CONTENTS ASSIGNMENT3 Introduction4 Analysis of External Environment5 The Macro-Environment6 The Industry Environment8 Strategic Groups11 Arguments For and Against Entering Emerging Markets12 Conclusions14 REFERENCES15 APPENDICES16 Appendix 116 ASSIGNMENT This assignment is based on a series of articles about the hotel industry published by The Economist and The Times between March 2005 and February 2009 and these can be found in appendix 1. —————————————————————————————————————————
Examine the external environment in which the big hotel chains such as Intercontinental operate. Using relevant B820 course models and concepts firstly assess the main challenges they face and secondly consider the arguments for and against entering ‘emerging markets’. Introduction This report is based on a series of articles about the hotel industry published by The Economist and The Times between March 2005 and February 2009 and presented in the course file (B820, Strategy, Course File ,November Presentation, p60 – 72) these can also be found in appendix 1.
With annual sales approaching $65 billion and growing at an estimated annual rate of approximately 2-3%, the hotel industry can be divided into three segments consisting of budget/economy, mid-scale, and luxury hotels. The major players in the industry are the 10-12 parent companies that operate a chain of international hotels, often with brands that are spread across the three segments. In addition to these global players, each segment also contains an abundance of smaller hotels that compete at the regional level.
This analysis will concentrate on examining the external environment in which the big hotel chains operate and the unique set of challenges this presents. Relevant B820 Strategy course models and concepts will be applied. Arguments in favor of, and opposed to, entering ‘emerging markets’ will also be presented. The following report was derived from the primary use of secondary sources, in addition to telephone Analysis of External Environment The Industrial Organization Model suggests that above-average returns for a business are largely determined by characteristics outside of that business.
The model largely focuses on industry structure or attractiveness of the external environment rather than the internal characteristics of the enterprise. There is a need to differentiate between the broad, macro-environment and the near, industry environment that encompasses the impact of industry structure and the organization’s competitors. Figure one below shows this differentiation. [pic] Figure 1 – The macro-environment and the near industry environment (Source: Best) Each environment typically requires different types of strategies.
Generally, strategies for dealing with the industry environment are more proactive than strategies for responding to the macro-environment. For example, the hotel chains typically have little influence on general trends in the economy such as currency rate fluctuations. Consequently, it is more reasonable to predict and adapt to broad trends rather than considering ways to change them. On the other hand, most firms can have substantial influence on stakeholders in their industry environments, such as customers or competitors.
Therefore, strategies for dealing with these stakeholders can be proactive. For example, hotel chains have developed robust customer loyalty programs that reward customer stays and aim to encourage repeat business. The Macro-Environment The macro-environment forms the context in which the firm, its industry, and other external stakeholders exist. The STEP (B820, Analysing the External Environment ,Unit 2, p10) analysis below seeks to identify and assess the external drivers of change that will have an influence on the hotel marketplace. Social & Environmental:
Significant growth in key socio-economic groups is expected, especially from emerging countries. There has been a significant shift over the last few years towards the higher socio-economic groups, suggesting a better-educated and more affluent population, already backed up by rising levels of disposable income which is an advantage to the hotel industry. However, certain segments are price sensitive, for example the Chinese prefer to stay in cheaper, more basic hotels. Traditional destinations are facing competition from emerging countries as destinations. e. g. travel to South Korea rather than Italy.
However there are challenges presented by doing business in emerging/foreign markets like China and Russia such as safety concerns, management style, and labor laws. Also catering to varying tastes, cultures, and languages of tourists and business travelers poses a challenge. The threat of natural disasters, especially in emerging markets also presents challenges and uncertainty. The industry needs to show concern for the environment (towel on hook means do not replace) and actually reduce energy consumption via modernizing, installing solar panels etc. Hotels contribute a lot to carbon emissions and water shortages.
Chains are being driven to contribute to environmental programs such as the Marriott in Brazil contributing to the save the rainforest efforts. Technological: Reservation systems revolutionized the industry while the internet has changed the way many customers make room reservations. Technological advances have also changed the facilities that are provided within hotels, such as broadband Internet and digital TV. Providing these services in most cases provides a competitive edge to certain segments, or has become the expectation in other segments. For example wireless internet for the business traveller.
Current technology has made it much less expensive to implement a wide range of service procedures. Hotels can maintain customer profiles on computer and thus have access to large amounts of data for mining. Economic Factors Economic factors are particularly critical to the success of firms in the hotel industry. There is a high sensitivity of profit to falling revenue per room, especially if the chain owns the hotel. Chains now mostly either manage hotels and collect management fees, or collect a franchise fee from hotel developers that use the chain’s brand name.
This is more stable, provides recurring income, and is less prone to downturn in revenue per room. The chains must act to free up money to return to shareholders (dividends), cut debt, add to company pension funds, and to build hotels catering to different markets (usually budget sector). Investors are now assessing chains on pipeline of management contracts and franchises, not just on revenue. Adoption of either a management or franchise model coupled with the sale of property provides the required cash.
However, it can be assumed that there is a significant challenge in restructuring from hotel ownership to hotel management and franchising. The last years have seen a greater need for a larger proportion of budget hotels because of the economic downturn that has caused more business travelers to use mid-tier hotels and the increase in travelers from poorer countries. It has proved difficult to take advantage of the increase in Chinese tourists, who would rather spend money on goods than on nice hotels. This has driven the room prices down.
However they will increasingly choose more expensive hotels as they make repeat visits and the industry must anticipate this and be ready. The industry is very sensitive to currency fluctuations and increases in the price of fuel. Europeans are the largest contributor to global tourism and this will suffer with a drop in the Euro, and the weak dollar has meant less US domestic or foreign travel. Increased fuel prices and surcharges are making travel by plane or car more expensive. Economic information for advanced economies is reported regularly and readily available.
In emerging countries information may be unreliable and infrequent. The chains are very active in nations without reliable reporting systems and may need to buy economic information from a research firm or hire consultants to gather data. It is important for the chains to anticipate possible economic changes and devise strategies for dealing with those changes. For example, a hotel company may adjust its pricing strategy or its marketing strategy on the basis of anticipated consumer demand. Political Factors: Government actions have a great effect on this industry.
The 1991 war in the Persian Gulf caused a sudden reduction in travel that left many hotels empty as did the events of the 9/11 terrorist attack. Government antitrust laws, taxation laws, labor training laws, educational philosophies and policies as well as their deregulation philosophies all influence the success of the hotel industry. The Industry Environment The industry environment includes external stakeholders with which the organization interacts on a fairly regular basis, particularly customers and suppliers.
Michael Porter (1980) proposed that the nature of competition in an industry can be defined by the market power of customers and suppliers, the level of inter-firm rivalry, and the strength of substitutes and entry barriers. Interaction among these five forces, he suggests, can determine an industry’s profit potential. Each of the forces is considered in more detail with regard to the hotel industry and summarized in figure two below: [pic] Figure 2 – Porter’s Five Forces Model Applied To Large Hotel Chains (Source : Best, Adapted: based on B820, Analysing the External Environment, Unit 2, p20)
Threat of New Entrants: The threat is reduced in this area as significant barriers to entry are present. Substantial capital is required to construct a hotel or to manage a franchise agreement. The existing companies also benefit from a high level of experience that puts them at the top of the learning curve. In order to compete successfully within this industry, a reputable brand name is imperative, which also represents a significant barrier for potential new entrants. Bain (1956) suggested that customer loyalty to existing products puts new entrants at a disadvantage.
Schmalensee (1982) showed that early brands have a perceptual advantage over later brands and retained customer loyalty if the first brand continues to perform satisfactorily. Therefore it may be difficult for new entrants to lure loyal guests that have become accustomed to the value and services of established brand name hotels. Power of Suppliers: Suppliers are plentiful, and they provide in the most part undifferentiated products that are easily substituted. Since it can be assumed that hotels would be large and steady customers, it is in the best interest of the supplier to completely satisfy their needs.
However, hotels would likely prefer to maintain relations with a trust-worthy supplier since quality is paramount and costly disruptions in service are prevented. Power of Substitutes: There is an absence of noteworthy substitutes. One threat may be the increasing popularity of online video conferencing such as Skype. As the product offerings mature they present a cost effective alternative to face to face business meetings and the need to travel, thus reducing the number of business travellers. Power of Buyers: Buyers have a high level of power.
There is a great deal of choice within this industry, and the cost of switching is low. Customer loyalty programs attempt to secure some customers. In certain segments there is high price sensitivity and a less differentiated product and service offering resulting in a standardized product. Property owners of hotel acreage are also buyers of management operation services. This group possesses power because they can select a certain brand over another; however, the level of power is still relatively less than guests because it is of mutual interest to have a well-known brand manage their property.
Intensity of Rivalry: Competitors are relatively equal in size and capability and rivalry is high. The competing chains must struggle for the same guests within the same segment. Customer switching costs are minimal, thus, loyalty is low. There is low industry growth with equality of size and power. Mostly the product lacks differentiation. There are high exit barriers and high fixed costs. Rivalry also exists on a different level, namely, competition amongst management operation firms for preferred real estate. Industry growth also influences industry rivalry.
Rivalry, or competition, generally strengthens as demand for services slows. Strategic Groups It is important to define the nature of rivalry in each market segment, as well as the industry as a whole. The key to rivalry in some hotel markets is pricing, whereas in others it is brand differentiation. These large chains, with multiple properties in different segments, are often competing against each other in several markets. In this situation, it is important to evaluate the effects of strategic moves in one market on possible competitor responses in other markets.
It could be assumed that each business is looking for opportunities in niche markets where growth can still be realized without severe competitive retaliation, this may be why the emerging markets appear attractive. Key Driving Forces As a result of intense competition, there must be continuous differentiation within the industry as each firm engages in aggressive campaigns to gain market share. The industry driving forces within this segment include increasing globalization, marketing effectiveness to increase customer loyalty, and product and service differentiation/innovation.
Due to the impact from world events and economic downturn, mid-value hotels are moving into the luxury hotel competition space. This is occurring as guests choose lower priced accommodations rather than more expensive luxury rooms. Therefore, mid-value hotels are in essence drawing guests from the luxury sector. If these hotels can provide a quality reproducible, customer experience they should be able to capture some of those customers who normally frequent luxury hotels. Also, hotels in the mid-value segment tend to focus more on offering price deals to attract guests.
Key Success Factors • Price –must be able to adjust to accommodate price sensitive customers without an adverse effect on profits. • Strong brand recognition and consistency are essential. Customers select a hotel based on its reputation, for example by reading online reviews and recommendations. Customers will also be influenced by experiences with a particular chain. Brand consistency allows customers to know what to expect from their stay regardless of facility or location. Location – customers often select a destination, not a hotel. Therefore, having a presence in existing and evolving business areas and travel destinations is critical. • Ensuring strong customer relationships that encourage loyalty and repeat business. Arguments For and Against Entering Emerging Markets According to the World Bank (2007) Emerging markets are countries that are restructuring their economies along market-oriented lines and offer a wealth of opportunities in trade, technology transfers, and foreign direct investment.
The five biggest emerging markets are China, India, Indonesia, Brazil and Russia. Each of them is important as an individual market and the combined effect of the group as a whole will alter the current state of global economics and politics. The hotel industry needs to develop a robust strategy to address these fast growing segments. The arguments for and against entering emerging markets are highlighted in the table below: |FOR |AGAINST | |Sociological |Increased desire to travel with economic |Need to provide for cultural expectations | | |prosperity |(prayer rooms, food preferences) | | |Establish first-mover advantage/brand | | | |recognition | | |Technological |Ease of installation of consistent, modern |Locally inadequate communication | | |infrastructure |infrastructure | |Economic |Local economic growth |Local risk of high inflation or interest | | |Cheap labour |rates | | |Increased income levels |Shifts in taxation | | |Potential for high margins |Risk of recession | | | |Expensive labour | |Political |Tax breaks |Rigid employment laws | |Employment incentives |Tariffs/room taxes | | | |Risk of fines for non-compliance | |Threat of new entrants |High economic barriers to smaller operators|Ability of competitors to operate more | | |High political barriers to smaller |economically | | |operators |Better brand recognition of competitors | |Power of suppliers |Suppliers compete for contracts, so |Lack of competition among suppliers or | | |negotiate good prices |supplier monopoly | |Power of buyers |Plentiful/Demand for rooms is high, market |Lack loyalty | | |expected to increase |Price sensitive – may drive the room prices| | | |down | | | |Require a highly customized product | | | |Unaware of brand | |Substitutions |Economic, regulatory and brand recognition |Local or other foreign-owned hotels provide| | |barriers to other foreign entrants |cheaper rooms | | | |Preference for locally-owned hotels | | | |Cheaper supply to local hotels (established| | | |deals) | | | |Other foreign operator with better brand | | | |recognition enters market | |Industry rivalry |Reduced rivalry if high-growth economy Competition for business reduces profit | | |Low advertising expenses |margins | | | |Lack of rules governing standard of | | | |accommodation | Conclusions In summary, the hotel industry is a profitable industry to operate in, especially for established, global players who have built strong brand awareness. Due to the existence of significant entry barriers the threat of new entrants is low. The power of the supplier and the threat of substitutes are also minimal. However, due to economic downturns, existing players have to compete more aggressively than ever in order to attract and retain customers who have high buying power.
Slowing industry growth in some areas and low customer loyalty has created intense rivalry with the same firms competing against each other in different segments. The macro-environment in which the industry functions can be volatile and provides a set of challenges that the chains must try to anticipate and react to. The industry is especially sensitive to changes in the economic and political area although technology, in particular the internet, and social changes have also had a profound effect. Hotel chains must incorporate a global strategy that increases customer loyalty through product/service differentiation while still maintaining a keen focus on how the industry will change due to the volatile external climate, as witnessed by the effects of recent terrorist attacks.
Emerging markets present an opportunity for expansion which could increase revenues, but this is not without risk. There will be high costs associated with the expansion and a high degree of risk that the endeavour will not be successful. However, if increased revenues can be obtained this would serve to offset the decline in other markets. REFERENCES Bain, J. (1956) Barriers to new competition, Cambridge, MA, Harvard University Press. Porter, M. E. (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors, New York, The Free Press. Schmalensee, R. (1982) ‘Product differentiation advantages of pioneering brands’, American Economic Review, vol. 72, pp. 349–65.
The Open University (2006), B820 Strategy, Unit 2 ‘Analysing the External Environment’, Milton Keynes, The Open University. The Open University (2009), B820 Strategy, Course File ‘November 2009 Presentation, Milton Keynes, The Open University. The World Bank (2007), 2007 World Development Indicators, Washington D. C, The Development Data Group APPENDICES Appendix 1 ECONOMIST ARTICLES BUDGET ROOM 17 May 2005 As they sell property, some hoteliers move downmarket. The rush of hoteliers out of owning hotels into simply running them is becoming a stampede. Since late February, four big groups have announced sales of large swathes of their property.
They reckon they can earn a better return in hotel management than in owning piles of bricks and mortar. But some are investing the cash from these sales in expanding their budget hotels, which can be more profitable than upmarket establishments. Whitbread, a British leisure group, said this week it would put 46 of its Marriott-branded upmarket hotels in Britain and Ireland into a joint venture with Marriott, who will manage them while – and, it is intended, after – buyers are found for the bricks and mortar. Whitbread expects this will bring it “at least” ? 1 billion ($1. 9 billion) over the next two years. Most of this will go to shareholders, to the company pension fund or to cut debt. But the aim is clear: Whitbread, which plans a further ? 00m of sales, including five more upmarket hotels and other assets, will concentrate its hotel efforts on its budget arm, now called Premier Travel Inn, which it expanded to 28,000 rooms last year by buying a smaller rival. This chimes with a large expansion promised this week by Premier’s nearest rival in Britain, Travelodge, owned since 2003 by a private-equity group. It plans to double its size, adding 15,000 rooms, by 2011. Two grander, international groups also are to sell, but remain upmarket. One is Hilton Group, a British-based firm that operates the Hilton brand outside the United States. In 2001 and 2002 it sold 21 hotels for some ? 650m ($960m at the time) on sale-and-leaseback terms, and by now it wholly owns only 64 of the 403 hotels it operates.
Last month it said it was looking for further big sales; a “substantial part” of the proceeds will go to shareholders. A single ? 1-billion deal was announced last week by InterContinental Hotels, also a British-based group, with brands including Crowne Plaza and Holiday Inn, and a hotel turnover last year of ? 1. 5 billion ($2. 75 billion at 2004 rates). It is selling 73 British hotels to a consortium of property funds. By next July, if all goes well, this will bring its sales total to ? 1. 75 billion, for 121 hotels, since the company was separated two years ago from the brewing side of their then joint parent, known as Six Continents. So far, it has promised to return ? billion to shareholders, and it still has ? 360m worth of hotels on the market. Here is a rare management: one that not only aims to increase its shareholders’ return on capital but to let them choose what to do with the money it no longer needs. France’s Accor group, with a worldwide hotel turnover last year of E5 billion ($6. 2 billion), is taking a different line. Last week it, too, announced plans to sell more of its upmarket hotels, while retaining the management: by 2006 it hopes 75% of its Sofitel brand hotels will be run on that basis, against 60% now. Though Accor may retain minority stakes in some, this will free more than E250m for other uses. What uses?
Aided by half of a E1 billion investment from Colony Capital, an American property fund (the other half going to cut debt), Accor aims to speed up its expansion plan. Notably, says Jean-Marc Espalioux, the chief executive, this will mean more economy hotels. Accor mostly builds and owns these itself, but (except in America) they earn 15% or so on capital, double last year’s figure for its Sofitels and mid-market Novotels. In bits of Europe – Spain, Italy, central Europe and Russia – this segment of the market is ill-served by the big chains. Accor will also make a big push in emerging markets, above all China. Like other chains, Accor already has hotels for tourists and well-off Chinese there, and plans a lot more.
But the real novelty will be more of its simpler Ibis brand for less well-heeled locals. Accor has one of these so far. By 2010 it hopes to have 50. And well it might; the one – in Tianjin, a big city 120km south-east of Beijing – recorded 94% occupancy last year, and a return on capital of 13%, even with a room-rate equivalent to only $22 a night. OUTWARD BOUND 22 June 2006 The Chinese are starting to travel abroad. But getting them to spend is difficult. China’s citizens do not only export goods; increasingly they export themselves. The concept of tourism – going abroad for pleasure rather than for business – is less than a decade old in China.
Yet since the Chinese government sanctioned overseas leisure trips in 1997, tourism has grown hugely. Last year more than 31m Chinese travelled outside mainland China and the World Tourism Organisation expects this number to grow to 50m by 2010 and 100m by 2020. Across the world, hotels, shops, restaurants and travel agents are salivating at the prospect. Although there is money to be made, profits will be harder to come by than the headline numbers suggest. For a start, of those 31m, some 21m only made it as far as Hong Kong and Macau. Half of the rest were “border tourists”, on day trips to Russia, Vietnam or Laos to trade or gamble in casinos, which are illegal in China.
Only 5m-6m Chinese could be called international tourists and most chose Asian destinations such as Thailand and Malaysia. Just 1m visited Europe and only a handful made it to America and Canada, which still restrict Chinese visitors. Nor are the Chinese likely to resemble the free-spending Japanese visitors who lifted global tourism revenues in the 1980s. Most first-time travellers from the mainland are deeply frugal. Typically, a Chinese tour group will choose the cheapest hotel – even if it is 50km (30 miles) outside a city – travel by bus and eat only Chinese food, says Wolfgang Georg Arlt, a professor of tourism at Stralsund University in Germany and author of a new book on China’s outbound tourism.
They visit only the most famous attractions and even these often get only a cursory glance. Those who return for a second or third visit will often spend more. But return visitors will be a minority for a long time to come – and so posh hotels, resorts and restaurants will have to wait for their Chinese windfall. At a recent conference organised by the European Tour Operators’ Association, hotel owners complained that the Chinese were pushing down room prices. Hard beds and cold noodles Chinese tourists are willing to put up with hard beds and cold noodles for a reason: they are champion shoppers who prefer to concentrate their spending on luxury branded goods, which are cheaper than back home and guaranteed not to be fakes.
In 2005 they spent more on shopping, per day and per trip, than travellers from Europe, Japan or America. The biggest winners of the Chinese tourist boom are therefore likely to be international retailers and luxury-goods manufacturers. In Germany the second most visited place by Chinese tourists after Berlin is Metzingen, a small town in the Black Forest unknown to most Germans, but home to a giant Hugo Boss discount store—since joined by another 20-odd factory outlets for designer labels. Big, diversified luxury-goods groups—including LVMH, Richemont and Swatch—which are present in duty-free outlets and big cities worldwide and have established brands in China itself, should also do well.
Antoine Colonna, an analyst at Merrill Lynch in Paris, reckons that the Chinese account for around 11% of the E97 billion ($121 billion) annual revenues of the luxury-goods industry today and that this will rise to 24% by 2009, surpassing the Americans, Japanese and Europeans. Those that do best, though, understand that Chinese shoppers can be tough customers, says Mr Arlt. “Compared with the Japanese, Chinese mainland tourists coming to Europe for the first time are ruder, louder and more demanding,” he says, citing a tendency to smoke under “no smoking” signs, haggle over prices and rip off packaging at the checkout to be sure that everything is in the box. “All that makes sense in China, but European salespeople think it is very rude,” says Mr Arlt. A growing number of organisations are, however, more than happy to cater to the Chinese.
Galeries Lafayette, a famous department store in Paris, celebrated China’s “Year of the Dog” this February with decorations of red and gold pooches, New Year messages in Chinese wishing happiness, prosperity and longevity together with greeters fluent in Mandarin, a Sichuan restaurant and deep discounts on its designer goods. Small wonder, then, that the Chinese spend more in the shop than any other group of foreign visitors do. Accor, a French hotel group, has adapted 56 hotels (the bulk are its mid-range Mercure and Novotel hotels) in Europe for Chinese tourists, offering noodles for breakfast, Chinese TV channels and Mandarin-speaking staff. Rosita Yiu, who oversees the effort, says Accor will open another 50 this year and perhaps 50 more next year. Tourist authorities are also trying harder. Switzerland’s has a website with local attractions explained in Mandarin.
Berlin’s city tourist authority has opened its own German-themed shops, partly aimed at the Chinese, and selling, among other things, cuckoo clocks and Swiss army knives—considered German by some in China. Tactics like these will pay off as more Chinese travel. Mr Arlt estimates that by 2020 there will be 30m “genuine” international tourists from China. They will demand more sophisticated service and new experiences, and will also be increasingly willing to pay for them. Accor’s Ms Yiu says that Chinese tourists making return trips to Europe want to stay in nicer, four-and five-star hotels. The western tourism industry will need to adapt quickly and intelligently to the demands of Chinese visitors—but the prize is huge for those who can manage it.
A NEW ITINERARY 15 May 2008 Both as destinations and as new sources of tourists, emerging economies are transforming the travel industry Dubai When you arrive at Dubai International Airport, the bus journey from your aeroplane to the terminal building takes almost 15 minutes. This is not because Dubai is inefficient – far from it – but because for a small country it has a huge airport, which is in the throes of expansion. The airport will still be too small to cope with the swelling inflow of travellers, so Dubai’s rulers are building another one, at Jebel Ali, a port town 35km (20 miles) away, which is due to come into full operation in 2017. Designed to andle 120m passengers a year, it is expected to be the world’s busiest airport. Booming emerging economies are the great hope of the world’s travel and tourism industry. Dubai is the most shimmering example. It has only a tiny percentage of the United Arab Emirates’ oil reserves, and so is straining to turn itself into a regional hub for finance, travel and high-class tourism. Three palm-shaped island-resorts are being built: the Palm Jumeirah, the Palm Jebel Ali and the Palm Deira. The Burj al-Arab, curved like a sail and on another artificial island, is the world’s only seven-star hotel – with its own helipad, naturally. Dubai also boasts the Middle East’s first indoor ski-slope.
About 30% of Dubai’s GDP depends on travel and tourism, but Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s ruler, wants the industry to grow much more. He is the driving force behind the construction of Dubailand, a tourism and entertainment complex divided into seven theme worlds that are Dubai’s answer to Disneyland. By 2015 Dubailand is aiming to attract 15m tourists, roughly 40,000 visitors daily. No wonder, then, that last month the top brass of the World Travel & Tourism Council (WTTC), the industry’s main lobby group, held their annual meeting amid Dubai’s glitz. They might have found lots of reasons to be gloomy: a weak dollar, sky-high oil and food prices, looming recession in America and a credit crunch on both sides of the Atlantic.
Yet the tourism barons were fairly chipper. They hope that Americans will still travel, albeit more parsimoniously. And they think that travellers to and from emerging economies will make up for some of the flagging Wanderlust of the developed world. Ready for take-off The rise of emerging economies marks the third revolution the travel industry has undergone in the past 50 years. The first came in the 1960s, in the shape of cheap air travel and package tours. Rising incomes enabled people of modest means to travel more, to farther-flung parts of the globe, and to take advantage of “all-in” offers that may have included sightseeing trips, scuba diving or camel rides.
The second was the advent of the internet, which has allowed millions to book flights, hotels, hire cars and package tours without going near a high-street travel agent. Now fast-growing emerging economies – not just Dubai but also the BRICs (Brazil, Russia, India and China) and others, such as South Korea and Vietnam – are changing the world of travel once again, either as destinations or as sources of newly affluent travellers. Often, citizens of these countries are visiting similar, emerging lands. Last year, for example, Russians made a total of 34. 3m trips abroad, up from 29. 1m in 2006. Turkey was their most popular destination, followed by China and Egypt. The Chinese head the table of visitors to Vietnam.
The WTTC claims that travel and tourism is the world’s biggest industry in terms of its contribution to global GDP and employment. The lobby group forecasts that global travel and tourism will account for $5. 9 trillion of economic activity in 2008, or about 10% of global GDP, employing 238m people. It expects employment to rise to 296m in the next decade. In fact, assessing the scale of the industry is not straightforward. When all travel and tourism is lumped together, so that everything from airlines to cafes counts, it is no surprise that the WTTC’s total is so large. As a rule, restaurants do not record whether they are serving tourists, business travellers or locals out for a meal.
The United Nations World Tourism Organisation (UNWTO) has resorted to monitoring international tourist arrivals only. It therefore knows where tourists are going to, but has a much less accurate idea of where they have come from. Travel and tourism data from developing countries, in particular, are unreliable. And many of the industry’s jobs, such as tour guides or souvenir salesmen, go unrecorded. Officially, the tourism business in Sicily is sizeable, but it would be bigger still if untaxed and undeclared jobs were counted. Never mind the difficulties of definition and measurement: the industry, from any angle, is huge and growing. It accounts for a large part of many countries’ foreign-exchange earnings.
For many developing countries, it offers an important route out of poverty. And further expansion and democratisation of tourism, centred on emerging economies, is under way. Having once worked in tourism, an increasing number of citizens of those countries are beginning to become tourists themselves. According to the UNWTO, international tourist arrivals grew by 6% last year, to 900m (see chart 1). The total has gone up by almost 100m in two years. Last year the Middle East welcomed 13% more international tourists, or 46m in all. Arrivals in Asia and the Pacific were up by 10%, to 185m – with much of the extra travel coming from elsewhere in the region. Africa saw an increase of 8%, to 44m.
This year, the UNWTO predicts, growth of international tourism will be fastest in Asia and the Pacific. Forecasts for growth are even less reliable than in other industries, partly because tourism is vulnerable to shocks such as natural disasters or terrorist attacks. Jose Antonio Tazon, boss of Amadeus, a travel-technology company, points out that global firms are less exposed than local ones. They can make up for lost business in a region affected by catastrophes with business in other parts of the world. [pic] A dollar won’t stretch that far For the next year or two, the travel industry is likely to find its long-standing customers in rich Western countries a less than reliable source of growth.
As American families plan their holidays, many will be worrying about the frailty of their country’s economy, the rising cost of petrol and – for those venturing outside the United States – the weakness of the dollar. They are delaying booking in the hope of nabbing cheap, last-minute deals. They certainly seem to be spending less. On May 7th Orbitz, an American online travel-firm, posted a first-quarter net loss of $15m compared with a net loss of $10m a year earlier. The mainstay of its business is domestic bookings, which were 6% lower in the first quarter than a year earlier, at $2. 4 billion. About 85% of American travel and tourism is domestic. Only one-fifth of American citizens have passports. Those thinking of going abroad will need more tempting than usual.
Some hotels in European cities are offering deep discounts to American travellers to make up for the weakness of the dollar. WorldHotels, a hotel-marketing company, says that Americans can book rooms at a one-to-one euro-dollar exchange rate – a saving of roughly one-third at today’s rate – at 52 of the European hotels on its books. Nevertheless, WorldHotels saw a 15% drop in business from Americans at its European hotels during the first quarter of this year. Yet the industry remains confident that people will travel, even if they spend less. “One of the last bits of discretionary spending people cut is their holiday,” argues Thomas Middelhoff, chief executive of Arcandor, the German retailer that owns Thomas Cook, a travel company.
Some European travellers, by contrast, will at least have the benefit of a strong euro. Within the continent, there are other pluses. The expansion of low-cost airlines is boosting short-break travel. The extension of the passport-free Schengen area to nine more countries makes trips within Europe easier. The Euro 2008 football championship in Austria and Switzerland, the Zaragoza International Expo in Spain and Liverpool’s reign as Europe’s cultural capital are also expected to be good for business. That will help the European Union remain the biggest contributor to global travel and tourism, with 27. 5% of the share of the world market and more than 10% of the industry’s total workforce.
Even so, Europeans are likely to feel the slowdown of the economy and the impact of the high price of oil. British Airways recently upped its fuel surcharge, which now stands at ? 158 ($312) for a return long-haul flight to Britain. On May 7th easyJet, a low-cost airline, unveiled a ? 57. 5m loss for the six months to the end of March. Granted, that is usually the company’s weaker half-year, but the loss a year before had been only ? 17. 1m. The trouble was the rising cost of fuel, which now accounts for 28% of easyJet’s cost per seat. All this means tourism in the EU will grow by only about 2% this year, reckons the WTTC, compared with worldwide growth of 3–4%.
For faster growth, the industry will have to look to emerging economies. These are becoming increasingly well established as places to visit. Now they are starting to provide more visitors too. According to McKinsey, a consulting firm, by the middle of the next decade almost a billion people will see their annual household incomes rise beyond $5,000 – roughly the threshold for spending money on discretionary goods and services rather than simple necessities. Consumers’ spending power in emerging economies will rise from $4 trillion in 2006 to more than $9 trillion – nearly the spending power of western Europe today. Some of that extra purchasing power will go on travel, at home and abroad (see chart 2).
Western companies are flocking into the developing world to prepare for these new tourists. “The Middle East, India and China are the next big thing,” predicts Bill Marriott, the chairman and chief executive of Marriott, an American hotel chain. He thinks that the industry will be bigger in the Middle East, where he is planning to build 65 hotels by 2011, than in India. China will dwarf even the Middle East. [pic] The new travellers Last year the number of visits abroad by the Chinese reached 47m, 5m more than the number of foreign visitors to China. The Chinese also made 1. 6 billion trips at home – a staggering total, but not much more than one each.
According to WTTC forecasts, Chinese demand for travel and tourism will quadruple in value in the next ten years. At present China ranks a distant second, behind the United States, in terms of demand, but by 2018 it will have closed much of the gap. Other emerging economies have woken up to the spending power of Chinese tourists. Mexico is one: AeroMexico will begin direct flights between Mexico City and Shanghai at the end of May. The plan is to fly twice a week. In Vietnam, home to one of the fastest-growing tourist industries in the world, Chinese and other Asian tourists are overtaking Westerners. In the first 11 months of last year 507,000 visitors came to Vietnam from China, along with 442,000 from South Korea and 376,000 from America.
The Tourism Authority of Thailand is also counting on more Chinese custom. It forecasts that 1. 3m Chinese will visit the country this year, 10% more than last year (when visitors were put off by Thailand’s unsettled politics). To speed up the development of tourism and other industries, the Chinese government is racing to build roads, railways and airports. In January it said that it planned to add 97 airports by 2020 to the 142 China had at the end of 2006. The number with an annual handling capacity of over 30m passengers will grow from three to 13. According to the state media, investment in infrastructure will see double-digit growth every year for the rest of the decade.
Between 2006 and 2010, $200 billion is expected to have been invested in railways alone, four times more than in the previous five years. In June the world’s longest sea-crossing bridge, a 36km six-lane highway across Hangzhou Bay, is due to open. This will halve the travel time between Ningbo and Shanghai, two of China’s busiest ports, to about two hours. Asia’s other rising economic giant is lagging behind China, both as a source of tourists and as a tourist destination. Last year India had only 5. 5m foreign visitors, a tiny share of the world market: the country of the Taj Mahal and the Himalayas ranks below Bulgaria and Bahrain. Fewer than 10m Indians travelled abroad, though about 600m Indians made trips at home.
Andhra Pradesh, home of many religious sites, got the lion’s share of visits, whereas foreigners flocked to Delhi and Maharashtra, India’s most urbanised state. Travel on the subcontinent can be bewildering even for Indians, owing to more than 20 official languages and innumerable dialects. Many moan as much as foreigners do about uncomfortable transport, strange food, unusual bowel movements and the lack of decent hotel rooms. The subcontinent’s biggest problem is the poor state of much of its infrastructure. The government plans to spend more than 20 trillion rupees (around $500 billion) on infrastructure in the five years to 2012. India’s tourism ministry says it spent 4. trillion rupees on 248 projects in the year to March. India’s main airports are undergoing expensive facelifts with lots of private-sector money. Parts of Mumbai’s Chhatrapati Shivaji International Airport are gleaming; but elsewhere people sit with their saris drawn over their mouths to stop themselves inhaling the dust as plasterboard is machine-sawn nearby. At Indira Gandhi airport in Delhi, immigration officials will think nothing of clocking off with four or five people left in the queue, who then have to go to the back of another line. An official will stamp a traveller’s visa – and a few yards later a guard will check that it has indeed been stamped.
Some investors are backing the country’s breathtaking beauty against all the inconvenience and bureaucracy. Marilyn Carlson Nelson, chief executive of Carlson, a privately owned travel group which owns Radisson hotels and Regent Seven Seas Cruises, sees great promise in India. Carlson is developing around 50 hotels in India compared with only ten in China. Manny Fontenla-Novoa, chief executive of Thomas Cook, a travel company, is equally optimistic about India’s potential. In March Thomas Cook bought Thomas Cook India, the subcontinent’s largest foreign-exchange and second-biggest travel business, dating back to the 1880s, from Dubai Financial Group.
Joint ventures in Russia and China are next on Mr Fontenla-Novoa’s list. Clouds on the horizon What might stop tourism’s latest revolution? Political violence is one possibility. Developed countries are no strangers to terrorism, but the dangers in emerging economies are greater. This week’s bomb attacks in Jaipur, a popular spot on the Indian tourist trail, are a bloody reminder. Kenya, a country that depends on tourism for much of its foreign income, lost about half its business in the wake of political violence after elections in December. Natural disasters are also likelier to cause worse devastation in poorer places. However, Mr Tazon of Amadeus points out that “the industry has proved to be very resilient. It recovered quickly after the terrorist attacks on September 11th 2001, SARS, the outbreak of the war in Iraq and the tsunami in December 2004. Another possible obstacle is the growing concern, especially in Western countries, with the environment. During the 1960s and 1970s, when tourism was growing explosively in American and Europe, few gave much thought to the consequences for the planet. That has changed. Philippe Bourguignon, vice-chairman of Revolution Places, a travel business, says that greenery cannot be dismissed as merely the flavour of the month. The industry, which contributes 5–6% of all carbon emissions, seems worried. Green strategies are multiplying.
In April Travelport, a travel-technology company, introduced the Travelport Carbon Tracker, which allows travel agencies and companies to measure and analyse carbon emissions and hence to help “sustainable travel decision-making”. Hotels are keen to show that they conserve water (do you really need a clean towel every day? ), recycle rubbish, and save electricity by using low-energy light bulbs. Airlines order less thirsty planes. Eco-spas powered by wind turbines and solar panels, and safaris based on conservation are vying for the customer with a green conscience. Marriott’s efforts are a case in point. In April the hotel firm and the Brazilian state of Amazonas signed an agreement to protect 1. 4m acres of endangered Amazon rainforest in the Juma Sustainable Development Reserve.
Marriott is chipping in $2m to pay for an environmental management plan administered by the newly created Amazonas Sustainable Foundation that will support employment, education and health care for the approximately 500 people who live in the Juma reserve. Over the next ten years Marriott aims to reduce energy and water consumption at its hotels by 25% by, for instance, introducing solar power at up to 40 hotels. “After years of lip service, companies like Marriott are really being proactive,” says Michael Johnson, dean of Cornell University’s School of Hotel Administration. For all this concern, emerging economies are much more interested in rapid growth than in ecology. And holidaymakers, wherever they are from, seem unwilling to give up flying or driving just yet.
Mr Fontenla-Novoa sees little evidence that an environmental conscience plays a big part in customers’ travel planning. Westerners have had their decades of fun. Now the rest of the world wants a turn. OUTSOURCING AS YOU SLEEP 19 February 2009 Reservations are plunging, but virtual hotel chains should escape the worst. You book a room on the website of a famous international hotel chain. As you arrive to check in, its reassuring brand name is above the door. Its logo is everywhere: on the staff uniforms, the stationery, the carpets. But the hotel is owned by someone else – often an individual or an investment fund – who has taken out a franchise on the brand.
The owner may also be delegating the running of the hotel, either to the company that owns the brand or to another management firm altogether. The bricks-and-mortar may be leased from a property firm. In some cases, yet another company may be supplying most of the staff, and an outside caterer may run the restaurants. Welcome to the virtual hotel. The franchising of hotels, like the franchising of fast-food restaurants, is half a century old. But it has received a further boost in the past few years, as the biggest international hotel chains, under pressure from shareholders to return capital, have put even their poshest properties up for sale. They are now mainly franchisers and managers, rather than owners.
In return for the fees they charge the hotels’ owners, they provide a glossy brand name and a steady stream of bookings from their online reservations systems. Among the keenest adopters of this virtual-hotel model, also called “asset-light”, is InterContinental, a British-based firm which in addition to its eponymous hotel chain owns the Holiday Inn and Crowne Plaza brands. InterContinental was formed from a demerger in 2003, just as the business emerged from the dotcom bust. Even then, it owned only around 200 of the 3,500 hotels that bore its brands. But during the recent boom it sold most of the remainder, while expanding worldwide through new franchising and management contracts with hotel developers. It now owns just 16 of the 4,186 hotels in its system.
The hotel business was doing fine until Lehman Brothers’ collapse in September. Since then bookings have drooped. InterContinental said on February 17th that its “revpar” – revenue per available room, the industry’s benchmark – fell 6. 5% in the fourth quarter. Marriott and Wyndham, two American rivals, have reported similar falls; Starwood, another American chain, says revpar has dropped by 12. 1%. All are gloomy about this year. However, the brunt of the recession will be borne by the hotels’ owners rather than the chains that manage and franchise them. Simon Mezzanotte of Societe Generale, a bank, explains that if revpar falls 1% at a hotel, its owner typically suffers a 5% profits fall.
But the management fees (which are usually linked to a mix of the hotel’s revenues and profits) fall by 3%; and franchise fees (which are usually linked only to revenues) fall by only 1%. So chains that have adopted the virtual-hotel model should suffer less in the recession. InterContinental should do better than its peers since around 75% of the rooms in its system are in franchised hotels, compared with 39% of Starwood’s. Starwood wants to continue virtualising its hotel system: its chief executive, Fritz van Paaschen, says franchise and management fees were 53% of total revenues last year, up from 18% five years earlier, and he wants them eventually to rise to 80%. Many hotel owners, having taken on most of the risk, will collapse into bankruptcy during the recession.
Even so, says Stephen Broome, a consultant at PricewaterhouseCoopers, the big hotel chains will have few worries: when banks take possession of a hotel from a bankrupt owner they usually keep it open, as hotels lose up to half of their resale value once they are closed. Thus the hotel chains will in most cases continue earning their franchise and management fees. In some cases bankruptcies will be a source of new business: Hostmark, an American hotel-management chain, says that last year it was brought in to run five hotels by lenders who took possession after the previous owners collapsed. Although they have offloaded much of the risk posed by the recession, the big hotel chains have exposed themselves to two new dangers. One is that investors are now assessing them not just on their revenues, but also on their “pipeline” of future franchises and management contracts, mostly from hotels under construction.
Leslie McGibbon of InterContinental says his firm is still signing up new hotels at a rate of two a day, despite the downturn. But beset by falling bookings and scarce financing for hotel construction, the firm’s impressive pipeline, which benefits its share price, is likely to be squeezed. The other risk is that, when recovery eventually comes, most of the gains will go to the hotel owners – at least, those that survive. WORTH CHECKING IN AT IHG HOTEL GROUP FOR A LONG-TERM STAY The Times 18 February 2009 Received wisdom has it that the hotel industry is among the last sectors to suffer in a recession and amongst the last to emerge from the other side.
Yesterday’s full-year numbers from InterContinental Hotels Group (IHG) would appear to support the first part of the equation – after a decent first nine months, the world’s biggest hotel company suffered a fourth-quarter decline in revenue per available room (revpar) of 6. 5 per cent as the financial meltdown hit confidence. The fall widened to 12. 2 per cent in January. The drop-off should have surprised nobody, given recent numbers from the likes of Marriott and Starwood and a clutch of gloomy surveys on business travel, but the worry is the lack of visibility on bookings, which, even in a best-case scenario, are tipped to remain in double-digit decline. In the recession of the early 1990s, revpar falls went as low as 30 per cent, although the hotel industry is, for the most part, a much more professional and resilient business than it was back then. IHG itself is a very different animal.
It has long since sold most of its assets and its fee-driven business model – the vast majority of its 4,150 hotels are management contracts or franchises – is far less susceptible to the vagaries of the hotel cycle. Any revpar decline is mitigated by the opening of new hotels – 400 this year alone – although the credit crunch is putting tangible strain on the ability of hotel owners and developers to fund new projects. The comfort of IHG shareholders such as the Barclay twins, who have seen their investments take a pounding, is that the group is in the best possible shape to ride out a downturn, with debt of only $1. 3 billion (E914 million), no repayment concerns and a cash-generative business model. It is also winning market share and, for the time being, is managing to avoid the heavy discounting that characterised previous downturns.
Andy Cosslett, the group’s able chief executive, runs a tight ship, having frozen this year’s salaries (including those of the board) and chopped 120 jobs at head office level and “a few hundred” more at hotel level as part of a $30 million attack on costs. Whether by luck or judgment, IHG’s $1 billion relaunch 18 months ago of the Holiday Inn brand has come at an opportune moment as companies trade down from deluxe hotels to midscale chains such as Holiday Inn and budget brands such as Holiday Inn Express. IHG said that the revamped Holiday Inn was claiming a disproportionate chunk of scaled-back corporate budgets. It is still far too early to call an end to the revpar decline and the pipeline of new rooms will, inevitably, slow, but once the hotel industry