By Peter Plaut
COVID-19 Dismantled the Global Hospitality Industry on Many Levels
In recent years, global tourism has fuelled exponential growth in the hospitality sector, but COVID-19 and the resulting precautionary and necessary lockdowns have dismantled the industry. The US accounts for most global tourism and the resultant spending and, for countries such as Italy and Spain, tourism represents upwards of 20 per cent of GDP and is thus key to their economies. This sector faces significant headwinds in both the near and the longer term. However, there is significant reason for optimism.
The Unprecedented Fiscal Policy Response Resulted in a Bounce in Economic Activity
The global pandemic prompted unprecedented policy responses from central banks globally and corresponding world leaders. Indeed, in less than three months after 31 March 2020, interest rates were cut to zero, enhancing the global economy with liquidity. In addition, fiscal measures including massive government spending initiatives and subsidies were initiated to assist businesses and the general public. These measures resulted in a sharp bounce in economic activity from unprecedented declines in Q2 2020.
COVID-19 forced the near or complete meltdown of almost every hotel business across the globe. At the height of the lockdown, occupancy rates were between 0 and 20 per cent industry-wide. To frame this properly, most operators require a minimum occupancy percentage of at least 40 per cent or more to simply break even. Once the shutters have been put up, it is not a simple task just to reopen, as there are many items that must be addressed, not the least of which is appropriate staffing, as well as implementing the necessary health and precautionary cleaning guidelines. Reopening has been flagged as the number-one near-term challenge facing the industry. In addition, determining appropriate room pricing remains a key issue as hotel room availability comes back online after the closures.
Vaccines and the Easing of Travel Restrictions Will Prompt a Rebound in Some Hospitality Sectors
In recent months, the roll-out of vaccines and the lifting of travel restrictions held out hope that the hospitality industry would benefit from an upsurge in travel spending. This was based on significant pent-up demand for international holiday travel following the prolonged lockdown since March 2020. For example, this past July and August, hot spots in Greece, Spain and Portugal witnessed sharp rises in travel and hotel demand. Moreover, as of 8 November 2021, European and UK citizens are now able to travel to the US after being banned for two years, just in time for the holiday season. In a surprising development, business travel has picked up quite significantly, despite concerns that it would be dead for years to come, as more people opt to work at home and use virtual apps to conduct meetings. For example, business conferences have shown increased activity, as people want to meet in person. Nevertheless, with the efficiency and productivity of virtual meeting platforms, business travel is unlikely to return to pre-pandemic levels anytime soon.
Over Time, COVID-19 Will Be Controlled, but not Eliminated
Despite renewed optimism, just as certain segments of the global hospitality community are recovering, a new COVID variant, Omicron, has initially resulted in renewed travel restrictions as we go into the holiday season and New Year. Over time, with the assistance of vaccines and booster shots, COVID-19 will be neutralised but not eliminated, and the global hospitality industry will rebound accordingly. However, key trends facing the industry prior to pre pandemic levels will likely become even more pronounced and will need to be addressed for the survival and growth of larger companies.
The Large Operators and Niche Hotels Are Best Positioned
Large operators with depleted but strong balance sheets and solid liquidity are the best positioned to benefit from the expected rebound in activity. There will likely be consolidation within the industry. Niche boutique hotels offering health-and-wellness-focused accommodation and experiences will be increasingly in demand, as well as those offering experiential activities. Smaller operators without a differentiated product offering will likely not survive, presenting opportunities for others to acquire the asset(s) or reposition them into other real estate asset classes, such as residential.
Traditional Hotels Are Dinosaurs and Will Need to Embrace New Ways to Attract and Retain Visitors
The traditional hotel business of renting a small room and bed is a dinosaur. Even the large, well-known brands need to adapt to changing customer preferences, especially as a new generation of global nomads and Generation Z become a more significant force. Hotels will need to explore ways to enhance the value of their brand, attract visitors, increase customer loyalty, and capture a greater share of their wallet. Competitive threats from new entrants, including AirBnB and start-ups, are disrupting the marketplace and placing stress on the traditional ways hotels market themselves and do business.
New Technologies and Personalised Experiences Are Key to the Future
Technology, especially smart technology, is becoming more critical to the success of the industry. COVID-19 has accelerated the introduction of mobile technologies, including the use of mobile phones for guest check-in, room access, food delivery, and other services. Mobile apps are increasingly being used for guest loyalty programmes and cross-selling. The guest data captured on these mobile platforms will be important in tracking customer feedback and spending patterns. The use of AI will allow for targeted marketing material and enhancing the overall personalised customer experience. Virtual reality in the hospitality industry will allow customers to experience the hotel and nearby attractions. Hotels will need to be focused on their digital and social media presence.
The hotel and hospitality industry will need to be more about personalised experiences. All-inclusive, theme-based experiences tailored to customer interests will be a growth business. In addition, COVID-19 has prompted a focus on niche boutique hotels delivering health and wellness and outdoor activities, including a different architectural model to achieve more distance between patrons. Global awareness regarding sustainability and environmental issues will lead to growth in “glamping” and other similar experiences, which has already begun in select markets.
In conclusion, the COVID-19 pandemic has decimated the global hospitality industry, but there is reason for optimism, most notably the transformation of the traditional hotel model and the emergence of new and dynamic product offerings and consumer experiences helped by smart technologies and a focus on health and well-being.
About the Author
Peter Plaut is consistently recognised as a leader in the industry. Since the COVID-19 pandemic locked down the global economy, Peter has been active in real estate development financing across various asset classes, including residential, mixed use, office, and hospitality. During the Great Financial Crisis of 2008, he was ranked as one of the Top Rising Stars of Hedge Funds. This track record is a recognition of his ability to manage through crisis and is cycle-tested. In early 2020, his team at Wimmer Financial was given the Real Estate Investment Bank of The Year award, ahead of BNP, Credit Suisse and UBS. In 2021, Wimmer Family Office won the leading Family Offices Specialist award.