The current pandemic is testing the resilience of the travel sector more than most other industries. While hospitality performance is expected to take a couple of years to recover, the industry’s landscape has likely been forever altered. Hospitality companies that have actively employed resiliency strategies are the most likely to endure the pandemic and shape the industry’s future.
Since the start of the pandemic, CEOs and top executives have shared their best practices for navigating the COVID-19 crisis across various webinars. Over the course of these conversations, “diversification,” “relationships,” and “agility” have emerged as strong recurring concepts. “Diversification” relates to industry-specific risks and the business environment, “relationships” define how businesses interact with business partners, and “agility” is a characteristic of the culture and capacity of an organization.
In applying this framework to the hospitality industry, remember that hotels involve both real estate and ongoing business. In the United States, these two components of the hotel structure are generally separate. The real estate component is often owned by financial institutions, private equity groups, or lodging REITs. Hotel management companies are responsible for managing the ongoing business and generally earn their revenues on a percentage of revenue fee-based structure. Many smaller companies still exist as owner/operator or owner/developer, and this is more the norm in the Caribbean and many Latin American countries, where the real estate transaction market is less active. Thinking about the two components separately is useful because the real estate business and the hotel operations business display different industry characteristics and distinct management philosophies.
Resilience in Hotel Real Estate
Hotel owners are in the real estate business and should think about strategies that minimize the risk of the asset type and market cycles. Hotel REITs have often either diversified by geographic area or service category. Private equity groups generally invest in multiple asset classes, including residential or office real estate. In developing countries, hotel asset owners often invest in less cyclical industries such as energy, infrastructure, or manufacturing.
Cash is king in a crisis, and relationships with lending institutions have proven instrumental in gaining access to capital and government subsidies during the COVID-19 pandemic. Similarly, the quality of the relationship with the operator has enabled asset owners to negotiate the temporary use of cash reserves for servicing debt.
The real estate industry is defined by market cycles, and in a downturn, it is essential to maintain communication with brokers who will help source market information and deals. Moreover, successful companies have planned cash reserves to execute in opportunistic situations.
Resilience in Hotel Management
Geographic diversification is probably one of the most common strategies that hotel management companies use to minimize industry risk, as local conditions strongly influence hotel performance. In Asia Pacific, where the recovery from the COVID-19 pandemic is ahead of that of the United States, as well as in domestic markets, leisure properties are seeing a quicker uptake than urban hotels that rely on corporate travel and meetings business.
Again, cash is essential to maintain operations in a crisis. Strong relationships, not only with lenders but also with client and supply chain partners, have proven crucial to surviving these times. Marriott and Hilton have both raised significant amounts of cash through their partnerships with credit card companies by selling loyalty points in bulk quantities.
Adapting business processes in a time of crisis is only possible with a culture of change and innovation. But corporate cultures are defined well before a crisis. Cultures that embrace change require transparent leadership to build trust, open communication to ease uncertainty, and employee empowerment to decrease fears of failure. An example of open communication was Marriott’s CEO Arne Sorenson’s heartfelt message in March, in which he detailed the company’s step-by-step strategy to respond to the emergency.
Furthermore, a company’s agility is influenced by its organizational structure. Generally, flatter organizational structures are more flexible and better able to adapt to change. While hyperspecialized roles work well in times of growth, in times of crisis, employees with cross-functional skills become the most valuable. Hence, another way for hotels to become nimbler is to build multidisciplinary teams by cross-training staff during low occupancy periods.
Many resiliency strategies may run counter to practices that promote efficiency when business is sustained at optimal levels. However, as the rate of change in the business environment accelerates, and disruptions such as the current pandemic or natural disasters continue to occur, the industry is learning that thorough resiliency planning is well worth the cost.