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The Evolution of Equality in the Hospitality Industry - Technology Solutions and Private Equity Are the Great Equalizers

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October 01, 2007
Hotel | Distribution
Robert Post - ceo@travelclick.net

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© 2008 Hospitality Upgrade. No reproduction without written permission.

The hospitality industry is anything but stagnant.  The pace of change accelerates with each new technology innovation, bringing greater merchandising power and leverage for hotels of all sizes, types and locales.  Today, hotels and their investors are realizing that proactively managing business from electronic distribution channels not only enhances the bottom line, it increases the long-term value of hotel assets.

Brand Leads the Way
To understand the pace of change, let’s step back in time to 1985.  Hotel brands dominated the market.  Along with financial clout, they have all the latest technology tools – voice and electronic reservation systems – plus the marketing muscle to showcase their properties through high-cost print and broadcast media. At the same time, they offered a consistent experience from property to property, assuring guests of what to expect when they open the door to their room.  Independent hotels struggled to compete with these proven and prosperous performers.

Strategies Change 
Crisis Drives Innovation

Fast forward to the decade of the ‘90s, entering the next millennium.  Brands first moved and then sprinted toward the franchise model, leaving owners to look to management companies to obtain the operational expertise formerly provided by the brands.  Marketing dominance and franchise funding are still dependent on flying the brand flag.

Then, the Sept. 11 attacks paralyzed the travel industry – at least temporarily.  Hotel occupancy rates plummet, forcing hoteliers, brand and independent alike, to think about new ways to stay in business.  Third-party online travel agencies like Expedia and Travelocity gain ground, providing an alternate channel to distribute inventory and build occupancy levels, even at the risk of lower margins. Independent hotels benefit from the explosive growth of these third-party sites, using them as a key distribution channel to regain lost occupancy levels and leverage side-by-side with brands.

By 2005, the Internet and emerging technologies are leveling the playing field between brands and independents in reaching companies in a direct-to-consumer model.  Hotel owners discover new alternatives to brand affiliation, and several make the break, building their own brand and reinvesting the money saved in affiliation fees back into their business in new technology and Internet marketing tools.  Now they can leverage the same comprehensive global distribution network and performance-enhancing technology as their brand competitors to generate cash, increase occupancy, and compete in the worldwide market.  These merchandising technologies are the great equalizer, allowing every hotel to build a direct-to-consumer channel, saving significant intermediary fees and investing in relationships with their customer base.

Private Equity Sees Opportunity and Invests Big
Today the Internet is now the predominant avenue for booking travel, with over half of total travel revenue booked online this year, according to PhoCusWright.  The market is growing at double-digits, with hotel revenue booked through the global distribution system up more than 16 percent in a year’s time.  It is an era marked by innovative approaches to financing and ownership, as reflected by the focused entry of private equity companies into the hospitality arena.  These companies initially purchased underperforming hotel assets and invested in them.  Improvements in asset performance through application of new technology and merchandising practices maximize their return on investment (ROI).  This often took the form of debranding properties from their chain affiliation to free up the cash to provide further investment in new merchandising technologies.  The trend has expanded, with private equity now purchasing the brands themselves (e.g., Blackstone and Hilton Hotels), and they are likely to apply this formula on a broader scale.

A Market Redefined
What’s next for the industry?  Expect the continued influx of private equity funding and an ROI focus that will jumpstart market opportunities for brands and independents alike.  The brands are likely to respond strategically – evolving their marketing programs, embracing newer technologies, and putting more control in the hands of individual properties to promote at the property level, not just at the brand level.  Independents, on the other hand, will likely take the lead on property-level and direct marketing strategies like social networking and user-generated content.  As Travel 2.0 evolves, hotel owners will face the challenge to bypass what might have buzz – e.g., blogs and podcasts – and focus on what truly influences customer buying decisions, including search placement and travel site consumer reviews.

From empowered brands to emerging independents to world-class financial companies who are recreating the hotel business model, the industry continues its rapid evolution – with promise for those who follow this superior performance-based model.  As demand continues to grow, and underperforming assets are increasingly sold and retooled with today’s technology, improved hotel performance is both achievable and an operational mandate.

Robert Post is president and CEO of TravelCLICK.  He can be reached at ceo@travelclick.net.

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