Hotel Industry Analysis
K ATH LEEN S H I M
JES S KR AU S E
KEVIN HSU
Agenda
1. Introduction
2. Industry Structure
3. Pricing Strategies
4. Insights & Recommendations
Introduction – Why hotels?
Highly variable prices from consumer to consumer
Personalized pricing/first degree price discrimination
New competition rising from services similar to Airbnb
The Past 5 Years…
High demand from leisure and business travelers and international tourists
Revenue growth at average annual rate of 4.2%
Demand for hotel rooms has outpaced supply, leading to higher room rates
IBIS predicts strong growth in extended-stay hotels, boutique hotels, spa and
health retreats and resorts segments
180.
U,S. Hotels Industry Revenue (Billions)
160.
140.
120.
100.
Billions of US Dollars
80.
60.
40.
20.
0.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Statista
Average Revenue per Room (USD)
90.
80.
70.
60.
50.
Dollars
Revenue
40. per Room
30. Inflation
20.
10.
0.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
Source: Statista
Consumer Demand Over Time
Industry Structure – Background
PRIMARY ACTIVITIES
Short-term motor Short-term resort
Short-term hotels Short-term motels
hotels hotels
MAJOR PRODUCTS AND SERVICES
Hotels with fewer
Guest room Food and alcohol Conference room Other revenue than 25 rooms and
rentals sales rentals from hotels other
accommodations
Industry Structure – Competition
HHI = 10,000 * (.076^2 + .132^2 + .132^2 + .036^2) = 419.2
Total number of establishments = 51,508 (as of 2015)
Concentration in the industry is medium
4 largest operators in the industry account for 37.6% of the industry revenue
Concentration is increasing as hotel buyouts and mergers become more frequent
Market share of top 4 competitors has grown over a 5 year period
Industry Structure – Competition
INTERNAL COMPETITION EXTERNAL COMPETITION
Competition is usually price or rate-based Wider market competition – RV parks, B&Bs,
and hostels)
There are a large number of small operators
and several very large companies Tourism market is becoming more fragmented
Room discounting increases during difficult Increase in services similar to Airbnb
economic period
Recently become very important to have a
presence on the internet to allow guests to view
the property’s facilities, services and rates, and
make/pay for reservations
Industry Structure – Barriers to Entry
Barriers to Entry Level 1. Brand recognition – establishing brand and
building a client base
Competition High Pre-established dominance of existing hotel giants
and their extensive networks
Concentration Medium Some consumers are members of hotel chains
Best option for most lies in boutique hotels
Life Cycle Stage Mature
2. Capital – high construction cost
Capital Intensity Medium Budget and economy hotel per room - $71,200
Midscale Hotels - $93,000
Technology Change Medium
Extended stay hotels - $121,000
Regulation & Policy Medium Midscale hotels with food and beverage -
$110,900
Industry Assistance Low Full service hotels - $214,800
Luxury hotels and resorts - $576,500
Source: IBIS World
Key Success Factors
1. Access to multi-skilled and flexible workforce
2. Being part of a franchising chain
3. Receiving the benefit of word-of-mouth recommendations
4. Proximity to key markets
5. Ability to quickly adopt new technology
6. Ability to control stock on hand
Industry Organization
Demand Industries:
Supply industries:
- International/domestic
- Food wholesalers airlines
Hotels & Motels in the US
- Computer and - Travel Agencies
packaged software - Tour operators
wholesalers
- Consumers
Major Players –
A Fragmented Industry
7%
13%
13%
Hilton Worldwide Holdings
Key Facts
• 13.2% market share
• Brand names: Hilton, Hilton Garden Inn,
Doubletree
• Employs 314,000 worldwide
• Purchased by Blackstone Group in 2007
and taken public in 2013
• Revenue $20,006 million in 2014
Marriott International
Key Facts
• 13.2% market share
• Brand names: Courtyard, TownePlace
Suites, Fairfield Inn
• Employs 123,000 worldwide
• Extends over accommodation market so
very versatile
• Recently acquired new properties with an
increase of 12%
• Made $19,829 million in 2014
InterContinental Hotels Group
Key Facts
• 7.6% market share
• Brand names: InterContinental, Crowne
Plaza, Holiday Inn
• Most diverse in quality (hotels &
motels)
• Revenue: $12,230 million in 2014
Pricing Strategies
Pricing Strategies
1st degree price discrimination
Variable pricing based on consumer
2nd degree price discrimination
Versioning within hotel companies – Boutique Hotels vs. Chain Hotels
Volume (bulk) reservation discounts
Bundling within travel booking sites – Flights, Hotels, and/or Rental Cars
Behavioral economics
Anchoring / framing effect
1st Degree Price Discrimination
“Historically, first-degree price discrimination has been very difficult to implement, mostly for
logistical reasons,” said Harvard Business School professor John Gourville. “With advances in
technology and collecting of big data, then it may be that it will become easier to do. However,
very quickly you start eliciting complaints about ‘fairness.’
“What made it interesting to me is that they use figures like weather from where visitors
arrive at the website,” said Kostick. “Where are they in the city? Are they in the outskirts?
Are they in the inner city?” This finer-grained analysis sharpens the insight into purchase
intent.
Source: Forbes.com
Price Discrimination Across Platforms
Source: Northeastern University
Content Personalization
Online cookies allow travel booking sites to execute first-degree price discrimination on hotel
pricing, offering different prices to different online users looking at the same hotels
Source: TechnologyNews
Backlash
“Using 2006 Web behavior data, he (Benjamin Shiller, assistant prof of economics at Brandeis University) calculated
that Netflix could have boosted profit by $8 million in 2006 and $23 million in 2012 by selling the same service to
different people at different prices. In his model some people would pay as much as 61% more than the standard rate,
others as much as 22% less for a subscription. Netflix has not considered targeting. “We like our simple pricing,” said
spokesman Joris Evers.”
“Many firms consider targeted coupons to be the most effective way to implement differential pricing, rather than risk
stirring up resentment by using surcharges. “As long as things are presented in the form of a discount for your special
behavior, people accept it,” said Tim Smith, founder of pricing consulting firm Wiglaf Pricing in Chicago.”
2nd Degree Price Discrimination
2nd Degree: Volume
Due to the volatile nature of hotel room reservations from night to night, hotels
will offer discounts when rooms are reserved in bulk and far in advance of the
dates of stay
Bulk discounts reduce uncertainty in hotel occupancy and provide higher
guaranteed revenue in exchange for lower margins
Some groups in particular take advantage of these discounts:
Wedding parties, for their guests
Travel booking websites, like Expedia.com
Tourism agencies
2nd Degree: Volume
Source: GroupTravel.org
2ndDegree:
Boutique Hotels vs. Chain Hotels
Boutique hotels have risen in popularity as a more unique, trendy hotel option
6.1% per annum growth in market size since 2009
These hotels are generally more expensive but provide a character and an intimacy that a chain
hotel does not provide (ex. lots of services and amenities)
Ex. Kimpton Hotels
Major hotel brands have begun buying ownership stakes in boutique hotels
Hilton – Canopy Hotels
Hyatt – Andaz Hotels
Mariott – Autograph Hotels
Boutique Hotels vs. Chain Hotels
Boutique Hotel Typical, Standard Hotel Chain
Source: Bricehotel.com Source: Hilton.com
Boutique Hotels vs. Chain Hotels
People choose their hotel type based on their financial limitations and consumer preferences
Three day average of staying in a Philadelphia boutique hotel* (Kimpton, 4/16/15 to 4/18/15)
(199 + 219 + 559) / 3 = $325.67
Three day average of staying in a Philadelphia chain hotel (Hilton, 4/16/15 to 4/18/15)
(149 + 169 + 269) / 3 = $195.67
THE RESULT: In this instance, staying in a boutique hotel costs
approximately 66% more per night
*Note: Values taken from Monaco Philadelphia Hotel and Hilton Philadelphia Hotel Websites
Rise of Interest in Boutique Hotels
Search Interest of Boutique Hotels vs. Time y = 0.0879x + 37.743
120
R² = 0.8113
100
Relative Search Interest
80
60
40
20
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Data Source: Google Trends
Boutique Interest Rise Is Correlated with
Decreased Interest in Normal, Chain Hotels
Search Interest of Normal Hotels vs. Time y = -0.072x + 86.649
R² = 0.7452
120
Recall: Slope of
Boutique Hotel
100
Search Interest
vs. Time Graph
Relative Search Interest
80
= 0.0879
60
40
20
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Data Source: Google Trends
Bundling: Our Experiment
Bundling
Why Bundle?
Dynamic pricing
Bundling shifts power
Easier to sell bundles
Higher revenue overall
Daily Average Price of Bundle vs. Daily Average Price of
a la carte Flights
660
640
620
600
580
Price
560
540
520
500
4/8/2015 4/9/2015 4/10/2015 4/11/2015 4/12/2015 4/13/2015 4/14/2015
Bundle Average A la carte flight average
What time should you book your bundle?
660
640
620
600
Price
580
560
540
520
500
4/8/2015 4/9/2015 4/10/2015 4/11/2015 4/12/2015 4/13/2015 4/14/2015
Morning Afternoon Night
It’s not about time…it’s about your destination
What browser should you use to book your bundle?
Chrome vs. Incognito vs. Internet Explorer
670
650
630
Price
610
590
570
550
4/8/2015 4/9/2015 4/10/2015 4/11/2015 4/12/2015 4/13/2015 4/14/2015
Chrome Incognito Internet Explorer
Price Variation:
Raw Data Collection
The Mini Experiment
Travel Sites:
Browsers:
Time of Day:
Hotel price varies unpredictably over the
course of a day
Hotel Price vs. Time of Day, searching Chrome on Kayak.com
58
56
54
Hotel Price ($)
52
50
48
46
4.8.15 4.9.15 4.10.15 4.11.15 4.12.15 4.13.15
Morning Afternoon Evening
Discount Websites Price Differently!
Hotel Prices vs. Websites, on Google Chrome
70
60
50
Hotel Prices ($)
40
30
20
10
0
4.8.15 4.9.15 4.10.15 4.11.15 4.12.15 4.13.15 4.14.15
Kayak.com Hotels.com Expedia.com
Minimal Price Difference Across Web
Browser
Hotel Price vs. Web Browser, on Kayak.com
70
60
50
Hotel Price ($)
40
30
20
10
0
4.8.15 4.9.15 4.10.15 4.11.15 4.12.15 4.13.15 4.14.15
Google Chrome Chrome, Incognito Internet Explorer
Insights & Implications
There appears to be a difference in price based on the time of day, but our study did not reveal
if any correlation exists between time of day and prices offered by travel booking sites
Kayak.com prices are the most variable out of the three websites and offered the lowest price
out of the three sites
There is a negligible difference in price based on browser choice
Variable pricing is okay on travel booking sites, but only flat-rate pricing used on hotel sites
1st degree price discrimination, bundling discounts, anchoring / framing effect
More price sensitive consumers on IE
Demonstrated by the movement of “Price” tab on Hotels.com
Behavioral Effects
Anchoring & Framing Effect
Hotels and travel booking
sites often show a higher
“retail price”, then
discount it heavily
The room is then
perceived as less expensive
and that they are getting a
good deal, making them
more likely to purchase
Source: Hotels.com
Future of Hotel
MOBILE & SHORT TERM RENTING
Large spent of time spent on travel sites is now via mobile
Share of time spent on U.S. travel properties via mobile devices in 2012
120
100
80
Percent
60
40
20
0
Hipmunk Kayak.com Delta Airlines Marriott Orbitz Expedia Southwest Travora Media Priceline.com TripAdvisor
Worldwide Airlines Media Group
Source: Statista
Most popular U.S. travel properties in June 2012, based on
number of unique mobile visitors (in millions of users)
8.
7.
Millions of Unique Mobile Visotrs
6.
5.
4.
3.
2.
1.
0.
Source: Statista
Mobile: What’s Next
• Users replacing PC search time with Mobile search time
• Content creation via mobile
• Targeting
• Higher or Lower Prices?
• Overall growth in the medium
• TripAdvisor (Sharability)
Short-term Online Rental Companies
Airbnb and similar short-term online rental marketplaces are technically illegal,
but lax enforcement of existing laws has allowed these entities to grow
exponentially in size
safety hazard
disturb neighbors
siphons affordable housing off the market
Their increasing popularity, together with unclear regulatory structures, has
prompted many local governments to examine new ways to tax and regulate
these companies
Recommendations Overall
Investment perspective
◦ Mobile
◦ Short Term Renting
Pricing strategy for firms
◦ Targeting (1st Degree) but semi-opaque
◦ Careful of backlash
◦ Make bundling more accessible to consumers
