Hospitality Industry: An Informational Insight

Hello. Would you like something hot or cold to go with your read today? Perhaps, I could interest you in some unknown facts? A little lesson on ‘why the 5-star hotels are losing money’ on the side, maybe?   
Let’s talk about the hospitality industry today. A general confusion that persists is that the hotel and the hospitality industry are one and the same, and so must be the travel and the hospitality... But they are not. 
Let us look at it this way- if the hospitality industry is a universal set, then the hotel and the travel industry are subsets of it, with many others comprised in it. And if you, my friend, yes YOU, are mathematically challenged just like I am, you’ll have to read further to find out. 

Introduction to Hospitality Industry

Did you know, according to the World Travel and Tourism Council (WTTC), the Indian Tourism and hospitality industry constituted 6.8% of the Indian GDP (2019) and generated $194 billion. 
The hospitality industry is all about people; people to people, and people to businesses. This industry is concerned with services related to leisure and customer satisfaction. It encompasses all services that cater to the needs of the guest away from home.

These four different sectors make the hospitality industry-

• Travel and tourism sector- The travel or the tourism industry is concerned with services for people who have travelled away from their usual place of residence for a relatively short period of time. Airlines, trains, buses, cruise ships are the common modes of travel used.

• Accommodation- Bed and breakfasts (B&B), hotels, motels, resorts, time-share, palaces, quasi hotels and whatnot! It primarily involves providing the customers with a place to stay on a temporary basis. Accommodation and lodging is the largest sector in hospitality. 

• Food and beverage (F&B) sector - This area comprises restaurants, fast food chains, and any other establishments made with the intention of serving food, snacks, drinks.

• Recreational sector - These establishments are purely for entertainment and leisure purposes. The primary focus is that the guests are able to enjoy and relax during their time there. Casinos, clubs, theatres, cinemas, theme parks fall under this. 

Let’s talk about the hotel industry in particular for today. 

The Hotel Industry 

The hotel industry in India is expected to expand at a CAGR of approximately 13% during the period of 2018-2023. Since the advent of Covid, FHRAI says the revenue of the Indian Hotel Industry has taken a hit of approximately ₹1.30 lakh crores. 

Did you know, according to Marriott International, Covid-19 caused more harm to it than the 9/11 and the financial crisis combined to its business. 

The hotel industry had very modest beginnings. Families would offer shelter and food to passersby for a night. Today, due to globalization and modernisation, this has expanded to high-rise or resort-style properties which have more than a hundred rooms. 

Revenue Management- The science of ultimate hotel success 

In today’s world, the lavish 5-star hotel chains find it difficult to compete with online agencies like Booking.com or Expedia, providing more options at cheaper prices. Most hotel chains, for example, Marriott, offer loyalty points to their dedicated customers. To eliminate the competition, these hotel chains make it mandatory for their customers to redeem the loyalty points through the hotel’s official website only. Thus, by eliminating the commission of these agencies, they are able to get back in the game.

Basically, revenue management does the job of matching supply and demand. This means it needs to find out about the need for the right room, for the right client, at the right time, at the right price on the right distribution channel with the right commission. 

But, doesn’t every business kind of follow this pattern to stay profitable? So, why does the hotel industry need it so desperately? 

This is because rooms are perishable. If a room is not booked for a night, its value is lost. You would rather let it out on discount or provide it to a loyal client. Also, hotels have fixed capacity and high fixed costs. This means there are only so many rooms that they could offer but the cost of operating like the salaries, utility bills and marketing expenses would always be high. 

How Revenue management works

Hotel room demands can be predicted. There are peak seasons and off-seasons for hotels based on multiple factors. These factors are identified and exploited to the best of their use. For example, finding travellers who would be interested in visiting the mountains in the summers. 

How does it maintain the balance between supply and demand in these strange conditions? It does this in three steps:

1. Segmenting the customers - In the hotel industry, the price for a particular service may depend on one of the following factors - customer’s age, marital status, spending habits, or whether they are business travellers. A bachelor in his early 20s might want a budget hotel. A married couple would want a luxurious and comfortable room. 

2. Dynamic Pricing - Now that the customers are segmented according to their room requirements, the pricing also needs to be adjusted. Hotels can adjust pricing based on their financial situation and the perceived value of their service. Automation and machine learning takes care of this. 

3. Demand forecasting - Since revenue management is all about matching supply and demand, to be able to forecast demand is essential for the hotel industry. They should be able to guess what demand would be like in the forthcoming 6 months and 1 year as well. Historical data, holiday events, the economic situation of the region, and weather are some factors that are considered when forecasting. 

If this is all so well planned, then why do hotel chains lose money? 

We dug out some dirty information. Quest by Finology has a complete sprint course on Why 5-star hotels lose money? Since it is a sprint course, it would take you exactly 17 minutes to find secrets these hotel chains do not want you to know. 

Financials

Here is how the hotel industry has performed in the past year. A few stocks have delivered up to 300% returns.

What does tomorrow hold?

In the first half of 2020, India saw a drop of 65% in the arrival of international tourists. Even after vaccination and following all Covid protocols, experts predict that we might have to wait till 2024 for international travels to return to 2019 levels. It is only fair that people need a bit of time to recover from the financial crisis Covid has caused and to regain all of their lost wealth. 

That’s about it, till we meet again!