Blogs

Hotel Business: The impact due to the onset of sharing economy

Traditionally, the hotel industry has catered to the lodging, dining and other amenities of travellers or guests. The industry operates across the different value chain by offering services and facilities as per the preferences and paying capacity of guests’. Typically, players in this industry own assets and or franchise their brands or manage third party assets. The hotel business is highly capital intensive but at the same time highly competitive, this is due to the presence of a large number of players across the different value chain. The industry is highly regional in nature, the hotel business is directly impacted by overall economic or business activity and tourist movement in the local area of operation. The players in the hotel industry have been competing with each other on conventional grounds. However, the advent of sharing economy signalled an onset of a new era in the hospitality business.

Sharing economy service providers offer accommodation related services to guests without owning the asset. They act as a link between local hosts (property owners) and guests, then earn revenues through commissions from both the sides. The business model is not capital intensive at all and has high scalability as the asset is not owned and as a result, geographic penetration could be easily achieved. The hotel industry is directly impacted by this business model since it provides similar services, albeit with a varied degree of differentiation. 

Televisory attempted to study the impact of sharing economy on the operational performance metrics of the hotel business, for the study Televisory considered Airbnb, the leading sharing economy service provider in the world. Televisory’s analysis concentrated on New York, which is the second largest hospitality market in the world and a leading hotel REIT market. Moreover, it is the main hub for Airbnb as well.

The study was based on three key operational metrics of the hotel business.

Firstly, supply of rooms in the New York market: Televisory found that though the supply of rooms for traditional hotels (system wide) increased at a CAGR of 11.9% over 2012-15, the growth rate exhibited a declining trend for all hotel segments in 2015 on a YoY basis with budget hotel segment registering the worst decline. However, Airbnb recorded a significant CAGR of 86.9% during 2012-15, with an exponential growth of 213.3% in 2015 on a YoY basis. This has been stated earlier and explains the key difference in the business models of shared economy services and traditional hotel business entailing capital intensity. Hence, this resulted in easier scalability of operations in quick time for the shared economy players. 

Source: Televisory’s research

Source: Televisory’s research

The slowdown in the supply growth was especially higher for the budget hotels during 2015, which was directly impacted by tourists and leisure travellers who preferred Airbnb over the traditional hotels.

Secondly, the consumer preferences also changed for the length of stay, for mid duration stays the consumers preferred Airbnb over the traditional hotels. The increase in duration of stay positively impacts the occupancy rate of any hotel. But, despite an increase in stay duration experienced by Airbnb average occupancy rates for hotels across all chain scale in the USA remained largely unaffected.

Source: Televisory’s research

Source: Televisory’s research

On a closer look at the third important operational metric which is the Average Daily Rate (ADR) of traditional hotels in the USA, Televisory found that the ADR of the budget hotel segment declined by 14.5% on a YoY basis and was worst impacted among on all chain scale in 2015. A declining ADR for the budget segment somewhat explains unaffected occupancy rate despite direct competition from Airbnb and increasing guest preference towards the accommodation provided by Airbnb, as budget hotels reduced their tariffs to compete with Airbnb. 

Source: Televisory’s Research

In conclusion, Televisory’s study reveals the impact on small budget hotels by sharing economy services. This is evident by the slowdown in room addition and declining ADRs (which has helped to maintain occupancy) for budget hotels. In response, these hotels, that offer apartment-style suites started listing their rooms on Airbnb.

Although it is true that Airbnb has gained more attention as an alternative to budget or low-end independent hotels, but it is yet to perfectly substitute all types of hotels. Both traditional and shared economy service providers are looking for different means to compete with each other and are continually stepping into someone’s shoes, only future will  divulge the business acumen of the players.

 

Your Rating

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Rapidly growing Indian online food delivery industry and its unrealised profits

Evolution of online food delivery industry in India Geographical penetration and scope for expansion Key players and their zeal to balance revenue and costs   Online...

Can lithium-ion anode demand for needle coke reduce availability for electrode players?

What is needle coke? Uses of needle coke Lithium-ion battery manufacturers demand needle coke   Needle coke? Needle coke is a specialised form of petroleum coke...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Carbon black industry, strong potential for supernormal profitability?

What is carbon black? Its uses Impact of the environmental curbs in China   What is carbon black? Carbon black is a fine carbon powder and it is a disorderly...

Blockchain, an emerging concept, a disruptive technology (Part 1)

What is blockchain? How is blockchain revolutionary? Cryptocurrency, the new money ICOs, the new way of raising money Summary Blockchain is a software architecture...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Rice industry outlook 2018

Major rice producers and consumers Global rice trade Factors dominating the trade   Rice is the 3 rd largest produced agricultural commodity in the world, after...

Indian wood panel industry, growth drivers and present trends

Current market scenario in the Indian plywood industry Growth in the housing sector and rapid urbanisation to provide the boost GST rationalization to reduce price difference...

Rise of Ant Financial, will the success story continue?

What is Ant Financial? Journey to become king of unicorn Will regulatory curbs hinder its success journey?    Ant Financial, an affiliate and integral part...

Baidu’s Apollo, the underdog of autonomous driving platform

Overview of the autonomous vehicle sector in the global automobile industry Search giant Baidu’s entry into the autonomous driving space Baidu’s approach in becoming a front-runner...

Malaysian rubber glove industry, an update

Rising global demand for gloves Impact of USP 800’s implementation and the US-China trade war on Malaysia’s rubber gloves industry Key challenges for the Malaysian rubber...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

Battle for the textile and apparel industry in Southeast Asia

The reasons for China’s decreasing presence in the industry Initiatives by the governments in Southeast Asia to boost the textile trade Vietnam and Bangladesh’s quest to conquer...

OYO Rooms, an Indian start-up to enter Japan

Growth story of OYO Rooms in India Business model of OYO Rooms Analysis of strategy to enter Japan   OYO Rooms, the Indian start-up has decided to venture in Japan...

What’s in store for India’s first commercial REIT as it hit the market with Blackstone teaming up with Embassy Group

Overview of the partnership and assets of Embassy Office Parks Comparison of the Indian commercial office market space with other developed markets Road ahead for India’s...

German economy, will the slide continue?

Weakening global industrial demand weighs on Germany’s manufacturing sector Inflation and business climate take a hit with broader signs continuing to be subdued Future...