This is a guest blog written by Richard Adam, Chief Executive OPTIMIST, NED Board Member, Strategist, Developer, High-End Experience Incubator and Digital Advocate. You can connect with him on LinkedIn here.
Since I can remember, there exist these “The future of …..” type of thing conferences, publications and panel discussions. What is the future of hospitality? I don´t know. I am sure there is one, although the commercial forms may be very different. Predictions are generally difficult, especially the ones concerning the future :). I am certain, however, the landscape of hospitality as a business will be different and we will see this happening in big blows. I am bold enough to say, the changes in the next 10 years will be more radical as they were in the last 30 years. This is in regards to the fragmented forms and offerings, we will see on the horizon, and this is regarding the players in the market, some of them sticking to their habits and business as usual for far too long already.
In the history of business and economics, as we know, nothing is for granted and nothing works forever the same way, not even the simple idea of providing shelter for people away from home. Imagine, you were given potatoes to eat all your life and your parents told you, there is not much alternative.
Grown-up, out of the house, when living in the privileged parts of the world, you suddenly discover the markets full of food, you have never seen or tasted. Will you still go for potatoes? That´s what we have in the world of travel and hospitality: more and more people are not happy with just potatoes anymore. We call them mature travelers. Research, reviews, comparisons and options at their fingertips, eyes wide open, an explorer by heart, even questioning where the profits of their purchase might go to or which booking decision rewards the lower carbon footprint.
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Over recent years we have seen a big appetite of some global hotel system providers (HSPs – originally known as hotel chains) dumping their real estate and their own hotel operations for the sake of growth of their brands and services to hotel owners and operators, also swallowing similar competitors to clean the market, the Starwood takeover by Marriott being one of the bigger transactions, but Hilton, IHC, Accor and others also have significant appetite for growth. It is astonishing to see these companies persuading real estate owners, their services are the best that could happen to a hotel property while they have sold most of their own. Today the hotel system providers´ stock price depends on growth rates. Increasing individual expectations and fragmented markets have led to more segmented hotel brands with specific brand promises, run by the same big hotel system giants who see their business model in providing labels called brands, booking technology, loyalty programs and management services.
Yet, I wonder whether any long-standing Ritz-Carlton guest has seen this as a progress in his or her guest experience, whether any Westin guest has seen benefits during the stay since it is under the Marriott umbrella and whether any Waldorf-Astoria or St. Regis is coming close to the original, just to name a few examples. Paste and copy of legendary originals is nothing else than selling an illusion. It is to find out, whether the illusion is meant to be sold to guests, to the hotel owners and investors or to all of them. Now, let´s explore that further.
1. The illusion of brand value
In the old days, when traveling to unknown territory with a less experimental mindset, it seemed to be safer to book a hotel from a known hotel chain. Especially frequent travelers are more concerned about minimum standards than getting the kick out of an overwhelmingly surprising hotel experience. Booking hotel brands are a reasonably safe bet and hotel chains were positioning their respective brands in the relevant segments from 1 to 5 stars and sold these concepts to hotel operators, owners and investors because it was safer for them not to deal with property investment or operational risks and gives more opportunity for growth. This was working well for all stakeholders for many years.
When big heritage brands were first established, they set themselves apart by capitalizing on an area of expertise, like a uniquely refined production method or an unparalleled sense of design. In the global world of multiplying hotel concepts according to standards, these competitive advantages got lost. Social currency is what rules brand choices today. The millennials have created their own rules and preferences. A real brand must be able to influence, inspire, innovate, tell a story, often linked to charismatic and visionary leadership.
I do not know a “sexy” brand with opportunistic streamlined technocratic executives in the lead and most companies hire CVs and “buzz words” instead of personality. A label concept is not an alive brand. A brand is a spirit.
When brands are too stuck in their past heritage, they often lose their influencing role. Tradition also means to keep the fire burning and not protecting the ash. Some iconic hotel legacies became a part of hotel group brands: The Erawan in Bangkok, The Mount Nelson in South Africa, The Carlton in Cannes, The Georges V in Paris, which was already a legend before Four Seasons existed, or The Raffles in Singapore now being part of Accor.
In the automotive sector, the Daimler-Benz corporation merged with Chrysler for a while and Mercedes-Benz cars suddenly had Chrysler parts built-in. The worst decline in sales for Mercedes-Benz cars was the consequence. These traditional legends may hope to have more distribution power in the market, but from a brand perception perspective, it lifts the HSPs brand more than it does for these traditional iconic properties. Some of them, like The Palace in St. Moritz, pulled out again after a few years not materializing the expected benefits. If I would be the owner of these famous properties, I would ask for royalties instead of paying them. Although hotel companies hire from the same source markets everyone else does, there can be some hypothetical benefits for these hotels, in management know-how, yield optimization, and digitalization, etc., but not when it comes to the glory of brands. The market leaders of the future will not necessarily be the bigger brands — they’ll be the ones that have the cultural sensitivity to understand what consumers want at any moment and what they can well do without. They need to center themselves around the customer, provide them with value, and redefine themselves as providers of experiences (not just products).
As I consider my background in strategy and marketing, I am a supporter of brand building. There is a promise, there is value, there are trust and delivery, in a perfect scenario there is even some magic and inspiration to it. It is certainly more than a label and corporate design standards.
Some hotel groups are good brands, they have a soul, a common spirit of doing things and serving their guests. The fame of The Mandarin Hong Kong and The Oriental Bangkok was blended and leveraged well for the Mandarin Oriental Group maintaining credibility. Other companies, mutated to selling trademark labels in the sense of commodity as their core business model with an emphasis on growth, have ceased being a brand in the true sense. Whoever believes money can buy everything also admits to being prepared to do anything for money.
The hotel owners and investors have paid their dues for what we now call the consolidation in hotel system providers, which has led to an inflation of hotel labels with a focus on growth but it seems, these concepts have increasingly overlooked to entertain or positively surprise their end-consumer, named hotel guests. Not surprisingly, Minor Inc. in Thailand has recently launched a court case against Marriott for getting too little in return for their royalties.
I remember when I once checked into a hotel in Orlando, belonging to the brand with the claim “ladies and gentlemen serving ladies and gentlemen” at that time. It was late, I had been traveling for over 20 hours due to some delays, I was also jetlagged and tired. But the receptionist took some time for his scripted greeting formula, he had to get across according to the procedure standards. It just wasn’t what I needed or wanted to hear at that time. Good intentions, unreasonably applied.
Several years ago, I was booked into an Aloft Hotel in South East Asia, still under the Starwood umbrella at that time. I am not a “high maintenance” hotel guest but I was very disappointed when I could not link my smartphone to the sound system in the room because the room’s connection device was outdated. Considering the brand promise of Aloft is to cater to the digital natives, that was an embarrassing delivery. For fairness sake, I grew up in a hotel and later have worked in hotels many years myself. There is no such thing as the perfect world. But these were experiences I still remember, completely contrary to the brand promise.
As a matter of fact, some hotel properties change their branding so swiftly, regular guests don’t even notice, which is not surprising: apart from labeling there is not much difference anyway. I dare to raise the question of whether brand promise in hospitality has become a big soap bubble and whether this brand inflation will come to the same saturation and decline like McDonald’s.
Why? Their marketing power is able to raise brand promise stronger than actual delivery. But when your customers are no longer hotel guests but hotel operators, owners and investors, consequently, your focus and competencies make a shift. You pamper your cash cows but feed hotel guests with potatoes. In good independent boutique hotels with passionate hoteliers, it is the other way around and people still get this special surprise and individual touch which makes the difference, assuming they are decently operated.
Global uniformed hotel branding systems tend to lose the focus on guest experience, especially when facing growth ambitions or fear of takeover or whatever is relating to the stock exchange rate, while traditional hoteliers have that by heart. Frequent travelers are finding this out increasingly.
What was once called “brand loyalty” may still work with running shoes, cars, and smartphones, seeing the immediate value of stringent product definition. In hospitality it has become a synonym for boredom.
All the loyalty programs and CRM technology are trying to compensate for this. I am a member of some of these programs. Not the big spender, but I do have my frequencies and none of these programs ever got me excited. It also becomes obvious, many hands involved squeeze room rates for little in exchange and fair-trade expectations will also play a role. Therefore, the global asset-light hotel system business model might become a dated dinosaur business model soon. Even when getting more and more segmented in their branding concepts, it is most likely rolled out with little substance for individual expectations and hospitality experience. Marriott currently holds 30 labels they call brands in the portfolio, Accor even 32. Can they really reinvent the wheel of hospitality in 30 different areas and roll it out globally as a profiled experience? The big players seem to have spotted this trend against them and are increasingly trying to offer independent boutique hotels a place under their portfolio of brands, not to mention it is another sort of income in terms of royalties for loyalty programs and distribution platforms etc.
Again, they are missing the point in guest expectations and experience. As Albert Einstein once said: “No problem can be solved from the same level of consciousness that created it”.
Smaller, innovative, more individual guest-centric and disruptive hospitality concepts are taking over the word of mouth “must-see” awareness. It is always about the destination experience, the special property and hardly ever about a label. Due to social networks and the power of advocacy, no marketing budget or paid (faked) influencer campaign can compensate when the word-of-mouth isn’t working for you.
2. The illusion of distribution power
In the year 2000, I learned from a McKinsey study, which stated that in about 15 years on from 2000, the majority of booking or shopping transactions in retail and travel will happen online. At that time, I was at the helm of a tourism development authority for a destination with 45 million registered annual visitors creating 50 billion USD in annual revenue and 8% of GDP. So, this was a statement of great relevance calling for action.
Ever since, I kept embracing digital technology and have my track record of success and failure, endless learning and continuous experience, which has helped me sharpening my senses to distinguish between what is technically doable, what is the “flavor of the months”, and what will generate real sustainable value of future relevance.
Today, in retail we have Amazon, Ebay, Alibaba etc. and in travel, we have Priceline (incl. their subbrands Booking, Agoda), Expedia, Trip Advisor, CTrip and so on. Hotel Groups may have their armadas of sales representatives for B2B and they invest in technology as well, but in terms of volume, they rely on the so-called OTAs (Online Travel Agencies).
Their contracting conditions forcing hoteliers to offer the best price options via OTAs played a big role in their growth. In many countries, this practice or contract terms are no longer allowed, but OTAs have their ways of bypassing that.
Booking.com pays 850 million USD per annum to secure a top ranking in Google searches and within the offers for a particular destination, it is about price or tangible added value, less about brands. Apart from making efforts in improving conversion rates, revenue and channel management, HSPs don’t have many competitive advantages in these systems. That’s why they run massive advertising campaigns to book directly to save commission or create some sticky alliance at the cost of the end consumer. In times of intelligent digital marketing automatization, these brand advertising campaigns are needed to keep glossy travel and general interest magazines alive and to boost executives’ egos, less and less for leveraging business. In OTA search listings, individual independent hotels stand next to hotel group branches, with the advantage of not having to pay additional royalties to the hotel system provider. That increases price flexibility or the opportunity to add value and service. Basically, any hotel can build competencies and set up self-sufficient revenue and channel management. It is not rocket science but requires commitment and the alignment of resources.
For the hoteliers of independent hotels, who are interested in improving their online distribution strategy, take advantage of OTAs without getting fatally dependent, you may check out my SlideShare contribution on that issue.
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When companies of all industries (including their executives) start to think they are the best there is, then they become most vulnerable. If you stop improving, you have stopped being good. History shows, every time companies get too much control and dominate markets, some people think of solutions to outsmart them. OTAs also have become dinosaurs to a certain extent and are feeling the heat. New technologies may make them obsolete again or at least make their business model less aggressively dominant. Blockchain technology concepts on flat fee connection may become a better alternative for the hotelier. Companies working on this, like Winding Tree, are not short of investors.
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In the “old economy”, companies controlling supply (e. g. oil, steel etc.) were called “Aggregators” and made people like Carnegie or Rockefeller very rich. In the “new economy”, aggregators are called Amazon or Alibaba in retail and Expedia, Priceline, TripAdvisor or CTrip in travel. The difference is, they do not control supply, they control demand. Hotel chains or in particular HSPs may have significant market share, but they do control neither demand nor supply, not even their “own” product delivery when the hotel guest is seen as the customer. As we know, their customers are hotel owners, so the focus may be accordingly. In a business model based on economies of scale, that is not an endlessly stable position. All they have is the promise, their brands and services are worth the royalty fees, in a business environment with relatively small margins for hotel operators, increasingly massive fragmented diversification and saturation of their labels as their excitement factor wears out. It may be applicable, that in certain circumstances, a prestigious hotel brand may increase the real estate value. Fair enough, but the owner has paid for that as well.
3. The illusion of economy of scale
Since Adam Smith intellectually introduced the concept of economy of scale, it has changed the world of production, supply chain and doing business. Needless to mention the series of products, which would not exist or would not be affordable. HSPs also benefit from this thinking and adopted the strategy in focussing on selling standardized labels, concepts, distribution technology, and management service to hotel owners and investors. That has led to tremendous global growth and worked well and comfortable for decades. The limits of a sustainable strategy based on an economy of scale are new developments, alternative offerings or change in customer behavior. In the hospitality industry, the assumption of segmented yet standardized target groups of hotel guests expecting standardized hotel experiences all over the world becomes obsolete.
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From a strategy perspective, except the traditional thinking in either focus on price or value-added, there are two directions: a feasible, “safe” strategy aiming for sustainable growth or a disruptive strategy attacking gaps of common business models and doing things with a new approach. As we know from Uber or WeWork, disruptors shake up the market in creating demand or solutions, nobody has seen or tackled before. But it is risky, and immediate profits or ROI better not be the first thing on the agenda. Then again, disruptive strategies can be a promise for the future. Should the vision of shared driverless cars ever become reality, the digital infrastructure of Uber is the plug-and-play operational backbone globally.
The former President and CEO of Starwood, Frits van Paasschen, wrote the book “The Disruptors’ Feast” after his tenure with Starwood. Whether this was coincidence or foresight, the business model of the HSP might become obsolete or needed a strategic shift, is answered in the book only subliminally. I assume he might agree to some of the thesis laid out here.
4. The illusion of guest experience
There is the old William E. Deming formula.
Quality is when delivery is equal to expectancy.
I guess that is still the philosophy of HSPs policy and procedure standards. But isn’t it the “wow” factor that makes guests share their experience in social networks or back home? Isn’t it the repeat customer or the advocate which every hotel needs to have a sustainable business? When delivery equals expectancy you do not create the “wow” factor. People don’t take pillows or stationary back home from a hotel stay (oh well, some do), they take away an experience and that’s what is left to rate the hotel for advocacy or potential return. Experience has to do with individual profile, character, and uniqueness. This requires intellectual property in design and conception, not copy and paste. It is an economy of scope rather than an economy of scale.
I am not talking about the frequent business traveler, who checks in late and leaves early with the only expectation of smooth-running processes and no negative surprises. For them hospitality is a commodity. I talk about the target groups who select hotels or hospitality for having a pleasant experience, those who are tired of “déjà vu”. Customers who compare and make a choice of preference. In a digital world, comparison has never been as effective.
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In less mature countries in terms of tourism, without the learnings of life cycle pattern history and effects, there is still misperception about the business model of HSPs. For ambitious Saudi Arabia, Accor has just announced to have “11.000 rooms” in the pipeline. One of the few remaining gold rush spots on earth for HSPs.
No doubt, Accor is a provider of valuable hospitality concepts and will help for further establishing the industry in the country to have more capacity of the usual and commonly known standards, but it is interesting to see in the feeds, that people think Accor is investing and taking the financial or operational risk. They are just selling their standardized services to Saudi investors. Investors better critically reflect whether today’s inflated concepts will be past glory in a decade, or even not be around any longer. Maybe, the entrepreneurial Saudi or international community (including the mindset of investors) with an ability, drive and dedication to set up hospitality in the country with a real innovative profile and character as a real driving force to visit, still needs time, education, investment and experience to emerge and to mature by learning instead of falling for copycats..
Global market research clearly indicates, authentic yet contemporary hospitality experience are key drivers to visit a country. People go to the supermarket because they know what to get, not because they wanted this specific experience in their shopping, not because they always wanted to be there. The driving force for selecting a destination among other options is a completely different case. Even young people, more often than not, have already traveled the world.
I remember when my kids were little, they often wanted the “same” as their friends, now they are grown and matured, they look for “different” things and experience. Similar to the matured traveler, they “grow up” and change preferences, documented in consumer behavioral shifts and consequences regarding millennials. Doing and having “the same” isn´t the explorer´s mindset of desire. In the world’s biggest and extremely competitive industry, HSPs can help to build trust and establish fundamental structures in the early development stage. However, for gaining international competitive edge beyond the mainstream, beyond satisfying common needs in “me too” fashion, beyond being and having “the same”, you have to think and create ahead. In consumer behavior, people go for the cheapest or for the best, little space for the mainstream.
Currently, Marriott is producing continuous press releases about growth and new properties in Japan. At the same time, an investor has initiated to bring the Ryokan concept, the traditional Japanese guest house experience, to other places internationally. Also, Muji, the Japanese retail and design company, is launching hotels. I leave it to the readers, which seems to be more interesting to explore from an experience perspective.
Apart from the revival of personally operated, individual boutique hotel concepts with charming storytelling, we see plenty of new attempts and concepts interpreting hospitality in a new way. My capacity for reading, observing or traveling is too little, to provide a complete listing of the most international initiatives. There are plenty and there are new competitors coming to the market every week. Although not everyone will survive, they are there because the demand for true out of the box hospitality experience is growing and the approach of HSPs is increasingly saturated. The “standard” is dead, no risk no fun.
I do not have the ultimate proof for that, but the rise of AirBnB and the increasingly different forms of products they offer is a strong indicator. The search for an individual alternative experience was a driving force for the rapid growth of AirBnB or emerging similar platforms, maybe not the intended strategy, but look how they are gaining profile by increasingly providing fancy individual, out of the box hospitality experiences. It is simply because there is demand. There are people not looking for potatoes only. A premium potato is still a potato. While HSPs are fighting to roll out, implement and control their standards, AirBnB (with all the critical issues of quality control) has outsourced creativity and provides the platform for disruptors.
Luxury consumer goods specialist and therefore well-tuned in luxury experience provision, the French LVMH Group has moved into the hospitality market as well. After establishing a small number of Maison Cheval Blanc, they have recently acquired Belmond. One of the few remaining true hotelier companies that still own and operate hotels and other upscale services, real rare iconic beauties among them, instead of another mutated vendor of labels. Belmond’s reputation for providing high-end hospitality experience is one of the best in the market. However, their business model encapsulates capital, is cumbersome and their pipeline of new properties in the making is close to empty. It will be interesting to see, whether they move ahead of the crowd in terms of providing superior experience under the LVMH umbrella and therefore become the luxury provider of choice or they move in the same direction of consolidated asset-light copy and paste for the sake of pure growth and become a “mee too” hotel system provider.
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For the younger, budget-minded and activity-oriented community of digital nomads, Selina is pushing into the market with their own promising version of experiencing the Latin American lifestyle or what will be left of it once “standardized” and exported.
For twenty years by now, different professional assignments in development missions bring me to China on a regular base. I have stayed in numerous hotels, most of so-called international standard. Since I found the Eclat Hotel in Beijing, this is the place for me (of course, people have different tastes, that´s why this article exists). No mainstream developer thinking in terms and standards of the established HSPs could have come up with a property like this. The place is so individual that no hotel brand standard would be adequate. It´s an art and design place equipped with beds and excellent service.
There is a big difference in development between city hotels, which is pure property development, or recreational hotels in remote areas, where the surroundings and environment play a more important role and the experience value is based on other criteria. This is more to be addressed as destination development as it is far more complex. Every contemporary hospitality development is “themed” as they say, more or less successfully. A destination development strategy aims to leverage a carefully curated story to generate a sharp and (almost) unique profile with a competitive edge. It is not about assembling branches and copycats. In my professional assignments in destination development in recreational or vacation areas, I am frequently confronted with the thinking in properties only. You come across satellite properties or “development zones”, but when guests want to leave hotels to get an experience of the place in general, they stand in the middle of nowhere in a dull atmosphere, confronted with views and impressions definitely not suitable for making them advocates or repeat visitors.
Even looking out of the guest room’s window needs to be curated. In recreational destinations thinking, planning and operating in ghettos is a brittle and susceptible approach. Visitors will always assess their entire experience of a geographic place and do not differentiate between the property of their stay and a neglected area when they go in front of the house. Both need care, attention and eventually action keeping the “visitor journey” in mind. Scientific research and findings in destination development are established a little more than 50 years looking into destinations with a long tradition, while science, know-how, and experience in building infrastructure and construction goes back much longer. That’s why in destination development, thinking in bricks and mortar is still dominant, creating so-called “white elephants” still today, leaving even attractive properties empty and investors, planners, architects wondering why?
Experience design requires either talented passionate hoteliers (and I like to point out, they can be found at branded hotels just as well, but might not have the opportunity to live up to the full potential). It can be the one lucky moment to have the idea that turns around your business or it can be systematic structured experience design along the visitor journey and its three dimensions: hardware, social and service, digital. For readers interested in more details, please check out this SlideShare.
It is the investor’s or hotel owner’s decision, whether they want to become a provider of a commodity for a good night’s sleep or an experience provider, which depends on various issues (location, business model, potential, market, investment, operational capabilities etc.).
But it will be the individual unique experience that separates the competitive edge from the commodity.
Finally, it all comes down to return on capital investment and EBIDTA. It is about business. However, the ability and desire of creating outstanding customer experience are restricted, when the pressure of shareholder value generation is haunting you. Consequently, so is the leading edge and trendsetter potential. The visionary creative counterpart of the accountant has to be in the strategic lead to successfully surf with the market and to avoid drowning.
Individual High-End Experience requires intellectual property first of all, service quality and other costly ingredients second, but can leverage sharp profile, competitive advantage, positioning and sustainability with an adequate price tag to it. Someone — hopefully a regular flow of visitors — has to pay for that in a price-sensitive environment. But talking about experience, as Benjamin Franklin once said,
"The bitterness of poor quality remains long after the sweetness of low price is forgotten."
© Richard Adam