Companies approach Grant Thornton when they have a challenge that they need help overcoming. This is the nature of what the advisory firm does and in this age of heightened anxiety over what is out on the horizon, its expertise and guidance can be the difference between racking up wins or suffering defeats.
HOTELS Magazine caught up with Grant Thornton’s Alex Rhodes, who as a partner and national hospitality and restaurants industry leader, has a good gauge on what the hospitality industry faces now and in the future. In this far-reaching Q&A, we asked him for his thoughts on the state of travel, how the Federal Reserve can impact investment and transactions and how labor and technology will play a crucial role in the hotels of tomorrow.
1. Lodging company full-year 2023 earnings reports were strong overall, but there is some concern over waning leisure demand and rate growth hitting a ceiling. Meanwhile, personal income increased 1% in January, while personal consumption expenditures increased only 0.2%. Against this backdrop, how bullish or pessimistic are you on travel generally?
Last year proved to be a strong year for the industry overall. According to the American Hotel and Lodging Association’s (AHLA) 2024 State of the Industry report, citing data from Oxford Economics and STR, annual average U.S. hotel occupancy rose from 62.58% in 2022 to 62.93% in 2023. It’s expected to reach 63.6% in 2024. The consensus of many in the industry seems to be that we will see continued growth in 2024, perhaps normalizing in the U.S. after a rebound in many sectors of the industry post-pandemic.
Overall, I am bullish on growth in travel through the rest of the year, driven largely by the leisure traveler. According to the Cushman & Wakefield U.S. Lodging Industry Overview, the TSA reported that checkpoint volumes in 2023 exceeded 2019 levels by 1.6%. This is offset by uncertainty in business travel as companies continue to hold back on in-person meetings and leverage technology as ways to manage costs and reduce environmental impact. However, there is optimism for group travel growth as 2023 saw strong demand for group business.
This optimism is set against economic and political uncertainties, including high interest rates and inflationary pressures, and geopolitical risk. There are also questions surrounding how these pressures will influence demand from the hospitality customer in an industry that can be significantly impacted by changes in consumer behavior, especially when relying on leisure travel to drive growth. When feeling uncomfortable, hospitality industry spend is an easy area for consumers to pull back on.
2. The jury is still out on whether the Fed will cut rates this year. One analyst remarked that higher rates don’t appear to be hurting the overall economy much. If rates do remain where they are, what does that mean for hotel development and transactions in the near and longer term?
There is a chance for development. In the March 2024 meeting, the Federal Reserve held rates steady and has held rates steady since July 2023. However, the Federal Reserve did not change its projection of three rate cuts in 2024—though that could, of course, change. Despite higher-than-expected inflation and labor market data, many still believe a cut is coming.
That said, while the economy seems to have remained resilient to higher rates, the volume of hotel transactions has remained lower. Sourcing debt at interest rates and terms that make sense to counterparties in acquisition, development or even financing transactions have been identified as major contributors to lower transaction volume, though upcoming maturities of existing loans, including CMBS financings, could result in refinancing and transaction activity.
3. What are your hospitality clients’ top concerns right now and how are you advising them?
We are seeing a number of trends across the industry, including:
- Driving efficiencies and cost containment — One overall theme that continues to be a focus of our clients is operating efficiently and controlling costs in an inflationary environment where labor, food prices and the cost of doing business overall is increasing. We have seen opportunities in many areas. For example, how lodging companies’ finance departments are structured and how they can leverage technology to drive efficiencies, including treasury management.
- Insurance and construction — These are two areas we are seeing as pain points for hospitality companies. I’m sure many can relate to the pressure of increased insurance costs, especially for properties located in coastal areas. We see a lot of activity among companies considering captive insurance structures, along with their insurance programs as a whole. Additionally, we have assisted hospitality companies through their evaluations and insurance RFP processes. Construction costs and project oversight are two other focus areas.
- Cybersecurity — This area is a major focus of lodging and land-based casinos. With several high-profile incidents over the past year, the industry continues to find itself a target for cyberattacks. A combination of a high volume of sensitive customer information (including credit card data), numerous access points and the opportunity for social engineering makes lodging companies an attractive target. Further, many of the larger lodging entities now need to comply with new SEC regulations, which became effective in December and require additional disclosure in their most recent 10-K filings.
- Loyalty Programs — We have been seeing a significant amount of activity among hospitality companies as they reevaluate their current customer and guest loyalty programs, leveraging data analytics to enhance their effectiveness. The key here is to analyze the data to gain insights into guest behavior. From there, hospitality companies can better connect with their guests and ensure that their investments in these programs are utilized effectively.
4. Expenses continue to go up hurting owner margins. Labor is particularly difficult: there is less of it and it costs more. How can the hotel industry do a better job of attracting and retaining talent?
Labor costs continue to grow, increasing pressure on margins for owners and operators. Further, as noted recently in its annual 2024 State of the Industry Report, the AHLA stated that U.S. hotels lost more than 680,000 direct employees in just one year from 2019 to 2020. And while the industry has hired back more than 400,000 employees since that period, the lodging industry workforce has not returned to pre-pandemic levels.
I expect the industry will continue to look for ways to streamline and make its operational and financial processes more efficient to compensate for the reduced workforce, including the use of AI and machine learning. Through continued investment in technology, many redundant, less popular tasks currently undertaken by talent in our industry will become easier, which will ultimately free up their ability to focus on other, more fulfilling tasks. Another area that can help efficiencies is leveraging data to optimize scheduling and employee workload.
We’ve also engaged in discussions with many hospitality companies about total rewards, where we look at the mix of compensation and benefits to attract and retain talent. By addressing concerns and areas of friction in the lives of an organization’s professionals, such as transportation accessibility or support for educational pursuits, an employer can distinguish itself.
One other area of focus for lodging companies should be training and onboarding programs. The onboarding process is especially critical for employee retention and making new teammates feel connected to an organization. Employers should also look at providing a path for hospitality professionals to train, develop and advance through online education courses and other means.
Ultimately, hospitality is a customer-service business. While we continue to see investments in technology, the guest experience is provided by hospitality professionals. Making sure we can attract and retain top talent is critical.
5. Technology plays a vital role across all industries and the hotel industry has traditionally been a slower adapter. The newest buzz is AI: How important of a role will it play in hospitality and how are hoteliers adapting to it?
One of the bigger opportunities continues to be in virtual assistants that can handle many guest interactions. A recent Oracle study noted that, on average, 70% of guest requests are now handled automatically by AI-enabled response technology in hotels where such systems are implemented. This significantly reduces the burden on property staff, allowing them to focus on other tasks or requests beyond the capabilities of AI technology, while also improving response time for guests. Over time, I anticipate that U.S. lodging consumers will become more comfortable with, and may even prefer, interacting with virtual assistants as the technology continues to be deployed in other areas of our lives.
Another area of opportunity for AI and Machine Learning is in personalization. Given the vast amount of data accessible to lodging companies, being able to further customize the guest experience presents a powerful opportunity. It’s not a stretch to imagine a guest checking into a property and having their favorite music and shows all preloaded and at the ready in their rooms. What’s more, a guest’s food and beverage preferences could even be noted and accessible at all the venues throughout the property, resulting in the ultimate guest experience customization.
6. Consolidation within the industry continues to be a hot development—both on the brand and management company sides of the ledger. Do you expect to see further consolidation and why or why is this not good for companies and customers?
We have continued to see consolidation in the lodging industry. The rationale behind these transactions, in addition to growth, revolves around scaling and acquiring talent, both of which potentially address many of the challenges, including talent, cost pressures and the need for technological investments to maintain competitiveness. It remains to be seen whether these efforts will be successful. When the industry invests in its workforce and guest experience, everyone wins.
7. Why should someone want to embark on a career in hospitality?
When I talk to young professionals about working in the hospitality industry, I always start with the most foundational element: Our business is about making connections. Whether it’s reuniting with loved ones or friends, meeting colleagues, exploring potential partnerships or discovering new corners of the world, this industry is amazing, dynamic and fun. Facilitating interactions with others fulfills a fundamental human need and I take pride in helping make that happen. So, of course, it’s no surprise that I hold a bullish outlook on our industry in the long term.
