LOS ANGELES — The hotel industry may have missed an opportunity to significantly change its business model.
Ted Darnall, partner and CEO of lodging and technical services at HEI Hotels & Resorts, said the COVID-19 pandemic presented a rare opportunity for hotels to fundamentally change how they do business — to reinvent how they serve both guests and owners needs.
But instead of doing that, the industry rushed to return to a sense of normalcy and embraced a business-as-usual approach.
During a session focused on hotel operations at the 2023 Americas Lodging Investment Summit, Darnall said the industry at large whiffed on a once-in-a-lifetime chance for positive change.
"This industry missed an opportunity to really understand the evolution of the customer, what's important to the customer, and rewrite the rules," he said. "We did what we shouldn't have done and went right back or are trying to go right back to how we did business before the pandemic when the customer has changed."
The return to everyday housekeeping as an industry standard is a big sign of that, he said, adding that many customers still would prefer to not have someone coming into their rooms on a daily basis.
At HEI Hotels & Resorts, Darnall leads a hotel operations and investment platform. He said hotel brands are the biggest offenders in this push to return to the way things were rather than innovate.
"We had a consumer that was willing to change, and we had a platform to change them, and I just think it was a missed opportunity," he said. "Everybody was so worried about upsetting the customer rather than knowing your customer. If we knew that customer, I think we could've created some change that would've been beneficial to our business model going into the future without harming that relationship."
James Carroll, president and CEO of hotel management company Crestline Hotels & Resorts, agreed that the industry allowed fear to push it toward broad inaction rather than innovation.
"There was a fear about making too big a change and what that might do to relations with the guests," he said. "But I think we could have done more than what we did."
Carroll said higher levels of profitability at hotels over the past two years are more a result of forces outside the control of owners and operators than they are the benefit of more sophisticated operations.
"People are asking how we are using the efficiencies that you learned during the pandemic going forward," Carroll said. "The truth is, in some cases, there wasn't a lot of efficiency learned. There was efficiency simply because of what we had to do and what was done. We stopped cleaning rooms for the most part, as well as check-out. There weren't enough staff to do all the things we needed to do, so we made dramatic changes, and the guests accommodated that."
Carroll said he'd describe it more as "we've figured out how to do things a little bit cheaper" rather than growing more efficient.
Darnall said he's been particularly dismayed by the industry's willingness to bring back costly food-and-beverage operations, which had a negative impact on profits before the pandemic, in an effort to gain a higher share of demand in their markets.
"Share is expensive, and I see people spend a lot of money to gain share," he said. "They give breakfast or food-and-beverage credits, all kinds of things to gain share, but in fact, it's not profitable."
The Costs and Benefits of Brands
Darnall said the brands' push to reinstate expensive operating standards have eroded some of their value, especially in an era when hoteliers have other options for technology and distribution. Traditionally, that was the advantage branded hotels held over independent hotels. He said it now comes down to an analysis of customer acquisition costs through online travel agencies versus brands.
"The biggest point we look at is the cost of acquisition — the cost of acquiring that customer," Darnall said. "Does that customer cost us 20% of the revenue? Does that customer cost us 5% of that revenue or 30% of that revenue? Understanding the customer cost then builds into the business profile or what brand or position is going to be most profitable."
He said franchise fees, discounted loyalty rates and the other costs of brand loyalty programs make it very expensive to acquire guests.
"There are other customers available in the marketplace through other channels that are in fact much cheaper," he said.
Carroll added there are a lot of costs that go into figuring out how profitable the hotel-brand relationship is today. He said that forgoing a brand is likely to increase such costs as sales and marketing, but decrease operating costs.
"There's a number of costs that might start going down" if you don't have a brand, he said. "Whether it's housekeeping, [food and beverage], some of your costs to acquire customers, and costs to handle payments and brand loyalty pieces. There are all these other costs you have to layer in."
Carroll said it should be a market-by-market and hotel-by-hotel decision whether to go branded or independent.
"In some cases, you're going to come to a conclusion that the brand brought me more revenue, but it just got completely gobbled up in the costs. ... And in other cases, there are some markets and locations where you put the flag on it, and you're just going to get business you wouldn't normally be able to."
Richard Kessler, chairman and CEO of the Kessler Collection, said he likes to think of all of his company's properties as independent whether they carry a brand flag or not — to "put the burden on us and responsibility to make it profitable."
He said making sure a property is desirable both in terms of its location and how it's positioned are vital to success no matter what brand it carries, particularly in the unique lifestyle segment Kessler Collection hotels operate in.
"We like to go places where we can really add something to the community and create a benefit for the citizens that live there," he said.
Russell Urban, principal and managing partner for Electra America Hospitality Group, agreed that positioning hotels is key to success either way.
"You need to have experiences, and you need to be in places people want to be," he said.