New York Hospitality by Vijay Dandapani
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The Shadow hotel industry's impact on hotels

March 03, 2016

“Where there is smoke there is fire” goes the old, if trite saying. There has been plenty of smoke, most of it aired by Airbnb, when it comes to characterizing the home-rental market.

Among the things it purports to have created is a whole new tour and travel market; enabled hundreds, if not thousands, of homeowners and renters meet their housing costs; and liberated entire sections of the populace from financial ruin. The fire, metaphorical and literal, lies in the millions of dollars of economic loss to society and potential physical damage stemming from a near total lack of fire-safety systems.

Airbnb and, surprisingly, more than a couple of CEOs of large hotel brands together with several consultants espouse the notion that the former is in a different space and therefore not competitive with the hotel industry. That is fanciful and wishful thinking at best even though the proponents likely come to the same conclusion for very different reasons.

Whatever the reasons, studies are starting to show that the shadow hotel market is indeed a threat to the legal hotel industry particularly in large conurbations like New York. The latest and, perhaps, most well-researched of them is by CBRE’s Hotels’ America Research team that was released in January. While noting that, during a 12 month period ending September 2015 Airbnb users spent $2.4 billion on lodging, more than a whopping 55% of that was spread over only the five cities of New York, Los Angeles, San Francisco, Miami and Boston.

The CBRE’s report has a compelling level of granularity going so far as to winnow down the Airbnb list of hosts to multi-unit “hosts” (Airbnb jargon for hotel operator) and stack them against regular hotels to determine penetration. The report consciously left out occasional renters/rentees whose profile is what Airbnb seeks to project in their bid to be portrayed as good corporate citizens.

The report specifically points to a correlation between Airbnb supply growth to cities with higher ADRs and occupancies with the metropolitan areas having the highest number of “active” Airbnb units. Unsurprisingly, the latter is shown to grow in response to compression in the traditional hotel market due to events like the super bowl, the Pope’s visit and New Year’s Eve.

CBRE also developed an Airbnb competition index that incorporated ADRs from Airbnb and regular hotel ADRs as well as the inventory levels of the two competing suppliers into a measure of potential risk for these hotel markets. Perhaps the most telling aspect of the report is that the index for New York City topped the chart coming in at 81.4 with an active (excludes hosts who rent sporadically) unit supply that is 20% of the total hotel room count.

The vanishing number of compression days, particularly in New York City which reported a grand total of three per the city’s visitors bureau (NYC & Company) in 2015 versus nearly ninety a decade ago, is certainly a direct consequence of the foregoing, hotel supply growth notwithstanding. That is only underscored by Airbnb’s boast of having achieved an astounding 47,000 room nights for last New Year’s Eve! As CBRE’s report rightly concludes, Airbnb’s impact on hotels is at least twofold: ADR growth will continue to be stymied while also serving to curb hotel construction. It also makes the lens for hotel development considerably more murky as it is almost impossible to guess when new “active” hosts will enter the market in response to compression given the development window for an Airbnb unit is merely a few hours compared to over two years for hotels.

Reports in a similar vein from last year point to the target market for multi-host operators on the Airbnb platform as being in the same business arena as hotels include an industry overview analysis brought out last summer by Bank of America Merrill Lynch which noted that 67% of Airbnb’s listings are competitive with the traditional hotel industry. At about the same time, HVS issued a report pointing to an estimated room revenue loss to the New York hotel industry of approximately $450million.

The knock-on economic impact of these factors to municipal coffers runs into billions of dollars that likely will remain out of reach of jurisdictions as long as the regulatory free-pass enjoyed by Airbnb due to lax enforcement of laws and dissimulation from Airbnb persists. Airbnb’s oft-expressed desire to pay occupancy taxes will do nothing to redress a range of issues such as ADA, real estate taxes, building code differences and wage costs incurred by regular hotels.

In the end, the idea of attaining a level playing field is one that is simply unachievable even if Airbnb and its many smaller cohorts end up with the regulatory framework they are seeking so long as they operate as de-facto lodging facilities and not the occasional home-renter model they claim as their business model.

There is a model whereby home-sharing can be embraced legally and with the internet it can and should be a growing phenomenon. But the model should be predicated on legality. Just as (illegal) Napster arguably spurred Steve Jobs to create (legal) iTunes perhaps Airbnb will spur legal home-sharing instead of the rampant illegality that lies at the heart of their model. In the interim, for hotel owners the many insidious effects of a shadow lodging provider is an existential crisis,; one that needs to be addressed head-on.

Branded content: Leading or Lemming?

October 23, 2015

Digital ad blockers have been roiling the ad industry for a while resulting in a spike in branded content that runs largely ad free. The digital Chinese walls apparently worry even the biggest digital ad company, Google/Alphabet, whose CEO Sundar Pichai despite protestations to the contrary  announced an ad-free YouTube service labeled YouTube Red which racks up a monthly $9.99 charge. Advertisers though display no ambiguity and apparently are buying into the notion that consumers are increasingly repelled by ads particularly in the smartphone universe and investing heavily in branded content. Those well off the launchpad include Andrew Zimmern of Bizarre Foods fame and Travel Channel Host with a list of clients that stretches from General Mills to Toyota and US Cellular.

Marriott has also checked into this not so new yet fast growing arena as a recent Financial Times report says "The hotel group is making its own films and running a ‘newsroom’ in its push for online branding." The hotel giant has added "original film production to the (advertising) mix. And while "financing and producing two short movies is more in keeping with a media company than a hotel operator" it has similar objectives as any media company: to find audiences they can monetize and hopefully woo and bring into their loyalty fold.

Although as the FT points out this is not a new phenomenon for Marriott, having featured comic books in its Hot Shoppe diner chain in the 60's, the "latest twist on the genre is quite different, given that Marriott is the creator, producer — and distributor — of the videos. As well as the films, it recently commissioned a Hot Shoppe animated series, which will run to five episodes and air on YouTube." Marriott's  21st century take has resulted in a news “studio” at  headquarters in Maryland with the moniker "M Live" which has been designed to bring together the company’s public relations teams, an in-house creative agency and media buyers".

Marriott is scarcely alone in the old-new world of branded content. The legendary London hotel, The Savoy was the real star in a ten minute video titled "Girl Panic".  The video has an astounding 7 million (and rising) hits in its four year life on YouTube. Starwood's Luxury Collection also preceded Marriott with a short (Indie) film titled "Here" albeit with far fewer hits.  There are many others looking into leap into this promising space.

Nevertheless, there seems to be a paucity of metrics to gauge the new wave's efficacy. In other words is ROI quantifiable or is there a lemming like rush to follow the "leader"? A reason for the measurement problem is that branded content seeks to set itself apart from "regular" advertising and so cannot be discussed with consumers/guests in those terms and if the message is unsubtle it is likely to be viewed as an infomercial or worse, an outright ad.  Perhaps time will tell whether the old, if apocryphal, adage of the ad-man "fifty percent of ads are effective while fifty do not but we don't know which fifty it is!" applies here.

A data breach encore. A moral hazard issue?

September 29, 2015

Data breaches, hackings, online invasions etc occur with such distressing regularity that there seems to be a sense of ennui when these incidents occur. The breaches result in more than a loss of privacy as was the case with Ashley Madison, something which Facebook founder Mark Zuckerberg airily dismissed as a given some years ago, but often cause considerable financial harm to companies and individuals.

Whether privacy has gone the way of the dodo or not data breaches present a different set of problems to consumers and businesses alike and ought not to be countenanced much less endured by firms. Nevertheless, some interesting research reported earlier this year in The Conversation suggests that there is an element of moral hazard at work that fails to incentivize companies to take data breaches more seriously and invest in cyber-security.

Benjamin Dean, the author of the article in the Conversation cites the example of Target where "the gross expenses from the data breach were $252 million. When we subtract insurance reimbursement, the losses fall to $162 million. If we subtract tax deductions (yes, breach-related expenses are deductible), the net losses tally $105 million."  That Mr. Dean points out was a rounding error amounting to a mere 0.1% of sales in 2014. In other words, Target had no incentive to step up its cyber-security both due to a de-minimis (to them) loss as well as very little if any customer blowback.

 

In the hotel space, the latest victim is Hilton Hotels and many of its brands as reported on the website Krebs on Security which focuses on cyber security. The site reports that the data breach was first noticed by Visa in an alert to various banks saying that it occurred sometime between April 21, 2015 to July 27, 2015.  Visa's policy precludes it from naming where the breach occurred but sources at five different banks soon "determined that the common point-of-purchase for cards included in that alert had only one commonality: They were all were used at Hilton properties, including the company’s flagship Hilton locations as well as Embassy Suites, Doubletree, Hampton Inn and Suites, and the upscale Waldorf Astoria Hotels & Resorts." 

It is not clear yet whether these breaches in the hospitality industry (Choice hotels had one a couple of years ago) stem from the same lack of financial incentive that has been ascribed to Target but its recurrence ought to spur a far more consumer sensitive industry than retail to be more proactive and responsive. After all in retail consumers  merely visit as opposed to staying or living in hotels. A memorable stay can quickly turn sour when on returning home guests find  both their privacy and finances ravaged.

Resorting to fees to boost profits

September 04, 2015

Hotel fees for "use" of a resort's facilities as well as other "amenities"  have unfortunately come under the scanner in a variety of forums and even invited comment from a Federal Advisory Committee focused on airlines surcharges. USA Today recently ran a story pointing out that "U.S. hotels are projected to reap a record $2.47 billion this year from fees and surcharges that require guests to pay extra for everything from getting into their room early to leaving bags with the bell staff" per a recent report from New York University.

While there is a lack of transparency on the part of a few operators the industry is unfairly being tarred by the brush used on the airlines, particularly US airlines.  With the exception of Southwest most of the others continue to find innovative ways to pick passengers' pockets while steadily constricting their offerings. United Airlines, for instance, is notorious for its steep baggage fees and outrageously high costs for sitting in any of the rows in the front of their economy cabin allegedly for an extra inch or two of leg room and insult to injury by "upselling" while passengers board the plane!

Left out in the clamor over undisclosed fees is that hotel room rates across the United States are actually below what they were for the peak year (2008) when rates were $107. Adjusted for inflation that amounts to  $117 in 2014 as compared to the actual average room rate of $113 for last year. While consumers are obviously unbothered by the escalating costs (real estate taxes for example in New York City have gone up between 35 - 70% for the same period) what is pertinent is the range of amenities that hotels have added since the advent of the Great Recession. These range from the by now ubiquitous free WiFi and continental breakfast to the more esoteric electric car charging.

Perhaps hotels need to do a better job of price perception by consumers and steer away from the airline or what's worse Uber's (surge) pricing models and take their cues from giant suburban retailers who give the impression of being cheaper than their specialty counterparts even if, on many occasions, that is not the case.  "Unbundling" amenities that indeed are optional (and desirable)  is also another way to overcome consumers' ire at "mandatory" fees.  In any event, a better job of conveying the fact that a highly fragmented industry like hotels can never act in the rapacious manner of a quasi-oligopolistic grouping like airlines is what is urgently needed.

 

The Yes - No Continuum for Bosses and Customers

July 30, 2015

The Harvard Business Review' has an article that reviews the difficulties faced by many managers in “getting to no” which they term as the "process for agreeing on what not to do" when dealing with tasks delegated by superiors.  The authors of the piece note that people frequently are "encouraged to be team players and responsive to colleagues" which makes it "seem counter-intuitive or even selfish to encourage managers to say no more often".  Nevertheless that is what they urge pointing out that while saying yes to every assignment may initially please the bosses it usually leaves "people over-stressed and inundated with work — a lot of which ends up half-finished or forgotten and "in the long run, no one is happy".

A key way to avoid getting onto a relentless treadmill of assignments is to learn how to "get to no" for both the individual's success as well as that of the firm. That, they point out, "requires tradeoffs as it is not possible to please everyone or even one person all the time.  "For example, if a new strategic project becomes top priority, managers need to ask what tradeoff should be made to accommodate it. And it’s important to engage in these dialogues regularly."

It is not a stretch to apply the foregoing precepts to a firm's "real" bosses - customers and deliver better service.  Too often, particularly in the Far East and South Asia customers, demanding and not, end up being promised goods and services that associates and managers fail to deliver on. That appears to stem largely from a desire to please both bosses, the employer and customer without fully considering the entire workplace framework and institutional capacity to deliver. Some hotels exemplify that gap as they strive to meet demanding customers who don't take no for an answer while also dealing with a culture that views a "no" as "disrespectful".  India and China are good examples of the latter with some Indian hotels being notorious for "over-promising" : A browse through Tripadvisor reviews of leading hotels in both countries (and a few others) easily underscores that.

Hoteliers in some of the above situations could improve upon service delivery through a combination of strategies ranging from empathizing with a customer who won't take no for an answer while not taking the easy way out by saying yes.  Empathizing requires trying to understand the customer's viewpoint while also conveying one's limitations inoffensively.  Another palliative is to offer an alternative as in a situation where a queen bed is unavailable by unhesitatingly offering another bed type with a promise to try and move them up when available. 

Asking a customer, even an irate one whose request is beyond one's wherewithal, how best to satisfy him/her the next time is a way of lowering the temperature while also serving to mitigate the situation.  In sum, as the HBR authors suggest saying "yes" in the short term leads to a no-no for the long term.

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ABOUT ME

  • President of Apple Core Hotels, a chain of 5 midtown Manhattan hotels offering value and comfort in the heart of the city.

    Member of the board of Directors - Hotel Association of New York.


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  • The views expressed in this blog are my own and not that of any company, association or organization.

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