Trends and Opportunities in the Global Hospitality Industry Irish Hotels Federation Symposium Alex...

Trends and Opportunities in the Global Hospitality Industry

Irish Hotels Federation Symposium

Alex Christou, Partner, Andersen Consulting

Dublin, 29 November 2000

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Presentation outline

Objectives

Andersen Consulting

Industry trends and opportunities

Implications for Ireland

Concluding remarks

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Objectives

Set out Andersen Consulting’s point of view concerning key trends in the global hospitality industry including– Customer service– Procurement– Financial management– Brand and product management

Identify key implications for the Irish hospitality sector– Commonalities and differences– Implications for industry strategy

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Objectives

Andersen Consulting



Concluding remarks

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130 + Offices in 48 Countries

Americas

Asia/Pacific

Europe/Middle East/Africa/India

IndustriesGeography

Resources•Chemical•Utilities•Energy•Natural Resources

Products•Automotive & Industrial Equipment•Food & Consumer Packaged Goods•Pharmaceutical & Medical Products•Transportation•Travel Services and Hospitality•Retail

Communications•Communications•Electronics & High Tech•Media & Entertainment

Financial Services•Banking•Health Service•Insurance

Government

With revenues of $8.9 billion and 67,000 professionals, Andersen Consulting provides unparalleled global strength

in the business consulting marketplace.

Our organisation

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Objectives

Andersen Consulting



Concluding remarks

7

Global hospitality and airlines industries are large and fragmented segments which have shown moderate revenue and profit growth

281288

295

308

260

270

287

303

230

240

250

260

270

280

290

300

310

320

1996 1997 1998 1999

Airlines

Hospitality

Global Airline and Hospitality Revenues 1996-1999US$ Billions

US $ Billion

Operating Margin

Airline Industry

Hospitality Industry

5.0% 6.9%

13.5% 17.5%

6.7%

20.8%

5.3%

21.6%

$

$

$

$

$

$

$$

Airline CAGR of 3.07%

Hospitality CAGR of 5.18%

8

The major global players

Company

1999 Total Rev (US $M)

1999 Operating Margin %

Bass 9000 16.8Marriott International 8700 8.1Cendant 7500 28.7

Best Western (private) 6900 -Granada Compass 6757 24.4

Carlson Hospitality (private) 5900 -

Accor 3747 9.8Hyatt (private) 3600 -Starwood 3335 4.1Choice 3256 58.1Hilton Hotels Corp. 3160 24.7Hilton International 3031 -Wyndham International 2500 -5.1SRS 2000 -3.1

Four Seasons 1653 -Club Mediterrannee SA 1558 2.7Hyatt International (private) 1400 -

1350 -MeriStar 1300 1.3

Fairmont (Canadian Pacific) 1233 -

Forte Hotels 1657 34.2

Ritz-Carlton

Global lodging supply, though consolidating, remains fragmented– The 10 largest branded companies hold just 20%

of the worldwide branded market and generate 20% of total revenue

Globally, approximately 50% of Hotels are affiliated with Chain Brands – Nearly 70% US, 25% Europe and Africa, 15% Asia

US and EU based Hotels account for approximately 74%of the 15.5M Global Hotel Room Supply

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After a period of mixed performance the global hospitality industry is focused on adding shareholder value

Since 1987, the US Lodging Industry has consistently performed below the Standard & Poors 500 Index and the Dow Jones Industrial Average.

Source: Bigcharts.com

From 1996-1998, Lodging stocks performed well against the S&P index

In 1998 a hiccup in the financial markets coupled with perceptions of oversupply in the industry caused Lodging stocks to badly under-perform the broader market

•Under-performed the S&P in 1998 and 1999 by 65 and 23 percentage points respectively

In 1998 to early 2000, the Lodging has struggled to regain it former momentum

In the last few months, the mood of the industry is optimistic as, in the latter half of the year, Lodging stocks have outperformed the market

10Source:FactSet 2000

However, Lodging companies on average are expected to generate moderate increases in value

P/E Ratio 2000

-30%

20%

30%

40%

0 10 40 60

% Change in Market- Cap from 1998 to

1999

50%

90%

Marriott (10.1, 21.6)

Canadian Pacific (12.0, 10.0,)

Bass (-4.9, 15.7)

Starwood (11.7, 20.5)

Hilton Hotels (-29.5, 11.6)

Meristar (58.1, 10.6)

Accor (17.1, 24.7)

Four Seasons (85.2 , 38.6)

Premium performance

and stable growth

Mature to Distressed

Earnings now, unclear future

20 30 50

10%

0%

-10%

-20%

60%

70%

80%

Future growth expectations

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HospitalityIndustry

ShareholderValue

Labour Shortages

Not Capita

lising

Shifting

Distributio

n

Channels

Limited

Supply Chain

Capabilities

Limited Customer Information Infrastructure

Dependency

on Macro

Economic

Forces

Lim

ited

Tech

nolo

gica

l

Infra

stru

ctur

e

CapitalRequirementsfor Growth Limited by Ownership Structure

Similar industry analysis and interviews found that the lodging Industry is facing serious long term growth challenges driven by chronic under-investment

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Performance is heavily dependent on uncontrollable, macroeconomic factors

The industry supply chain is fragmented and inefficient

Under-investment has resulted in poor technical infrastructure that limits flexibility and profitability

Demand is highly correlated by GDP and consumer confidence

Supply is rigid, driven by real interest rates, past demand and GDP forecasts

Profitability forecasting models are very unreliable

3 levels of purchasing ( e.g. corporate, regional, property) with little visibility and control over 10,000 skus

Despite access to the customer, chains have limited marketing and CRM capability

Only 45%of chains have a guest database, 11% have it integrated with an executive information system. Only 23% have significantly automated the loyalty program

In general chains have inadequate eCommerce strategies and their capabilities fall far behind other industries

Little attempt to target groups and tours

85% of executives believe technology limits growth

Multiplicity of Property Management Systems (some older than 15 years)

Technology providers are fragmented and unreliable

Hotel ownership, management and brand may belong to different parties resulting in complex relationships

Management companies must offer capabilities for 100% of managed Hotels, but only control 27% of revenue resulting in under-investment

The structure of ownership / management results in under-investment

There is a shortage of qualified labour

US hotel employee turnover ranges from 60% to more than 300% annually

Turnover can cost an average $2,500 for direct and $1,600 in indirect turnover expenses per departing employee

Lodging CRM capabilities are minimal

Hotel Chains

Hotels are not capitalising on eCommerce changes

CRM capabilities are minimal

Key industry issues

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Trends and opportunities

Value Lever

Reduce Costs

Area of Value Creation

Back Office

Opportunity

•ASP/BSP / Shared Services•Areas include

•Financial systems, Accounting, Corporate Services, Tax, Legal, etc.

Rationale

•Currently fragmented (done at property) and redundant (corporate•Management Companies are perceived as “Fat Cats;” current shared services are ineffective and many costs of operations are charged back to property owners

ImpactLikelihood

High High

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Value Lever

Reduce Costs


Procurement

Opportunity

•Procurement Strategy and Marketplace Integration•Venture or “pure play” network marketplaces

Rationale

•Procurement strategies at three levels: Chain/corporate; Local/regional; Overall redesign•Marketplaces are being created with out an overarching eStrategy•Current Lodging industry led exchanges attempt to cover all buying activity; There may be an opportunity to create niche exchanges

ImpactLikelihood

Very High Very High

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Value Lever

Generate Revenue


Customer Relationship Mgmt

Opportunity

•eCommerce development (e.g., Branding; Customer Loyalty)•Consulting Database Implementation•Business Service Provider/ Venture/ASP

Rationale

•Despite significant contact with the customer, Hotels have limited CRM capabilities•Many hotel databases are not integrated•Despite, branding Hotels risk becoming commoditised

ImpactLikelihood

Very High Very High

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Focus on the customer

1998 2000 2002

Asset Based

Guest Ownership

Focused

(Measure: REVPAR)

(Measure: REVPAF)

(Measure: REVPAC)

Assets/Resources Path of Paradigm Shift Guests/Information

Second Curve

First Curve

Bu

sin

ess

Tra

nsf

orm

atio

n

Ma

rke

t V

alu

e P

/E Key:

REVPAR: Revenue per available room

REVPAF: Revenue per available franchise

REVPAC: Revenue per available customer

Guest/customer focus underpins the migration of lodging corporations to new levels of revenue and profitability growth

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Value Lever

Generate Revenue / Reduce Costs


CRS / PMS / Yield

Opportunity

•Venture/ ASP- Add Lodging Activity Booking to complement current hotel CRS/PMS offerings•Venture/ ASP- Develop New, net-centric CRS/PMS

Rationale

•Products offer broad marketing•Large hotels are not doing it well•Turnkey solution for chain expansion•Most mid sized chains(15-30 hotels) do not own systems, they rent•Product could reduce current CRS/PMS spending which we estimate can reach $5-10 per transaction

ImpactLikelihood

Very High Very High

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Integration of revenue management and customer relationship management

Traditional Revenue Management

Focus on maximising revenue on per reservation basis

Optimise demand forecast given static set of products

Not customer sensitive

Not context sensitive

“Memory of One” ; only the current purchase matters

Customer Relationship Management

Objective to maximise customer loyalty

Optimise customer value expectations

Highly customer centric

Often context sensitive

“Lifetime Memory” of past as well as expected future purchases

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Opportunity Rationale

Customer Relationship Management

• eCommerce development (e.g., Branding; Customer Loyalty)

• Consulting Database Implementation

• Business Service Provider/ Venture/ASP

• Despite significant contact with the customer, Hotels have limited CRM capabilities

• Many hotel databases are not integrated

• Hotels are becoming commoditised

Create Capabilities in Markets other than individuals

• Tours - Channel Integration Consulting Project

• Groups -B2B Consulting Project• Venture or “pure play”

• Tours are currently more important to the European market created without and overarching eStrategy

• Potential to create offerings to facilitate large groups, meeting and convention planning

Customer Reservation Systems (CRS); Property Management Systems (PMS)

Probability of Impact

Size of Impact

Very High

Procurement

• Venture/ ASP- Add Lodging Activity Booking to complement current hotel CRS/PMS offerings

• Venture/ ASP- Develop New, net-centric CRS/PMS

• Procurement Strategy and Marketplace Integration

• Venture or “pure play” network marketplaces

• Products offer broad marketing• Large hotels are not doing it well• Turnkey solution for chain expansion• Most mid sized chains(15-30 hotels)

do not own systems, they rent• Product could reduce current

CRS/PMS spending which we estimate can reach $5-10 per transaction

• Procurement strategies at three levels: Chain/corporate; Local/regional; Overall re-engineering

• Marketplaces are being created with out an overarching eStrategy

• Current Lodging industry led exchanges attempt to cover all buying activity; There may be an opportunity to create niche exchanges

Value Lever

Generate Revenue

Generate Revenue

Generate Revenue/ Reduce Costs

Reduce Costs

Very High

Low Low

Very High Very High

Very High Very High

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Opportunity Rationale

Back Office • ASP/BSP / Shared Services• Areas include

•Financial systems, Accounting, Corporate Services, Tax, Legal, etc.

• Currently fragmented (done at property) and redundant (corporate

• Management Companies are “Fat Cats;” current shared services are ineffective and many cost of operations are charged back to property owners

Personnel / eHR • HR process re-engineering• ePeopleServe• Human Xchange• eHP offerings to improve human

performance (e.g., ePeopleserve)

• There is a shortage of qualified labor in the Hotel industry

• Services could be offered to large hotels and products to mid sized chains

Others

Probability of Impact

Size of Impact

Travel Experience Integration

• Participation in Auction Markets

Maximise revenue by optimising the allocation of inventory to various market segments.

• There could be an opportunity to off load distressed inventory

• There has been an explosion in the number of sales channels

• An effective channel strategy is even key given the focus on customer relationships and the opportunities to significantly reduce distribution costs

Value Lever

Reduce Costs

Reduce Costs


High High

Very HighAverage


Low Low

Low Very High

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Balanced scorecard1 - Turning strategy into operations

“Hilton's goal is to create value for all its constituents --- customers, owners and shareholders, employees (known as "team members"), strategic partners, and the

communities where each hotel is located --- by delivering a consistent value proposition. To achieve that goal, the company relies on the axiom that what gets

measured and managed gets delivered.”2

1. Robert S. Kaplan and David P. Norton, "The Balanced Scorecard-Measures That Drive Performance," Harvard Business Review, January-February 1992, pp. 71-79.

2. Source: http://www.hiltonfranchise.com/news/pg1.htm; Cornell Hotel and Restaurant Administration Quarterly; ©1999 Hilton Hotels

Identify the drivers of value

Plan

– Develop key performance metrics and objectives for each value driver

Execute

– Measure and report!

– But … use KPIs

Act / react

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Technology model of the future

Finance Procurement

Multi-property PMS Central Reservation System

CRM and Loyalty Revenue Management

HR Recruitment

The technology model of the future enables individual hotels to focus on execution - ie providing excellent customer service - while it enables

senior management to manage the chain or brand from the centre

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Operating model of the future

Global PMS/Res

RevenueMaximisation

Single Image Inventory

Sales & Marketing

Customer / Property

Alliance PartnersAirlines / Car Rental

WebDistribution

Accountingand Planning

Integrated Global Operations

Chain and Brand Management

Hotel Management

GlobalCommsNetwork

Integrated Global Services

FinancialServices

TechnologyServices

CROServices

HRServices

eCommerce

DynamicMarketing

ServiceDelivery

RevenueMaximisation

ControlException

Management

Minimum Technology

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Objectives

Andersen Consulting



Concluding remarks

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Increasing dominance of the major brands– The Irish market does have a choice– How do you achieve the benefits (economics/scale, flexibility, loyalty) without adopting brands?

Flexibility in HR management– Rostering between properties to balance demand– Use of part-time employees to tune resourcing levels to occupancy

Loyalty is becoming a key weapon in maximising customer revenue and contribution– Loyalty is at the brand rather than individual property level

Regulatory issues are transparent to the consumer– Reliance on brand values, identification and loyalty rather than formal classification

Increasing sophistication and ‘corporatisation’ of the global hospitality industry– Central capabilities (procurement, financial management, revenue management and pricing, HR and recruiting, customer

interaction and billing)– Sophisticated management techniques (technology, eCommerce, CRM, balanced scorecard)– The Irish market is less highly developed in this sense: What needs to be done? Who takes forward?

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Objectives

Andersen Consulting



Concluding remarks

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Concluding remarks

Global product and brand– Leveraging increasing global travel and loyalty

Scale economies– Procurement, marketing and operations

People– Flexibility in rostering based on occupancy

Management vs Ownership– Focus on return on equity

Focus on the customer– Customer at the centre– Drive profitability through customer relationship

Balanced scorecard– What gets measured gets done

Outsourcing– Business processes, technology, customer service– Focus on core skills

Technology– Central visibility and higher speed of information flow– Customer centric (Not hotel centric)

Trends and Opportunities in the Global Hospitality Industry Irish Hotels Federation Symposium Alex...

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