotel rooms on platforms that travelers know and trust, OTAs stand to dramatically accelerate adoption of private rentals.

Decrease in Demand, Increase in Supply of Hotel Rooms
While the traditional hotel business isn’t likely to disappear anytime soon, even a drop of a few percentage points in occupancy can have severe consequences. A separate report from Morgan Stanley Research found that compression nights, when hotel occupancy is greater than 95 percent and hotels typically make their highest profits, fell by 17 percent from 2015 to 2016 in the largest 25 markets in the U.S.

Meanwhile, the supply of hotel rooms is increasing in regions around the world. According to Lodging Econometrics, there are 11,547 hotel projects and 1,953,784 rooms in the global pipeline, up 6 percent and 4 percent respectively year-over-year.

As a result of this perfect storm of decreased demand and increased supply, the hotel industry can expect lower occupancy and rates, shrinking profits, and, ultimately, layoffs and closures.

Embracing the Sharing Economy
Hotels that wish to prevail will have to be forward-thinking and open-minded. It starts with accepting, however reluctantly, that home-sharing represents progress. It’s a natural evolution of the so-called sharing economy, which creates efficiencies and reduces waste by putting to use empty homes, idle cars, vacant office space and other underutilized items.

Yet rapid change creates disruption, and growth in private rentals takes affordable housing away from local residents, drives up the costs of housing and rentals, and takes away traditional hotel jobs. The hotel industry needs to support legislators in the fight to regulate and tax private rentals, curb growth and ensure a fair playing field.

At the same time, hotels can seek new opportunities in the sharing economy by optimizing underutilized services and infrastructure. Traditionally, hotels design services and facilities primarily for guests. Efforts to attract local residents are only moderately successful because many people regard hotels as overpriced and lacking atmosphere—a necessity when traveling but a place to avoid in their hometown. Yet as the number of overnight guests shrink, hotels will need to displace lost revenue, and this could come from locals, commuters and travelers.

One hotel company that recognizes the potential is AccorHotels. “Why could not your client be the one living next door to your hotel?” CEO Sebastien Bazin said in a recent interview with Hotels magazine. “He may not need a room but there are many services we can render to him, whether it is laundry, key service, package delivery, because we are open 24/7 and we have 240,000 experts.” Bazin estimated that such services could comprise one-third of the company’s revenue in the future.

Recently, AccorHotels announced the launch of JO&JOE, a new co-living hotel brand, and has invested in luxury vacation rentals site Onefinestay.

Hotels can utilize existing infrastructure to cater to travelers staying in alternative accommodations, many of whom need workspace, social spaces, food and beverage, concierge services, business services, fitness and recreation.

They can also expand inventory to include branded rental apartments. Room Mate Hotels offers private apartments near its hotels on the Be Mate site, providing guests with all the benefits of private accommodations plus access to the hotel’s public spaces and services, including luggage storage, key delivery and concierge services.

There is also potential for hotels to contract services to operators of private rentals, including the collection and distribution of keys and mail, concierge and business services, security, professional cleaning, and training in guest service, hospitality and cleaning standards.

WeWork Co-working Space


Optimizing Spaces
Many areas in hotels sit idle a lot of the time, including function space, restaurants, lobby space and guestrooms. Ballrooms and function rooms are intended to attract lucrative group business, but as more travelers choose alternative accommodations it’s increasingly difficult for group organizers to commit to large room blocks.

Some of this space could be repurposed into communal work spaces for guests, travelers and locals. Following the lead of companies like WeWork and Spacious, hotels could cater to the growing number of independent workers who do not have offices and need the services and communal aspects of shared office space. Space could be made available for day use, evening use or even overnight use for independent workers, local businesses, start-ups, projects, productions and pop-up retail spaces.

These spaces could be designed to be more flexible; easily converted from sleeping or dining areas to working and socializing areas depending on the time of day and demand. Services could be monetized through drop-in fees, day-use rates and monthly memberships, in addition to rental fees and incremental food, beverage and retail sales.

No question, such changes would bring challenges of their own, but as more travelers opt to stay in private homes, hotels will need to find ways to evolve with the times.

 

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7 Responses to “The Incredible Shrinking Hotel Industry”

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  1. Martin Soler says:

    Great article I think there are a couple of points on this (long rant, sorry).
    1. If we stopped for a second and re-thought how we look at things in this space we’d probably stop thinking of Hotels vs Rentals. In the end is it rooms and a place to sleep. I think we should work with Airbnb and other rental distributors (or wait, OTAs for Short Term rentals…) hotel rooms will likely end up in those sites as well. What is going to happen through those sites though, is like newspapers where we read articles and not necessarily specific papers or websites, we’ll rent rooms rather than rooms in a specific hotel.
    2. I still think Airbnb is a bigger threat to OTAs than it is to Hotels because of profitability. Selling an individual room is incredibly expensive, the cost of acquisition for one room is rarely profitable. The profitability comes in selling hotels because you can re-advertise that same “room” 100 times. Obviously to counter this Airbnb will start working to sell hotel rooms or work on selling districts – or both.
    3. I believe we all need to start looking at how we can grow the pie of travel rather than eat each other’s parts. We can grow the pie by working on ways to make travel booking easier, cheaper, faster and less risky for the travelers. With low-cost airlines, travel increased – we need more initiatives like that.
    If people could, they would travel more not less. We need to help them get there.

    • Daniel Edward Craig says:

      Hey Martin, Your rants are always welcome here! Agreed that Airbnb is a threat to OTAs, but OTAs will do just fine. I wonder if the newspaper analogy works for hotels … there is so much more at stake when traveling, and personally I am more selective than ever about the newspapers I read in the era of #fakenews.

      I think it would be a shame to see Airbnb evolve into an OTA given that it built its popularity on offering an alternative to hotels. Definitely room for everyone, especially if travel increases, but hotels will never be able to compete with private rentals on cost.

      My fear is that the growing sense of nationalism and isolation in the world will only reduce global travel. Thank god for emerging markets. That said, I really need to do my part and come visit you in Paris …

  2. Bas Lemmens says:

    Nice article and great comments Martin!! Time that hotelchains and owners of Place to sleep really look at their distribution costs. As Airbnb also is 15% this is not really a game changer , Try to get your distribution costs lower to take the distribution into your own hands. Technology is available to steer your conversion and increase your direct bookings and be less dependent on the OTA’s.

  3. Great summary of the disruptive effect of sharing economy on the all-too-often over conservative hotel sector Daniel. Rapid developments should definitely give hoteliers pause for thought as to what their business actually is and how they can best service customers.

    I am glad you talk about Accorhotels, where Sebastien Bazin has definitely driven a rethink of what the hotel business model of the future might actually be. As a result the company is revolutionising how it does not just operations, but distribution and positioning as well.

    I recently experienced a hotel product in Amsterdam that really made me think about how often we fail to realise the potential of our hotel properties.

    The Student Hotel is a concept that combines student accommodation (the majority) with long stay accommodation (the large minority) and ‘normal’ hotel stays (the small minority. All three populations mix seamlessly, and public space is monitized with a restaurant, coffee shop (in the International rather than the Dutch sense), a sublet gym that puts most hotel gym facilities to shame, coworking spaces and even soon a swimming pool. It seems every inch of space is utilised by revenue generating consumer lead initiatives mixed in a very non-traditional manner.

    Disruption is not coming to the hotel sector, it is already here. If they are to survive, hotels need to stop moaning that the world is changing and get with the program!

  4. Alain Classe says:

    Hi Craig.

    Great Post. Hotel industry should really have a look on their distribution costs.
    Hotels need to realize that the world is changing and if they don’t adapt they will died.

    I definitely agree with Martin Soler when he said “Airbnb is a bigger threat to OTAs than it is to Hotels because of profitability. Selling an individual room is incredibly expensive”.

    Optimizing services and hotel spaces should be a solution, and the idea of “en.bemate.com” is great one, they are one step in advance.

    Alain Classe
    Ecole Hôtelière de Genève
    @alainclasse @ehgnews

  5. Very nice post. i also agree with martin soler about airbnb.

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