deloitte-hospitality2010

Audit.Tax.Consulting.Corporate Finance.

DeloitteMechanic280


Tourism, Hospitality & Leisure


Hospitality 2010A five year wake up call

An in-depth report intodriving shareholder valuein the hospitality sector

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ContentsForeword 1

Executive summary 2

Deloitte Enterprise Value Map® 4

Brand: Time to build on the brand 5

Emerging markets: Re-shape world tourism 8

Human assets: The people perspective 12

Technology: Why travel and IT are made for each other 16

Airlines and hotels: Joined at the hip 20

Actions to consider 24

Acknowledgments and the team 25

About Deloitte and New York University 26

Deloitte Enterprise Value Map fold out 27

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We also recognise the importance of the business model andregulatory requirements and accordingly have identified these areasfor review at a later stage.

We hope you find this report useful and we look forward to anyfeedback you may have and the opportunity to discuss with you theaspects affecting shareholder value in your business in more detail.

Best regards

Alex Kyriakidis Dr. Lalia RachGlobal Managing Partner Associate Dean andTourism, Hospitality & Leisure HVS International ChairDeloitte Preston Robert Tisch Center for

Hospitality, Tourism and SportsManagementNew York University

Welcome to Hospitality 2010 – our vision into mega-trends that willaffect shareholder value over the next five years.

New York University (NYU) and Deloitte dedicated a joint team ofprofessionals to develop a “Vision 2010” of the global hospitalityindustry. Our vision is supported by research, analysis and structuredinterviews with leading industry CEO’s.

The report focuses on the strategic implications of the mega trendsthat are shaping the future of the hotel industry and which generatemost shareholder value.

The mega-trends we have selected for review at this stage are:

• Brand

• Emerging markets

• Human assets

• Technology

We have included a section on air travel as this holds keyinformation which relates to the changing shape of the hospitalitysector by the year 2010.

Foreword

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Question: How many drivers of change are there in our industry? Answer: Far too many!

Executive summary

To focus our strategic analysis, we used theDeloitte Enterprise Value Map® to filter allthe possible drivers of change on the basisof their potential impact on shareholdervalue which, whether a public or privateenterprise, is the key measure of financialsuccess. We concluded that five “mega-trends” will have the greatestimpact on shareholder value namely,Brand, Emerging markets, Human assets,Technology and the Business model.

Brand is the way forwardAs most gateway cities reach productsaturation, brand, long held as the mostimportant value driver in consumer business,is receiving the industry’s full attention.The changes in customer lifestyle,demanding experiential stay, will mean thatbrand choice, as opposed to location choice,will lead the way in the future.

While brand is much talked about, there isno consensus within our industry on what itmeans or how it should be measured.We take the step in this report of proposingan industry definition for brand and aframework for the development of brandmetrics. Interestingly, the industry analysts,commenting on brand value and innovation,are sceptical about the industry’s ability todemonstrate “payback” on research anddevelopment (R&D) spend. Our researchshows that spend on brand innovation isone of the key CEO priorities into thefuture. Further more, the growing focus onbrand management versus assetmanagement impose challenges on existingpeople development and reporting metrics.

Where is the next big thing?Three emerging markets stand out above allin terms of growth opportunities for theindustry, China, India and the Gulf States.China and India, today 2nd and 4th in GDPpurchasing power parity rankings, will moveup to 1st and 3rd by 2020 with Chinaovertaking the USA for the number 1 slot.Between India and China, we predict that atotal of 1.4 million of additional brandedhotel rooms will be required for thosemarkets to reach the same branded hotelpenetration as in UK.

Should those markets move to USA levels ofbrand penetration, the demand rises to3.6 million of rooms, or 36,000 hotels.We predict that the majority of these roomswill be positioned in the economy and mid-market segments. The Gulf States areinvesting heavily in tourism infrastructureand markets such as Dubai, Qatar, Bahrainand Oman will challenge the traditionalContinental Europe destinations for tourism– business, leisure and residential.

While these emerging markets offerexceptional growth opportunities, theworld’s largest tourism spend market – theUSA – still has some way to go. Total travel& tourism spend in the USA, both domesticand outbound, is predicted to double from$830 billion to a staggering $1.6 trillion by2015, leaving room for growth, particularlyat the luxury end of the market.

The generation gameAttitudes and lifestyle differ between themain generation segments with the babyboomers (aged 42-60) living longer andenjoying a more active and youngeroutlook. These so called “silver” consumersare brand wise, travel more and desire newexperiences both in terms of cultural andevent based tourism. Our research showsthat, by 2050 the world’s population willgrow to around 9 billion1 but less than 6%of that growth will come from developedcountries. The percentage of the populationaged 65 and over in Europe will increasefrom 15% in 2000 to nearly 25% by 2015and increased travel by the “silver” segmentwill keep Europe as the number one tourismexporting region, delivering some730 million travellers by 20202.

With a turnover rate of 50%, the industryneeds to do a better job in attracting andretaining employees. The ageing populationin many of the developed economies meansthat, increasingly, human assets will besourced from developing countries and theindustry will need to adopt new standards inHR management. The hotel of the futurewill be a micro-cosmos of generational,religious, nationality and culturalintegration.

Technology: playing catch-upThe industry, historically in the lowestquartile of spend on technology withinconsumer business, recognises the need forgreater investment in technology,particularly in customer relationshipmanagement (CRM) systems, as a means ofinfluencing customer behaviour. The airlineindustry leads the way, with travellersshowing greater preference for airline milesthan hotel points and making consciousdecisions to fly with the same carrier despiteinconvenient schedules. There is anopportunity to learn from other industriesbut also to innovate in terms of extendingthe customer touch-points with the brandwell beyond the physical stay.

Key to the industry’s success will betechnology investment associated with thedistribution puzzle. Our findingsdemonstrate that due to investment inonline B to C systems, a more transparentpricing structure – with rate guarantees –and increased penetration of internet usagegenerally, the industry is winning a greatershare of the online market. With up to23.1% of room revenue at stake inintermediary commissions, there is a lot togo for.

From West to EastThe future of air travel, the critical link in thetourism chain, is bright, with skyrocketingnumbers of passengers flying by 2010. Over 1.6 billion passengers worldwide usethe world’s airlines for business and leisuretravel. By 2010, we estimate that number tobe in the range of 2.3 billion with RevenuePassenger Kilometres (RPKs) expected toreach 5 trillion. By 2010, we predict a shiftfrom North to South and West to East withthe emergence of India and China tocapture 15% of the global passengergrowth.


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Hospitality 2010

Safety & security concerns will prevail.Whether terrorism, natural disasters orpandemics, the industry will face shockswhich will impact performance. On thepositive side, tomorrow’s traveller will takegreater ownership of his or her safety &security through increased use of theinternet for travel risk assessment and, ifhistory is anything to go by, travellers willreturn to affected destinations as soon asthey perceive the destination to be safe.

Looking good but needs workIn summary, the fundamentals for theindustry are very robust, now and into thefuture. The global demand for travel andtourism will provide unprecedentedopportunities for the industry to grow butas this report shows, actions must be takento seize the opportunities available. Theseare set out on page 24 of the report.

1 Jacob Kirkegaard, Institute for InternationalEconomics – Demographics, speaking at World Traveland Tourism Council Summit 2006.

2 World Tourism Organisation.


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Hospitality 2010

Deloitte Enterprise Value Map®

The Deloitte Enterprise Value Map®,developed by the consulting team atDeloitte in 2005, is a tool to assistcompanies in assessing projects to ensurethey are generating shareholder value. An interactive element allows managementto map their ongoing and planned projectsto shareholder value generators enablingthem to review whether projects supportthe company’s strategy and aims andwhether they are evenly balanced across the generators.

We have tailored the high-level generatorsof the Enterprise Value Map® for thehospitality industry as shown at the back ofthis document. Using these generators weestablished that the key drivers of changewhich will impact shareholder value in theshort to medium term divide into fivethemes – brand, human assets, emergingmarkets, technology and the businessmodel. Given the resources available weconcluded that whilst the business model,including a regulatory theme, is vitallyimportant to the industry it would bedeferred to be the subject of research nextyear.

Speaking to the CEOs confirmed that thefive mega-trends identified were the keydrivers of change they thought wouldimpact shareholder value through to 2010.The notable difference between the CEOs istheir view of the relative importance of thethemes and the timescale in which they willimpact. Three of the CEOs thought humanassets were most important. Brand was themost important or second most importantconsideration for five CEOs. Regardless ofwhat is most important with regards toshareholder value, most of the CEOs viewtechnology and emerging markets as thethemes which are moving most quickly andhave the most public impact.

An adaptation of the Deloitte EnterpriseValue Map® for the hospitality industry isattached as a fold out at the back of thisreport.

“Technology is the fastestweapon the industry hasfor material productdifferentiation. Brands aremore important over thelonger term and changingbrand perception is a slowprocess. Demographicchanges tend to take 5 to10 years to materialise”

Andy Cosslett, CEO, InterContinental Hotels Group


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Hospitality 2010Brand

Time to build on the brand

Brand

Today, when customers browse throughtheir hotel choices, location is usually thedeciding factor. More than 97% of affluentleisure travellers and 93% of affluentbusiness travellers consider location to be‘extremely influential’. In contrast, only 57%and 54% are influenced by the brand.1

However, this picture is gradually changingand, given the market saturation in gatewaycities worldwide with leading brands sitedclose to one another, location is likely tobecome increasingly less important. This isalready happening in Park Lane, London,which is home to five luxury hotels.

Tomorrow’s traveller will be far moreinfluenced by brand, and – importantly forthe financial health of a hotel – guests whoare loyal to their preferred brand are likelyto stay more and spend more.

Loyalty programmes among airlines areincreasingly popular, with travellerschanging their itineraries – often at theirinconvenience – to ensure they qualify formiles and tier points with the same carrier.Although it’s debatable whether customersare being loyal to the airline or the pointsprogramme, these schemes are working well.

As a recent study confirmed, both businessand leisure travellers prefer airline miles tohotel points, with 80% of travellerschoosing to belong to an airline loyaltyprogramme, and only 60% opting to join a hotel frequent guest programme.1

This may be because, until now thehospitality brand has been defined in narrowterms, focusing on image and consistency ofexperience, but without much innovation tocapture customers’ interest. However, thereis now plenty of scope to increase the brandvalue, as companies in the broaderconsumer goods sector have done, bylooking at additional elements such asglobalisation, brand personality, brandleverage and meeting the needs ofcustomers for different experiences.

More than a name Our research reveals that, currently there isno consensus of what constitutes ‘thebrand’, and few organisations within thehospitality industry use brand metricsbeyond the traditional JD Power and RGIindices. But if hotels are to respond to shiftsin market demand, it’s time the industryadopted a more inclusive definition of whatthe brand covers.

Deloitte considers the brand to be anexternal and internal representation ofeverything the company stands for. Itembraces each stakeholder interactionswith the organisation and includes thestakeholder’s expectations of the brand.The term stakeholder covers not onlyhotel guests, but employees, owners,franchisees, suppliers and intermediaries,because all of these groups help deliverthe brand promise.

Setting expectations In order to set stakeholder expectations,the brand promise must be defined andcommunicated. This often leads to thepublication of a brand positioning statementthat underpins internal and externalcommunications. It should articulate clearlythe brand promise. Often, there is anassumption that the brand promise mattersonly to customers, but in reality it must beadopted by everyone in the value chain.

“Marriott Rewardsmembers on averagedouble their number of stays at a Marriottproperty after joining theprogramme and 85% ofmembers say they’ll driveout of their way to stay at a Marriott.”

Holly Mendelson, Director ofCommunications, MarriottInternational Rewards LoyaltyProgramme

The core message will not change, but it willbe adapted slightly for each stakeholdergroup, such as employees and businesspartners.

Employees – who are the main deliverers ofthe brand promise within the hospitalitysector – have a critical role. The mostsuccessful consumer business brands tendto be those where the reality of customerservice matches the promises made by thecompany in all its marketing promotions.

Image Experience consistently delivered

Personality

Extension/leverage

InvestmentGlobal vs International

Innovation

Equity Valuation

Chart 1: Brand value drivers

2006 2010

Source: Deloitte & Touche LLP


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Finding the right targets In a crowded market place, a clearlydifferentiated brand persona is vital. It enables targeted marketing, which is wellestablished in the consumer goods industry,but is relatively new in hospitality. A goodexample is Starwood with its ‘W’ brand. This approach enables clarity within a brandportfolio to prevent overlap across targetmarket segments, and it avoids confusion inthe minds of customers, owners andinvestors.

Clearly, the industry has a lot of work to do inthis area, as consumers currently find it hardto articulate the differences betweencompeting brands within a given segment.A recent Brandimensions analysis of onlinetraveller discussions between 1 January and31 October 2005, confirmed that guestperceptions toward different hotel brandswere similar.2

Because of the fewer opportunitiescustomers have to ‘test’ the brand, hotelcompanies find it harder than consumergoods organisations to build brandrecognition. For example, 50% of the UKpopulation had visited a coffee shop in 20053

but only around 35% had stayed at a UKhotel4. As ‘trial’ is one of the most popularforms of tactical marketing, this lack ofpersonal experience is particularly relevant.

The price premium Strong brands can demand higher prices, ascan be seen in any High Street store. People expect to pay more for goods from aname they recognise, or from a popularbrand, than they do for an unknown – andthis applies as much to car insurance as itdoes to a T-shirt. However, while the pricepremium in consumer goods can beimpressive, in the hospitality sector it is oftenmarginal. For example, in the UK 2 litres of supermarket cola costs £0.39whereas 2 litres of Coca Cola costs £1.36, a price premium of 249%5. Data fromHotelBenchmark Survey by Deloitte showsthe price premium for branded hotels in theFirst Class segment to be just 10%.

This is only possible where employeesunderstand and accept their organisation’sbrand attributes and are prepared to deliverthem.

All operational and investment activitiesshould be built on the brand promise,particularly staff training, advertising,portfolio decisions and renovationsotherwise, the brand value could be diluted.

Consistency is paramount, as shown bysome of the most successful global brands,where a consistent product experience iscentral to the brand’s success and customerloyalty. However, because of the multitudeof customer touch points, consistency ismuch harder to achieve in the hospitalityindustry.

When every touch point counts, budgethotels tend to be product-based with fewercustomer touch points. For instance, withAccor’s Formula 1 hotels it is possible tobook online and check-in via credit cardaccess to the room, with no humaninteraction.

In this case, consistently delivering thecustomer experience is relativelystraightforward. At the other end of thespectrum, the customer experience in luxuryhotels is built on a high level of personalservice. Staying at a first class hotel can leadto multiple interactions with numerouspeople – such as the doormen,receptionists, porters, concierge,housekeeping, room service, spa staff andothers. It therefore relies on a multitude ofquality interactions with employees.

The larger the number of employee-customer interactions, the harder it is tokeep control of the brand delivery at eachtouch point. We estimate that, for250 property upscale hotel chain, up to200 million guest touch points, per annumwould occur, highlighting the challenge ofconsistent delivery of the brand promise.

This lack of a price premium hits brandinvestment and innovation, as the businessbenefits can be very hard to quantify.Our discussions with Wall Street analysts onresearch and development (R&D) in the hotelindustry confirmed a lack of confidence inthe industry’s ability to show an acceptablerate of return on R&D investments.

“US business travellers tendto view hotels as a place torecharge and renew whenon the road and thereforeexpect the comforts andamenities they have intheir own homes. Bycontrast, Europeantravellers tend to seebusiness travel more as an‘event’ that should enhancetheir personal lives andtherefore expect morefrom hotels in terms ofdining, bars and otherfacilities.”

Bill Shaw, President & COO, Marriott International


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Table 1: Potential brand measurement metrics

Perception metrics Performance metrics Financial metrics

Awareness Familiarity and Purchase Loyalty Value creationconsideration decision

Are your What do customers How do How do customers How does customercustomers aware think and feel customers act? behave over time? behaviour createof your brand? about the brand? tangible economic

values

Saliency Differentiation Customer leads Customer Market sharesatisfaction

Brand recognition Relevance Customer Retention Revenuesatisfaction

Credibility Trial Revenue per Operation cash flowcustomer

Likeability Repeat Share of Wallet Market cap

Perceived quality Preference Customer lifetime Analyst ratingvalue (LTV)

Purchase intent Price premium Referrals Brand valuation

ROI

Cost savings

Source: Prophet

Without a proven business case, the analystssuggested, the markets would penalise a listedhotel company if R&D spending impactedEarnings before interest, taxes, depreciationand amortisation (EBITDA).

As a result, there has been little realinnovation in the hospitality sectorcompared to other consumer businesses. In general, investment has focused on core‘safe’ areas such as the bed, shower andtelevision sets provided, although somehotel operators are creating a more high-tech experience for guests by adding thelatest technologies.

Strong enough to stretch In the consumer goods arena, brands areoften flexible enough to extend their brandreach into new product areas. Confectioneryand chocolate manufacturers moving intoice cream and hot drinks are goodexamples. The hospitality sector has alsoexperimented with this approach, movinginto vacation ownership, residentialmanagement and gaming at the macrolevel, and bathroom products at the otherend of the scale.

Linking themselves with other brands –through sponsorship or partnerships – isanother common approach; for instance,Starwood with Yahoo, Hyatt with Expediaand Sol Melia with Warner Brothers.

While the debate continues on whether thenon-hotel branded products that make up atypical guest stay add to or detract from thehotel brand itself, there is no doubt thatstronger brands can stretch themselves moreeasily, whereas weaker brands could snap.

The Virgin Group is the often-quotedexample of a flexible brand, whoseattributes apply equally to sectors as diverseas music, airlines and telephones, showinghow a strong brand can add value to itsoriginal proposition. This opportunity toextend the marketing reach furtherreinforces the overall message that a strongbrand is a pre-requisite for continuedsuccess in the hospitality sector.

• Airlines have shown the value of well-structured loyalty programmes, but themajor hospitality players have some wayto go to achieve maximum returns ontheir own schemes. Research shows thesemust reflect customer’s wishes.

• Today, there is a new breed of customerwho is more interested in the experienceof travel. Hotels, particularly at the luxuryend of the market, have an opportunityto satisfy these new customers andgenerate greater differentiation.

• Consistency remains the single mostimportant factor in brand delivery. Like all successful organisations, hotelsmust ensure everyone in the value chaindelivers the brand promise. Employeesparticularly, need to understand theirpivotal role.

1 Yesawich, Pepperdine, Brown & Russell, 2004.2 Hotel Branding: Using Online Research To Drive

Innovation – Brandimensions – January 2006.3 Mintel.4 Keynote.5 www.tesco.com – 21 April 2006.6. Prophet’s 2002 Best Practices Brand Measurement

System.

Brand measurementAs in all business, rigorous measurement isthe only way to define success, yet a recentbrand management study revealed that lessthan one-third of all companies surveyedhad any kind of measurement system tojudge the performance of the brand.6

Implementing a balanced scorecard acrossthe business will measure all the dynamicsand enable the company to benchmarkitself against the competition. The tableabove gives some examples of metrics weconsider should be measured and tracked.

Increasingly, the brand will impact thebottom line and delivering the brandpromise will enable companies todifferentiate themselves in an extremelycompetitive market.

Achieving success in 2010

• Customers will expect the brand promiseto cover every interaction with theorganisation – pre-stay, stay and post-stay. If the hotel gets it right, they canexpect improved customer loyalty with asubsequent impact on RevPar. Locationwill then be less important as a driver ofchoice in many markets.


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Hospitality 2010Hospitality 2010Emerging markets

Re-shape world tourism

Emerging markets

By 2010 there will be approximately onebillion tourists a year, if annual increasesmatch the World Tourism Organisation’s(WTO) long term predictions of a 4.1%average annual growth rate. However, signsare that international tourist arrivals willovershoot these forecasts by some distance –creating dynamic opportunities for companiesin the hospitality business.

By 2010, we expect to see 791 million intra-regional travellers and 216 million long-haul1

travellers by 2010 as emerging markets suchas China and India continue to grow, and newmiddle classes, keen to spend disposableincome on travel, make the most of low costcarriers and the easing of visa restrictions.

While massive growth is forecast for theseemerging markets, other regions around theworld – particularly Europe and America –will remain among the most visiteddestinations. Even in maturing markets suchas the US, there is plenty of room for growth– specifically at the high-end – as severalCEOs confirmed in our discussions. Currently,China is taking the lion’s share of the travelheadlines. But with massive investmentunderway in India and the Gulf States, theseare also areas to watch. These three markets,we believe, will see the fastest growth inhotel development outside of the US.

China – a magnet for travellers International travel to China has quadrupledto 109 million today, compared to 19902.In the same time, revenue from internationaltourists has increased by a factor of 12, andnow stands at US$25 billion2. This growthwill continue, with the WTO predictingChina will become the world’s topdestination by 2020, with 130 milliontourists a year1.

“I look for GDP growth as a sign for futuredevelopment potential formy hotels… I believe theUS market is far fromsaturation, as it continuesto be the global economicpowerhouse.”


The 2008 Beijing Olympics, the Shanghai-hosted World Expo two years later and theopening of Shanghai Disneyland in the nextdecade will all add to this fascinatingcountry’s attractions.

South Asia Middle East Europe AfricaAmericasEast Asia Pacific

14.4

59.8

2.20.73.6

19.3

19.4 52.4

3.61.14.7

18.9

1995 2010

Chart 2: Regional market share of international tourist arrivals (1995 and 2010) – %

The Chinese domestic picture looks evenbrighter. Domestic tourism has grown by10% over the past decade, accounting formore than 95% of all Chinese touriststoday2. By 2010, the domestic travelindustry will be worth US$100 billion, with1.75 billion people visiting other parts oftheir own country3.

China is, naturally, investing heavily in traveland tourism, with spending expected togrow 8.3% (Annualised Real Growth) to20164. US$35 billion, for example, is beingspent on the Beijing Olympic games alone.This level of investment is far higher thancomparable figures in the US, where a 2.6%4

increase is expected, albeit from a higherstarting point.

The growing importance China is attachingto domestic travel has been confirmed byevents such as the first China TourismInvestment Fair at Ningbo, the capital city ofeastern China’s Zhejiang province, last year.This welcomed delegations from 26provinces and autonomous regions and18 cities, bringing with them more than1,000 development projects for discussion.5

“The traditional coremarkets of Europe andAmerica still have plentyof growth potential andwill remain a focus for usin terms of our existingresource, however we arealso very active in othermarkets, particularlyAsia, where we areinvesting in newresources to build ourposition.”

Andy Cosslett, CEO, InterContinentalHotels Group

Source: Tourism 2020 Vision, Volume 5 Middle East


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Hospitality 2010Emerging markets

rooms in the next five years if it is to followthe UK or US model.

The emphasis will be on the lower end of themarket, including economy hotels andserviced apartments. In response, IndianHotels plans to invest US$328 million8 inbuilding 150 IndiOne economy hotels in thenext five years. A joint venture betweenInterGlobe Enterprises and Accor –InterGlobe Hotels – should lead to thedevelopment of 25 Ibis economy hotels inthe next 10-12 years9. The Bird Group alsoplans to build 20 new hotels in the region9.

India invests for growth India’s buoyant economy, and its boom inbusiness and leisure travel are driving stronggrowth in tourism. This has been helped bylower airfares and an emerging middle class,keen to travel for the first time. The numberof domestic tourists in India is expected toreach 750 million in 20106 from 368 millionin 2004.7

As international tourist arrivals in India arealso rising rapidly – up to 5.1 million by 20101

– we predict the country will need between400,000 and 900,000 more branded hotel

Like China, investment in India’s travel andtourism industry is expected to increase,growing by 7.8% (Annualised Real Growth)by 20164, but starting from a base eighttimes lower. To get things moving, India’sgovernment set up a Viability Gap FundingScheme last year to support large tourisminfrastructure projects. It has also launchedthe Assistance for Large Revenue GeneratingProjects to increase public-privatepartnerships/investments in tourisminitiatives, including tourist trains, cruiseterminals, convention centres and golfcourses10.

With this amount of growth underway, theregion’s airlines have taken prompt action.At last year’s Paris Air Show, Indian airlinesreportedly placed orders for around 190 aircraft, and this is set to rise to around500 in 201011.

The Gulf states move ahead To reduce the region’s economic reliance onoil, many countries of the Gulf States arenow focusing on tourism, capitalising ontheir natural assets, historic cultures andIslamic traditions. Massive investments arealready paying off, as the Middle East is nowthe fourth most visited region in the world.12

An average annual growth rate of 7.3% ispredicted, and by the year 2020, the regionwill be welcoming 4.4% of all tourist arrivals– around 68.5 million people13.

Investment in tourism in the Middle East ishighest in the United Arab Emirates, followedby Saudi Arabia, with Qatar projected to havethe highest growth7.

Dubai’s hotel market currently ranks amongthe world’s best. In 2005, a record5.42 million guests stayed at the country’s371 hotels and hotel apartments, bringing ina total of US$1.7 billion14. By 2010, thegovernment expects 15 million visitors a yearto arrive in Dubai, about three times thecurrent number15.

Dubai has built its reputation on luxury,which has been popular with bothdevelopers and consumers. Consider thedevelopment of Kempinski Hotels’ five-starSwiss chalet-style hotel next to five indoor skislopes inside one of the world’s largestmalls18; the building of the world’s largesthotel tower; the Burj Dubai; and of coursethe Palms Jumeirah, Jebel Ali and The World.

Domestic market Total arrivals & domestic market Departures

0

5,000

10,000

15,000

20,000

201020092008200720062005

Domestic market Total arrivals & domestic market Departures (Right Axis)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

201020092008200720062005

Chart 3: Chinese international/domestic arrivals and departures (2005-2010) – £’000

Source: International figures from WTO, Domestic Market figures are projected from WTO figures

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

201020092008200720062005

Chart 4: Indian international/domestic arrivals and departures (2005-2009)


Domestic market Total arrivals & domestic market DeparturesDomestic market Total arrivals & domestic market Departures (Right Axis)

0

2,000

4,000

6,000

8,000

10,000


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Hospitality 2010Hospitality 2010Emerging markets

However, there is room for expansion at theother end of the market, and last yearInterContinental Hotels announced plans tobuild 20 Express by Holiday Inn hotels acrossthe Arabian Gulf in the next seven years.Five of these will be in Dubai; and Accor –which already has a budget class hotel inthe region – is planning seven more16.

More mid-market choice As new middle classes emerge in these threemarkets – China, India and the Gulf States –there will be a shift in demand for differenttypes of hotel rooms. More budget and mid-market options will be needed fordomestic leisure and business travellers, andmiddle-income inbound tourists will seekmore economical options. New resorts will bedeveloped for both domestic customers andinternational visitors, and as leisure tourism isgrowing faster than business travel, the mixof product will need to reflect this.

As the hotel sector in these regionsresponds to the new wave of travellers, theimpact on industry brands will be dramaticand it’s likely that new brands will becreated to reflect the needs of targetcustomers. If China or India were to adoptother countries’ branded models – forinstance 66% of hotel rooms in the US17

and 35% in the UK18 are branded – then amassive increase in branded hotels willresult. If the UK model were copied, therewould be potential demand for 10,000 newbranded hotels in China and 4,000 in Indiabased on current tourism levels. Demandwould be even greater in 2010.

International tourism is part of the widermove towards globalisation, but thehospitality industry must not lose touch withits local roots. Like many industries that crossinternational borders – it must ‘think globallyand act locally’. Cultural differences, localtraditions and customs must be kept in mind.

These new markets, while financiallyattractive, can throw up some uniquebarriers to entry, including political,ownership, business model and culturalchallenges. Hotel companies will need towork through these to achieve the potentialfor success over the next few years, and wewill look at them in detail in our businessmodel report, to follow.

A more pressing concern will be therecruitment, training and retention of localstaff to serve these emerging markets.

There is little tradition of hotel managementto build on in these regions, and there is theadded problem of finding enough people tofill the vacancies. Educational and trainingestablishments will be needed, whilelanguage, religious traditions and culturaldifferences must be considered. The overlying issue is the paradox of theinternational versus local brand, and hotelcompanies will need to tackle this beforesuccessful expansion can begin.

There are some good examples in Dubai,where luxury hotels have taken into accountIslamic requirements and are alcohol-freepremises. Al Sondos Suites by Le Meridien,an alcohol-free boutique hotel near theairport, had occupancy rates of over 95%for the final quarter of 200519. CoralInternational, a Dubai-based companyclaiming to be the world’s first alcohol-freehotel management company16, has threehotels in Dubai and plans to open sevenmore by 200820.

Chart 5: Middle Eastern international arrivals and departures (1990-2010) – Millions


70

60

50

40

30

20

10

0

Arrivals Departures

1990 1995 2000 2010 2020* Estimated

*

Chart 6: Global personal vs business travel spend (outbound & domestic) – US$bn

Source: WTTC

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Business spend Leisure spend

2004 2005 2006 2015


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Hospitality 2010Emerging markets

Table 2: Numbers of travellers (millions) and number of branded rooms per million travellers in 2005

Country Travellers Branded rooms China 1,141.7 96.3

India 371.0 29.2

UK 175.7 1,007.5

US 1,210.1 2,444.8

Source: China National Tourist Office, India Naional Tourist Office, WTO, Mintel, Smith Travel Research, HVS International, Travel ResearchInternational

Table 3: Branded rooms requirements in India and China based on US and UK operating models

US model UK model

Number of branded rooms per million travellers 2,445 1,007China – number of new branded rooms required 2.7m 1.0mIndia – number of new branded rooms required 0.9m 0.4m

Total number of branded hotels required in China and India(average of 100 rooms per hotel) 36,000 14,000

Source: Deloitte calculations


• Substantial opportunities are available forproduct in the emerging markets ofChina, India and the Gulf States.

• To date, hotel development in China, Indiaand the Gulf has largely been four andfive star to cater for international touristsin both leisure and business. But with thesurge in both domestic tourism andinternational visitors looking for moreeconomic options, these regions –particularly China and India – will needmore mid-market and limited servicehotels.

• Although globalisation of the industry isunderway, more sensitivity towardscultural differences in marketing, hoteldevelopment, employee recruitment andtraining will be key to measure.

1 WTO Tourism 2020 Vision: Global Forecasts.2 CLSA.3 Deloitte projection based on CLSA current figures,

assuming 9% annual growth.4 WTTC.5 SinoCast China Business Daily News, 7 November 2005.6 Deloitte projection based on WTO current figures,

assuming 15% annual growth.7 Ministry of Tourism for India.8 Indian Business Insight, 22 July 2005.9 The Indian Express, 1 July 2005.10 Indian Business Insight – Press Information Bureau,

16 August 2005.11 The Financial Express, 21 June 2005.12 Deloitte HotelBenchmark Middle East Performance

Review, Summer 2005.13 WTO Tourism 2020 Vision: Middle East.14 AME Info – United Arab Emirates, 2 May 2005.15 International Herald Tribune, 5 December 2005.16 Ibid.17 Smith Travel Research.18 Mintel.19 International Herald Tribune, ‘Is Dubai’s Hotel Boom

Unstoppable?’ by Otto Pohl, 05/12/05.20 Coral International Website.


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Hospitality 2010Hospitality 2010Human assets

The people perspective

Human assets

It’s a generation thing Lifestyle preferences can often be matchedto generation bands, and detailed researchon preferences within these bands can helpwith the development of tailored tourismproducts.

Four generations currently dominate the USmarket – Matures, aged 61 to 77, BabyBoomers, aged 42 and 60, Generation Xers,aged 28 to 41, and Millenniums aged 12 to27. There may be slight variations acrossWestern Europe, but people in these fourgroups tend to have similar tastes in music,film and clothes, and enjoy the same social,cultural and political experiences.

Baby Boomers are a demanding bunch.Generally speaking, they will live longer,more productive lives than theirpredecessors and won’t tolerate beingignored or marginalised by the travelindustry. They are adventurous and sociableand have the necessary finances to fundtheir desire to travel and experience life tothe full.

“Baby Boomers wereraised to expect jobs forlife, while GenerationXers tend to have a morefluid view of theircareers.”


Although Boomers are growing older, theyrefuse to age and don’t intend to live life inthe slow lane. Whereas products directed atthem in the past were Levi jeans, FordMustangs and Sony transistor radios, nowit’s more likely to be cosmetic surgery andanti-ageing products, along with qualityclothing and high-tech sports equipment.

The Matures, like the Boomers, don’t like torefer to their age much – so when hotel chainsoffer age-related promotions for ‘seniors’ theoffers are not likely to be as popular today asthey were with previous generations. Equally,Matures are not that keen on being addressedas seniors citizens or silvers.

Instead, travel and hospitality offers willneed to match lifestyles, offer value or beconnected to loyalty programmes to getthese groups interested, and each customerwould prefer to be identified by name –rather than age.

Generation Xers are great trendsetters. Mostof all they live for the moment, blendingwork, with play and family.

This generation is brand wise, likes multi-purpose products and is technology-savvy.Travel is important, but they want differentpropositions than those offered to Boomersor Matures. They also value relationshipsmore, so are big fans of loyaltyprogrammes. For hotels, this means thewelcome, service, concern and commitmentmust cover the time before, during andafter any booking, plus this generationwants to feel valued even when they haveno current travel plans.

Tourism is a people business. At its most basiclevel, the industry transports people from Ato B, provides hospitality in a variety of forms,and then transports them back again.

But the industry has moved beyond thebasics to become a diverse and dynamicinterconnection of choice, meeting theincredibly varied demands of the one billionor more tourists who will be moving aroundthe world by the year 2010.

People’s expectations of travel – traditionallydefined by age, background, culture andfinances – are becoming more complex,while emerging markets are changing thedemographic mix of the travellingpopulation.

In Europe, the dominance of the silversegment will continue, and an ageingpopulation in some other countries willhamper the hospitality sector’s ability to findenough staff, shown in Chart 7. In thissection, we look at hospitality from thepeople perspective.


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Hospitality 2010Human assets

someone else’s children. Resorts thatcurrently make over-18 restrictions only forthe pool will probably need to extend this toother areas to capture this market.

Today’s consumers have become used toeasy access to entertainment, and this willinfluence the design of airports, hotels, andrestaurants. Regular travelers have becomejaded over time and flying has become moreof a chore than a pleasure. However, as canbe seen in our chapter on air travel, manyairlines are bringing back a more personalisedservice and extra facilities to try to recapturethe joy of flying.

The workforce of the future With an ageing population in somecountries, and little hotel managementexperience on which to build in others,sourcing the workforce of the future willbecome an issue.

More women are working than ever before,and in some countries, the percentage ofemployees who are employed either full orpart time when they are over 60 willincrease significantly.

As a result, many companies will need to re-think the way they attract, develop andretain employees, as discussed in a recentHarvard Business School Working Knowledge

The Millenniums are the most inter-connected, global and diverse generation inhistory. As children, they had a great deal of‘adult-free’ time, watching TV, playing gamesor making calls from their bedrooms. As theywatched TV without their parents, theydeveloped their own perceptions of life.

They tend to have friends across the world– gathered through the internet, gap yeartravel or university – and friendships tend tobe based on similar interests rather thanproximity. They take travel for granted, andbecause they have grown up in a media-saturated world, they are not easilyinfluenced by marketing.

Demographic changesWhile marketers can profit from appealing tothese different generation groups, we arenow seeing profound changes in thedemographic make up of the typical traveller– if indeed there is such a person anymore.

Today, more women travel, more peopletravel alone, and the expansion of tourismin emerging markets – India, China and theGulf States for instance – means manypeople are travelling for the first time.

The easing of visa restrictions, the rise in lowcost carriers and the increase in disposableincome have opened up the world of travelto millions who were previously excluded.

Whatever the age group, most people willwelcome more choice, as Shangri-La hotelsproved. It developed an interactive food andbeverage experience where customers canchose exactly what meals they want,selecting their own ingredients and how theywant them cooked.

Increasingly, people want more from theirstay than just a good night’s sleep andtravellers will want to experience more ofthe cultures and customs around them.

Mix and match Travellers are increasingly keen on mixingbudget and luxury to get the best value,so we’re seeing people flying on a low costcarrier and then staying in a luxury hotel;

or flying first class long-haul and then back-packing across the country.

In the same way that people shop at discountwarehouses to save on food, householdsupplies, and personal care products andthen take them home in a $30,000 car,travellers will opt to save money on oneexperience and splash out on others.

Often they will check with global communityboards on-line to see where they can get thebest value, with word-of-mouth advicetravelling from one corner of the world toanother in a nano-second.

And as the take up of the internet becomesmore pervasive across China, this globalcommunity will include more people thanever before. The Chinese will make up thelargest group of travellers within ten years,according to the World Travel and TourismCouncil (WTTC), and – as you can see inTable 4 overleaf – tourism spending in bothChina and India is set to rise rapidly.

The concept of family travel is changing too,with the increase in the ‘adults only’category. This is the couple who love to travelwith children, grandchildren, nieces ornephews – but not all the time. And whenthey go off on their own, they don’t want toshare the swimming pool or restaurant with

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2020201020001995

Africa America East Asia/Pacific

Europe MiddleEast

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Notspecified

Chart 7: International outbound tourists by generating region (1995-2020) – millions



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Hospitality 2010Hospitality 2010Human assets

its workforce. By implementing proprietarysoftware across its entire hotel portfolio,once staff have been trained to use it theycan easily move to other hotels anywhere inthe world.

Many companies are sharpening up theirtalent agenda, and investing in new benefitprogrammes that focus on the values heldby the various generation groups in theirworkforce.

The reward and recognition of employeesshould recognise productivity and the qualityof guest service, with the latter closelyaligned to the brand persona, as outlined inour chapter on the importance of the brand.

Human Resources (HR) will need to embody2010 values, with a greater emphasis onwork life balance and the change to moreflexible working hours, both on-site andfrom a home location.

Working policies will need to become moreinclusive and recognise the diversity of themodern workforce, thereby meeting theneeds of different ethnic and religiousgroups. Investment in HR processes thatenable and measure progress in this criticalarea - traditionally neglected by the industry– will be essential.


• Innovation in product development willneed to meet the needs of the four keygenerations segments. Above all,companies will need to connect with theirtarget customers.

• The “one-size fits all” marketingcampaign is gone forever. Changes will beneeded in operations, sales, andmarketing, as well as in the wayemployees interact with guests at alltouch-points.

• HR divisions will need to re-think theirtalent agenda to ensure they can hire,train and retain a flexible workforce.Particular consideration will be requiredwith respect to staffing in the newemerging markets.

1 Knowledge Flight: The Challenge of Hotel EmployeeTurnover, Ambika Mehta, HVS International: March2005.

article: Can you manage differentgenerations, Eric J. McNulty, 17 April 2006.

Staff turnover has plagued the hospitalitybusiness for years, with research suggestingit is among the highest of any industry.Studies have shown that the averageturnover among non-management hotelemployees in the US is about 50% andabout 25% for management staff.1

Hilton Hotel Corporation has found aninnovative way to increase the flexibility of

Table 4: Personal domestic & international travel and tourism spend

2006 2016 % annualised Rank Country Spend (US$bn) Rank Country Spend (US$bn) growth 2007-2016

1 USA 862.0 1 USA 1,437.4 2.9

2 Japan 293.1 2 Japan 508.6 2.3

3 Germany 185.8 3 China 405.7 9.9

4 UK 168.8 4 Germany 257.7 1.7

5 France 142.2 5 UK 228.1 2.5

6 Italy 109.3 6 France 210.4 2.9

7 China 99.2 7 Italy 158.7 1.9

8 Spain 96.5 8 Spain 155.9 2.4

9 Canada 83.3 9 Mexico 122.7 3.5

10 Mexico 71.7 10 Canada 120.8 2.8

20 India 21.4 18 India 45.0 6.7

Source: WTTC

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28

Europe

2000 2015 2030

North America Oceania Asia

Latin America/Caribean Near East/North Africa Sub Saharan Africa

Chart 8: Projected increase in percentage of population aged 65 and over by region to 2030

Source: US Census Bureau


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Hospitality 2010Human assets

cafe TOO, A Theatre of Food –Shangri-La Hotels and ResortsThe innovative cafe TOO, brings all-daydining to a higher level of creativity.With a choice of seven differentcooking theatres, cafe TOO is truly atheatrical experience where theinteractive array of lights, colours,music and aromas combine to make afeast for the senses. Here, the chefs arethe performers and the restaurant, theirstage. International cuisine comprisingpan-Asian, seafood and westernappear on the à la carte menus or atthe specially prepared buffets forbreakfast, lunch and dinner.

“Human interaction is often the keydifferentiator in virtually allaspects of hoteloperations.”

Doug Geoga, President, Global HyattCorporation

“There is a directrelationship between worldwealth, personal wealthand travel behaviour.”

Peter C Yesawich, at the WTTCSummit, 2006

Table 5: GDP ranking of the world’s largest economies

GDP (US$bn, at Purchasing Power Parity)2005 World rank 2020 World rank

United States 12457 1 28830 2

China 8200 2 29590 1

Japan 4008 3 6795 4

India 3718 4 13363 3

Germany 2426 5 4857 5

United Kingdom 1962 6 4189 6

France 1905 7 3831 7

Brazil 1636 8 3823 8

Italy 1630 9 2884 10

Russia 1542 10 3793 9

Spain 1151 11 2427 14

Canada 1071 12 2423 15

South Korea 1067 13 2837 11

Mexico 1059 14 2459 13

Source: Economist Intelligence Unit


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Hospitality 2010Hospitality 2010Technology

Table 6: Global IT spend per sector ($m) 2004 to 2008

2004 2005 2006 2007 2008

Consumables 44,755 46,301 48,127 50,246 52,353

Textiles & apparel 18,998 19,844 20,721 21,771 22,864

General retailers 19,869 20,680 21,634 22,534 23,468

Grocery 21,940 22,717 23,487 24,515 25,638

Restaurants and hotels 18,022 18,552 19,371 20,011 20,858

Speciality retailers 52,664 54,619 56,756 59,302 62,024

Wholesale durable and nondurable goods 78,407 81,369 84,444 87,806 91,138

Source: Gartner, December 2004

Why travel and IT are made for each other

Technology

Hotels need to catch up Traditionally, the hospitality industry has letthe airlines test drive new IT before itfollows suit. So, whereas today’s air travellercan look up flight information, buy tickets,reserve a seat, choose a meal option andthen print the boarding pass before settingout for the airport, all the hotel guest cando – generally – is make an onlinereservation.

Hotels need to catch up with other parts ofthe tourism industry fast, as travel productsare ideally suited to online sales.

When electronic commerce first took off,travel – along with music and books – wasone of the first great electronic commercesuccess stories. The product is intangible, itdoesn’t need to be ”tried for size,”so thebuyer is not at any disadvantage comparedto buying through traditional outlets.

For some time now, travel has been themost popular product sold online,accounting for around 35-40% of totalonline retail revenue. Airlines represent 62%of that, with hotels accounting for 14%1.

In the US last year, the online travel marketadded up to around 27% ($68 billion) oftotal travel revenue and is expected to reach34% – or $104 billion – in 20102.

While Europe currently lags behind the US,with only 7% of bookings made online in2004, spending is expected to double thisyear to more than $50 billion, and begin tocatch up with the US2.

People don’t just turn to the internet tomake a travel booking, they also use it tofind out about destinations, resorts andhotels rather than use more traditionalmeans. Recent research showed that, acrossthe US and Western Europe in the past year,more people relied on the web for travelinformation rather than friends andacquaintances3.

“Absolute investment intechnology will increasebut the mission is to makeit pay back in cost savingsthrough greater efficiencythat either reduces cost orenhances revenues.”

Giovanni Angelini, Chief ExecutiveOfficer & Managing Director, Shangri-La Hotels and Resorts

Consumers are using the web more andmore for sharing information, and there is agrowing tendancy to base purchasedecisions on other peoples product reviewsand blogs. Suppliers in the hotel industryneed to understand that in the future muchof the ‘marketing’ of their products andservices will be outside of their control.

Given that travel has been the most popularproduct sold online for some years, it is stillsurprising that the global hotel industry istrailing behind other consumer businesseswhen it comes to investing in technology.The annual worldwide spending gapamounted to more than $22bn last year –around half of that in the US alone.

Comparing the amount spent on IT by thehospitality and airline industries showshospitality is still the poor relation. AcrossEMEA, hospitality is 65% behind airlines andit’s 20% behind in the Americas.

As the table shows, this trend is expected tocontinue over the next three years, so thegap is set to remain.

However, all the CEOs interviewed expect to increase IT investments, particularly inreservations, distribution, loyalty programmesand in CRM systems. But they share the sameconcern – who will pay? Without a clearbusiness case proving which areas carry thebest return on investment, owners, operatorsand franchisees will disagree on who footsthe bill. One way to reduce upfront costs maybe to use technology partners, but sharingthe revenue will limit the benefits to thebrand manager or owner.

Clearly, business leaders need to invest in theright technology, at the right time. The market demand and acceptance bycustomers have to be there, which wasn’t thecase when hotels first introduced kiosks. A few years down the line, when check inkiosks have become business as usual atmany airports, customers are more willing touse them and some Hilton hotels now giveguests the opportunity to check-in fromkiosks at the airport’s baggage claim area.

With more demanding customers, who havecome to expect a more personalised service,effective CRM systems are a real benefit tothe business, and most CEOs plan to build upcapabilities in this area. There are, however,concerns over individual privacy, and howcaptured customer data can then be used toenhance the ongoing customer relationship.


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Hospitality 2010Technology

New age travellers As covered in other chapters in this report,emerging markets mean millions of newtravellers, and these will boost the potentialfor online sales and distribution.

China offers massive opportunities for onlinebusiness. Today, China has the secondhighest number of internet users after theUS, yet penetration is still only 9% comparedto 67% in the US. China’s debut into thenetworked world is astounding and even ifinternet penetration only increases by aroundfive percentage points in the next year, aspredicted, this will expand the global onlinemarket by around 68 million people.Currently, the amount of travel booked online by internet users in China is around halfof that in countries such as the US, the UK,Japan and Germany, but as the technologytake up increases, the trend towards onlinebooking is expect to follow suit.

The direct approach The challenge for suppliers in the hospitalityindustry is to drive bookings through theirown web sites, rather than through those ofagents and online intermediaries.

Today the battle is between online travelagencies, who currently draw the highestvolume of visitors, and direct suppliers likeairlines and hotels, who tempt customers totheir web sites with aggressive, lowest-priceguarantees and loyalty promotions.

OnQ – HiltonAs early as the mid 1990s, Hiltonexecutives determined that a “onesystem” approach for technology wouldprovide a sustainable competitiveadvantage for the company. As a result ofthe acquisition of Promus in 1999, Hiltonwas in a position to integrate bothcompanies’ superior information systemsand create one solution that was costefficient and would open up new revenueopportunities that didn’t previously existfor the newly created family of brands.

OnQ is the Hilton Family of Hotels’proprietary technology platform comprisedof a suite of highly-integrated components

that automate business functions fromend to end, including pricing, reservationsand sales, guest service, operations, backoffice, and business intelligence.

The strategic objectives of OnQ are

– improved efficiency and productivity inrunning our business,

– increased revenue generation

– improve guest loyalty to the HiltonFamily.

OnQ is revolutionary in its capabilities andintegration. It connects to every guest

touch-point and database, every brandand each individual hotel; thereforeallowing complete access and informationsharing to help sell rooms and services andbuild customer loyalty. No other majorhotelier has OnQ (or anything like it) this iswhat gives us a big advantage in ourindustry

In North America, OnQ has beenimplemented throughout more than 2,300hotels across nine brands and plans areunderway to deploy OnQ throughout therest of the global Hilton Family of Hotels,which include Hilton, Conrad and Scandicproperties by 2009.

Restaurants and hotels Airlines

Chart 9: EMEA and Americas technology spending (2004-2008) hospitality versus airline industry

Source: Gartner, December 2004

5,000

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20082007200620052004

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2006 2007 2008 2009

Chart 10: Comparison of internet access in key emerging markets versus other markets (as % ofpopulation) 2006-2009

Source: Pyramid Research; IDC; Economic Intelligence


18

Hospitality 2010Hospitality 2010Technology

Now, 38% of online buyers believe suppliershave the best prices – up from just 14% twoyears ago5. There is, however, still a lot ofconvincing to do if 62% don’t think goingdirectly to the operators can save themmoney.

Guarantees of low-fares by airlines and lowroom rates from hotels is driving more directsales, but while these may dent the profitsof the big online agencies, they are unlikelyto end their domination.

As direct bookings cost suppliers less,pulling more customers to their onlinedistribution channels remains a key focus.

Fresh competition is coming from new travelsearch engines or meta-search companiessuch as SideStep and Kayak, but these areearly days for the newcomers and they havenot yet gained sizeable traction.

Since the late 1990s, suppliers seem to bethe consumers’ favourite. Across Europe, forinstance, around 66% of online sales arenow made direct with the suppliers – upfrom 45% in 19984.

This swing towards the suppliers is helped bya shift in consumer perceptions over whooffers the best hotel prices. In 2002, 59% oftravellers said internet agencies had the bestprices, but this dropped to 45% in 2004.

To stay ahead, hotel operators need to beinnovative and find ways to outsmart theintermediaries’ next move.

No longer a luxury What customers expect from a hotel hasgradually evolved, so that what was onceconsidered to be a luxury feature – such as aTV, internet connection point or a telephone– is now considered standard at budgethotels.

More pervasive technology is enhancing theguest experience, and as technology getsboth smarter and smaller, hotels will movefrom providing standard technology optionsto supporting the guests’ own technologysolutions.

“In the next five years as the offline tourismindustry in China comesonline we will see reallyexciting changes.”

Barney Harford, speaking at WTTC2006 summit in Washington

Own websitesRetail websites

IntermediariesOpaque websites

GDS travel agentVoice

2005% reservations 2004% reservations

Total internet

26.630.2

3.73.1

34.61.8

21.434.3

3.82.2

35.7

2.6

Chart 11: Reservation sources for major hotel brands (2004-2005) – %

Source: Travelclick

Table 7: Comparison of the cost to the hotel operator of different booking types

Offline OnlineIntermediary Cost Walk in Direct hotel CRS Agency Tour ops Direct GDS site Agency site Merchant

Price to Guest 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Hotel Reservation Team $1.00/Booking – 1.0 – – – – – – –

Hotel Website Booking $0.50/Booking – – – – – 0.5 – – –

CRS $2.50/Booking – – 2.5 2.5 – – 2.5 2.5 –

Switch $0.50/Booking – – – 0.5 – – 0.5 0.5 –

GDS $5.00/Booking – – – 5.0 – – 5.0 5.0 –

Wholesaler / Tour Op 25–35% Mark–Up – – – – 23.1 – – – 23.1

Off–line Agency 10% of Booking – – – 10.0 – – – – –

3rd Party Site – Agency 5–10% of Booking – – – – – – – 5.0 –

3rd Party Site – Merchant 25–35% Mark–Up – – – – – – – – –

Gross Yield for Hotel 100.0 99.0 97.5 82.0 76.9 99.5 92.0 87.0 76.9

Source: Morgan Stanley Research Estimates, Factiva

s


19

Hospitality 2010Technology


• With the internet now becoming the first‘touch point’ between the guest and thehotel, hotel companies’ eCRM strategieswill need to engage the guest of 2010and capture personal data. The primaryeCRM components, edistribution and ebrand differentiation will be key toenabling success in what is already a verycompetitive space for one-to-onecustomer interaction.

• Defining and implementing an onlinestrategy for emerging markets such asChina and India will be critical inmaximising direct bookings by 2010.Suppliers will need to offer a compellingalternative to intermediaries who arealready claiming major success in thesemarkets, such as Expedia in China andTravelguru in India.

• Analysis and evaluation of emergingtechnologies needs to ensure investmentsin technology are sound, rather thanfollowing the latest ‘fad’. The dual axis ofsoftware and product convergence willprovide substantially greater opportunityfor guest interaction, guest service andbrand differentiation.

• Partnering with technology suppliers forin-room and public space technologywould lower the investment burden onowners and allow on-going investment intechnology upgrades across the portfolio.While collaborating with a mass markettechnology company may dilute thebrand’s ability to differentiate, too muchbespoke technology carries a risk of non-acceptance by the customer ortechnological failures that are expensiveto support.

1 Jupiter Research.2 PhocusWright.3 Global Market Insite Inc.4 Centre for Regional & Tourism Research

and Carl H. Marcussen, 23rd Sept 2005.

“For the industry at large,spend on onlinedistribution will continueto be significant ascustomers are looking formore choice, flexibilityand ease in managingtheir relationship withhotel companies. Thiswill also provide thepotential for cost savings.However, I amunconvinced that theindustry will ever see thefully loaded price perreservation of 25 cents, as somecommentators havesuggested.”

Tom Keltner, Executive Vice President,Hilton Hotel Corporation

Yesterday Technology: Telephone, televisionProduct: Standard bed, basic F&B

TodayTechnology: Flat panel TV, internetaccess, kiosk check-in.

Product: High quality bedding, range of upmarket food & beverages, spa,branded gym facilities. Emergence of ‘lifestyle hotels, such as W and HardRock.

2010Technology: Plasma screen interactive TV, wireless broadband access, MP3 player docking station, VOIP (Voice overinternet protocol) telephone, PDA oronline check-in, online room selection,

Product: Personalised bed (variablefirmness), innovative and well-beingcentric F&B experience, personalised in-room food and beverage offering,personalised service, branded gym, in-room spa and fitness facilities.


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Hospitality 2010Hospitality 2010Hospitality 2010

Joined at the hip

Airlines and hotels

KLM, Lufthansa and Virgin are now offeringall-business class flights, and most majornetwork carriers are investing heavily toimprove their products. This upward marketsegmentation is illustrated by marketingcampaigns featuring:

• Increased on-board comfort levels, withpossible shower facilities, gym andmassages.

• Seamless and pervasive technology, withbroadband as the bare minimum, andpossibly video conferencing.

• Mood lighting to aid jetlag and assist sleep.

• On-board entertainment to move into‘home-from-home,’ with online gamingand the option to challenge fellowpassengers.

• Amenities that focus on customers’personal needs. Using CRM technologiesand data capture, airlines can offer apassenger’s preferred reading materials,menu items, wines, and other services.

• Segmentation of the physical space toallow interaction or solitude.

• Door-to-door rather than gate-to-gateservice.

Despite the intrusive, though vital, securityat airports, these additional personaltouches and luxury facilities will make theflight an enticing prospect again – for some.

It would seem that, although air travel hasgenerally become a commodity product,airlines will continue to find ways todifferentiate between the value consciousand those seeking luxury.

The future of low cost travel If the way forward for many airlines is moreluxury, does that mean that LCCs havereached the end of the road? Not quite.The continuous expansion of low cost travelin the US, where it first took hold in the1970s, proves the business modelfoundations are sound and still meet theneeds of a major chunk of the market.

No strategic overview of the future of thehospitality industry would be completewithout a look at air travel. Analysisconfirms that any disaster that hits airlines – such as a terrorist attack, or the outbreakof war – also impacts hotel businessesdramatically. Likewise, positive events, suchas major sporting events and conferences – gives both airlines and hotels a boost.

As many people reach the hotel receptiondesk via an airline, we need to look at airtransport predictions for 2010. If the airtravel industry is changing, how will thisinfluence tourism, which is both a majorcustomer and supplier?

A shift in traffic More than 1.6 billion1 passengers a year usethe world’s airlines for business and leisuretravel today. By 2010, we expect that to soarto around 2.3 billion, with RevenuePassenger Kilometers (RPKs) reaching 5 trillion. As you can see in the chart 12,some regions will experience even strongergrowth.

Last year, more than 50% of total passengertraffic was generated within North Americaand Europe, with Japan accounting for anadditional 4% from domestic or internationalflights1. These three regions equate to morethan 70% of the US$ 400 billion of airlinerevenues1.

However, this picture will changedramatically in the next five years, duemainly to the emergence of China and Indiaas economic superpowers, set to capturearound 15% of the expected growth inglobal traffic. Business travel will dominate,but inbound and outbound leisure tourismwill account for a significant slice of thetraffic. Importantly, this signals the openingof an entirely new market, since much ofthe growth will come from people whohave never flown before.

To date, air travel has been mainly aprivilege for the western, industrialised massmarket, but it will increasingly become anoption for all. While liberalisation ofdomestic and international traffic, fuel

prices and political stability will impact thespeed of growth, there is no doubt thatthere will be sizeable shift in air traffic fromNorth to South, and from West to East.

Business, pleasure – or both People choose to fly for both business andleisure reasons, but will the distinctionbetween the two continue to matter?Across America and Europe, productdifferentiation is changing.

Some airlines, such as Aer Lingus, haveabolished business class on short andmedium-haul flights, while Low CostCarriers (LCCs) have introduced featuressuch as in-flight entertainment anddepartures from first tier, business friendlyairports to attract more business clients.Recently, several companies have brought inbusiness class “low cost” options on long-haul routes.

“We have customised ourservices throughtechnology, so that we cantreat all fliers as if theywere frequent fliers. It’sall in the execution, soeven if most competitorshave the same tools as wedo, the differentiation istheir use.”

Larry Kellner, speaking at WTTC 2006Summit in Washington

Fierce competition between LCCs and thetraditional carriers, plus cost-cutting by bothairlines and corporate travel managers, havetriggered this trend. But as the airlineindustry stabilises and the corporate marketrecovers, there will be space for moreproduct differentiation, including businessand luxury services. This can already be seenon intercontinental traffic, where someairlines, such as Air France, British Airways,


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Hospitality 2010

However, we do expect significant changesin the segment across Europe and Asia,where LCCs are still youthful and facingsome unprecedented challenges. Themarket is reaching saturation in NorthernEurope. There is also tough competitionfrom network carriers, which are in bettershape in Europe and Asia than they are inthe US, as well as charter airlines. It followsthat consolidation is on the cards, eitheramong the LCCs themselves, throughacquisition or market exit by start-ups.

Survivors, however, will continue to beamong the world’s most profitable airlines,generating less than 50% of revenuethrough ticket sales, with the bulk of theirrevenue and all of their profit coming fromrelated activities, including on-board sales,car rentals and hotels, ground transportationtickets fees, and other services.

2004 2010

Chart 12: World RPK growth 2004-2010

Source: Deloitte estimates based on IATA, Boeing and Airbus data

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“The word I would chooseto characterise the traveland tourism industry isresilience. There are nowreasons for optimism…but even when thingshave gone wrong, whatwe have seen in travel andtourism is resilience abovewhat one would haveexpected. Travel andtourism recovers fromdisasters – such as afterthe bombing in London –with remarkable speed,even exceeding previouslevels.”

Gene Sperling, speaking at WTTC 2006 Summit in Washington

Obviously, this will only be possible if theairport infrastructure can accommodatelong-haul aircraft and the extra passengersfrom intercontinental traffic.

It’s therefore likely that public policies, localcommunity support for huge infrastructureinvestments – including runways, groundtransportation, logistics platforms, retail andcommercial activities – will determine thefuture of air transport as much as productinnovation and customer preferences.

Supersize me Airlines currently seem divided on futurebusiness model options, and this is reflectedin current investment decisions. Hub &spoke supporters are ordering the so-called‘Super Jumbo,’ such as the double deckAirbus A380 with 550-800 seats, and itsBoeing archrival, the stretched B747-800 orsmaller B777 or A340.

Those who favour point-to-point travel areordering the new ‘Sub Jumbos,’ which have250 seats, such as the Boeing 787 and therenewed Airbus 350.

In the Middle East region, where the low costrevolution has just begun, we can expect thesame kind of pattern. Low cost mania, aswitnessed in South-East Asia and Europe inthe past decade, will last for around threeyears, followed by consolidation.

Moving from A to B Will LCC consolidation mean the end to thepoint-to-point network promoted bybudget airlines? Probably not. Although thismodel is less economically efficient overall,it meets the passengers’ needs of movingfrom A to B better. All things being equal –especially the price – it will always bepreferred over any network link thatrequires a connection. Additionally, recenteconomic benefits of the hub & spokemodel – essentially asset allocation andslots utilisation – have been eroded by thecost of complexity built in by airlinesrunning huge network operations. There isevidence that major network carriers arealready slimming down their huboperations, either by reducing the numberof waves or withdrawing from certainairports where they had established‘secondary hubs.’

There are noticeable exceptions to thistrend. Emirates, for instance, with nodomestic market, is building its futurebusiness success on its Dubai hub. Byaround 2010, it intends to be the biggestlong-haul carrier in the world. But asEmirates has built its strategy on marketliberalisation (the UAE has ‘open skies’agreements with all the major countries,making it possible for Emirates to link tosecondary airports in Europe, Asia, Africaand the Pacific Region and leverage itsnatural hub position), international air trafficliberalisation could contribute to the successof point-to-point.

If the recently agreed open sky dealbetween the EU and the US is ratified,similar agreements around the world willfollow. It will then be possible to fly fromany city to any other city of the country orregion that adopts the agreement, makingconnection stops at super-hubs (such asLondon Heathrow) redundant.

Chart 13: Aircraft deliveries (2005-2010) – £‘000

Domestic market Total arrivals & domestic market Departures

0

5,000

10,000

15,000

20,000

201020092008200720062005

Domestic market Total arrivals & domestic market Departures (Right Axis)


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

201020092008200720062005


23

Hospitality 2010

Other factors are influencing their buyingdecisions, including:

• Oil prices;

• Environmental concern and relativeregulation;

• Cost of capital/access to financialresources;

• Investment decisions of airports toaccommodate super jumbos;

• Final customer preference; and

• Traffic congestion and Air Traffic Controlregulation and technology.

We believe there is sufficient demand forboth types of aircraft and the current boomin orders has been stretching Boeing andAirbus’ production plans to the limit.Interestingly, orders placed last year wereabout a quarter higher than the totalnumber in 1989.

Safe and secure When news of terrorist attacks, hurricanesor other natural disasters strikes, the initialreaction around the world is profound shockand outrage, then sympathy with the tragicloss of life and destruction of property. Next, everyone on the travel and hospitalityindustry begins the painful task of calculatingthe cost and rebuilding, where possible.

But, as our research shows in chart 14,travellers appear to have become moreresilient. Despite the disasters that sweptthe world in recent years, visitor numbersand hotel performance, as measured byrevenue per available room, has remainedbuoyant and the industry is now enjoyingunprecedented levels of growth. We expectthat tomorrow’s travellers will take moreownership of their security by using theinternet to check safety issues prior to travel.

Governments worldwide are responding toterrorism threats with a diverse range oftraveller identification initiatives, such asbiometric passports and extremely rigorousentry visa procedures. These will increaseborder security, but may also slow thegrowth in travel, particularly for countrieswhere security investment and internet takeup lags behind.


• Air transport will remain hugely influentialwithin the larger tourism industry. Flyingwill become part of everyday life formillions of people, who, until a few yearsago, never moved from their villages.

• Technology – both IT and avionics – willimprove market segmentation and directsales. Airlines, especially charters whoalready offer up-to 35% of their seatsonline, and airports will compete withtour operators and hotels for customerspending. After all, the more that’s spentat the airport and on-board, the less thereis to spend at the destination.

• Government policies, international co-operation and public concerns willdictate the pace of transformation.

• Travellers will continue to become moreresilient to political, terrorist and naturaldisasters, and will increasingly use theinternet to assess safety & security levelsprior, during and after their travels.

• Substantial investment in biometrics andother technologies will continue – at thecost of individual privacy. In the short-term,a country’s ability to invest insafeguarding their national borders mayimpact the growth in travel.

1 IATA.

Chart 14: Global revPAR movements since 2000

Source: Hotel Benchmark Survey by Deloitte, US data STR

Asia/Pacific Europe € Middle East US

Iraq war/SARS9/11

2000 2001 2002 2003 2004 2005

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%


24


Actions to consider

• As product and software platformsconverge, IT investments must berigorously evaluated to ensure spending ismatched by greater efficiency and/orincreased RevPAR. Investment in shortterm IT ‘fads’ should be avoided.

• The talent agenda, aimed at attractingand retaining employees, will requireinvestment in new dimensions – focusedmore on generational values and less ontraditional compensation structures.Performance metrics will need to reflectthe transition from asset manager tobrand owner. HR will need to reflect 2010values – including flexible working, on-site and work-from-home arrangements,and ethnic and religious integration.Enterprise-wide HR processes andtraining, traditionally an area of under-investment by the industry, will beessential.

• The emerging markets of China, Indiaand the Gulf States offer massiveopportunities for development. Entry andgrowth strategies should be developedthat reflect the unique business, realestate and tax environments of eachmarket. Given that China and Indiapresent huge potential markets fordomestic tourism, investment in productinnovation and adaptation to localpreferences will be necessary.

• Recruitment of trained talent is achallenge in the emerging markets ofChina, India and the Gulf States andaction is required to develop local andinternational training to meet thedemand. With the number of Chinesetourists rising rapidly, Mandarin languageskills will be in strong demand worldwide.Hotels will need to make sure their F&Band entertainment offerings cater forthese new travellers. Are your hotelsready to receive Chinese visitors?

• Customer loyalty will depend on the hoteloperator’s ability to deliver the brandpromise consistently at every touch point– from reservation to post-stay. Getting itright will deliver sustained returns andbrand premium. Action is needed toreview the customer relationship on aholistic basis and operationalise the brandresponse to the customer – at every touchpoint. Among other things, this willrequire:

– A virtual, as well as a physical CRMstrategy. An eCRM strategy willbecome even more important asbroadband and next generation mobilecommunications become pervasive.

– Investment in loyalty programmes thatrecognise customer needs. Points maynot always be the answer, but hotelsmust find innovative ways to recogniseand reward customers if they want toincrease loyalty.

• Innovation in both products and marketsegmentation must meet the diverseneeds of the four generations. The ‘onesize fits all’ approach will no longer work.Work is needed to define the brandpersona which should reflect theexpectations of the target generation.These will vary across different regions.Operations, sales and marketing, andservice delivery must be adapted to thedifferent needs of each generationalsegment.


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Hospitality 2010

AcknowledgmentsWe would like to thank both InterContinental Hotels Group and Marriott International for their help and support in providing their viewsand input into the report.

We would like to thank the following people who allowed us some time to interview them after our preliminary research we did, providingus with their comments and thoughts:

Michael Flaxman Managing Director Accor

Ian Carter CEO Hilton International

Tom Keltner Executive VP – Brand Performance and Development Hilton Hotels Corporation

Doug Geoga President Hyatt International Corporation

Andy Cosslett CEO InterContinental Hotels Group

Jack Adler President & COO Loews Hotels

Bill Shaw President & COO Marriott International

Giovanni Angelini CEO Shangri-La Hotels and Resorts

Sebastian Escarrer Vice Chairman Sol Meliá

We would also like to thank the following for their input into the report:

Christian Hempell Director of Strategy InterContinental Hotels Group

Julie Moll Senior Vice President, Brand Research and Business Intelligence Marriott International

Alessandro Cassinis Director – Global Aviation & Transport team Deloitte – Italy

John Worthington Research & Market Intelligence Deloitte

The teamDeloitte Team

Alex KyriakidisGlobal Managing PartnerTourism, Hospitality & LeisureDeloitteTel: +44 20 7007 0865Email: [email protected]

Adam WeissenbergUS Managing PartnerTourism, Hospitality & LeisureDeloitteTel: +1 973 683 6789Email: [email protected]

Liz ArnoldProject ManagerTel: +44 20 7007 7509Email: [email protected]

Matt BathamTaxTel: +44 20 7007 2737Email: [email protected]

Deborah GriffinCorporate FinanceTel: +44 20 7007 2685Email: [email protected]

Kevin HaimesAuditTel: +44 20 7007 0212Email: [email protected]

Mike TanseyConsultingTel: +44 115 936 3970Email: [email protected]

New York University Team

Dr Lalia RachAssociate Dean and HVS International ChairPreston Robert Tisch Center for Hospitality,Tourism and Sports ManagementNew York UniversityTel: +001 212 998 9105Email: [email protected]

Dr Mark WarnerDirector for Graduate Programmes andClinical ProfessorPreston Robert Tisch Center for Hospitality,Tourism and Sports ManagementNew York UniversityTel: +001 212 998 9107Email: [email protected]

Preston Robert Tisch Center GraduateStudents

Ana MotaEmail: [email protected]

Brigit O’MearaEmail: [email protected]

Xavier CobosEmail: [email protected]

Kenji ShimizuEmail: [email protected]


26

Hospitality 2010

The Tourism, Hospitality & Leisure team atDeloitte believes today’s challenges provideopportunities for businesses to re-think theirstrategies, develop new products andservices and harness advanced technologiesto create better value for the customerwhile gaining competitive advantage in avolatile marketplace.

Deloitte has an unrivalled knowledge ofboth the industry and the businessimperatives facing individual clients.

Its teams work together to provide serviceexcellence with a focus on value creationthat is unique to Deloitte.

Deloitte mirrors the needs for cross-industryintegration with a team of professionals thatoffers extensive expertise and experienceacross all functions and business models. Thisensures that our global expertise can bedelivered locally in response to any of ourclients’ business needs in: Audit, Tax,Consulting, Corporate Finance.

Specialist teams work with businesses inthe following sectors: Aviation & TransportService, Betting & Gaming, Hotels &Resorts, Destination Leisure, LicensedRetail, Sports, Travel Distribution & TourOperators, Health & Fitness.

www.deloitte.co.uk/hospitality2010

About Deloitte

New York University is a privatemetropolitan university that offers theadvantages of a great urban setting to ahighly diverse student body originating fromall 50 states and from more than 120countries. The University is a member of theAssociation of American Universities and isaccredited by the Middle States Associationof Colleges and Schools. Graduate andprofessional accrediting agencies recogniseits degrees in all categories.

The Preston Robert Tisch Center forHospitality, Tourism, and SportsManagement:

As the world’s premier tourist and sportsdestination, there is no better place to learnabout the professions of hospitality,tourism, and sports management than NewYork City. At the Tisch Center forHospitality, Tourism, and SportsManagement, the city is truly our classroom.

The Tisch Center at New York University,entering its second decade, is named forPreston Robert Tisch, the pioneer andvisionary who has been recognisedthroughout the world for his leadershipwithin the hospitality and sports industries.A consummate advocate for New York Cityfor more than thirty years, he came tosymbolize everything positive about NewYork hospitality, sports, and tourism.

The Tisch Center is a dynamic and growingeducational and research center located inthe heart of Manhattan. The Tisch Centeroffers an extensive complement ofhospitality, tourism, and sportsmanagement academic programs, includingtwo bachelor’s degree programs, threemaster's degree programs, and numerousprofessional development courses, seminars,and certificate programs. Connections withindustry are advanced through theprestigious International Hospitality Industry

Investment Conference, the annual RamseySport Management Lecture Series and theannual Grossinger Tourism ManagementLecture Series.

In concert with our location in the financial,sports, and tourism capital of the world,course work is concentrated in the areas ofasset management, financial analysis,destination management, productdevelopment, strategic marketing, sportsmanagement, and information technology.As entrepreneurial educators, ouradministrators and faculty are experiencedin the profession and bring the reality of theindustry into the classroom.

www.scps.nyu.edu/tischcenter

The Preston Robert Tisch Center for Hospitality, Tourism and SportsManagement

About New York University


Notes


Notes


Hospitality 2010

Deloitte Enterprise Value Map®

Revenue growth

Owners/managers/franchisees

RevPar Royalties Alternative income streams

New guests

Guest retention

Yield maximisation

Up-selling

Management fees

Franchise fees

F&B

Space utilisation including retail

Hospitality related income

Other brand licence fees

Brand leverage

Residential

Vacation ownership

Spas

Gaming

Hotel costs

R

Hum

Op

Key: Brand Technology Emerging markets Demographics Business model


Shareholder value

Operating margin Asset efficiency

Real estate& infrastructure

Owner/franchiseereturns

Equipment & systems

FF&E maintenance

costs Central costs Tax

IT

Real estate

Human resources

Operating costs

Reservations

Business management

Financial management

Human resources

Tax management

Brand

Sales & marketing

Loyalty schemes

Sales/marketing

Owned/leased Working capital

Capex City ledg

Credito

Cash

Invento

Property development

Risk management

Hospitality 2010


Hospitality 2010

People & brand

Owners/franchiseesrelationships

al

City ledger

Creditors

Cash

Inventory

Market Brand perception

Guests

Employees

Investors & lenders

Expectations

Corporate governance

Reporting

Corporateresponsibility

Humane

Environmental

People

Employees

Partners

Owner/franchiseerelationships


Notes



Enterprise Value Map®

Adapted for the Hospitality sector

Driving shareholder value

Tourism, Hospitality & Leisure


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