Covid Crisis has hit the hospitality & tourism industry the hardest and it will take a long time for the dust to settle. Need to holiday is fundamental to most humans and hence leisure travel, especially within driveable distance of urban centres, has been the quickest to recover. Moreover, since international travel is completely in standstill mode, luxury travel to holiday destinations has seen revenge demand by travelers who have moved their international budgets to domestic stays.
However, business hotels are the hit the hardest, and it is extremely difficult to estimate how deep the scars are. Most companies (large and small) have tasted blood with video conferencing and universal acceptance of work from home model, which has reduced business travel (especially to urban centres) to less than 50% of pre-covid levels. The irony is that business hotels comprised 70% of total supply in hospitality space and most of these hotels are facing an existential crisis without customers and profits.
How do hotels react to this tsunami? Hotels in this new world may have no other option but to reinvent themselves and think outside the box. With every calamity comes a moment of opportunity and those who are able to swim against the tide will reach the shores safe. In this article, I will try to share some ideas on what hotel owners can do differently and how they can weather the storm.
The fundamental tectonic shift that will emerge for hotels out of this crisis will be around three pillars: efficiency, automation, & technology. One way to think of hotels is to compare them to large mega-factories with machines and workers- working tirelessly in shifts to produce output. Just like how concepts like ‘lean manufacturing’ and ‘just in time production’ fundamentally changed the manufacturing industry, hotels may soon have our own ‘Toyota’ moment. Hotels will need to adopt similar concepts that focus on revenue and cost efficiencies because profit can no longer be taken for granted. Fixed costs will need to be converted to variable costs to shed our extra flab thereby reducing spare inventory and wastages. We will need to use an ideal mix of machines, manpower, technology and automation to maximize our output while minimizing input, without compromising on guest satisfaction. We will need to take hard decisions about which business units to continue and which ones to pull back from.
Hotels will carefully need to plan its manpower strategy keeping in mind automation possibilities in every department. Staff to room ratios will see a downward trend and there will be emphasis on achieving ‘more’ with ‘less’. Reservations and back-office teams that perform repetitive clerical tasks can be minimized by introducing automated reservation systems and chatbots that are linked to integrated all in one systems that perform all hotel tasks like operations, marketing, and guest relationship management. The large clunky IT departments in hotels will be replaced by centralized cloud-based integrated systems reducing the need for periodic backup and maintenance. Core functions like revenue management, CRM, and online distribution will be centralized &automated using modern sophisticated systems, which will lead to increase in productivity & yields. Large sales & marketing teams that service corporates and travel agents can be trimmed down by introducing B2B marketplaces where suppliers and customers can transact directly.
Many hotels may need to revaluate ancillary business units like restaurant, bar, spa and gym which have a high operating cost and fail the profitability litmus test. It may be prudent to either outsource these areas or completely remove them from the product portfolio. Guest enhancement functions like room service, concierge services, travel desk and check-in-checkout can be automated using smartphones, tablets, kiosks, and AI based technology to increase efficiency. Energy costs like electricity and water can be minimized using IOT devices and energy saving instruments that run on ‘use as you need’ basis instead of large centralized units with high fixed costs. Hotels will need to differentiate from competition by having a lean, efficient team that can increase guest satisfaction by incentivizing staff based on reviews & ratings
The increase in online business will continue to be beneficial for hotels because it will replace fixed acquisition costs (large sales teams) with variable costs like digital marketing. Even though OTAs will continue to command a lion’s share of business, hotels will focus their efforts on direct booking channels including own websites and booking engine to reduce distribution costs. Incessant discounting schemes introduced by some OTAs to grab market share will reduce because short term valuation boost will no longer be considered a metric for success. This may bring about some maturity and fair distribution of market share across online channels. Special focus will go to meta-search platforms like Google who will be able to direct customer traffic directly on hotel websites, instead of having to pay high commissions to OTAs.
Banks, PE and VC funds may chase projects that are more sustainable, scalable and profitable rather than outlandish bets that follow a herd mentality of super-natural growth. Asset light models like revenue share & management contracts will be more popular for new projects than outright purchase or lease models. Due to reduction of profitability in the industry, new supply will not flood the market as new projects will either be shelved or be converted to other less risky asset classes. Hotels that are able to survive the crisis may come out as winners because they will be the last men standing when the crisis is over and demand returns.
Covid-19 will be a watershed moment for the hospitality industry. Instead of writing obituaries for the industry, we should instead use this opportunity to regroup, rethink, and reset. There are always winners that emerge out of every crisis and it is our time to ‘cross the rubicon’ and script our own futures.