It seems like generations ago when “Globalization” with a capital “G”, was the watchword of corporate America, and of the largest companies and consumer brands in the world. Enabling technologies such as laptop computers, the internet, and the privatization of communications infrastructure in the 1980s made it feasible to move production and delivery of goods and services closer to their end user consumers. The expansion of free trade encouraged optimizing production cost by locating each stage of a product’s value chain wherever competitive advantage dictated.
From Industrial to Information Age
Business schools at the time were equipping today’s industry leaders with the latest of Michael Porter’s strategy constructs: The five forces model and the three generic corporate strategies (lowest cost, differentiated service, or focus). An even older model, Ansoff’s Product/Market matrix, made many a successful career, encouraging the expansion of existing products to new markets and/or penetrating existing markets further with new product extensions.
Existing Product, New Market
Two commercial real estate examples are worth noting. First is that of the McArthur Glenn company. J.W. “Joey” Kaempfer Jr., after earning a BA degree from NYU and an MBA from Harvard, founded a real estate development and management company. About 12 years in to the growth of his company, in 1993 he created McArthur Glenn, after having observed that for some reason Factory Outlet Malls did not exist in Europe. In 1995, McArthur Glenn opened its first designer outlet mall, Cheshire Oaks, in the UK.
After becoming the largest developer of outlet malls in Europe, McArthur Glenn was restructured to become a joint venture between Kaempfer Partners and Simon Property Group, the largest owner of shopping malls in the United States. The McArthur Glen website states “ We welcome 90 million visitors a year to our 23 designer outlets in 8 countries – Austria, Canada, France, Italy, Germany, the Netherlands, Spain and the UK.” 90 million visitors per year from bringing an existing product to new markets.
New Product, Existing Market
The other example is from the opposite quadrant of the Ansoff Matrix, in which a new product extension was introduced to existing markets. This example is one in which a new product adaptation was introduced in Mexico and the Caribbean. All-inclusive resorts were well established in this region, but were perceived to be a “lowest common denominator” form of travel. In exchange for a package price that typically included airfare, local transfers, a guestroom, food and beverage services, entertainment and other amenities, guests could economically enjoy a one-week beach vacation.
With a focus on indulgence and consumption, but not quality, one brand’s guestrooms were known for having three upside-down bottles hanging like a fixture on the wall with knobs at the bottom to open and close the flow of liquor. The bottles were marked “Rum”, “Vodka”, and “Gin”, like dispensers in the shower might be marked “Soap” and “Shampoo”. Such a level of product quality, and service to match, were not suitable for, or comparable to, what North American travelers had come to expect from a Marriott, Hilton or Hyatt vacation in the Caribbean.
In the early 2000s, several companies, including Apple Leisure Group (ALG), Karisma Hotels and Resorts, and Playa Hotels and Resorts, saw the opportunity to upgrade the all-inclusive hotel model to a new standard, and each of these companies re-created the guest experience from start to finish, making adjustments at every step of the hotel guests’ experience. Instead of encouraging “all you can eat and drink”, Karisma established “gourmet-inclusive”, with a focus on quality instead of quantity. ALG abolished the traditional plastic bracelet that identified an individual as a hotel guest, and instead restricted the number of access points to the resort property and increased the size of the security staff.
Playa did away with the cruise-ship dining tradition of two set dinner seatings, and instead expanded the number of F&B outlets, reducing each one to a more intimate size. The result was the appearance of a large selection of restaurants, that had a total seat count of almost twice the ship’s room count. The efficiency of one large central kitchen was preserved, and passengers were able to dine at whatever time they desired, in “normal-sized” restaurants, with only a minimal chance of having to wait more than five or ten minutes to be seated or served.
By 2015, the introduction of upper-upscale and luxury-tier all-inclusive resorts by these newer companies had reached a level of market penetration that had the largest hotel brand portfolio companies each devising entry strategies for the all-inclusive market, so that they could catch up with their customers, who had to leave their “family” of hotel brands to stay at an all-inclusive hotel.
Most readers are familiar with these success stories. The point is not to educate anyone regarding the history of outlet malls and all-inclusive hotel evolution, but to demonstrate that implementing what appeared to be a simple strategy using the 1960s-era Ansoff matrix paid large dividends for a period of roundly 50 years.
Source: Majestic Hospitality
What Has Changed?
If laptop computers and plentiful data transmission capacity, along with a new matrix management organizational design, were primary economic catalysts that ushered in something as profound as globalization in the 1980s and 1990s, then the infotech leaps taken since 2005 should have enabled countless and even more grand innovations. In fact, constant change to the ways in which existing hospitality products and services are delivered is now expected and taken for granted. The most shocking attribute of disruption in mature markets today is no longer a focus on the genius of the innovator, but instead the failure of the legacy providers to have better defended their market share by disrupting the status quo themselves.
A variety of the enabling technologies of the next generation of economic production and distribution have already impacted operations and service delivery methods in the hospitality sector, as well as in many other industries. No longer a simple two by two grid of options, the number of enabling factors today has multiplied, and so have the number and types of potential outcomes. A few examples that have become best practices in recent years are worth pointing out.
“Big data” is one of the key enablers. With its help we can collect location data of cell phone users and determine whether a location in the Napa Valley or in the East Bay is frequented by a higher concentration of foreign visitors and people of higher income levels, to validate a forecast of ADR for a new East Bay resort hotel, for which Napa Valley resorts are the nearest comps. Intuition might tell us that Napa would be the winner, as it is a more mature luxury resort market. But Pleasanton, located in the East Bay, with its San Francisco Premium Outlets, brings in higher dollar visitors from a more diverse geography.
The IoT, or Internet of Things, another enabling technology, can have the HVAC system in a hotel guestroom monitor the temperature in the room and reduce the power used for cooling when the room is unoccupied, saving energy whose consumption was previously unmonitored. Another enabling technology, converting products into subscription services (PaaS) means that carpeting 40,000 square feet of meeting space no longer has to be a capital expenditure, but can become a monthly expense for the life of the carpet, with the manufacturer’s local service representatives replacing carpet squares when needed, and conducting deep cleanings according to a schedule that maximizes the life of the carpet. The carpet manufacturer should be better equipped than the hotel maintenance staff to keep the meeting space looking fresh. An additional benefit of this switch in responsibility is that the manufacturer also has a vested interest in keeping the carpet looking new and having an extended useful life, so that the hotel GM, as the client, has little reason to consider changing suppliers.
Outsourcing of functions that were traditionally performed by hotel employees can result in costs as well as benefits. Housekeeping and laundry come to mind, but even a specialty restaurant can transition from being a source of pride for a hotel to becoming a source of rental income if management chooses to stick to their core talent and bring in a restaurant operator who can display their food and beverage expertise from a hotel venue, and possibly be more effective than the hotel staff at attracting outside capture. Placing a “middle-person” between the hotel’s management and the employee is a potential cost of outsourcing, as the employer is no longer the hotel, but the contractor company.
Attempts at disintermediation of distribution channels and at the deconstruction and reassembly of supply chains have been analyzed in virtually every industry by now. If a new entrant can find a “better” way of performing one process or one hand-off in the production or distribution process, they can become a niche specialist and often grow a new enterprise starting with the seed of that one process or one broadcast communication link that is in some way stronger or cheaper or more quickly implemented than the prevailing method.
Analytics abound in the industry with quarterly updates published regarding the moving target of the cost of accepting a guest reservation through a wholesale channel, an OTA, a loyalty brand.com site, vs. calling the hotel directly, so that each channel’s customer segments can be assessed for their pliability to be persuaded to move to another lower-cost channel.
Product Convergence
The drivers of product development and product differentiation discussed herein have only been viewed from the perspectives of the exponential growth in the capacity of infotech and the academic view of competitive strategy. However, political and regulatory trends also have influence (e.g. in resolving National Park overcrowding or the taxing and licensing of short-term rental use of residential property) in how and when product extensions are developed and introduced. Social trends also influence the timing of new innovations in hospitality products and services, such as the trend in recent years of hotel spas morphing into a large spectrum of wellbeing programming, or the growth of multi-generational vacation parties that has prompted several brands of all-inclusive resorts to innovate with the introduction of six-bedroom villa accommodations, while maintaining the “per person package rate” pricing structure.
Villas La Mar Hotel in Monterrico, Guatemala — Photo by Majestic Hospitality
Blurring of Product Boundaries
One of the by-products of the newer analysis technologies is that most of the simpler strategies of moving a new product into an existing market or an existing product into a new market, or even disintermediation of existing channel arrangements, can be simulated and tested in models for their potential, without the cost of actual market trials. That these models can harvest the “low hanging fruit” of identifying product and market penetration opportunities may limit the number of truly innovative breakthroughs in creating new and better ways to solve existing or emerging needs of consumers or businesses, or in our industry’s case, hotel guests and vacation home buyers.
Instead of dramatically new approaches, we see a myriad of incremental features and attributes applied to existing products and services, and on occasion these small changes can converge to create entirely new platforms for producing or distributing products and services and unlocking previously unserved pockets of demand.
We have seen so many of these service delivery formulas applied to short term-rentals, branded and non-branded residential communities both inside and outside of mixed-use master-planned resorts, as well as urban incremental innovations applied to co-living, formalized roommate schemes and even “club-structured” housing where subscribers can spend the night in a number of sites throughout an urban metro area or for weeks and months at a time from a host of sites in 50 cities around the world.
From the hotel side, the extended stay model, with a residential feel and more modest service levels, has grown in popularity and a new generation of “studio-style” brands have recently been introduced. One company has even experimented with half of the units in the building being furnished hotel suites and the other half being unfurnished spaces for full-time residential use. With shared amenities, the hotel guests get to stay in a mini-community of “locals”, enhancing the cultural experience and authenticity attributes of the lodging accommodations by design.
In this product segment of resort residential real estate, an interesting dichotomy is emerging. In the markets of the Caribbean and Central America, where resort-based residential real estate has been thriving in the past five years, the developers are typically family businesses of relatively smaller scale than typical development firms in the United States. Some of these developers have focused on hospitality development in the past and others are quite experienced but only in residential and retail development. There are two perspectives, or mindsets, of developers in this field, based on their background having been residentially versus hospitality oriented. In the residential condominium world, homeowners associations (HOAs) either directly manage or contract for property management services to keep the business entity of the community in compliance with laws and local regulations regarding commercial real estate, to keep the property maintained and/or improved up to an agreed-upon standard, and to enforce any infractions of unit owners’ codes of conduct or of the community’s rules and regulations.
The overarching work ethic in most HOAs and property management operators is to scrutinize all purchases and go to reasonable lengths to minimize expenditures on behalf of unit owners. Common actions taken, all things being equal, are taken on the side of frugality. Postponing replacement of an elevator, or deciding to not heat the swimming pool except on weekends are examples of expected HOA and property management recommendations for their condominium communities.
Conversely, developers who were adding branded residences to a luxury hotel and came from a hospitality development background were more concerned with making sure the finishes and furnishings in the residential units were at least as luxurious, if not more so, than were those in the hotel zone of the property. Often amenities were duplicated for the branded residence owners so that unit owners would never have to “compete” with hotels guests for a chaise lounge by the swimming pool or beach. Owner’s lounges, or other amenities that were intended exclusively for condominium owner use, were standard components of the residential zone of mixed-use resort properties, though these are less common as the branded residence product category matures.
A residential developer in Central America’s Pacific coast established a master-planned residential resort community several years ago. In addition to the vacation condominiums there was a beach club. The developer also offered a rental management program to purchasers of the townhomes. The rental management agreement was written by his attorney who had no hospitality background and included clauses such as either side can terminate the agreement with thirty days notice.
The townhomes were attractive and were configured in clusters of ten units around a swimming pool. In the first year of selling finished product, around 80 units were sold, and approximately two-thirds of unit purchasers accepted the rental program. The following year, most rental program participants were satisfied that the rental manager had generated enough demand that the units were roundly forty percent occupied and unit owners were receiving close to 50% of the net rental revenue.
The following year, however, an equivalent number of occupied room nights were generated via the rental program, but an additional 70 units had been purchased, so occupancy dropped to nearly 20% and unit owners’ payments also fell by half, and unit owners began to talk about these issues with each other, generating considerable ill will. The developer, with a residential mindset, kept building and selling since the market was still buying. The mismatch here was that purchasers of the townhomes thought they were buying into a resort lifestyle and the developer thought he was selling condominiums in a subdivision.
In another case, on a Caribbean island, six buildings with a total of 150 condominium units are nearing completion. The community is not branded and the amenity set is basic, as the development is the first of several that will be co-located, including a marina, many restaurants and a hotel. The developer was concerned that 150 unit owners might find 150 types of rental arrangements on their own, creating chaos for the property managers. He wanted to have an exclusive rental program and agent for the development and was frustrated to find little interest from the property management community. He finally found a local company and a foreign company to bid on the rental management opportunity and both offered to manage the service for a fee of 40% of net rental revenue, leaving only 60% for the unit owner and the developer to share. We agreed was a more than aggressive proposal.
Conclusion
The current fragmented manner of product development and introduction can uncover new opportunities and can create new combinations of products that threaten to cannibalize revenue from products that did not quickly adapt to changing customer needs or to harness new technological and analytical tools. Though lodging is not the most technology-intensive industry (and has been in existence for several thousand years), leaders in the sector must stay as up to date as those in high-tech industries on the newest needs and tools available, or risk being displaced by others.
Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com.
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