• Pandemic trends: redefining service and consolidation

Battered by lockdowns and precipitous falls in revenues, hotel operators around the globe have been forced into cost cutting.
There has also been a renewed focus on how to strip long term costs out of the service offering, by refocusing on what guests really want. Some of this is an overdue rebalancing of brand standards, while other issues address changing guest expectations.
Brands and operators have culled staff to reduce overheads, and are looking at how to do more with less. Both head office and operational teams have been reduced – and won’t be returned to the previous levels in a hurry.
At IHG, CEO Keith Barr revealed during recent quarterly results: “One of the measures we’ve taken to protect the business this year is to make up to a USD150m of cost reduction in the fee business. We now plan to make around half of this cost savings sustainable into 2021, which includes a rebalancing of our resources to meet expected demand, while still allowing us to focus on investing in our business and growth initiatives.”
At Marriott, CFO Leeny Oberg said work to improve profitability was ongoing: “A whole lot of the work right now is focused on lowering the break-even at these lower levels of demand. We’ve, kind of globally, reduced the breakeven occupancy by 300 to 500 basis points around the world and much of that should be helpful in the much longer run.”
Hilton CFO Kevin Jacobs said the group was also rethinking everything. “We want to use this opportunity to really dive very deeply into each and every brand which we are doing both the capex and opex standards to see if we can’t drive far greater efficiency.  What we are doing in a simple way working very closely with customers is figuring out what are the things that are most important to driving those premiums and what are the things that don’t matter and it’s the things that don’t matter, or they were from yesteryear and they might have helped, ten years ago, but they don’t matter as much today, then we don’t need to be doing those things.”
“I will say we are going to find for our ownership community significant savings at the same time, I believe finding a way to make these brands even better and even more relevant to customers, because we will lean in heavier to the things that matter and get out of the things that do not matter.”
Tom Baltimore, CEO at Park Hotels, gave more colour on what changes will impact the guest experience, starting with “limited or no housekeeping. The reality is that it protects the guests and employees. I think that mindset is probably going to continue post pandemic.”
“We continue to think about ways to provide a different level of value and service and can we go to like the airlines have gone, more a la cart on some items. The airlines redesigned this in their process. I don’t know why hotels can’t also do the same.”
Baltimore predicted a more nuanced offering: “We probably will end up with some sort of opt-in or opt-out depending on the market and the scenario. But there’s no doubt from a customer prefer standpoint. Customers are speaking, and the evidence is there. So as a result of that, clearly, there are going to be savings there, and we believe pretty significant.”
“But if you also combine that with sort of reimagining room service, going with probably a limited menu and probably a delivery only or pickup, sort of a drop-and-knock, if you will. Again, when you’re having little contact with certainly the guests which is again the preference for many.
“I also think more contactless front desk and really continuing to see an expansion of Digital Key at Hilton and the equivalent obviously mobile check-in that Marriott and Hyatt and others have. I think you’re going to continue to see that.”
“I think those three buckets, if you will, are a huge opportunity in the industry. And if you take our portfolio, and if you assume we get 100 basis points or if we’re lucky to 300 basis points, you’re looking at probably USD30-90m a year in sort of operational savings when you look at a pre-COVID environment. So I think there’s a huge opportunity there.”
At Host, CEO Jim Risoleo was similarly confident of reducing overheads: “Based on 2019 revenues, we believe these measures have the potential to reduce annual hotel level expenses for our current portfolio by an aggregate USD100-150m which represents approximately 3-4% of pro forma 2019 hotel level expenses.”

HA Perspective [by Chris Bown]: So, could this be the death knell for the famous Doubletree chocolate chip cookie? We hope so. Your bemused correspondent has had a sticky biscuit thrust into his hand on at least two occasions in the last decade or so – the perfect example of a bizarre brand ritual that may mean something in some parts of the good old US of A, but on a hot summer evening check-in in Manchester, simply leads to choccy fingerprints everywhere.
Other, less ridiculous brand standards will surely fall, as the hotel groups look to re-examine what matters to guests, in a post-covid landscape. Room housekeeping is an obvious one, and expect marketing to reinforce the positive option of not having your room tidied during your stay, as the worry over coronavirus recedes.
And could we end up, as hotel guests, looking at a model similar to the lower cost airlines? While Park’s Baltimore is keen to turn a hotel stay into an airline-style operation, with sliced and diced service offering and pricing, there’s a danger of confusing the consumer – and that’s the last thing the sector needs right now. We’ve seen misguided skirmishes over wifi in the past, and in the US there’s a continuing backlash over “resort fees” too. No more, please.

Additional comment [by Andrew Sangster]: The biggest impact of the Covid pandemic is, I would argue, in speeding up existing trends. A key trend is what we discuss in this story, one of (finally) improving productivity in the hotel sector.
Higher cleaning standards from Covid has driven a significant surge in costs, on some estimates as much as 25% more. This has been mitigated in part by only cleaning rooms between stays but this does lead to a reduced perception of service by guests.
Technology is critical here as many hotels still rely on pen and paper for in-room cleans. We will take a look at this in a future Perspective.
In the meantime, I want to mention another trend that looks set to be speeded up: consolidation. The big rumour sweeping the hotel sector this week is a tie-up between Accor and IHG. First reported in French newspaper Le Figaro, there is as yet no official confirmation.
But the tie-up, worth around EUR14bn, is an obvious fix for both IHG and Accor. The French giant needs a competitive position in the US market, the hotel world’s most important, and would benefit from a leg-up for its loyalty scheme. IHG’s exposure to China is another bonus.
For IHG, the benefit is mainly in obtaining scale and regaining its global leadership position it lost when Marriott bought Starwood in 2016 (and Hilton has subsequently engineered an overtaking too driven by faster organic growth).
Most likely is a dual-listing structure in London and Paris, structured as a merger of equals. It would create a global giant with 1.6 million rooms, overtaking Marriott with its 1.3 million or so.
IHG failed in its bid to takeover Starwood in part because Starwood’s shareholders would be unable to take IHG’s London-listed paper. A dual-listing gets round this problem but it will dilute some of Accor’s powerful shareholders, including Kingdom and the Qatari Investment Authority who hold 6.3% and 11.3% respectively. The biggest shareholder is Jin Jiang at 13.0% but the Chinese state-owned enterprise might see this as an opportunity to exit its position.
Analysts at Bernstein were not in favour of the Accor and IHG merger, particularly if structured as an Accor takeover as reported in Le Figaro. Rather than M&A, they prefer Accor to grow organically and “embrace your inner Hilton”.
But I’m not so sure. Accor desperately needs an entry point to North America where it is non-competitive. It is number one in most territories outside the US or at least a significant contender (in the UK, for example). IHG makes it a scale player in the US and China (although this latter big market has lost some of its appeal due to current politics).
The biggest point to make in favour of M&A is the need to scale and get to a position where a company is a price maker rather than price taker. According to Morgan Stanley, in the US, the most heavily concentrated major market with 72% brand penetration, brands have a 15% premium over the average for the industry. Owners are prepared to pay for this.
But, as Morgan Stanley pointed out in a report in early August (Brand saturation? The case for and against hotel brands), Covid has upset the status quo. In the US, independents appear to be outperforming brands.
In part, the strength of independents probably has more to do with the focus of brands on more profitable business travellers. With the recovery centred on leisure, and local customers who are a drive away, independents had the initial advantage.
If independents can keep this edge, perhaps with the help of Online Travel Agents, then the big brands will be in trouble. Some owners are already grumbling about fees. IHG faces the possible loss of SVC in the US (about 100 hotels formerly known as HPT) and Travelodge may see the departure of some properties, possibly in the hundreds.
This all remains hypothetical. OTAs have a whole host of their own problems which makes them unreliable saviours of the independents. And big brands are able to negotiate better fees with the OTAs, mitigating the “double fee” effect of paying a brand company fee on top of an OTA fee.
Morgan Stanley concludes that the evidence is mixed when it comes to the big hotel brands and “worth monitoring”. To make sure that they are best placed during the post-lockdown recovery phase of Covid, however, Accor and IHG both know that scale matters. There are more positives than negatives to this combination.

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