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