The Modern Hotel Industry

1. The Modern Hotel Industry Chapter Two PowerPoints developed by Bharath M. Josiam, Ph. D. Professor, Hospitality Management University of North Texas, Denton, TX, USA And Edited by Gary K. Vallen, Ed. D. Professor, School of Hotel and Restaurant Management Northern Arizona University, Flagstaff, AZ, USA

2. Objectives of Chapter 2 New Product Patterns: Segmentation, Brand and Image New Product Segments Concept of “Price Elasticity of Demand” New Market Patterns Marketing to individual guests Marketing to groups Changing structural patterns as industry adapts Different ownership and management models Differentiate between hotel as: Real estate investment vs. An operating business Increasing role of third parties Operational Issues Financial Issues Resources and challenges

3. Price Elasticity of Demand Elastic – Change prices – demand changes As prices drop, demand rises As prices rise, demand falls Fewer people can afford it Fewer people think it is worth it, even if they can afford it! True for most products and services Certainly true for leisure travel Inelastic – Change prices – demand is static True only for a limited range of products True for business travel to a large extent Trip to finalize a million dollar deal will not be dropped if airfare rises by $1,000 True for medicines or surgery Remember: There is always a limit to increases! Increases drive customers to use substitutes or do without!! There is no such thing as a “captive” market!!!

4. Segmenting the Lodging Market Definition of Market Segmentation: Process of dividing a large heterogeneous market into two or more smaller homogenous market segments (Homogenous = Consumers with similar needs) Logic of segmentation: You can’t please all the people all the time. If you try to please everybody, you will end up pleasing nobody! No average guest and no average stay

5. Brand and Brand Equity Brand: A name and logo recognized by customers A unique package of products, services, amenities, and ambience at a price point that is associated with that brand. Hotel companies are always trying to establish new brands based on market segmentation Exhibits 2-1& 2-2 Brand Equity: Inherent value that recognition gives to the brand, when associated with positive images. Brand equity can be increased by Instant identification Broad distribution Consistent quality An assured level of service Job the hotelier is to create and deliver something unique, targeted at the right customer, enabling the hotelier to charge a premium, that the customer willingly pays. If you sell a bed for the night you can charge $85; if you sell a unique experience, you can charge $250!!

6. Segmenting the Lodging Market Economy Hotels Hotels with minimal services (amenities) and charging low rates First Motor Courts in 1930s Problem: “Amenity Creep” to compete better/feed ego, resulting in increased prices Free soap to free soap+shampoo+conditioner+lotion 27-inch TV to 37-inch flat screen LCD Someone has to pay!! Exhibit 2-3 Economy hotel becomes “Mid-Market” New “Economy Hotels” emerge Hard Budgets “Real” Economy Hotels Microtel Chain, Some Airport Hotels, Capsule Hotels in Japan, Easy Hotels in Europe

7. Segmenting the Lodging Market All-Suite Hotels All rooms with separate living and sleeping areas; may include kitchenette Can conduct business in the rooms Appeals to many segments Business people, women, families, extended stay Available in many price categories and brands Extended Stay Hotels Average guest stays for 18 nights Corporate Housing Long stay apartments with hotel services May be permitted in residential areas Exempt from hotel room taxes Example: Marriott Executive Apartments

8. Segmenting the Lodging Market Mixed-Use Projects Hotel is part of a complex of offices, retail, housing, entertainment and recreation Provides access year-around to multiple market segments Example: MGM Grand’s $7 billion City Center in Las Vegas Casino Hotels Income from gaming (Wins) Rooms/Food & Beverages may be “loss leaders” to bring in guests Occupancy % more important than ADR. Conference Centers (Exhibit 2-5) Specialized in conferences, meetings, etc Lots of audio-visual equipment May not accept transients Bundled rates – Corporate Meeting Package (CMP) Problem of low weekend occupancy Hotels with many conference facilities Spas – A resort based on mineral or curative waters Now more health/beauty/indulgence based Current craze – many hotels with “Spas” Exhibit 2-7

9. New Market Patterns Marketing to the Individual Guest The Guest Profile Business Travelers Leisure Travelers International Guest Preferred Guest Programs (PGP) The New Amenities Nonguest buyers Marketing to the group

10. Specialized Guest Segments Business and Professional Travelers: Bread and butter of industry 20% of population doing 80% of travel. Year-round, with limited seasonal fluctuation Less price sensitive than leisure market Increasing number of females Profitable, but demanding Do you have the resources to cater to their needs? Very competitive Globalization of business is expected to increase business travel considerably

11. Specialized Guest Segments Leisure Travelers People traveling for pleasure Their needs are different from business travelers Very price sensitive Many sub-segments of leisure travelers Mature Travelers/Gray Market: Market of people 55 and older Largest and fastest growing age group in industrialized countries They spend more and account for 80% of all commercial vacation travel They are wealthier and have more free time They are healthier today and more active Use “young-looking” seniors in advertisements Show lots of “young” activities with seniors participating Avoid “old-folks” stereotypes!

12. Specialized Guest Segments Single Travelers: A person who lives alone and travels with or without a companion Come in all shapes , sizes, and sexual orientations Many social trends have increased number of singles Single supplement make traveling alone costly Internet is helping singles link up for travel purposes

13. Specialized Guest Segments International Travelers: Travel outside one’s country of citizenship British most active internationally Tend to spend more money than locals May have specialized culinary/other needs Factors promoting international travel Rise in disposable incomes Longer vacation periods Globalization of all businesses More people exposed to international issues through TV, Internet, Movies Decrease in international airfares Exchangeable currency, credit cards, ATMS

14. Attracting and Retaining Guests Preferred Guest Programs (PGPs) Freebies given to guests to “reward” stays Move to provide upgrades and special perks targeted to needs of frequent travelers, rather than just free rooms First started by American Airlines as “Frequent Traveler Programs” (FTPs) Disadvantages Very costly to set up and administer Accumulates liabilities quickly Does it really attract or retain guests? Ethical issues – companies pay, but individuals benefit Tiger by the tail – can’t let go! Advantages Retains loyalty of “heavy users” Companies have purchased properties just for FGP use! Quickly build up mailing lists Develop guest profiles – then target them Easier and cheaper to administer with computers now

15. New Market Patterns - Non-guest Buyers Non-guest Buyer An intermediary between the hotel and the guest who buys the room for the guest Benefits to hotelier Deal with one person – lower costs & hassles Saves commission to credit cards, travel agents etc., Saves costs and hassles of individual bad debts Free advertising (Exhibit 2-8) Bulk buy in advance – peace of mind, steady income Risk shifted to intermediary Disadvantages to hotelier Have to discount heavily to get bulk business Will get blame/liability for intermediaries problems

16. New Market Patterns-Marketing to the Group Tourists/Leisure Groups Tour Packages Bought by a wholesaler, who buys rooms, airline seats, travel arrangements in bulk, packages it, and sells it to groups and individuals Cheaper for guest than components bought individually Wholesaler gets benefit of “breakage” Breakage – Items paid for but not utilized, like meals etc., Inclusive Tour (IT) Packages (Exhibit 2-9) Hotels doing own packaging Eliminates costs of middlemen Hotel gets benefit of “breakage” Marketed to individual guests Hotel is competing with itself – marketing is tricky

17. New Market Patterns – Marketing to the Group Business/Commercial Groups SMURF – Societies, Medical, University, Religious, Fraternal All such groups hold meetings and conventions Convention – A group assembled to promote a common purpose. Meetings, papers, talks given on common subjects Groups can be as large as 100,000 They need extensive meeting facilities Large meeting rooms and dining rooms needed More complete the property, greater the appeal Competing hotels cooperate to host large conventions Trade Shows- Exhibits of product lines shown by purveyors to potential buyers May be done in guest rooms itself May require large exhibit space with special requirements

18. New Market Patterns – Marketing to the Group Business/Commercial Groups (Continued) Single Entity It has an adhesive that binds its members together. Attendees already belong to the unit (a company, an orchestra, the football team) before coming to the hotel. The unit makes the reservation and pay costs Incentive Travelers: Rewarding top employees with all-expenses paid trips Free vacation is more motivating than more money! Trips are usually first-class Organized by specialists Very demanding business! The most driven people win these trips! Top performers expect top performance!!

19. New Ownership Patterns State of the Industry From Turmoil to Churning Investors in industry for wrong reasons(1970-90) Ego, real estate speculation Overbuilding, high operating costs, low demand Bankruptcy of hotels, bank insolvency Saying - Only the third owner makes money!! Investors and banks have learnt their lesson Demand is slowing, but less overbuilding now A Consolidating Industry Large companies are buying smaller ones Consolidation driven by economies of scale in all costs Consolidation improves marketing, builds stronger brands The Global Village Hotel industry is dominated by global players Nationality of buyers shifts with currency values

20. New Ownership Patterns Individual Ownership Can be individuals, family or a group Combination of personal wealth and borrowed capital More likely with smaller properties, as less capital is needed Larger properties are more capital intensive and need complex financing schemes Real Estate Investment Trusts (REITs) Investment vehicle for real estate deals including hotels – many tax advantages Restrictions prevent REITS from operating hotels, so they set up related companies to run the hotels

21. New Ownership Patterns Condominiums and Timeshares Condominium Ownership Owner owns and pays for maintenance Units are placed in common rental pool Owners may use part-time, rent out the rest Fees are paid to operators/managers Gets rental income, capital gains on sale Pays condo fees to association for maintenance Timeshare Membership Owner buys the right to use for a fixed period each year for a agreed upon number of years Example: Two weeks every year for 20 years Operator furnishes and maintains the time share Many problems earlier, now well regulated and big brands in the business Moving towards a point system integrated with FGPs

22. New Ownership Patterns Joint Ventures and Strategic Alliances Partnership between different commercial entities Radisson Hotel in Moscow is a joint venture between Radisson, Russian Ministry of Foreign Tourism and Americom Used when different parties have different expertise/assets to offer

23. New Management Patterns - Chains Chains – Increasing in popularity because of (Exhibit 2-14): Large capital needs Risk is diversified geographically and segment wise Economies of scale Expertise in site selection Ability to attract management talent Increased marketing clout, particularly brand building Ability to invest in and leverage technology

24. New Management Patterns - Chains Parties to the Deal Developer - Sees the opportunity and puts together the deal Financier – Whom the money comes from – a bank Equity/Ownership – Individual, Group, REIT etc., Management Company – Runs the day to day operations for a fee Franchising Company – Provides systems and brand recognition Hilton/Marriott

25. New Management Patterns- Chains Consortia and Membership Organizations/ Referral Groups A cooperative structure, where members pays fees and get services that a chain would provide Best Western International 4000 properties in 100 countries A way for independent operators to get the advantages of a chain, without sacrificing their independence or individuality. Operators get marketing, reservation systems, recognizable logo Guests get consistent standards, yet a unique experience

26. New Management Patterns - Management Companies and Management Contracts Management Contracts – An agreement between a hotel owner and a management company by which the management company operates the hotel within the conditions set down by the contract, for a fee. Happens where owner lacks inclination, time, or expertise to manage Management companies have grown with the separation of ownership from management Fees are paid by the owner irrespective of profit or loss There may be a bonus for profitable operation Owner gets to keep profits or take losses Management company may be different from Franchisors If franchised property, management is done within parameters of the franchise agreement Exhibit 2-15

27. New Management Patterns – Owner and Leaseholder Leases – An agreement between a hotel building owner and a leasing company by which the leaseholder operates the hotel. Building (Hotel property) owner gets a risk-free flow of lease payments from the operator Lease holder operates the hotel Lease payments are made by the hotel operator from operating income, irrespective of profit or loss

28. New Management Patterns - Management Companies and Management Contracts Franchises - The buyer (Franchisee) acquires rights from the seller (Franchisor) to the exclusive use of a name, product/s, and system of a franchisor within a defined geographic area, for a fee. Enables the Franchisee to operate as an independent, but still have the benefits of chain membership. Fees are paid for many things and can add up to 8% of gross sales of 40% of net profits (Exhibit 2-15) Franchisor makes money, even when Franchisee is losing money! Franchisor can terminate the franchisee for non-adherence to standards Problems arise when franchisors want to expand too rapidly and franchisees claim that their territory is being infringed upon by other franchisees One individual can buy different franchises

29. Objectives of Chapter 2 New Product Patterns: Segmentation, Brand and Image New Product Segments Concept of “Price Elasticity of Demand” New Market Patterns Marketing to individual guests Marketing to groups Changing structural patterns as industry adapts Different ownership and management models Differentiate between hotel as: Real estate investment vs. An operating business Increasing role of third parties Operational Issues Financial Issues Resources and challenges