New factors impacting lodging investment
“The future ain’t what it used to be.” — Yogi Berra
Anyone in the hotel industry who is acting on the assumption that “past is prologue” better take a time out to re-examine their bases for decision making. Though our blog is focused on finance and real estate, this advice is as appropriate for operators, branders and marketers as it is for developers, investors and lenders.
The following are some of the more significant factors that will impact lodging industry investment on a going forward basis that are materially different from what we have seen in the past:
Demography. While still a major influence on travel, Boomers are sharing a much larger portion of the stage with GenXers and Millenials whose combined population dwarfs that of Boomers (77 million vesus 130 million). They are a very different consumer with different purchase criteria and spending habits and they are going to have a significant impact on brands/branding, marketing, service style and design. In addition to this shift, the U.S. market is undergoing a transition from predominantly Caucasian (66% in 2009) to predominantly non-Caucasian (estimated to be 46% in 2043). Even today, roughly 50 million Americans speak a language other than English in their home. For the most part, the industry has yet to adapt to these two demographic shifts.
Social Values. There are at least two major factors that will be affecting travel consumption in the foreseeable future. First, many experts believe that the Great Recession and the accompanying economic upheaval have changed consumerism for the long term in the U.S. Paying retail is now regarded as a fool’s game, even among the well-to-do. Second, roughly 6,000 Baby Boomers are turning 65 years old every day. The question is this: How will the massive reduction in Boomers’ wealth/security over the past three years and the likelihood that they will become more conservative in their spending habits as they age play out against the twin offsets of their strong propensity to travel and their becoming beneficiaries of the most significant transfer of wealth the world has ever seen (according to one source, US$33 trillion over the next 20 years)?
Government Intervention (in particular, health care). Not to wax political, BUT… health care in the United States is a mess and the recently passed legislation is going to drive up – not reduce – employers’ medical insurance costs. For anyone who believes differently, I have a bridge in Brooklyn that I would like to sell you. This cost increase – which hotels need like a poke in the eye with a sharp stick – brings to mind one of the most interesting (and disturbing) structural aspects of the lodging industry; namely, that increased costs cannot simply be passed on to the consumer in terms of higher prices.
Organized Labor. Speaking of unwelcome cost increases, the Employee Free Choice Act is down but not out. Unions have placed a giant target on the hotel industry. And why not? This fixed-asset-based, labor-intensive business cannot move its production to a location with lower labor cost. Hotels are and will remain vulnerable to unions and the politicians who court them. As for the impact on the bottom line, ask anyone who owns/operates a hotel in San Francisco what happens when hotel unions control wages, benefits and work rules. Even in less virulent locales, the adverse impact of unionization on a hotel’s bottom line will be minimally 10%.
Technology. Technology is creating incredible benefits in areas such as cost efficiencies, data collection/management, real time market intelligence, and so on – even though, keeping up to date with state-of-the-art systems and platforms requires continuous significant investment. There is, however, one very scary aspect of technology that will affect the industry in profound ways in the foreseeable future. Namely, third-party technology has introduced unprecedented price transparency into the industry providing consumers with virtually instantaneous and continuous knowledge of offered prices for rooms (and other services) on a real time basis. Combined with consumers’ newfound propensity to seek the best price and the commoditization of brands, it will be a long time before pricing power returns to the vast majority of this fragmented, quick-to-discount industry – even when demand recovers and compression re-emerges.
Economic Anemia. If demand compression is what the industry needs to regain some semblance of pricing power, then it is going to take a while for most U.S. markets. By almost any measure, this will be a longer, slower, and more painful recovery than anything the industry has previously seen.
Hotels Have Lost Control of Their Inventory. Speaking of fragmented, the lodging industry has once again handed control of a substantial portion of its inventory to Online Travel Agencies (OTAs) who are anything but fragmented. Like hotels, they are discount prone – except that the discounts they trade in come at the expense of the hotels they intermediate, not themselves. To make matters worse, individual hotels and hotel companies have become more and more reliant on third party intermediaries for group business generation – at a substantial incremental cost.
Return of the Brand Arms Race. While the recession put a damper on brand initiatives (capital and operational), hotel owners should expect that hiatus to end in 2011. Owners should also brace themselves for higher guest loyalty program costs as hotel companies try to differentiate undifferentiated products with more rewards to their “loyal” customers.