A Hotel is just a Hotel: Or is it?

Handing over keyThe complexity of the lodging industry is really only complex to those behind the scenes, with a vested interest in the market share. To the general population of travelers visiting a hotel, they likely never give a thought as to who might own or manage the hotel, other than the name on the building or the branding throughout the hotel. A company (or individual) you may have never heard of owning a Marriott, Hilton or Hyatt property? A company you may have never heard of managing one of these properties? Adding to the complexity, are the multiple avenues to book rooms through what we call “OTAs”, online travel agencies, vying for their piece of the revenue stream. The layers of opportunities and related challenges make the lodging market the exciting, dynamic industry it is today.

In the history of the lodging industry, it was very typical to have large hotel franchising companies owning and operating many of their hotels. More recently, we have seen these franchisors spin-off most of their owned hotel assets into separate companies in order to become “asset light” entities. Choice Hotels and Marriott started the trend in the 90’s, with Hilton following in early ’17, and Hyatt announcing plans of selling assets over the next 3 years.

Hotel ownership can range anywhere from an individual investor or family, to a private equity firm, or a publicly-traded real estate investment trust (REIT). The hotel may be part of a larger portfolio of hotels, or other types of real estate assets such as multifamily, commercial or retail. While some owners may still manage their hotels, the majority of owners will hire an independent or affiliated operator or strategic partner, to manage their assets.

Regulatory risks and macroeconomic trends For publicly traded owners, operators, or franchisees, there are significant regulatory requirements to be compliant in the public environment. A publicly-traded owner must be certain that internal controls put in place to provide reasonable insurance financial operations and reporting are operating effectively not only within their corporate function, but with the operator managing their assets as well. Some comfort may be derived from an SSAE 16 service organization control report, or from performing audit procedures directly at the operator’s location.

As heard all too often lately, it’s no surprise the hotel industry accounts for one of the highest number of sector data breaches seen in the last few years. Given the number of hotel specific transactions (room reservations, restaurant, gift shop etc.) some performed remotely or through a third party, the sector is ripe for intrusions. Effective this month, the General Data Protection Regulation (GDPR) is a regulation in EU law on data protection and privacy for individuals within the European Union. This regulation could be applicable to an owner and/or operator and goes into effect May 25, 2018. Any company worldwide who’s processing EU residents’ personal identifiable information (PII) will be affected.

Other regulatory risks arising in the hotel industry include the rising minimum wage and union requirements. As the cost of labor has increased, the availability of labor continues to decrease. Even with the increase in minimum wage, companies are finding it increasingly difficult to attract and retain employees. Companies with employees in highly unionized areas may impacted by demands for pay increases, working hours, workloads etc.

Not to be forgotten is the 2017 tax reform legislation. Clearly a broad impact to all those in the lodging industry and beyond as many are hopeful individual and corporate tax cuts will put more money in paychecks and fiscal budgets, leading to an increase in discretionary leisure travel and corporate spend. There is a positive outlook for more access to affordable capital, which could stem an increase in new developments. At the same time, there is concern about the oversaturation of certain markets, but an uptick in interest for expansion in Asia, India and China.

Disaster Recovery and Emergency Preparedness Unfortunately, the lodging industry has been too often impacted by unforeseen events in the last several years. From natural disasters such as hurricanes and the related wind and storm surge damage, earthquakes, and wild fires, to riots, civil unrest and terrorist attacks, across the world. While the impact to room demand in various circumstances fluctuated, the need to look at the preparedness, response and recovery efforts surfaced as a significant priority. Reviews of formalized policies and procedures including communication and evacuation plans, safety reviews with new considerations for access rights and responsibilities of owners/operators, and insurance coverage reviews.

Technology Technology innovation can be challenging given the desire for growth and customer experience, while protecting the digital space of corporate and personal information. With new technology such as digital keys and personalized in room technology, cyber security and privacy become even more important. Access to data to perform data and cognitive analytics, as well as artificial intelligence provide faster processing and access to room data and inventory, as well as guest preferences leading to customer satisfaction and brand loyalty.

Innovation and Disruptors New innovation and disruptors are more prevalent than ever, but the impact in some cases may be difficult to quantify. With more brands to choose from, additional options such as Airbnb, VRBO and HomeAway bring an interesting alternative to a traditional hotel stay. But not to be outdone, we are beginning to see the brands fight back as just recently, Marriott announced its partnership with a company called HostMaker, which per Marriott “offers short term home rentals…leveraging its loyalty program and expertise in branding to stand out in a crowd”. Brands continue to fight to take back margins as they combat the Online Travel Agents (OTAs), driving customers back to their own websites for a brand-direct booking. In 2016, Hilton had a very successful rollout of their largest marketing campaign titled “Stop Clicking Around".