The economy is a constantly changing environment. Most economic phenomenons can not be characterized as inherently good or bad, as the positive changes often undermine themselves or lead to negative changes in other parts of the globe.
Every industry is subject to many economic currents - some constant, some cyclical, some with positive short-term effects and negative long-term effects, some vice versa, and many combinations of thereof.
In each industry, some companies navigate these currents and show great results even when the industry itself faces a substantial downturn. Great examples are the mainframe computer manufacturers who were able to switch to the PC business; hedge funds who developed risk-parity portfolios and showed stable results during the 2008 crisis; hotels who started to offer isolation services during the COVID pandemic; oil companies who anticipated the transition to clean energy and invest in green technology.
We attempt to understand the factors which impact our industry, hospitality, as we treat our business not just as a hotel, but as an investment of capital - largely our own and private investors. Capital should always be allocated where it is used most efficiently. Therefore, we study the trends in the industry and anticipate the changes they bring to benefit from them.
Particularly, we find the insights which contradict the popular belief the most valuable: sooner or later, the popular beliefs will be forced to match the reality, but those who held realistic views the earliest will be rewarded the most.
The forces impacting the future of the hospitality industry
We can divide them into the following four groups:
- Political changes
- Demographic changes
- The post-COVID policy and mindset changes
- Global economic changes
The current developments in each of these areas are neither positive nor negative for the industry; they impact different segments differently.
The new generations prefer the brands that match their values and offer them experiences, not material things
Cohorts of young travelers naturally hit the market every year. With time, some of their preferences change, as most people's financial situation tends to improve with age, while other preferences stay the same.
One noticeable preference of the millennials, and to a larger extent also of the Gen Z travelers, is that they put less emphasis on the hotel itself, spend less time in it, and instead prefer to spend more time exploring the city and the local culture. This redefines luxury and renders many of the traditional amenities less useful. The city itself always has a better selection of restaurants and spas than a single hotel could ever offer. Therefore, the new definition of luxury, as we see it, lies in helping travelers to explore the city, to socialize, and to get the business done more simply; you can call it a Siri for the offline world.
In terms of branding, the younger generations prefer to purchase brands that match their values, be it the values of veganism, sustainability, or entrepreneurship. Speaking in general terms, millennials would rather stay at a hotel where Elon Musk stayed, or which was recommended by Richard Branson, than at a hotel endorsed by an oil magnate. The larger hotel chains associated with prestige and pomposity become obsolete in a world of sharing economy and responsible consumption.
The merger of hospitality and residential real estate
Another noteworthy trend is the rising number of people taking workcations or long-term trips where they work remotely. A typical hotel is far from being suited for work: no guaranteed internet connection, furniture and spaces not created for work, units and amenities not adapted to long-term stays, just to name a few. Living in a hotel is the opposite of feeling at home and this is an opportunity for the innovators.
As a consequence of the pandemic, remote work is booming. However, remote workers do not perceive themselves as a separate segment with their preferences, nor do the hoteliers. Once managers start to create hotels that fit this segment, and marketers start to voice the needs of this group, this will launch an irreversible and self-reinforcing process where the supply reinforces the demand. We expect to see a lot more investment activity and market growth in this segment.
Political changes direct tourists towards safer countries
With the wealth gap being worse than in the early 1930s and all of its consequences, we expect a decade marked by tensions that will most probably not be resolved within this decade. Tensions are rising both inside and between the two most influential countries in the world - China and the US.
The US has started focusing more on their internal problems and less on supporting global justice and is thus contributing to a power vacuum. Power vacuums often lead to conflicts of political, economical, or military nature in which a new hierarchy is being established. This leads to massive destruction of wealth and decreased safety. The "safe enough" destinations will become "less safe than enough", whatever the definition of "enough" is.
This means that societies with a stable social structure, a strong independent economy, a transparent justice system, and strong police and military forces will attract more visitors than less stable countries.
We expect these developments to negatively impact countries with a lot of internal tensions, such as the United States and other regions that are at risk of international conflicts, such as the countries in the Far and Middle East. Especially the last two would be hit hard should their US dollar positions decline, as large portions of their national income, the debt they hold, and their government reserves are dollar-denominated.
Law-enforcement personnel monitor from a balcony in Washington, D.C., on January 20, 2021. Susan Walsh / AFP / Getty
Countries and regions that will benefit from these developments are the EU and their bordering countries Switzerland and Norway. This list can be extended by the relatively strong and calm Canada and Japan. Global demand for traveling is not expected to decrease in the long run, as productivity has globally been rising together with the standard of living for more than two centuries without interruption. Only a few of those destinations will experience an increase in demand, while some will suffer a decrease.
The pandemic-related risks have ... decreased after COVID
Contrary to popular belief, the likelihood of receiving damage from future pandemics has not increased due to COVID but has decreased. COVID was a black swan, but it left the world better prepared for such a disaster. Thus, COVID probably taught us an indispensable lesson on how to manage pandemics in general. Future pandemics will be inevitable but they will be more manageable, as governments and private companies will by default include them in their risk management. Next time, measures will be better adjusted, taken with more determination, faster, and more efficient. We became way more resilient against pandemics after COVID and even though most people do not realize it, the world was already much more resilient when reacting to COVID than it was about a century ago when reacting to the Spanish Flu. Hoteliers on the other hand have to focus on how to survive in a post-covid world, rather than on how to prevent a pandemic that is already subsiding.
Socially distant audience seating is one of the attributes of the post-crisis increased pandemic resilience. Brendan McDermid / Reuters
Investors who are pessimistic about the hotel industry actually help the optimists. The panic selling of the former will help optimists to buy hotel stocks at the low, while the pessimists will not buy until the stock prices have already climbed back high enough. This will push those stocks even higher and thus generate more profits for the optimists and lower the pessimist’s profit potential (by "purchasing in the middle" or "purchasing on the top").
The financial and economic situation
The QE in the 2010s and 2020s led to the creation of way more cash than could ever be converted into goods and services. Once investors realize this, equities will be flushed with even more cash. This creates an opportunity for those companies that can scale quickly and have a capital-light business model.
The hotel of the future: Who will benefit from the changes?
The hotel that is adapted to the coming trends looks more like home and less like a hotel. It is suitable for work, long-term and healthy living, has an extended gym setup and open coworking facilities. It is built sustainably and the management itself is well-versed in the subject of responsible consumption. The guests’ needs are anticipated and they are supported in every step of their way, whether it is choosing the city's best restaurants, purchasing groceries, or picking them up after a night out.
In terms of locations and financing, the most profitable hotel businesses will be based in the most socially stable and economically strong countries, surrounded by equally healthy and friendly neighbors.
Companies with capital-light business models who can scale quickly (e.g. are able to rent typical city buildings and convert them into hotel units with minimum renovations) will benefit most.
These insights have been provided by Le Bijou's R&D department and are the basis for the company's experimentation with new forms of hospitality to anticipate future changes.
