Transformation in the Lodging Industry

Lodging is in the midst of a profound, multidimensional business transformation that will affect virtually every part of the industry. New skills, capabilities and supporting infrastructures will be required to deal with its drivers and ramifications, capitalizing on the opportunities while mitigating the challenges. Existing capabilities won't become obsolete; rather, most traditional ones will still be quite necessary. At the same time, they likely will not be sufficient to succeed in tomorrow's lodging environment. The new skills, capabilities and infrastructure will require changes in strategic focus, organizational composition, workforce structure, management and investment.

WHAT IS THE TRANSFORMATION?

Lodging is changing from a product-focused, physical asset-intensive industry to a more customer-focused, brand-intensive one. The goal — value maximization for investors, owners and managers of hotels — hasn't changed, but the means has.

Historically, the emphasis was on developing physical products and supporting services that companies believed their customers wanted and deploying the sales and marketing and distribution resources necessary to sell them. In the future, the focus will be on developing and marketing a more holistic product wrapped within specific brands and based upon a deeper understanding of the wants and needs of a more precisely targeted set of customers. Product and brand will be designed to provide customizable guest experiences that connect with each customer on an emotional level. The goal is building customer loyalty that is durable, tangible and extendable across a broader array of products and services.

The phrase, “holistic product,” aims to convey the customizable end-to-end combination of physical product, ambience, service, communication and messaging across all touch points, method of distribution and follow-up. The product may extend beyond the enterprise to include an ecosystem of transportation, food and beverage, retail, activities and entertainment. The notion of resonating with customers on an emotional level aims to convey an experience that goes beyond meeting rest and nourishment requirements to evoking as a favorite song or a particular photograph might. Once established, emotional connections are enduring and singular. Wrapping these elements within a strong brand efficiently conveys the company's offering to targeted customers and creates preference and value for owners.

The graphic on page 60 provides a high-level overview of the transformation activities expected in the coming years.

While this strategic shift may seem subtle, its effect on lodging will be far-reaching. The capabilities and infrastructure required to acquire and make sense of the customer information and execute new sales and marketing strategies and more modern property level operations are significant. Future “products” will likely include a dynamic ecosystem of transportation, food and beverage, retail, distribution and travel intermediaries, and sports and entertainment suppliers. Assuming these connect with the customers on an emotional level, they will be both enduring and difficult for competitors to replicate. A strong brand efficiently conveys a company's offering and thereby creates preference and value for owners.

TRANSFORMATION DRIVERS

Among factors driving the transformation:

  • Physical constraints. It is becoming increasingly difficult for hotel companies to differentiate themselves by changing their properties. Companies will continue to use distinctive architectural design and physical product to differentiate themselves, but innovations tend to be expensive and easily replicated. Starwood is among the most creative in using design and product innovation to distinguish such basic hotel aspects as beds and showers, but the run on hotel bedding products it launched has in the past few years eroded the competitive differentiation it once enjoyed. The difficulty of duplicating a unique customer experience that resonates on an emotional level is one of the drivers behind the industry transformation.

  • Investors/analysts. The desire for the more stable and predictable income streams associated with fees and services has led many global hotel companies to divest many of their owned hotel properties. Management, franchise and other fee and licensing income has different growth drivers than property ownership, principally system growth, which in turn is driven by the strong brands hotel owners and management companies prefer for their ability to produce greater profits. Strong brands are built by customer preference, increasingly a function of a differentiated customer experience — and a driver of industry transformation.

  • Technology. It is both a driver of and a constraint on industry transformation. It is a driver because it enables many capabilities required to understand customer needs and wants and the ability to act on them to deliver a unique customer experience. Increasingly robust applications, infrastructure, networks and global communications — all at declining costs — provide hotels with unprecedented opportunities to cost-effectively deliver customized service.

  • Demographics and psychographics. The industry will soon be servicing the two largest demographic groups in history: Baby Boomers and Millennials, or Echo Boomers. However, these groups are quite distinct in their preferences. Satisfying the needs of both simultaneously is a driver of industry transformation.

  • Globalization is a huge driver of the industry's transformation because, as business and leisure pursuits become increasingly global, so does the need to provide an integrated, worldwide, multi-cultural and consistent customer experience. This cuts both ways, as China and India represent the fastest-growing outbound markets. Asian and Indian hotel companies are aggressively expanding into Europe and the U.S. for the first time.

  • Costs. From operations to construction to financing, costs are on the rise. Labor costs are among the fastest rising, and an impending labor shortage and resultant compression of the market will likely exacerbate this trend among an increasingly fickle and less-skilled worker pool. Customer acquisition costs, too, are on the rise as the Internet and demographic shifts have produced informed consumers only a click away from a competitor. The need to develop lasting customer loyalty has never been greater. But without technology, this will be an extremely labor intensive proposition.

    Among the more poignant examples of the transformation, which reflect some drivers:

  • Strategic focus. Global players, boutique hotels and recently constituted companies of private equity funds all emphasized the overarching strategic importance of building brands that drive system and fee growth.

  • Asset sales. Branded hotel companies have divested to a greater or lesser degree their owned real estate. While they will continue to selectively invest to gain contracts and/or establish strategic presence or gain critical mass, a separation of asset ownership and management shows the transformation.

  • Executive management. Brand building and marketing are core strengths of the new CEOs of two major global branded companies. The executives, who come from non-hotel, consumer-marketing and brand-oriented companies, have brought with them or recruited professionals from Procter & Gamble, Johnson & Johnson, Unilever and other consumer marketing-oriented stalwarts, further evidencing the transformation.

  • Product diversification. A long-term trend gaining momentum and importance is diversification into new product types. The new products range from virtually all lodging types across all price points to urban and resort residential, planned unit developments, golf, spa and branded restaurants, bars and nightclubs, vacation ownership and fractional. Strategic partnering and value ecosystems are expected to create even more new product and service types.

  • Merchandising. Transformational lodging companies are merchandising logo items, beds, beauty products and the like. Tie-ins with entertainment, music, books, celebrity chefs, actors will likely be forthcoming.

  • Value ecosystems. More companies realize the benefits of creating ad-hoc, dynamic products and services through participation in value ecosystems — without the burden of asset ownership. The increasing prevalence of these ecosystems is further evidence of the transformation.

BUSINESS RAMIFICATIONS

The most important aspect of the industry's transformation is the impact it will have on a company's day-to-day business. Among areas of impact:

  • Traditional competencies

    Central reservations, sales and marketing, call centers and back-office processes like HR, procurement and F&A benefit from economies of scale and will continue to be important components of a lodging company's added value. However, as many of these transaction-intensive activities become more automated and generic, they will be less important as sources of competitive differentiation.

  • IT investment

    Spending 75 percent to 90 percent of one's IT budget on keeping support functions running will be increasingly less acceptable. Companies will have to find a way to reduce expenditures in these areas and re-invest the savings into technologies that add value and directly affect the guest.

  • Strategic focus

    There will be a shift in focus to building powerful brands based upon the cycle of creating holistic products and services that deliver unique customer experiences each stay and harnessing that feedback into continuous improvement over the lifetime of targeted customers.

  • Operationalized CRM

    Progress has been made in better understanding the wants and needs of guests. Considerably less has been made in putting that information to use. The ability to leverage customer knowledge for operations will be essential to sustainable competitive advantage and the linchpin of successful transformation.

  • Workforce Management

    Technology will increasingly allow support functions to be centralized in the most cost-effective locations. It also will enable guests to participate in service delivery through use of self-service technologies and creation of innovative combinations of functions at the property level. The importance of guest experience to successful branding will require the cost-effective placement of technology in the hands of customer-facing employees.

The transformation of the lodging industry is not for the faint of heart. Success will require flawless execution; otherwise, the repercussions could be devastating. A company cannot afford to hinge its entire value proposition on the promise of a strong brand and fail to deliver against that promise.

This is the first of two articles about transformation in the lodging industry. Part Two will present and analyze the opportunities and challenges associated with that transformation.


Clay B. Dickinson a client industry executive at EDS Travel and Hospitality. Reach him by telephoning 770-754-4390 or e-mailing him at clay.dickinson@eds.com


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