New realities in a post-COVID world
New realities in a post-COVID world
30 JUNE 2020 7:37 AM

The coronavirus pandemic is forcing changes on the hotel industry, some of which might be net positives for the industry in the long run.

I hope one day we are able to look back on the COVID-19 pandemic and say, “You know, as bad as it was, some good things came out of it.” Here are a few potential outcomes that that might elicit that kind of reaction.

An emphasis on clean
Let’s face it, no matter what the quality scale, the hotel industry has operated—in varying degrees—in blissful ignorance about what “true” cleanliness entails. I spent the past five years working on a new wellness-oriented hotel brand, one of the core tenets of which was delivering an unprecedented level of cleanliness throughout each property. I’ve hit the pause button on that venture, in part because COVID-19 is causing many, if not most, hotels to close the gap on what we planned to provide in terms of a close-to-pristine environment and what was the accepted standard, pre-pandemic. Now, virtually every discussion regarding operations and customer engagement starts with safety and cleanliness.

There is no doubt that delivering a well-sanitized room to the market will be harder and more expensive, but the end result will be a happy outcome for travelers, who will hopefully pay for the privilege.

Urgently needed efficiencies
In the midst of every down cycle, operators become more efficient—at times voluntarily and at times at the behest of owners and/or asset managers. Then, as the industry returns to health, costs slowly creep back into the equation. As an industry, we’re like serial dieters: lose, gain, lose, gain.

Post-crisis cost increases were largely the result of six things: three were self-inflicted (increased brand standards, increased layers of supervision and added freebies to acquire/retain guests), and three imposed by third parties (government/union labor mandates, real estate taxes and insurance premiums).

The cycle that ended on or about mid-February 2020 was no exception. As the saying goes, revenue hides a multitude of evils. In the most recent up cycle, these cost increases were aided and abetted by interest rate spreads that understated the risks hotels bore to other real estate types. As the pandemic carnage mounts, this interest rate crutch is going to go bye-bye. Now what?

It doesn’t take a genius to know that the cumulative effects of a revenue cliff-dive, multi-year expense increases and increases in the cost of capital are going to require significant belt-tightening at virtually every hotel, regardless of price/quality tier. Besides the urgency unique to the current situation, it will be different this time around, as the industry is forced to rethink the hotel operating model, from top to bottom.

Housekeeping, in hotels without heavy F&B, is the most labor-intensive department. Maintaining productivity levels while simultaneously increasing cleanliness standards and navigating the threat/actuality of union work rules and minimum wage pressures can only be solved by structural changes. Along comes opt-in room cleaning, technology, new cleaning/sanitation tools such as ultraviolet-emitting robots, antimicrobial surfaces/chemicals, improved processes/training and different approaches to supervision.

As another example, the ubiquitous free breakfast at limited service hotels is probably on the way out – at least as a universal brand standard. Why? Here are the falling dominos. In a post-COVID-19 world, buffet-style/self-service dining will be an anathema to many customers and, likely, health departments in many jurisdictions. If hotels are forced to convert from a self-service model to a staffed/served model, they will need to make up the cost difference with a rate increase or surcharge. If the “free” breakfast is no longer really free, I surmise that most travelers will opt out of the barely edible offerings at their limited-service hotel and instead pay $7 for a half-decent breakfast at Denny’s or IHOP. We will soon find out if I’m right. (Breakfast gravy makers don’t despair. You can still sell your product to General Motors as a low-cost replacement for the fiberglass they use in Corvettes.)

Whether operational, as in the examples above, or physical (design, programming, layout), everything is on the examining table now, and not simply as an option, but as a means for survival.

A la carte pricing
Since the mid-1980s, I have wondered from time to time why all-inclusive pricing was not more widely adopted. Remember the various mantras “time is the new currency…” or “consumers value simplicity and convenience over price…” etc.

I can stop wondering now whether all-inclusive will ever really catch on because the industry is going to move in the exact opposite direction. What used to be offered as a “one-size-fits all” room price is now on a forced march to the museum of natural history To borrow from The Eagles, “there’s a new kid in town”—it’s called a la carte pricing.

Smart hoteliers have always charged premiums for room types (views, elevation, bed types, additional space, etc.), and that will, of course, continue. However, the definition of what is included within those variegated room rates is about to change, writ large, to an airline model.

Is that a good thing?

Customers will almost certainly dislike the idea. Their expectations have been conditioned by tradition and increasingly by hotel company freebies in a quest for market share.

For many years, restaurants (especially higher-end) have utilized a la carte pricing for everything but the entrée, even for what once was complimentary bread. Car companies charge extra for virtually everything but the motor and the tires. Computers and cellphones offer a basic price and then charge for every possible upgrade. Name an industry. Cable? Cellular? Transportation? Fuel? You’ll have to think hard to find the kind of bundling of services and amenities offered by hotels at no incremental cost to the customer. The simple (perhaps sad) fact is that hotel industry’s bundled pricing is an anachronism.

It is also worth remembering that “customers paying only for what they use/care about” was one of the core concepts behind the introduction of premium select-service hotels in the 1980s. Many individual business and leisure customers wanted a room product with the quality of a full-service hotel but didn’t care about (or want to pay for) the meeting space, restaurants, etc., that came with it. Not exactly a la carte pricing, but it is the other side of the same coin.

I don’t expect hotels to become Ryan Air, but frankly, if moving to an airline model is what it takes for owners/investors to get paid for the risk associated with hotel ownership, then, “This is your captain speaking—welcome aboard.”

Accelerated reductions in inventory
A couple of down cycles ago, some really smart industry pundit said, “The industry is not over-supplied… it is under-demolished.” Minor reductions have occurred, but the truth is, a lot of marginal product has been kept on life support by a robust economy and low interest rates. It appears the piper is about to be paid.

The doors of some temporarily closed lodging establishments may never reopen. Some will sit fallow until some new use is created. Some have been and will continue to be converted to other more economic uses. Others have already started down the redevelopment path. The net result will likely be a recordable—and welcome—decline in lodging inventory.

This article presents a glimpse of some things that are likely to come about as a result of the pandemic and resulting economic catastrophe. Stay tuned as more is yet to come. While COVID-19 and its economic consequences may not be as dramatic as the meteor strike that wiped out the dinosaurs in the late Cretaceous Period, it is going to induce significant, long-lasting changes to our industry. The challenge is going to be how to ride the wave, as opposed to being pummeled by it.

Richard Warnick is managing director and co-chairman of CHMWarnick. Follow CHMWarnick on Twitter @CHMWarnick and LinkedIn.

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