Travelling North

 

Digital dilemmas

I have recently been talking about the potential impact of Airbnb on the hotel industry: to be specific on the luxury hotel industry.  Airbnb is a huge intermediary service, linking those providing accommodation with those seeking it. It was launched on 2008, when it was famously said to have been a web app that offered a sofa in someone’s flat to a backpacker as the core of its business.  It has grown dramatically from that low level base, and it now has over 2 million listings in 34,000 cities and 191 countries (it even proudly includes 1,400 castles on its inventory).  The range today covers those basic accommodation needs, a bed in a flat, to luxury homes and apartments (and, of course, those castles!).

In discussing this development with people in the luxury hotel industry, I have suggested that Airbnb offers a real challenge, a potential disruption even, as its listings include an extensive inventory of luxurious accommodation, many offering kitchens, living areas, bedrooms, pool rooms and entertainment centres combined with housekeeping, maid and catering services.  Such properties offer more for the client than most luxury hotels, and at the same time have the added benefit that they are available in many more locations than any hotel group can offer.

The challenge this new business provides is easy to see.  The harder question is how to respond.  Classic competition theories would suggest three options:  compete, and seek to do what they do better; collaborate, and seek to find ways to work together; or ignore.

Some hotel groups are already going down the path of competing.  Among the many examples to be found in the boutique hotel industry, CitizenM and Yotel in New York are offering an approach that is designed to make them more competitive with apartments.  They have work spaces, meeting areas, and a causal environment which is intended to make a guest feel more at home.  They represent the next stage of development in the boutique segment of the industry:  places that are distinctive and offer a relaxed atmosphere that suits the guest by providing familiarity and features of a home.  In other words, these hotels challenge Airbnb by creating places characterized by informality, shared workspaces and meeting areas, and a blurring of the lines between guests and staff.

As an alternative, at least one hotel group has decided to go down the path of collaboration. Accor has acquired onefinestay.com, said to be an upmarket competitor to Airbnb.  Small, with just over 2,500 properties in a few major cities, Accor has said it intends to build up this this websites coverage, attacking Airbnb at the luxury or premium end of the market.  In making its acquisition, the CEO of Accor observed that he had made a ‘mistake’ in not investing in Airbnb when the group had the chance to do so a few years ago:  for Accor, as with most other groups, this initiative is seen as a key strategy to deal with the competition from online operators, (the other key source of online competition coming from OTAs, online travel agents, who are already the major source of bookings for most hotels).  Accor’s approach is interesting, seeking to compete with Airbnb in just one part of the market, the premium sector, exactly the area in which some feel Airbnb is most vulnerable.

Or ignore:  what about the third response to competition?  Most hoteliers would claim that what drives business in the luxury hotel industry is service.  Guest loyalty is a function of the service that is offered, and the level of personal service and guest recognition that distinguishes luxury hotels will take Airbnb years to emulate, if ever.  Precisely because of its size, and the role Airbnb plays as an intermediary, it will find it difficult to analyse data on clients and target service in the same way that a luxury group can.  Airbnb is a challenge to hotels, but perhaps the greatest threat is in the middle and cost-conscious sectors of the business.  It may be of concern for boutique hotels, like CitizenM, but they are already developing ways to carve out a distinctive approach.  It will be a major concern for the bottom end of the market, the cheap motels and hotels that really provide a bed for the night and not much more.

So much for the conventional analysis.  Now let’s do what we should have been doing at the outset, and turn to examining the customers for accommodation, not the service providers.  As you might expect, that offers a slightly different picture.

A simple framework for looking at customers sorts them out along three dimensions:

• Reason for travel – leisure, business, group (conferences etc.)
• Age of traveler – under 30, 30-60, over 60s (very roughly aligning with Gen Y and younger, gen x and younger baby boomers, and the majority of baby boomers and older)
• Income – in US this can be divided into the top 5% (affluent, with incomes $150K or more), upper middle class (30% of population, incomes $100k or more), and the rest (65% of population, of whom some are said to be ‘comfortable’, maybe 25% of the total population, and the rest are struggling or poor)

To simplify a little further, we can combine these into a small number of categories of particular interest to luxury hotels:

1. Affluent and upper middle class young – Gen Y with incomes continuing to increase – travelling for leisure and business
2. Affluent Gen X and younger baby boomers – again travelling for leisure and business
3. Affluent older – mainly leisure
4. Affluent and middle income group travel (primarily companies seeking upscale conference and meeting venues)
5. Affluent and middle income special occasion leisure travelers (weddings, honeymoons, etc.)

Taking this guest perspective, things do look a little different.

Between them, the affluent older and the upper middle class travelers (categories 2 and 3 above) are still a strong component of luxury hotel guests and tend to be loyal to a particular company:  many hotels at the top of the market see these two groups as the continuing core of their business.  They represent what some researchers call the ‘brand loyal’ group:  they like what they know.  There will be times when Airbnb might be considered, for holidays with their extended family, but for themselves and their partners, staying at a luxury hotel is their clear preference.  Indeed, there is some evidence to suggest that these two groups are also using luxury hotels for multi-generational travel to a greater extent:  it is still easier to sleep in another room away from children or grandchildren at night, and very enjoyable to be able to avoid all the cleaning and cooking!

Most luxury hotels report that the bulk of their guests are over 40.  Many will still be travelling in 10 or even 20 years’ time.  The only concern is that at these guests become older travel starts to drop off, and this leads, inevitably, to a desire to understand what the next generation guests is seeking when they travel, to make sure they build the next cohort of brand loyal guests.

Naturally, a key focus today is on the younger affluent and upper middle class travelers (the first group above).  Do they differ from the generations that preceded them?  The truth of the matter is that we really don’t know.  Despite many articles on Gen Y and the Millennials, there is more guesswork than knowledge.  Despite this, there are a few factors that may be important:

• This is a group that grew up in a digital world (‘digital natives’, as one writer calls them), and their expectations about digital support are important – they expect to be online using their portable devices at any time anywhere;
• Many are from smaller families, and what little we know about children in smaller families suggests they may be rather more spoilt than those from larger families, rather more selfish, and as a result, expect to have things done ‘their way’;
• Third, it seems this generation is less brand loyal than preceding generations, while still remaining very brand aware.

What does all this mean?  From a workforce perspective, employers are said to be concerned that this group is less likely to stay in a job, and will tend to hop around.  As far as we can tell, that is not especially clear at this stage.  Many young people join companies and prove to be very loyal (while expecting to be rewarded for their commitment); of course, they may have moved around a bit before they find the right place to work (just as earlier generations did when they were young).

As guests, there are some signs of difference, however.  Digitally enabled, increasingly this group will bring their own devices (iPhones, iPads, whatever) and expect the hotel and its rooms will provide a seamless interface.  They will want to use their devices to do just about anything, from finding tickets to a show through to making a choice in the hotel restaurant.  These digital natives live digitally enabled and seek an environment that sustains this.

Second, they are very much more interested in the variety of experiences they have when travelling, and are not as likely to see visiting a city being based on staying in the one hotel for the time they are there.  Some will stay in a luxury hotel for one or two days, then stay in a boutique hotel in an interesting area, or even meet up with a group and use Airbnb for a few days.  Brand aware, certainly:  they love to talk about where they have stayed and the places they visited, (posting ‘selfies’ as they do so), but boutique and ‘different’ brands are as important as established ones.  They are influenced by trends, reading online blogs and commentaries on the places to be seen, where to eat, what to do.  For many, the world of social media plays a major role in what they choose to do and where they choose to spend their time.  Finally, and as a consequence of all these factors, their perspective when they travel is, perhaps, a little different from older travelers.  Many see the city as a whole as their ‘home’, and the hotel in which they are staying is, in effect, the ‘bedrooms they are using.

Is this a problem for luxury hotels?  I suspect that many concerns are over-rated.  The group is likely to look very different in their 40s and 50s, and may turn out to be much closer in their behaviour to the generations that are in that age group now.  That transition may take place more quickly than some expect as concerns continue to grow over safety and terrorism; younger travelers (and their parents) are increasingly likely to want to be reassured every night they are in a safe as well as luxurious environment.

Group travel (the fourth category above), together with travel for special occasions (the fifth category) remains as competitive as it has always been.  Much of this market has always had a strong price element as companies look for tradeoffs in price and services when looking at various properties for group travel needs.  The luxury hotels do offer something important to many companies (and many getting married), and that is the association with prestige:  that competitive edge will mean that the market will continue to have a segment where the luxury hotels are only competing with one another, and price is a less important factor, although still an area for (sometimes intense) negotiation.

What does this guest perspective tell us?  I think it is like most areas of change:  the landscape is always changing, but some features remain important.  Luxury hotels are like the mountains in the landscape.  The stand out, and they will continue to attract guests because of their prestige, and the power of brand association.  Each luxury hotel will continue to battle with others in the same city or area, but there will be guests for whom luxury is important.  The real challenge will be deciding how far a property is willing to be exclusive, to charge much more than others in the same city, thereby making them more prestigious and hence more desirable, but at the same time shrinking the available market.

Of course, the hotel industry will look much more demanding once you move past the luxury ‘mountains’.  Prestige and middle market hotels will find that they will be subject to increasing completion from Airbnb and other intermediaries offering rooms and apartment, home and castles, all over the globe.  To some extent luxury hotels can take comfort from the fact that they can largely ignore some of the competitive issues those in the other segments will have to address.  Managing social media, creating ‘legendary experiences’ and an unrelenting focus on guest service and guest satisfaction will remain critical for success at the top end of the market.

Is that all there is to be said about the digital world and luxury hotels?  Certainly not!  There is another topic, online travel agents, that does offer some real and difficult challenges.  However, OTAs will have to be addressed another time.

July 2016