An Insight to the Chained v. Independent Hotels - Article Example

Abstract The study views at the outlook of the hotel industry thru the chained and independent hotels perspective. Through literature review, problems and experiences of each sector are viewed using Porters Five model of competitive analysis. Advantages and disadvantages of chained and independent hotels are depicted thru experiences in various regional environment, particularly, UK, China, US, Africa, India, and Taiwan A conclusion is derived that the sector who can survive the financial crisis is one that practices innovative strategy and offering cheaper cost. Costs are the number one consideration in the light of a declining economy. Keywords: Hotel industry, brand hotels, chain hotels, independent hotels, Porters Five Introduction Our concerned areas for discussion are chained and independent hotels that are both testing the international markets to keep their profitability in the light of a slowing economy. I have noted several reports saying that multi-national hotels have looked at emerging countries and offshore opportunities for hotel investments using their brand names and chain marketing. I have noted that Independent hotels compete with these multi-nationals using a different kind of marketing strategy in regions. In this framework, I would like to know what strategies are being used by these hotels to remain in a competitive shape and how do they survive in the globalization process. In this context, strategies of each hotel segment will be presented using Porters five competitive model process. Michael Porters Competitive forces models consist of rivalry, threat of substitutes, buyer power, supplier power and barriers to entry. (QuickMba) The Porters Competitive forces diagram is shown below: Porter's Five Forces A MODEL FOR INDUSTRY ANALYSIS Source: 12 Manage conflict. Five Competitive forces Porter. I. Barriers to entry. First let us look at barrier to entry. Barriers to entry explained by 12Manage.com and QuickMBA are some of the reasons that make entrance of new entities to an existing industry difficult. These barriers come from: a. Capital requirements. First, both articles consider capital requirements as a hurdle, simply because of the intensive capital needed to construct a hotel. Below is a calculation of how much does it cost to construct a hotel. Assumption was made on the cost per room of different class of hotels. (Coy, J and Haralson, B. 2003). Type Project cost Economy Hotels Lowest $30,100 Highest $64,600 Average $48,900 Mid-priced hotels Lowest $48,200 Highest $203,900 Average $101,800 Upscale hotels Lowest $66,400 Highest $323,500 Average $172,000 Source: Jeff Coy, J & Haralson, B. 2003 As shown, the costs of constructing a room vary widely if it is economy, mid-price or upscale hotel. An in-depth profitability study should be done to study the appropriateness of the type of hotel needed in the region. b. Next are the government regulations. At this point, investors should look at the regulations imposed by countries to encourage or discourage new entrants 12Manage.com directs analysis on the importance of regulations such as subsidies offered by the government For instance, Indian government has set aside a 10 year conditional tax holiday for all government tourism projects. Further, Indian government supports hoteliers who will invest on diversity tourist attractions such as wellness tourism, medical tourism and golf enthusiasts Tax exemption up to 50% of profits will be allowed if they will be reinvested to tourism projects. .(Equity market.com) Aside from the above, OECD (2009) and Tim Grosser (2009) Minister of Trade in New Zealand, both agreed to keep markets open. OECD said that new entrants are encouraged by the liberalization, bilateral agreements and protectionists policy of government. OECD expects that “a lower trade barrier to competition could result to 2-3% increase in OECD area per GDP capita”. Minister Grosser agrees that government must relax on protectionism policy and believes “that the more countries try to protect themselves by solating their economies, the more both exports and imports decline…”(Grosser) c. Brand loyalty. The question to be answered here is “are customers loyal to the brand?” Brand loyalty is defined as “the customer’s preference to buy a particular brand in a product category.” (Giddens, N. 2002) Giddens believes that there is “a brand loyalty when a customer is committed to the brand, willing to pay a higher price than other brand, and that customer is willing to recommend it to others.” This explains why there are top ranking hotels in the world, shown below. Brand loyalty is seen when customers favor top hotels in Las Vegas for gaming activities and hotels in Thailand and Malaysia for adventure. Executive Travel (2009) listed the top 10 largest hotels in the world as: 1 Venetian/Palazzo Las Vegas 7,128 2 First World Hotel Genting Highlands of Malaysia 6,118 3 MGM Grand Las Vegas 5,044 4 Mandalay Bay/The Hotel Las Vegas 4,752 5 Luxor Las Vegas 4,408 6 Ambassador City Jomtien Thailand 4,210 7 The Venetian/Palazzo Las Vegas 4,049 8 Excalibur Las Vegas 4,008 9 Bellagio Las Vegas 3,993 10 Circus Circus Las Vegas 3,774 Source: Executive Travel d. Retaliation from existing industry players. According to study of Ikeburst, G.P., et.al , 2002), the general reactions of businesses is to get worried about crowding out situation with the new competition and would work doubly hard to maintain the loyalty of customers. G.P. Ikeburst, et. al, saw that possible reactions of managers is the relation of price and non price strategies that the hotels have to do. Result of research done among 250 hotels in UK, as reported, showed that the competition will be the in the race for price discounting among hotels. (Ikeburst et. al.) e. Access to technology. Lack of proper use of technology will hamper efficient operations and reduces profitability as Carson, A, (n.d.) says. Technology plays a definitive role in a business, Carlson states, and that this could only be availed of by large multi-national hotels. He describes the role of technology as: “technology maintains data flow, manage contacts, track processes and employee records. Technology makes it possible for businesses to operate efficiently and effectively with minimal manpower and helps to reduce the cost of doing business. Technology helps business operations by keeping them connected to suppliers, customers and their sales force. Because of its ability to streamline operating costs, technology delivers instant access to supplies and information, so businesses are better able to offer affordable pricing of goods and services without sacrificing quality.”(Carson, A.) II. Threats of substitutes depend on several factors. a. First is quality. The question that needs to be answered here is: ”Is the quality of substitutes better?” Quality assurance is said to “increase customer confidence on the credibility of the company” This also enables the company to compete better in the industry. Process of quality assurance is generally provided by international service organization (ISO) and mostly done to multi-nationals. (Search.software.com) b. Buyers’ willingness to substitute, relative price performance of substitutes and cost of switching to substitutes. At this point, there is a need to see if buyer is willing to substitute his choice of hotels taking into consideration the price differences. Delloitte (2009) said people travel for business, recreation, leisure, vacation, education, work and medical purposes. These cannot be postponed and travel has to be accomplished, but this time, consumers’ travel differently optimizing on costs. Most people conserve on costs just enough to cover the essentials on cost, in the same way that hotels look for means to cut on operational expenses. (Delloite, 2009) Deloitte, reporting for the US tourism industry, said that tourism fell in 2008; from 80% occupancy in August 2007 to its present low level. Deloitte described changing patterns of expenditures in tourism, hotel and leisure, as customers now prefer to eat at quick serve restaurants, which is relatively cheaper, than the casual dining restaurants. Deloitte also pointed to less gaming activities as indication of cut back on expenses. For instance, Deloitte points out, that on a 2008 travel survey, respondents said they plan to travel less for the next 12 months; instead of taking long vacations, consumers now prefer short vacations; the high cost of plane fare prevent the consumers to fly to leisure destinations and will rather choose vacations nearer to home. For corporation, business travel expenses were cut. Deloitte reports that the Business Coalition Survey of 106 companies showed that 26% had implemented cut back on travel expenses. These companies however still consider the importance of business meetings and conferences and will probably look for different measures to limit travel costs. Changes in travel behavior have also been observed in the Middle East as they promote domestic tourism. Travel Video News TVN (2009) reported that there is an increasing interests among worldwide hotels to tap the Middle East Market, as this report showed that Arab Gulf countries spend around $20 billion on vacation every year. The TVN said that for the coming year, a change in vacation pattern of Arab Gulf countries is noted because of scare of air-borne diseases in other countries and the downfall of economy. These travelers now plan to spend vacations closer to home, TVN news said. III. Supplier power. a. Suppliers have bargaining power if there is a concentration of buyers (12 Manage.com.) If this is the case, this will be a suppliers market because there will be more travelers than hotels available, and hotels can command a price. However, in reality, this is not the case, as there is a reported decline in hotel occupancy. For instance, demand or occupancy in UK as of 2008 declined; occupancy rate is 73%, a decline of 2.2% over last year. Average daily rate is 93%, a decline of 3.5 1.2% from last years’ and revenue per available room is 68.84%, a decline 1.2% over last year. (Iveson,H. 2009) As illustrated, there is a decline in profit, there is decline of occupancy and average daily rate which could be due to oversupply of rooms. . b. . Differentiation. Chain and brand hotels differ in quality and services offered from that of independent hotels Forgacs, G. (2003) believes customers choose brand hotels because of predictability of services. He concludes in his study “that integrity of any brand will ride on doing well what they say and saying it right what they do every day at every point of guest contact. “ Forcags’s report says there are in the USA, over 70 percent of the hotels are branded; in Canada, brand penetration is around 40 percent, in Europe it is under 25 percent and growing. IV.Rivalry. Porters view the intense of rivalry depends on the industry structure, whether there are too many or less competition in the industry, or when there is a leader in the industry. Rivalry is also displayed when rivals are encouraged to cut costs. Competition in UK. The number of budget hotels in UK has grown from 849 with 50,397 rooms in 2001 to 1,292 hotels with 97,901 rooms in 2008. ”. (Frewin, A. 2009) Expansion from brand hotels. Zach.com reports on expansion plan of The Marriott Hotel to double its exposure in Europe to fight the recession in U.S. Marriott owns 174 hotels in 24 countries in Europe under the Marriott, Renaissance and Ritz Carlton brands. If plans pursue, Marriott plans to buy existing independent hotels to make integration faster and would result to an additional 40,000 rooms under their brands. Hilton Hotel, a fierce competitor, owns 2,800 hotels with 490,000 rooms in more than 80 countries as of 2006. (Peer Papers n.d.). Expansion In Africa. There is a sudden interest of the Preferred Hotel Group (PFG) a large international brand, to have a presence in this region. The PFG has 30 members in the continent and have entered partnerships with regional organizations as a marketing strategy. PFG designs their hotels based on locations and recognitions of wildlife, culture, beauty and individuality as independent group. (Hotelsmag.) Above details there are still room for expansion in the hotel industry as shown in the continuing interest of investors. V. Buyer power. Framework of analysis depends on whether there are few dominant travelers (demand) and there are many supplier hotels (supply). The decline of the industry have slowed operations of hotels. For instance, demand or occupancy in UK as of 2008 declined; occupancy rate is 73%, a decline of 2.2% over last year. Average daily rate is 93%, a decline of 3.5 1.2% from last years’ and revenue per available room is 68.84%, a decline 1.2% over last year. (Iveson,H. 2009) As illustrated, there is a decline in profit, there is decline of occupancy and average daily rate which could be due to oversupply of rooms The buyer power also depends on several factors such as the quality of service and product; the advantages or profitability the buyer is supposed to gain and the perception of the traveler to the hotel (12 manage.com) Part II. Limitations and challenges of hotels a. Outlook for the hotel industry. Figures cited in the outlook has been limited to 2008 and in part to 2009, as data is not available. At the end of 2009, occupancy rate of hotels was projected at 55.5% which is way below the 2008 level of 60.3%. Considering this figure of occupancy, Hotel World Network HWN (2009) feels hoteliers will still face constrained credit environment and will have to optimize on what they already got, and have to do more with less. HWN sees that cost cutting will put a strain on the managers on training employees as salary levels are most likely to remain the same if not lower. In 2009. There was a “war of occupancy” on hotel rooms using discounts, but in 2010, HWN predicts that it will be more on increasing revenues of hotels. On the supply side, HWN sees that there will be a trickle or a slowdown of construction of new rooms as a consequence of tight financing. On the overall, HWN thinks that the innovative process to be done by hotels in terms of management, technology information and marketing strategy will revive the industry. Forecast of hotel occupancy US remains at a low level, and the drop of 9.7 level in 2009 will continue to prevail in 2010 with a drop of 8.4 percent.. (Hotel Marketing.com 2009) Prospects in UK hotels hope to reach 3 percent growth in 2010. (Hammer, J. 2010) In India, Sunil, N. (2007) said medical tourism adds to interest in Indian Tourism. This country is expected to have a tourism growth as influx of tourists is expected to reach 22.65% between 2007 to 2011. India forecast about 1 million tourist arrivals until 2012 looking for medical treatment. India gets 50% of their revenue from hotel room occupancy (Sunil, N) In China, occupancy rates of all hotels dropped in the fourth quarter of 2000 and revenue per room subsequently declined. Occupancy was 92.9% a year ago but fell to 84.1% at closing, while revenue per room went down to 5.1% from 5.6% Subsequently shares of stocks fell because the anticipated growth of revenues was down and lesser than expected.(China Economic Review, 2010) Statistics from the UNWTO, tourism in 2007 showed that out of 52 million additional worldwide tourists’ arrivals, Europe accounts for 19 million, Asia and Pacific had a record of 17 million tourists’ arrivals. (Asia Travel Trips) America was up by 6 million, Africa 3 million and the Middle East by 6 million. According to UNWTO, the middle east has become to be a tourists success and its growth is faster than the world total in 2007.(Asia Travel tips) b. Default on loans. As experienced by most businesses worldwide, Cadwalder, L. 2009) said the hotel industry has been the hardest hit by the economic crisis as domestic and international travels declined. Cadwalder, reporting for Daily Journal Corp. wrote abour the defaults of hotel loans in California. This report states that there are about 250 hotels defaulting in their loans due to decline in their average daily rate of tourists visits. This prompted hotel owners to cut down on expenses to remain in business, but this strategy seem to be not enough to pay their loans. Some troubled hotels were taken by lenders. The high end market hotels, full service luxury resorts and high profile “asset” hotels during the last quarter of 2008, according to Cadwalder are among those affected. c. Product technology and development. The internet presence according to Carson allows customers to look at what hotels offer and book travels conveniently on line. The internet gives hotels the opportunity to reach potential customers worldwide. Information technology, according to Carson promotes efficiency and productivity, as there will more efficient tracking process and lesser accounting work. As monitoring tool, hotels are able to check almost all the activities of the hotel regardless of location. The study of Li Shi & Makkula, J. (2004) in Finnish hotels showed the importance of IT as a strategy in differentiation and to establish its competitive strength. The ability of the independent hotels to compete with chain brands has been enhanced by the internet, (Swigg, R. 2000) Swigg, R. stated that IT allowed the small and medium sized hotels to receive significant hotel bookings . Internet bookings for the top 30 brands, according to Starkov. M. (2010) , has increased by 6.6% as compared to 2008. Conclusion In the face of slowing economy, which hotel strategy would survive? Is it the brand hotels or the independent hotels? Based on data analyzed, it is fair to conclude that: 1. There is an equal opportunity for both sectors in terms of technology with reference to internet use and process. 2. .A change in purchasing and travel behavior favors less expensive hotels over high end and luxury hotels. Demand for shorter vacations and local tourism are shown to be changes in travelers practices. 3. Financial crisis. Cost of construction of hotels, under the short term condition, gives weight to low cost hotels or independent hotels. Financial crisis affected mostly high end hotels because of huge investment and low profitability. It is noted that new investments will be on new areas away from the matured markets. For example, China, India and the Middle East will be the focus of worldwide hotels. 4. Stiff competition provided by new entrants to market proved to hurt operations of existing ones. The demand is less than the supply in rooms available showing market concentration on availability of rooms. As a whole, the industry will continue to face difficulties but only the sector that provides innovative and cost effective approach will survive and I believe it is the independent hotels at this point in time. The best strategy that will work in times of crisis are those of the independent hotels because of lesser costs in operation, lower price, unique experience brought about by culture and locations. These factors become the independent hotels competitive advantage that will work in a tight economic situation. List of references 12 Manage conflict. (n.d.) Five Competitive forces Porter. Available from http://www.12manage.com/methods_porter_five_forces.html [Accessed 12 March 2010] Akehurst,G. P. Hallsworth,L, C. Patrick, C and Snee, H. (2002) Identification of Reactions of hotel managers to new competition. Department of Business and Economics, University of Wales Institute of Science and Technology, Cardiff CF1 3EU, U.K. Available from http://www.sciencedirect.com/science[Accessed [10 March 2010] Asia Travel Tips. (2008) World Tourism statistics exceed expectation in 2007. Available from . http://www.asiatraveltips.com/news08/301-TourismStatistics.shtml [Accessed 16 March 2010] Cadwalder, L. (2009). United States: The Key To A Successful Hotel Loan Workout: Understanding The Hotel Management Agreement. Available from http://www.mondaq.com/unitedstates/article.asp?articleid=90328 [Accessed 10 March 2010] Carson, A. (n.d.) The role of technology in a business organization. eHow. Available from http://www.ehow.com/about_6082161_role-technology-business-organization.html [Acessed 16 March 2010] China Economic Review (2010)/ Hone Inns falls after 2010 forecast. Available from [Accessed 14 March 2010] Coy, J.& Haralson, B. (2003).What it’s going to build a hotel with an indoor water park? A guide to cost allocation for developers. Available from http://www.docstoc.com/docs/1604634/How-Much-Does-it-Cost-to-Build-a-Hotel [Accessed 10 March 2010] Delloite. (2009) Industry Outlook: Tourism, Hospitality and Leisure Available from [Accessed 10 March 2010] Equity Master.com 2009. Hotels - Sector Research & Analysis. Available from [Accessed 10 March 2010] Frewin, J.A. 2009. Budget hotels in the UK 2008 - Industry data. Available from [Accessed 10 March 2010] Forcags. G. (n.d.) Brand asset equilibrium in hotel management. Available from http://www.emeraldinsight.com/Insight/viewContentItem.do?contentType=Article&hdAction=lnkhtml&contentId=867501 [Accessed 20 March 2010] Giddens, N. (2002) Brand Loyalty,IOWA State University. Available from http://www.extension.iastate.edu/agdm/wholefarm/html/c5-54.html [Accessed 20 March 2010] Grosser, Tim. 2009. Minister welcomes Australian business initiative on protectionism. Beehive.gov.nz. Available from http://www.beehive.govt.nz/release/minister+welcomes+australian+business+initiative+protectionism> [Accessed 13 March 2010] Hammer, J. (2010). UK hotel revpar forecast to grow by 3% in 2010. Available from http://www.caterersearch.com/Articles/2010/03/01/332440/uk-hotel-revpar-forecast-to-grow-by-3-in-2010.htm>[Accessed 13 March 2010] Hotels.mag. (2010). Lure Worldwide Hotels Room Nights Revenue Up This Year. Press Release. Available from Accessed 10 March 2010] Hotel Marketing.com. (2009). Smith Travel Lowers US. Hotel Forecast. Available from http://www.hotelmarketing.com/index.php/content/article/smith_trav. [Accessed 13 March 2010] Hotel World Network.(2008) Sabre simplifies corporate travel rate negotiation process. from [Accessed 13 March 2010] Hotels Mobile (2010) Preferred adds 14 Mantis Group Hotels in South Africa. Press Release. Available from Accessed 1 March 2010] Hotelworld network (2009). Hotel industry predictions for 2010 from RevPAR Guru 2009 Available from [Accessed 11 March 2010] IVeson H. [2009]. UK Hotel outlook uncertain. Hotel News Now. Available from http://www.hotelnewsnow.com/articles.aspx?ArticleId=457[Accessed 10 March 2010] Naukri.Hub. [2010]. Challenges for Hospitality Industry. Available from http://www.naukrihub.com/india/hospitality/overview/challenges[Accessed 10 March 2010] OECD [2009]. Keeping markets open at times of economic crisis Policy Brief. Available from www.oecd.org/dataoecd/48/19/42459971.pd [Accessed 13March 2010] Peer Papers. (n.d.) Hilton Hotel. Available from http://www.peerpapers.com/essays/Hilton-Hotel/142553.html?topic> [Accessed 13 March 2010] Quick MBA. (n.d.) Porters Five Forces. A model for industry analysis..Strategic Management. Available from http://www.quickmba.com/strategy/porter.shtml [Accessed 15 March 2010] Searchcom. Quality assurance definition. Search Software Quality.com Available from http://searchsoftwarequality.techtarget.com/sDefinition/0,,sid92_gci816126,00.html [accessed 15 March 2010] Sunil, N. (2007) Indian tourism Forecast 2007-2011. Available from http://www.prlog.org/10025900-indian-tourism-industry-forecast-2007-2011.html [Accessed 15 March 2010] Swig,R. (2000) . Independent hotels: the new brand alternative. Ideas and Trends.RSBA Associates, Hospitality Consulting Services. Available from < http://www.hotel-online.com/Trends/Swig/Swig_IndependentBrand.htm> [Accessed 10 March 2010] Trip Advisor. (n.d.)2010. Athens Hotel. Available from [Accessed 10 March 2010} Travel Video News. (2009) WTO: Middle East tourism is expected to rise. Available fromhttp://www.travelvideo.tv/news/middle-east-general/07-27-2009/wto-middle-east-tourism-is-expected-to-rise> Accessed 13 March 2010 Yang, H. & Cherr, N. 2008. Resource Management Challenges in the Hotel Industry in Taiwan. Informworld. Available from http://www.informaworld.com/smpp/content~content=a904501288&db=allHuman [Accessed 13 March 2010] Yoon, K,, Seoki, L and Soyoung B. [2009] Impact of brand recognition and brand reputation on firm performance: U.S.-based multinational restaurant companies’ perspective International 29.Journal of Hospitality ManagementVolume 28, Issue 4, December 2009, Pages 620-630 Available from http://www.sciencedirect.com/science [Accessed 13 March 2010] Zach.com. 2010. Marriott to double its European properties. Seeking alpha. Available from http://seekingalpha.com/article/192701-marriott-to-double-its-european-properties?source=bnet> [Accessed 10 March 2010} Read More