Thoughts on Dealing with COVID-19
Well, I had a topic all lined up for this week’s column. I had completed most of the research and sat down on Monday to start writing. But with all that is going on in the world, I decided to put that on the shelf for a cycle or two. No one is going to take the time to read anything right now that doesn’t talk about the novel Coronavirus and the COVID-19 disease. So, I started afresh and will diverge from my usual approach.
For those of you who don’t know me, I’ve been in the hotel technology sector for 32 years, working closely for most of that time with many dozens of hotel CIOs, CMOs, COOs, CFOs, and CEOs, as well as with hundreds of top leaders from technology providers large and small. I was there through prior hotel industry downturns in 1991, 2001, and 2008, and had direct experience with regional disruptions due to SARS in 2003 and MERS in 2012.
If you want some good news, you’ll find some tidbits toward the end of the article, but Rich is the good-news guy. I’m going to be the realist for now and paint a picture of where what we’re likely to see over the next year or two. I will then try to help technology providers navigate their way through. And yes, there are some opportunities as well as the obvious threats.
First let’s talk about the hotel industry itself. Regardless of the speed of recovery, 2020 will go down as the worst in modern history for hotels around the world. Many properties in hard-hit zones (now including the U.S.) are already closed or closing. They are already facing severe financial stress, and the dominance of mom-and-pop ownership of smaller hotels means that many have few if any options. Layoffs are already happening; if I extrapolate a few known numbers, we are probably already talking in the hundreds of thousands in the U.S. alone.
Occupancy has never dropped this fast or this far on a global scale. Hilton CEO Chris Nassetta said earlier this week that he expects occupancy to be in the range of 10-15% worldwide within a week, and much lower in areas with active outbreaks, including major U.S. cities. The American Hotel & Lodging Association (AHLA) said last Tuesday that the coronavirus had already had a more severe economic impact on the hotel industry than 9/11 and the recession combined. If restrictions expand and/or continue more than a few weeks, many cash-strapped properties may never be able to reopen (or may only do so under the direction of a lender after foreclosure).
Based on the six-to-ten-week lead time with which COVID-19 arrived in China, Taiwan, Hong Kong and Singapore, we now have some guidance as to how long this might last in other parts of the world. They appear to have gotten the virus under control in recent days; as I write this, China reported its first day with no new local infections. About two months after the initial downturn, there are some early signs of recovery for hotels in China and Singapore, and similar anecdotal reports from Hong Kong and Macau. These governments took drastic measures to control the spread of the virus, so we can expect this is probably close to the “best case” scenario. In that best case, hotels will see little or no occupancy for two to three months, with a slow ramp-up thereafter. Countries that are less effective at stopping the spread of the virus may see the biggest impact last for several months. Industry leaders such as Chip Rogers, President and CEO of AHLA, talk about full-year 2020 occupancy rates in the U.S. of 35%, down almost half from last year’s 67%.
Inevitably this will also result in major challenges for hotel technology providers. It’s still too early to know how long or deep this cycle will be, but not too early to know it will be one of the worst of our lifetimes. Even a fairly quick rebound will leave severe damage. And the likelihood now is that a full recovery will take at least a year for hotels, and perhaps two or more for technology spend.
Technology providers are quickly discovering that IT projects are not exactly top-of-mind for hotel executives right now, nor will they be for some months to come. With rare exceptions, sales solicitations will be unwelcomed right now. This is an incredibly quick reversal: just two weeks ago in the U.S. and three to four weeks ago in Europe, it was mostly business as usual.
Within the last week or two, demand for non-essential and even some essential technologies simply vanished. Major hotel groups have put big IT projects on hold. Properties can no longer fund incomplete tech projects and are furloughing many of the staff involved. Hotels that may be closed for months will, where they can, terminate SaaS services, and even those that stay open may cut non-critical ones. Hotel construction projects may be halted even after some technology products have been contracted and down payments made. Force majeure clauses will be scrutinized by customers to try to avoid contractual requirements that they can no longer afford.
Financial distress does all these things. The best case for many projects will be delays of three to six months. Many will be shelved entirely, including some that are partially complete
To be sure, some tech revenues are better protected than they were in the last downturn. The ongoing migration of many providers from CapEx to OpEx business models makes their revenue streams less vulnerable; these providers are less dependent on new sales than they were in 2008. This is especially true for ones providing mission-critical and revenue-producing technologies. But across the board, there won’t be many that will not see a drop-off in revenue for at least a while. The established ones mostly have enough cash reserves or borrowing power that, with prudent cuts, they can make it through a moderately long and deep downturn. A few of them, as well as many newer companies, will be more challenged. If 2008-2010 is any guide, many will not survive. The lucky few that have recently closed major funding rounds will have bargain acquisition opportunities over the next 1-2 years.
During the past 30 years, I have advised many hospitality tech CEOs and boards, both formally and informally, as they worked their way through disruptions like 9/11, SARS, and the financial crisis. I’ve seen many companies succeed, and many others fail; in the process I’ve gained some insights that may be useful to tech providers today.
CEOs (in hotel tech as elsewhere) tend to be optimists, and among those who haven’t dealt with major downturns from the top of a company, there’s a tendency to hope for the best and to develop a contingency plan to address a moderate downside case, say a 10% reduction in revenue. That’s not nearly enough in today’s environment. The CEOs whose companies failed during the 2008-2010 crisis were the optimists who believed that the downturn wouldn’t be as deep or as long as it was. They didn’t take the necessary actions soon enough or decisively enough.
The hotel technology industry today is experiencing the early stages of its own novel form of Coronavirus, with striking parallels to COVID-19. Every technology provider will be affected, indirectly if not directly, just as virtually every human will be affected in some way by COVID-19. Many will fall ill. Some will require intensive care and life-support measures. And there will be deaths. It’s fine to hope for the best, but prudent businesses need to plan for the worst, and try to ensure that they can survive should it come to pass. If it’s not that bad, then they’ll be well positioned to take advantage of the market when it does come back (which it will!).
As epidemiologists say, preparedness is everything.
I thought it might be useful to look at which parts of the industry will be most and least affected by the crisis, and some of the strategies tech providers can consider for filling the inevitable revenue gap they will face. Those whose core markets are likely to be most affected can think about transactions, pivots, or changes in business models that could lessen the impact, potentially buying them some time to recover.
Core revenue producing software that operates on SaaS or revenue-share models should recover most rapidly. These systems will be essential as soon as travel restrictions are lifted. They include reservation service providers, channel managers, customer relationship management systems, online travel agents, and group/event software. Partners that can deliver provably incremental business and/or pinpoint the individual segments at the right point in time (since recovery times will vary significantly by segment and even microsegment) will be especially well placed. There will still be some falloff depending on how many hotels close for extended periods or permanently, and revenue-share models may be impacted by the downturn and ensuing lower rates. But the impact won’t be as dramatic as in other tech categories.
One multi-property owner told me this week they are carefully examining force majeure clauses and bankruptcy clauses in all their agreements, wondering what they can terminate. Management and franchise agreements will likely be on the table in many cases. Bankruptcy administrators also often have the power to terminate these. If a significant number of franchise agreements are terminated, it could create opportunities for alternative providers of whatever core technologies were supplied by the terminated brand. Many providers of these types of technologies have had limited success selling into brands. However, they may offer very competitive products that could appeal to the newly liberated independent hotels who will need them. Reservation service providers, channel managers, and in many cases property management systems and revenue management systems, could all benefit.
SaaS based software systems that provide operating cost reductions could also do well. Artificial Intelligence-based messaging platforms or chatbots, such as the kind I covered in this blog from last spring, are proving they can help hotels reduce labor costs while maintaining guest service ratings (I heard this week from one in Europe that is getting calls for exactly this reason). So can operational optimization software such as covered in this one from last month. Outsourced contact centers may be an opportunity for some hotels to reduce or eliminate PBX and “at-your-service” staff, or at least delay rehiring people who have to sit by the phone waiting for calls that are just too infrequent at current occupancy levels. Hotels know that theoretical labor savings of fractional people often don’t materialize, however, so the provider needs to be prepared to show the hotel which specific positions can be fully eliminated, or not rehired after a departure or layoff.
Solutions such as self-service kiosks and energy management systems might also do well, but only if they can be structured to avoid up-front costs for hardware, installation, training, and the like. In a cash-tight environment, the cash outlay by the hotel needs to generate immediate savings. Third-party financing sources may be able to help convert fixed costs to variable.
Low-cost or pay-per-use solutions that can generate new revenue to help a hotel leverage fixed costs could also be quite attractive. As one hypothetical example, a point-of-sale system provider could help underutilized but essential hotel food and beverage operations by supporting takeout or delivery options through integration with consumer apps like Grub Hub or Uber Eats. This is an area ripe for low-cost innovation.
Other opportunities will appear as the industry starts to recover. Worldwide, we may be looking at as many as 10 million front-line staff who will have been furloughed, and who will eventually need to be rehired. The increasing role of talent acquisition and management, as well as e-learning solutions that reduce the training burden, will be needed when this happens.
It’s too early to say, but we may see changes in food service that could create technology opportunities. In response to COVID-19, most hotels have closed buffet lines and moved to a la carte or other forms of food presentation that carry less risk of virus transmission. Some of this may be temporary, but if travelers’ views of hygiene are altered by their experience with COVID-19, then we may see permanent changes, and new delivery models that need to be supported by technology.
Hospitality technology providers should carefully consider the potential to diversify into nearby markets. While this carries a lot of risk if you don’t research each new market carefully, there are certainly opportunities that have been successfully exploited by others in the past. Many core technologies used in hotels are also used in health care facilities, retirement communities, educational institutions, multi-dwelling housing structures, commercial buildings, and elsewhere. Infrastructure technology, building controls, security and access control, and even some distribution technologies can find new homes. But if you take this approach, you need to make sure that your product, your marketing strategy and message, and your sales approach all fit the new market, or that the costs of adapting them are considered. New markets are never as easy or inexpensive as they first appear.
Both hotels and tech providers should plan for the high likelihood that some of their providers or customers will fail. When midsized and larger companies hit financial distress, and their services are critical, another company usually comes in and buys them, ensuring at least some minimal level of continuity for their hotel customers. With smaller or newer suppliers, this may not happen, so contingency plans are needed on the part of customers. And on the technology provider side, monitoring of supply-chain health, as well as diligence in keeping collections current on subscriptions and service invoices, become paramount. Cash-strapped customers will pay only those suppliers who are most critical AND most insistent, and if they do go into receivership, lack of persistence may leave you holding the bag on months of late payments.
What silver linings have I missed? Please share your thoughts!
As in every prior cycle, our industry will get through this. Quick but thoughtful action now can help tech providers do so with the least amount of pain.