Chapter 12

Competition in the Lodging Business

As in Chapter 6, after an overview of competitive conditions in lodging, the textbook used the marketing mix as an analytical framework to describe competitive practices in the hotel business. This format, as noted in Chapter 6, is intended to offer students an introductory level understanding of some of the key concepts of marketing, a subject that is proving of increasing importance to hotel operators.

In discussing product, it is critical that students see that the product is ultimately the guest's experience, that is, the interaction of product, service, franchise system or chain services, and the influence of other guests in the guest's experience. (Think of a low cost bus tour's entrance into the lobby of the Ritz or a noisy convention group in some other five-star property.)

The product and services provided must respond to the targeted segment (for instance, upstairs- or downstairs-oriented guests). Food service on premise is important to downstairs guests while usually not to upstairs guests. While profitable operations is a reasonable goal for hotel food service, its principal function is as a service that attracts room guests. (Note differences in contribution margins between rooms and F&B departments.) Other services and amenities are often useful but if they are easy to copy, they are unlikely to be a competitive point of difference.

The section on price sets out some of the principal reasons hotels offer varying rates to different groups at different times. Yield management is a technique for managing these rate variations in a way intended to maximize profit. Indifferent or unscrupulous operation of yield management runs the danger, however, of alienating guests.

Place involves not only the location of the property but also the way in which channels of distribution serve the property to maximize representation in many markets by travel intermediaries.

Promotion or marketing communication is often confused with marketing. As the text makes clear, it is only one element of marketing activity. Advertising is persuasive communication at two levels. The individual property advertises to secure local F&B sales and to burnish the property's image in the local market in hope of securing referrals from the community. Brand advertising is a chain function intended to burnish the chain's image in a wider regional, national or international market. Sales promotion includes games and special contests, for instance, to increase reservation call volume. Guest reward programs are an increasingly powerful sales promotion tool, often based on partnerships with other travel companies such as airlines.

  1. Competition

    1. Fragmented Market (See Figure 12.1, p. 343)

      1. Ownership in hotels not concentrated but spread among a wide number of individuals and corporations
      2. With independent agents pursuing their own interests - overbuilding remains a threat
      3. Common brand names [often called "flags"] conceal ownership fragmentation
      4. Owners can and do change brand affiliations (See Table 12.1, p. 341)
      5. Fragmented industry is less predictible

    2. Cyclical

      1. Characterized by periodic overcapacity
      2. Supply vs. demand
      3. Only in upper upscale market is demand still outgrowing supply

    3. Cost Structure

      1. Lodging industry

        1. Low variable cost - little cost associated with the sale of a room
        2. High fixed cost - mostly principal and interest payments
        3. Makes it easy to cut costs

    4. Securitization

      1. Making capital readily available to developers
      2. Easy capital makes overbuilding a threat.
      3. Brings "deep pocket" companies into the hotel business

    5. Technology

      1. Technology has helped to improve service, control costs, heighten security
      2. GDS (Gloabal Distribution System) has heightened the role of intermediaries in selling hotel rooms (travel agents, reservation services, the internet, and others selling hotel rooms)
      3. The Internet is having an impact on selling room

    6. Competition

      1. The hotel industry is characterized as being highly competitive.
      2. The framework for the analysis of competition in the hotel industry is the marketing mix
      3. Strategies and tactics in the lodging market today focus mostly on differentiating product offerings

    7. The Marketing Mix (Figure 12.2) -- Marketing mix targets guest segments and aims to differentiate "our" product from "theirs"

      1. Product

        1. The best description of the lodging product is the guest's experience
        2. Includes both physical goods and services
        3. System (i.e., reservation services, minimum standards, etc.)

      2. Price

        1. Prices vary with demand and with customer groups served
        2. Rack rate - list price

      3. Place

        1. Location of the property
        2. Places where hotel rooms are sold (number of locations)

      4. Promotion

        1. Refers to mass communication media
        2. Marketing - advertising, sales promotion, public relations
        3. Target market - a specific guest segment and their needs

  2. The Product

    1. Rooms

      1. Goods [tangible aspects of lodging such as a lobby or a guest room] and services-including interpersonal activities which make up the total guest experience
      2. The Upstairs Market -- are interested in what you find upstairs in a hotel (the guest rooms)

        1. Want clean comfortable rooms
        2. Will give up extra services
        3. Fairfield, Comfort, Hampton

      3. The Downstairs Market -- need more extensive services offered by a full-service hotel

        1. Is service intensive
        2. Want lobby floor attractions, dining rooms, cocktail lounges, meeting and banquet facilities etc.
        3. Willing to pay for additional services
        4. Full service hotels, convention hotels, conference centers, resort properties etc.
        5. Food service very important

    2. Food service -- food service can be a pain in the neck to many hoteliers. They don't understand it very well, they have very little experience with it and they don't make much, if any, profit from it. As a result, many see it as more of an annoyance than a profit center. In addition, many guests [upstairs guests] aren't concerned with extravagant food service. They want low cost good food. Hoteliers therefore try to find way to provide food service without actually being responsible for it. They do this by co-locating with restaurants, allowing restaurants to construct on-site units, lease space in the hotel to restaurants to major chains etc.

      1. Limited service properties generally provide an advertised, standardized free breakfast (usually continental)
      2. All-suite properties usually provide a scaled down, on-premise restaurant
      3. Over the long run, most hotel restaurants make little profit
      4. Leasing the restaurant to an outside operator is becoming common

        1. The problem is that there is now two companies running major parts of the hotel
        2. When business slows down, the restaurant has to cut costs and services

      5. Sous vide - food processed and packed in vacuum packed bags.

        1. Limiting food service -- using frozen and sous vide foods and less skilled crews
        2. Can be reheated and served with a small crew

      6. Franchised Restaurants

        1. Franchised brand name restaurants provide consistent quality operations and free up hotel management from time consuming operation
        2. Usually name brand restaurants such as Bob Evans, Cracker Barrel etc.
        3. Conventional hotel restaurants -- in big cities, hotel restaurants can't compete with upscale restaurants in the city. They then opt for more casual and smaller restaurants such as bistros, and brasseries.
        4. Some hotels will lease specialty restaurants to supplement their in-house operation
        5. Some hotels have made in-house operations into a profit center

      7. Restaurants as a competitive strategy -- many hotels don't expect to make a profit from food service but see it more as a revenue builder for the rooms side of the house [higher occupancy rates].

        1. The most difficult service to copy in hotels is food service
        2. One of the appeals of a good hotel restaurant is increased occupancy in the hotel

    3. Other Services

      1. Concierge and Superfloors

        1. The concierge provides guest services and information
        2. The concierge and super-floors -- special floors for the "high rollers" -- these floors provide special lounges and other services that are not typically provided to other guests in the hotel.
        3. Services such as superfloors and other amenitites serve to differentiate a property from the competition

      2. Fitness centers

        1. Fitness facilities -- many hotels provide fitness facilities for the guests [note: watch out for liabilitiy issues if someone gets hurt using the equipment].
        2. Spas and resorts -- not always easy to duplicate and consist of spa, fitness and recreational facilities.
        3. A spa can increase occupancy for a hotel

      3. Busniess Centers

        1. Business Centers -- almost a must for business travelers -- they consist of computers, printers, typists, copying equipment, faxes, internet hookups, shipping services etc.
        2. Range is from full service to self service
        3. Some have secretarial help available

      4. Quality Assurance

        1. The franchisor is responsible for assuring quality
        2. Quality is assured by inspection systems
        3. Most services can be easily copied such as shampoo, continental breakfast etc. -- difficult to copy are things such as excellence in service, food service

  3. Pricing

    1. Strategies

      1. Upper and lower boundaries for price are set by competition in the market and cost of doing business
      2. There is a tendency to discount rooms when demand is low because of a low variable cost. During peak demand, prices go up. Therefore, hotel prices tend to vary with demand
      3. Different prices appropriate to different classes of customers (i.e., conventions, corporations, off-peak guests, etc.)

    2. Yield management -- the first rooms sold are typically the cheapest; the last room sold has the highest price. So basically as the supply of the rooms goes down, the price of the rooms go up. From a consumer standpoint, it is best to make your hotel reservations as early as possible becase that is when you can get the best rate -- the longer you wait, the more it will cost you for the room.

      1. Addresses problem of how many rooms to sell at what price for any given point in time
      2. Yield management combines a history of room demand with current demand
      3. Perception of guest and general public, pricing may seem arbitrary and unfair
      4. See ground rules for rate reductions through yield mgt. (p. 360)
      5. Staff training -- the staff needs to be trained on how to handle customer questions and complaints regarding yield management.

    3. Rate competition

      1. Discounting is common (See Figure 12.3, p. 359) but price cutting (i.e., departure from pricing policy) is not
      2. Happens in down markets in face of overcapacity -- causes a negative cycle because everyone does it and profits decrease.

  4. Place and Places

    1. Place: Location

      1. Near transportation system and(or) destinations
      2. Contents of a feasibity study (See Figure 12.4, p. 363) -- Feasibility studies are used to determine if a hotel will be profitable in a particular location.

    2. Place: Channels of Distribution

      1. The complex system of providing information and reservation services to travelers
      2. Channel members/intermediaries -- how hotels get referrals/reservations

        1. Hotel chains -- central reservation systems
        2. Franchise systems -- several brands using one reservation system
        3. Referral (membership) services -- Best Western
        4. Hotel sales reps -- in-house sales staff
        5. Travel wholesalers --
        6. Travel agents (retail)
        7. GDS members (airline/car companies etc.)
        8. Internet -- websites as well as internet referral services

      3. Promotion and Marketing

        1. Mass Communication

          1. Advertising (See Table 12.3, p. 369) -- newspapers, magazines, electronic media, TV, radio, billboards, direct mail
          2. Brand advertising -- carried out by chain, franchise, and member organizations
          3. Advertising on the Internet
            1. Web sites

          4. Sales promotion

            1. Incentive to immediate purchase -- offers an incentive such as a discount for immediate action
            2. Partnerships and reward programs -- frequent guest clubs where guest are rewarded for frequent use of the hotel and partnerships with other industries such as transportation [airlines for example]
            3. Frequent stay programs in the hotel business reward guests for brand loyalty
            4. Frequency marketing and data bases -- collects data on guests so the property knows how to target its marketing

          5. Marketing and competition

            1. Marketing and competitive strategy should be proactive rather than reactive in terms of attracting guests.




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        Comments or questions about these notes should be sent to Dr. Patterson: E-Mail at: rich.patterson@wku.edu


        Date last Modified: December 7, 2000
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        Western Kentucky University