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.

Also Read:- Restaurant Business–The Story of Long-Term Survival


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