1. Chapter 2 The Modern Hotel Industry

2. Segmenting the Lodging Market
Definition of Market Segmentation:
Process of dividing a large heterogeneous market into two or more smaller homogenous market segments
(Homogenous = Consumers with similar needs)
Logic of segmentation:
You can’t please all the people all the time.
If you try to please everybody, you will end up pleasing nobody!
No average guest and no average stay 2

3. Brand and Brand Equity (1 of 2)
A name and logo recognized by customers
A unique package of products, services, amenities, and ambience at a price point that is associated with that brand.
Hotel companies are always trying to establish new brands based on market segmentation
Brand Equity:
Inherent value that recognition gives to the brand, when associated with positive images. 3

4. Brand and Brand Equity (2 of 2)
Brand equity can be increased by
Instant identification
Broad distribution
Consistent quality
An assured level of service
Job the hotelier is to create and deliver something unique, targeted at the right customer, enabling the hotelier to charge a premium, that the customer willingly pays.
If you sell a bed for the night you can charge $85; if you sell a unique experience, you can charge $250!!

5. Segmenting the Lodging Market (1 of 5)
Economy Hotels
Hotels with minimal services (amenities) and charging low rates
First Motor Courts in 1930s
Problem: “Amenity Creep” to compete better/feed ego, resulting in increased prices
Free soap to free soap+shampoo+conditioner+lotion
27-inch TV to 37-inch flat screen LCD
Someone has to pay!!
Economy hotel becomes “Mid-Market”
New “Economy Hotels” emerge 5

6. Segmenting the Lodging Market (2 of 5)
Hard Budgets
“Real” Economy Hotels
Microtel Chain, Some Airport Hotels, Capsule Hotels in Japan, Easy Hotels in Europe
All-Suite Hotels
All rooms with separate living and sleeping areas; may include kitchenette
Can conduct business in the rooms
Appeals to many segments
Business people, women, families, extended stay
Available in many price categories and brands 6

7. Segmenting the Lodging Market (3 of 5)
Extended Stay Hotels
Corporate Housing
Long stay apartments with hotel services
May be permitted in residential areas
Exempt from hotel room taxes
Example: Marriott Executive Apartments
Mixed-Use Projects
Hotel is part of a complex of offices, retail, housing, entertainment and recreation 7

8. Segmenting the Lodging Market (4 of 5)
Dual Brands
Casino Hotels
Income from gaming (Wins)
Rooms/Food & Beverages may be “loss leaders” to bring in guests
Occupancy % more important than ADR.
Conference Centers
Specialized in conferences, meetings, etc.
Lots of audio-visual equipment

9. Segmenting the Lodging Market (5 of 5)
May not accept transients
Bundled rates – Corporate Meeting Package (CMP)
Problem of low weekend occupancy
Hotels with many conference facilities
Spas – A resort based on mineral or curative waters
Now more health/beauty/indulgence based
Current craze – many hotels with “Spas”
Fitness Centers

10. New Market Patterns (1 of 5)
Marketing to the Individual Guest
The Guest Profile
Business/Leisure Travelers
International Guests
Preferred Guest Programs (PGPs)
Freebies given to guests to “reward” stays
Move to provide upgrades and special perks targeted to needs of frequent travelers, rather than just free rooms 10

11. New Market Patterns (2 of 5)
First started by American Airlines as “Frequent Traveler Programs” (FTPs)
Disadvantages
Very costly to set up and administer
Accumulates liabilities quickly
Does it really attract or retain guests?
Ethical issues – companies pay, but individuals benefit
Tiger by the tail – can’t let go! 11

12. New Market Patterns (3 of 5)
Advantages
Retains loyalty of “heavy users”
Companies have purchased properties just for FGP use!
Quickly build up mailing lists
Develop guest profiles – then target them
Easier and cheaper to administer with computers now

13. New Market Patterns (4 of 5)
Non-guest Buyer
An intermediary between the hotel and the guest who buys the room for the guest
Benefits to hotelier
Deal with one person – lower costs & hassles
Saves commission to credit cards, travel agents etc.,
Saves costs and hassles of individual bad debts
Free advertising (Exhibit 2-8)
Bulk buy in advance – peace of mind, steady income
Risk shifted to intermediary 13

14. New Market Patterns (5 of 5)
Disadvantages to hotelier
Have to discount heavily to get bulk business
Will get blame/liability for intermediaries problems

15. Marketing to the Group (1 of 4)
Tourists/Leisure Groups
Tour Packages
Bought by a wholesaler, who buys rooms, airline seats, travel arrangements in bulk, packages it, and sells it to groups and individuals
Cheaper for guest than components bought individually
Wholesaler gets benefit of “breakage”
Breakage – Items paid for but not utilized, like meals etc.,
Inclusive Tour (IT) Packages
Hotels doing own packaging
Eliminates costs of middlemen
Hotel gets benefit of “breakage” 15

16. Marketing to the Group (2 of 4)
Marketed to individual guests
Hotel is competing with itself – marketing is tricky
Business/Commercial Groups
SMERF – Societies, Medical, University, Religious, Fraternal
All such groups hold meetings and conventions
Convention – A group assembled to promote a common purpose.
Meetings, papers, talks given on common subjects
They need extensive meeting facilities 16

17. Marketing to the Group (3 of 4)
Large meeting rooms and dining rooms needed
More complete the property, greater the appeal
Competing hotels cooperate to host large conventions
Trade Shows- Exhibits of product lines shown by purveyors to potential buyers
May be done in guest rooms itself
May require large exhibit space with special requirements
Single Entity
It has an adhesive that binds its members together.
Attendees already belong to the unit (a company, an orchestra, the football team) before coming to the hotel.
The unit makes the reservation and pay costs 17

18. Marketing to the Group (4 of 4)
Incentive Travelers:
Rewarding top employees with all-expenses paid trips
Free vacation is more motivating than more money!
Trips are usually first-class
Organized by specialists
Very demanding business!
The most driven people win these trips!
Top performers expect top performance!!

19. New Ownership Patterns (1 of 5)
State of the Industry
From Turmoil to Churning
Investors in industry for wrong reasons
Ego, real estate speculation
Overbuilding, high operating costs, low demand
Bankruptcy of hotels, bank insolvency
Saying - Only the third owner makes money!!
Investors and banks have learnt their lesson
Demand is slowing, but less overbuilding now 19

20. New Ownership Patterns (2 of 5)
A Consolidating Industry
Large companies are buying smaller ones
Consolidation driven by economies of scale in all costs
Consolidation improves marketing, builds stronger brands
The Global Village
Hotel industry is dominated by global players
Nationality of buyers shifts with currency values
Individual Ownership
Can be individuals, family or a group
Combination of personal wealth and borrowed capital 20

21. New Ownership Patterns (3 of 5)
More likely with smaller properties, as less capital is needed
Crowdfunding
This nontraditional source raises money from the public, “the crowd”
Real Estate Investment Trusts (REITs)
Investment vehicle for real estate deals including hotels – many tax advantages
Restrictions prevent REITS from operating hotels, so they set up related companies to run the hotels 21

22. New Ownership Patterns (4 of 5)
Condominiums and Timeshares
Condominium Ownership
Owner owns and pays for maintenance
Units are placed in common rental pool
Owners may use part-time, rent out the rest
Fees are paid to operators/managers
Gets rental income, capital gains on sale
Pays condo fees to association for maintenance
Condo Hotels
Residential guests buy condominiums within commercial hotels 22

23. New Ownership Patterns (5 of 5)
Timeshare Membership
Owner buys the right to use for a fixed period each year for a agreed upon number of years
Exchanges
Role of the Timeshare
Joint Ventures and Strategic Alliances
Partnership between different commercial entities
Radisson Hotel in Moscow is a joint venture between Radisson, Russian Ministry of Foreign Tourism and Americom
Used when different parties have different expertise/assets to offer

24. New Management Patterns – Chains (1 of 3)
Chains – Increasing in popularity because of:
Large capital needs
Risk is diversified geographically and segment wise
Economies of scale
Expertise in site selection
Ability to attract management talent
Increased marketing clout, particularly brand building
Ability to invest in and leverage technology 24

25. New Management Patterns – Chains (2 of 3)
Parties to the Deal
Developer
Lender
Equity/Ownership
Management Company
Franchisor 25

26. New Management Patterns – Chains (3 of 3)
Consortia and Membership Organizations
A cooperative structure, where members pays fees and get services that a chain would provide
Best Western International
A way for independent operators to get the advantages of a chain, without sacrificing their independence or individuality.
Operators get marketing, reservation systems, recognizable logo
Guests get consistent standards, yet a unique experience 26

27. Management Contracts and Management Companies (1 of 5)
Management Contracts – An agreement between a hotel owner and a management company by which the management company operates the hotel within the conditions set down by the contract, for a fee.
Happens where owner lacks inclination, time, or expertise to manage
Management companies have grown with the separation of ownership from management
Fees are paid by the owner irrespective of profit or loss
There may be a bonus for profitable operation 27

28. Management Contracts and Management Companies (2 of 5)
Owner gets to keep profits or take losses
Management company may be different from Franchisors
If franchised property, management is done within parameters of the franchise agreement

29. Management Contracts and Management Companies (3 of 5)
Leases – An agreement between a hotel building owner and a leasing company by which the leaseholder operates the hotel.
Building (Hotel property) owner gets a risk-free flow of lease payments from the operator
Lease holder operates the hotel
Lease payments are made by the hotel operator from operating income, irrespective of profit or loss 29

30. Management Contracts and Management Companies (4 of 5)
Franchises - The buyer (Franchisee) acquires rights from the seller (Franchisor) to the exclusive use of a name, product/s, and system of a franchisor within a defined geographic area, for a fee.
Enables the Franchisee to operate as an independent, but still have the benefits of chain membership.
Franchisor makes money, even when Franchisee is losing money! 30

31. Management Contracts and Management Companies (5 of 5)
Franchisor can terminate the franchisee for non-adherence to standards
Problems arise when franchisors want to expand too rapidly and franchisees claim that their territory is being infringed upon by other franchisees
One individual can buy different franchises
The Franchise Flag