By Stuart Pallister
Luxury hospitality is at risk of becoming obsolete, according to PwC Global industry leader for hospitality and tourism, Nicolas Mayer. That’s because it no longer fulfills the ‘needs and desires’ of clients that they couldn’t get elsewhere.
Mayer told EHL students recently in classroom sessions that, in decades gone by, luxury had involved ‘standard expectations’ about security, beautiful surroundings and service levels that guests were willing to pay for.
Whereas now, this brand promise and standardization, this consistency promise, doesn’t need to be obtained from a luxury operator anymore. You can get it online and through different channels yourself or through peers or people you trust.
These are complex businesses, Mayer says, so hoteliers should not be on the lookout for a new competitor that is going to disrupt the industry and put them out of business.
However, citing the examples of the online travel agencies (OTAs) and alternative booking platforms such as Airbnb, he argues “there are disruption innovators that chisel away at the core revenue-generating activities that operators deliver on behalf of hotel owners.”
Unbundling is becoming an issue
Many businesses are increasingly “looking at hospitality as an unbundled sequence of services and disruptors saying ‘well, I can’t become a full service hotel operator but I can do distribution, revenue management or procurement, or I can do housekeeping or engineering better than (hoteliers).'”
Owners no longer want the full service offering from hotel operators, he says, but only certain elements of the bundle, combined perhaps with the services of small companies. “So that’s how, in my view, disruption will come.” It will not come from one big player pushing the others around but “will chisel away at some of the core services of hospitality.”
Neither Uber nor Airbnb are truly disruptive innovators, Mayer argues, adding their offerings are more incremental than revolutionary. He sees Uber as a taxi offering and Airbnb an accommodation offering that is “incrementally developing what the hotel industry has been doing all along and, by being more agile through technology, basically grasping market share.” Indeed, Airbnb may become a victim of its own success, he says, due to pressures on real estate prices and rental space, as well as security issues,but
Nobody has really asked themselves in the hotel operators’ business: how is it possible that a new guy comes along and immediately so many of my clients run away and switch ships? That’s the question that needs to be answered. They’re grasping a piece of the market share and are here to stay.
Towards obsolescence in luxury hospitality?
Mayer further says the issue of obsolescence in luxury hospitality is serious because it takes time for hotel groups to reinvent themselves.
“I don’t think any of the large, recognized players will become obsolete tomorrow. However their value proposition now is increasingly being challenged because the historic deal was: I shall provide a number of useful services in a package deal, in a management contract with a three percent base fee and a ten percent incentive fee on the owner’s side. But both owners and consumers want to spend more on those parts of the package where they see value. For instance, some may prefer to spend ‘disproportionately’ more on a room than cross-finance a fitness or business center.
“The luxury delivery model is in danger of obsolescence,” says Mayer, “because it is based on a transactional premise where we say you give us $800 a night and I will make available an array of things, some of which you’ll use and a cross-subsidizing deal that works for everyone.” That classical or traditional model is being challenged, he says, through the development of lifestyle hotels.
If you start unbundling an $800 daily rate and take out the cross-subsidization that goes towards fitness, MICE (meetings, incentives, conferences and events), the business center, beach club, etc., what is left over is probably not going to be sufficient to cover the costs.
So the unbundling and change in business model are actually putting the luxury model at risk of obsolescence. It’s not so much that people will no longer wish to have human contact or nice experiences whether they be in dining or something else.
Mayer stresses that luxury hotels are weak in terms of processes, IT and digital systems, and the development of staff.
Hospitality-specific systems, whether for revenue management, or distribution, had had been bought in. In addition, due to a lack of training, systems are “being poorly used.”
As for processes, the hospitality sector is “among the least mature, the least standardized and the least modern”compared to any other major industry.
Check-in processes, he says, have not changed fundamentally since the 1970s (although he does praise citizenM for being a pure digital company which “never had to build processes on top of an analog heritage”). Most operators have merely transferred analogue processes to a digital environment “but that is not digital transformation in a process environment.”
As for the development of staff, Mayer says “the hospitality industry is particularly suffering from a lack of access to talent because they have amongst the weakest management development programs of any industry.” Consequently he urges hotel groups to offer career tracks and career clarity. “That doesn’t need to mean that I will map out the next 12 years until your first GM position but people want to know there is a plan for them, rather than feel they’re a reserve battalion to be dispatched when the first vacancy pops up somewhere in the chain.”
Plenty of areas for improvement then, so what advice does Mayer have for hoteliers as they tackle these issues?
My first recommendation would be, look at industries that are really good at process improvement and ask yourself what is that they’re doing that you can replicate.
The airline industry, he adds, is a good example as it “constantly looks at every micro process” to make improvements and, as in the hotel industry, “if you fix it, even in just a very small piece, that can have very big effects.”
“Looking outside the industry is tremendously important. One of the issues of the hospitality industry – and it’s not a very original statement – is that it’s almost incestuous,” as hoteliers switch from one group to another, taking their expertise with them. Whether it be financial services (for the check-in process) or manufacturing (for purchasing and human capital management processes), the results have been ‘phenomenal’, Mayer says, when hoteliers have looked outside the sector for inspiration.
Nicolas Mayer is Global industry leader in hospitality and tourism at PwC.
Dr Florent Girardin is an assistant professor of marketing at EHL, specializing in luxury brand management and brand authenticity.