A hotel CEO once commented that “There is only one boss. The Guest, and they can fire everybody in the company from the chairman on down, simply by spending their money somewhere else”.
The Hospitality business is forever at the mercy of its customers’ opinions, pockets and ever-changing trends and desires. Asset owners and operators have to maintain a consistent guest experience while suffering from reliance on market cycles, and a capital intensive, economically fragile business model, while navigating the complexity of operator contracts, enduring the reliance on high fixed costs with thin net margins and broad oversupply.
From my own experience, I would say that anyone who does not ask themselves at least occasionally “Why am I in this business?” is showing a certain lack of awareness as to the environment in which they are operating. While the world has been severely affected by Covid-19, few industries have been laid as bare as Hospitality and the brittle foundations that many business models have been built upon.
The pandemic is forcing all of us to lifeboat existing assets and rethink our core strategies going forward. This is a time of reckoning for the industry from which there will no doubt be significant casualties.
Despite being in the eye of the storm, I am optimistic. I have always been of the belief that extreme adversity brings about cyclical if not generational changes. The inherent need to make businesses viable, more efficient, sustainable and ultimately profitable, will bring out a wave of rationalisation, creativity, innovation and much needed investment recalibration. This window of opportunity will make it possible for both prudent investors and adventurous operators to push their way into this crowded space and, once, there, to stand out in it.
Hotels that were well run and financially sound before the pandemic and the economic fall-out from it will hopefully survive. It is the over-leveraged, ill-conceived, poorly operated and uninspired that, to be frank, face a cull, and not before time. So those seeking to enter the industry would be well advised to learn from the best.
There is almost certain to be an over-hang of commercial property on the market as the crisis deepens. This will generate new opportunities to buy at reduced capital values and to re-purpose such properties as, among other things, hotels. The “staycation” is here to stay. People are increasingly discovering the delights on their own doorstep rather than queue for hours at airports, wearing masks and enduring the anxiety and risks associated with air travel. The notion of a hotel as our home away from home will become even more pronounced in the future.
Technological developments in hospitality are finally becoming transformational. The adoption and implementation of a modern tech stack is essential in creating deep efficiencies in the operating model while advances in AI are improving the guest experience. Businesses are already innovating to provide a touchless journey, to reduce physical contact as much as possible to avoid infection in a post-coronavirus world, while in turn reducing staffing costs.
I believe that hotels will need to strive to over-deliver on the expectation vs value proposition for the customer. This requires a re-focus of their core principles, their business model and their culture which will set them apart from the pack – a reassessment of what the hotel experience actually means at every level.
I have long been an investor at the high end of this industry, but for me, today the most enticing investment prospects lie in re-imagining the world of the budget hotel, those establishments charging less than £100 a room. Gone are the days when a budget hotel should mean dull, uninspiring rooms and an anaemic experience (if that is the right word) that does not vary from one boring box building to another. Customers today expect quality and thoughtfulness across every aspect of their stay, from the room design, the comfort of the beds and the strength of the showers to name a few.
The art here is for operators to use all the tools at their disposal and find the right balance point among cost, benefit and experience. Yes, experience – the holy grail of Hospitality. The competitive landscape and lack of disposable income in the near term means that “old mediocre” is no longer good enough.
Those hotel owners who hone their craft and listen to their customers carefully to create something special should do very well indeed in this new climate.