Faced with a rapidly changing consumer, the biggest hoteliers are changing their approach. In doing so, however, they threaten to almost entirely alter the hotel industry.

The hotel industry is not usually one known for innovation. In the last 40 years, hoteliers have introduced only minor changes coming few and far apart: Holiday Inn debuted the Double Queen bed room, someone painted a white wall grey, and a few have finally managed to add Wi-Fi. But a new wave of guests, the oft-discussed millennial generation, is demanding a new type of hotel that poses to fundamentally alter the industry. Initially dismissed as outlandish, the boutique hotel model is entering the mainstream, falling into favour with the latte-and-laptop generation over the carbon copy boxes championed by brands like Hilton, InterContinental, and Marriott. But responding to these needs is more than a momentary race for market share. As the big hoteliers move into the boutique game hoping to recapture the modern-day traveller, they are altering the industry at its roots, and perhaps unknowingly, sowing the seeds for a whole new way of doing business in the hotel space.

Traditionally the major players in the hotel industry left innovation to avant-garde boutique hotels. These city-based concepts that rose to prominence in the 1980s were viewed largely as fads. Hotels like the Bedford in San Francisco and The Blakes Hotel in London catered to an insignificant group in search of a sophisticated, unique, and off-beat hotel experience. For these people the boutiques acted as a counterweight to the unchallenged standardisation of the bigger chains. As the New York Times’ David Brooks explains in the The Edamame Economy, “instead of offering familiarity, they offered difference. Instead of offering beige, they offered edginess, art, emotion and a dollop of pretension.”

Standing strong behind staggering economies of scale and multi-brand loyalty programs, the larger hotel groups did not consider the forward-thinking boutiques a threat. This belief was reinforced as they expanded globally throughout the 1980-90s. The chains employed a growth model that demanded the standardisation and commoditisation of their products, giving rise to what is now known as the ‘box hotel concept.’

All around the world, hoteliers adhere to cookie-cutter methods that centre on a number of familiar core products and capabilities. Standard Operating Procedures (SOPs) delineate exactly how hotel staff must behave to maintain the brand’s image. A 2010 Hilton manual outlines how a caller’s name must be used twice during a call. Housekeeping staff at Marriott famously follow a 66-point checklist for guest room servicing and ensure the sheets in Kuala Lumpur have same specified thread-count as those used in London.

While the consistency of these brands is a remarkable accomplishment, the ‘McDonaldisation’ of the hotel experience has made the experience what The Economist calls an “emotional failure.” Inherently, the model continues to see economic success due to its established reliability and worldwide network. After all, the familiar red Marriott logo remains one of the surest signs of comfort and a decent night’s sleep. Undeniably however, there is a  growing segment of travellers looking for more. Currently only serviced by boutique hotels, more and more big hoteliers are looking to tap into this market of affluent, trendsetting travellers.

The Modern Guest

As the larger hotels look to the boutiques for their pioneering insight, the greatest difference is surely the type of guest. The modern traveller, who is as likely to step out of a sleek black Uber wearing a tailored suit as arrive in a t-shirt and jeans after using the Tube, is one of the most significant changes in the hotel industry’s recent history.

“Guests used to come for one of two things: business or pleasure,” says Patrick Tan, a student at Cornell and front-office supervisor at the school’s esteemed Statler Hotel. “Now it’s a mix of work and play that involves everything from business meetings and art gallery visits to city tours to drinks at the city’s best bars”

Tan’s statement is supported by market research. A 2013 survey conducted by a Hilton Garden Inns saw 45% of respondents cite new experiences as the best part of business travel. For 65% of the survey-takers exploring a new city was the number one motivator to extend a business trip.

More than ever before, the hotel guest has transcended the confines of their hotel. Keen to explore, curious, social, and often combining work and weekend trips, the modern traveller and guest no longer looks for the uniformity offered by the larger business chains.

“People are seeking unique experiences. They are seeking hotels that are distinctive from others in style, design and service.” writes Veronica Waltdhausen in a study for leading Hospitality Consultants HVS.

In the golden age of hotels, people came to be pampered and surrounded themselves with luxury. It was under this model that the star system, where the number of stars equates to higher price point, came into being. But the modern-day traveller is no longer looking for a money-driven experience. Instead of status symbols they seek experiences.

“Do they really want a Nespresso machine in their room (the proud new addition to most hotel rooms),” Waldthousen asks. “Wouldn’t a guest be much more likely to relax in a bar in the hotel’s lobby lounge and drink a coffee surrounded by other people?”

This movement away from the tangible product to an experiential one is complemented by a change in what millennial consumers look for in hotels. Rooms at CitizenM, the contemporary Dutch hotelier that was one of the first players to act on these new demands, feature plush beds, high-powered rain-showers, and free WiFi and movies. Advertisements for the hotel, however, centre on the actual guest experience, highlighting “a great night’s sleep” and “a love for free movies on demand.”

The company’s mantra – affordable luxury for the people – does away with unnecessary luxuries over which many hotels compete. The hotel’s lobby swapped out doormen and luggage carts, favouring automated check-in kiosks that set room temperature and mood lighting to a personalised preference upon a guest’s arrival. A buzzing bar and eatery is complemented by sharp but inviting italian furniture, contemporary art and books, as well as dynamic meeting spaces right off the lobby-floor.

“The lobby is more like a living room than anything else,” says Noreen Chadha, CitizenM’s Commercial Director. “The room is the place to sleep and relax while the lobby is the perfect place to work, meet, eat, and drink.”

As Chadha explains, the physical boundaries that once distinguished hotel lobbies, bars, and restaurants are blending together. The open-space lobbies of hotels like CitizenM or the Ace Hotel simultaneously entertain an array of work meetings, lunch dates, happy hours, and even musical performances. For the hotels, the lobby’s transformation works to bring in both guests and city residents. Whereas the typical hotel bar and restaurant sits mostly empty, these venues hum and buzz, drawing in both the hotel guests and local crowds. For these kinds of hotels, the restaurant can move from being a money-losing nicety to a key asset. According to a Business Journals report, hotels that share their vision and values with restaurants can see up to 20% of revenues coming from food and beverage operations.

The hotels also benefit by being able to generate more revenue per square foot. While the larger corporate hotels may have higher occupancy levels and even feature several restaurants, a comparably-priced boutique hotel that optimises its space and plays host to more guests and visitors in its bar, restaurant, or lobby will have greater revenue per square footage. So while it is difficult to make an apples-to-apples comparison, the boutique model almost certainly presents a better deal.

Historically, the big hoteliers looked on passively on from the sidelines. Business guests and foreign tourists built work trips and holidays around the reliable and consistent nature of the big chains. From Caracas to Mumbai, a Hilton was a Hilton.

But as the millennial generation approaches its peak, a new type of guest is emerging. No longer impressed by turn-down service and trouser presses, they seek unique experiences and interactions. Generation X and Y already make up more than 50% of hotel bookings. And with the boutique industry expected to increase at 6.5% annual rate between 2014 and 2019 according to an IBIS World report, each of the major chains is now keen to capitalise on this growing industry.

Bringing in the Big Boys

With the hospitality industry continuing its post-recession recovery, the large hoteliers are looking to diversify their portfolios. Though boutique hotels took a 12.7% hit in 2009 with revenue per available room (RevPAR) falling as much as 30%, the segment typically yields high profit margins. During times of economic upswing, boutique hotels are more attractive than ever. Generally low-cost investments, they attract an affluent customer and offer an exciting opportunity for brand building. Among the hotel industry’s largest operators, these projects are being fast-tracked by forecasts about the vastly different needs of the rapidly expanding millennial segment.

Besides the substantial research pointing to the millennial opportunity, one of the industry’s largest players, Starwood, is already knee-deep in the boutique world. The company, whose 10-brand portfolio demands about 12% market share in the boutique industry according to IBIS World, owns some of the industry’s leading names. Its W, Aloft, and Element hotels and franchises have proved to be  “game-changing” for the company and continue to lead and “disrupt” their respective industries, according to Starwood’s 2012 report. In each market, these Specialty Select Brands (SSBs) continue to drive growth*. In Canada, the hotelier’s Element brand debuted just last year but has already overtaken its competitors on the popular comparison website TripAdvisor.

Given Starwood’s demonstrated track-record, more and more of the major players are launching brands into the space. Next year, Marriott will debut its Moxy brand in partnership with the Swedish design giant, IKEA. Despite it being the world’s largest hotelier’s first foray into the millennial space, the hotels feature a now-familiar model of design, approachability, and affordability. By a similar token, the parent of the normally no-frills Radisson brand plans to spend $140 million building or acquiring the first five properties of its new, daring Radisson Red brand. The hotel, which channels the concrete, loft-like feel of a modern art gallery joins Starwood’s Aloft, Hyatt’s Andaz, and InterContinental’s Hotel Indigo brands .

It goes without saying that the entry of the larger players has dramatically increased the size of the boutique industry. As explained by IBIS World, the industry is “on its way up to the penthouse,” with industry growth expected to surpass pre-recession levels before 2019. Fielding heightened demand from a 3.1% and 2.7% annualised increase in the number of international arrivals and domestic trips respectively, hotel operators will see a surge in demand in both domestic as well as foreign markets.

A Boutique Bubble?

While the numbers point to a triumphant ‘go,’ questions remain about the viability of this new model. For one it seems as though both boutique and big brands occasionally lose sight of the purpose of this modernisation. From a literal standpoint, critics of Marriott’s upcoming Moxy brand claim the brand’s fast-paced rollout – which hopes to build 150 Moxy hotels in Europe over the next 10 years – may be too ambitious. Others cite the location of its first property next to Milan’s Malpensa airport as too far removed for the economically-minded millennial.

In a 2007 article for The Wall Street Journal, Darren Everson highlights some of the industry’s more fundamental issues. Everson sketches the stay of a University of Southern California graduate student staying at the W Chicago City Center hotel, citing confusion and discomfort.

“There is a backlash brewing against boutique hotels,” Everson writes. “[While] W’s are still thriving, the…segment is finding that some customers – even once loyal ones – are getting tired of their tragically hip ways.”

Indeed, as the industry giants skip from baby steps to a full-steam sprint, they risk alienating their newest customer before they even arrive at the hotel’s doorstep. In the age of cut-throat competition and review sites like Hotels.com and TripAdvisor, just a few negative reviews can result in being crossed permanently off the list.

So, while the millennial guest has almost certainly swapped room service and bidets for contemporary design and free Wi-Fi, certain elements remain, and are perhaps more relevant than ever. Though veterans of the old-model, consistency, loyalty incentives, and good service remain at the top of the list for many consumers. The form follows function principle continues to reign supreme (as this author found out when water from his shower spread cooly across the entire bathroom floor at The Standard Hotel).

For the boutique industry, the entry of everyone from Hyatt to Hilton ushers in an unprecedented era of competition. For the full-line producers however, the move into the boutique space may be the first step to fundamental change the hotel industry as a whole. While currently still limited to one or two brands in the portfolio, the tenets driving the change: change in the core customer, promises to revolutionise the field.

As Jeffrey Catrett points out in his article for Hotel Business Review, similar changes to the retail and other service sectors have forced industry-wide overhaul. For the standardised hotel industry, the costs of changing thousands of properties around the world seems almost unimaginable. The ageing core products of these hotels – behemoth conference spaces, spas, and other amenities – may soon be more or less obsolete. While the luxury segment, particularly resorts, will be sure to carve its own niche, the mainstream hotels may soon face something of a crisis. Indeed, changing consumer trends sometimes stirs trouble. For the hotel industry and the biggest players in particular, however, they just might change the way they do business entirely.

*Starwood’s Annual report does not provide a financial breakdown of each brand, making it difficult to quantify how much each contributes to the company’s overall profitability and growth.

Uber is a technology company based in San Francisco that provides customers with private car services on demand with its smartphone app. Basically, with only one tap on its smartphone app, Uber will connect a customer with a Uber driver, and the customer can enjoy a reliable and safe ride experience. Everything is done through the app, so it’s totally cashless and convenient. Since its founding in 2009, Uber service has expanded to over 70 major cities around the world. While its revenues had grown more than 10 times in 2013, Uber continues to seek out for larger markets. And recently, in February 2014, Uber officially launched in China. As China has the largest population as well as the largest smartphone market in the world, Uber considers its expansion into China as a greatest opportunity for the company ever in terms of the size of the market and potential customers, but maybe it should be prepared to face its toughest challenge while performing in China.

Hiring local staffs will be a starting point for Uber’s localization. Uber needs to hire the right team in China in order to succeed in the country as a foreign company. For example, one of Groupon’s biggest mistakes which led to its failure for expansion in China is that it failed to hire local staffs for the right management positions. Right now, Uber is still actively hiring management roles in China, as well as drivers in major cities like Beijing, Shanghai and Guangzhou, to join its ride-sharing community. Besides this, Uber has made some important decisions in terms of localization, including creating its Chinese name “You Bu” to target local customers and build up its brand image, and supporting online payments via Alipay, which is one of the most popular e-payment services in China. And instead of owning all its cars in China, Uber forms partnership with local car rental companies to rent the cars.

One existing opportunity for Uber to grow in China is that many Chinese people in major cities have already accepted the idea of giving rides to strangers, so it won’t be difficult for Uber to fit in the culture with its ride-sharing app. As a consequence of the increasing number of middle class in China who can now afford taxis as their daily transportation options as well as the fact that the number of taxis in urban centers hasn’t kept pace with the increasing demand, it now has become extremely hard to get a taxi in major cities like Beijing and Shanghai, not to mention the time during holidays and rush hours. Thus, as a result of the high demand of taxi services and the lack of enough supplies of taxis especially in major cities, there have been a growing number of “black cabs” in the cities. Black cabs refer to those private cars that the drivers make money on their own by providing rides to people in need of cabs, without any proper taxi licenses. It’s an illegal service, but somehow becomes acceptable in China due to the high demand by customers and as it’s hard to regulate by the government as well.

It’s quite normal for people in major cities to hop into a black cab when they fail to catch a taxi but in need of a ride. I personally do the same thing. Sometimes I need to get to somewhere in hurry, and I can never make it if I take the bus or subway as it takes too much time. But I just cannot catch a taxi nearby. When I call the taxi company to ask for a cab, they usually tell me “There’s no available taxi around your place. Please wait for a few minutes and try again.” It’s really frustrating. However, the good thing is that there are always a couple of black cabs waiting near our neighborhood. When the black cab drivers assume that you are trying to get a cab, they will approach you and ask where you are heading to. If you accept the price based on the distance, deal! It’s usually cheaper than a taxi and much more convenient to get one especially during rush hours or holidays, so such illegal service is somehow quite popular in China. Of course, safety will be a concern, just like people’s concern for Uber’s safety control when it just launched in the U.S. as a ride-sharing app connecting drivers with customers. But many of the people in China actually accept such ride-sharing concept, which creates the potential for Uber to expand in China.

Besides the opportunity, there will also be competitions, accordingly. The biggest challenge for Uber will be the fierce competition in the Chinese market. Interestingly, even though Uber has benefited greatly from its innovative and successful ride-sharing model, its presence in China doesn’t seem to disrupt the taxi cabs industry in the country. Actually, according to Quartz, “the market for taxi services has never been bigger in China”, especially in major cities like Beijing and Shanghai. I interviewed a taxi driver, Hailin Wu, in Shanghai, and from his perspectives, he didn’t even take Uber as a competitor. “There had been competition over the past few years, when it was quite easy for people to catch a taxi and we as drivers needed to compete for customers.” Wu said, “But now, the demand for taxis is always higher than the actual number of taxis available in the city.” Wu shares his taxi with his friend and does one shift per day (for approximately 10 hours), and he usually has customers from the start to the end of his shift. He barely has the time to grab a meal during work. According to Wu, there are some apps doing the same thing as Uber, but they don’t seem to affect the business for taxi drivers. In cities like Shanghai, there is always more demand than supply in the market. So for taxi drivers like Wu, there will always be enough people looking for taxis, even when there are those black cabs all the time, as well as those emerging apps. It’s even usual for drivers to “select” their customers in these major cities. For example, if the distance to your destination is not far enough or the route to the destination is with heavy traffic, it’s very likely that a driver will refuse to provide the service to you.

Thus, from Wu’s point of view, Uber’s major competitors should be those similar apps in the market which already have their customer bases as well as large amount of drivers. Uber’s biggest competitor as a smartphone app should be Didi Dache. It has been the most popular ride-sharing app in China since its launch in 2012. Users can use voice messages to contact drivers nearby and can even pay a small fee to let the drivers wait for them for a while. At the end of February 2013, Didi announced to have 600,000 subscribers and 12,000 drivers in Beijing only, not to mention the number of drivers it has around the country. Other competitors include Dudu Jiaoche, Yaoyao Dache, Kuaidi Dache, and Dache Xiaomi. All these apps provide services in a similar manner. But compared to Uber, they already have a steady and even growing user base to maintain stable revenues. More importantly, many of these apps have seen growing investments from outside. For example, the E-commerce giant Alibaba has invested nearly $1 million in Kuaidi Dache in April 2013. As a result, when expanding into China, Uber really needs to find out its competitive advantage in order to attract customers and succeed in the market.

Moreover, how to maintain a competitive price is also a question. Initially, Uber positioned itself as a premium or even luxurious riding option in China, in order to differentiate itself from the so-called “crazy cheap” taxi market in the country. However, there isn’t such high demand for riding services that come with a premium price. Those who can afford such services on a daily basis usually already have their private drivers. And the competition still exists. For example, Yongche is a famous web-connected car rental company in China, offering limo rides with drivers at a competitive price. Yongche’s price is 300 RMB for driving you in an Audi A6 from central Shanghai to Shanghai Pudong International airport, while Uber charges approximately 350 RMB for mid-range to high-end cars for the same distance. In order to be more competitive, Uber has adjusted its position and strategy. Now the base fare to use Uber service in Shanghai has dropped to 30 RMB, compared to double the price (around 60-70 RMB) when it started its test run in the city in summer 2013. However, the price is still not quite competitive in the market, especially when you take into consideration all the similar apps, black cabs, and the already affordable taxis. After all, a price war won’t help Uber succeed in the Chinese market.

I consulted Uber’s issue with Carl Cai, a senior consultant at PwC Beijing. He told me that Uber approached a famous consulting company in the industry to take care of its localization in China. However, according to Carl, “Whether Uber can succeed or not in China fully depends on how soon it can figure out its competitive advantage in the market.” Now Uber has its Chinese name, convenient payment options tailored to Chinese customers, and it is actively building up a outstanding management team as well as a welcoming community for both its drivers and its customers. But this is not enough. They still haven’t figured out their “fit” strategy to perform in the competitive market in China, and to differentiate itself from competitions. Uber should take a close look at itself, take approaches to performing that are suitable to the given situation in China, and build on their strengths based on their success in the United States. For example, instead of lowing the price and starting a price war, maybe build on their innovative idea not just as a ride-sharing app, but as a ride-sharing community, which is a fairly new and unique concept in China.

It’s difficult to judge Uber’s performance right now as it has just launched officially in China for few months, and the company didn’t want to mention the actual numbers of its performance in China so far. Yet, Uber is still optimistic toward its expansion in China despite all the challenges. Actually, Wall Street Journal reported based on the interview with Allen Penn, Uber’s head of Asia, that the number of trips booked in Shanghai through the Uber app since the test run in August 2013 even exceeded the number of trips made in San Francisco or New York during each of their first half year. “The company prides itself on being a premium service and, perhaps crucially, a “safe” option that includes a high level of customer service.” said by Sam Gellman, head of Asia expansion at Uber, “Our focus is on delivering a great experience, and numbers so far have shown great initial results and we just want to keep building it up.” Maybe we just need to wait a few more months to see Uber’s results in the following periods, and to find out whether its future in China is as promising as it has expected.

 

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References

 

http://thenextweb.com/asia/2013/08/07/uber-china/

http://www.techinasia.com/4-mistakes-behind-groupons-failure-in-china/

http://qz.com/70123/chinas-versions-of-uber-could-fix-city-cab-shortages/\

http://www.techinasia.com/uber-picks-chinese-officially-launches-china/

http://thenextweb.com/asia/2014/02/13/uber-is-bullish-about-its-potential-in-china-but-it-wont-discuss-rivals-or-reveal-figures/

http://online.wsj.com/news/articles/SB10001424052702304703804579379884010342724

 

Interview with Hailin Wu, taxi driver in Shanghai

Interview with Carl Cai, senior consultant at PwC, Beijing.