Round Table: Hospitality Sector 2014

1. Have there been any recent regulatory changes or interesting developments?

Migdal: The litigation surrounding the so-called “midnight raids” – when an owner removes its manager from the property – resulted in final judicial pronouncements -at least under New York and Florida law – that Hotel management agreements are personal service contracts. This did not make new law, but those who study hotel management cases,  going back to the early 1990s appreciate that the ever changing relationship between owners and managers will continue to evolve as a result of the recent litigation. Some owners will feel empowered to seek termination of the manager for any number of reasons leading to the irreparable disintegration of that relationship. The Management agreement for many branded hotel management companies may change slightly, but since these cases have further interpreted the state of the law, not made new law, there is probably more to be gained by increased owner/manager dialogue and problem solving than anything else.

Nunez: On 1 Janurary 2014, a new United States Internal Revenue Service (IRS) rule regarding the Taxation of automatic gratuities became effective. Pursuant to the new rule, the IRS will tax automatic gratuities as Service charges, not gratuities. In order to qualify as a gratuity under the IRS’s new criteria, customer payments cannot be compulsory and must give the customer the right to determine the amount and recipient of the gratuity. Because service charges need to be factored into employees’ regular wages, restaurants that continue to impose an automatic gratuity for larger parties will have to make several payroll adjustments. Automatic gratuities are now subject to state and federal withholding, cannot be used as a tip credit to meet the minimum wage requirements, and do not qualify for the Social Security and Medicaid tax credits. In order to adjust to the new IRS rule, US restaurants can avoid the new tax implications by eliminating automatic gratuities and offsetting the economic impact by increasing Food prices and paying servers higher wages, or including tip suggestions with percentage calculations at the bottom of the check.

McDonnell: In British Columbia recent legislative changes allow for “Happy Hours” which allow bars and restaurants to serve alcohol at a discounted rate between certain hours of the day – namely late afternoon to early evening. This could result in over service/consumption which could increase liability exposure. In Addition to this, food markets and Corner stores will soon be allowed to sell beer and wine which will also contribute to the availability of alcohol to the public, again increasing liability exposure relating to the service of already intoxicated Patrons.

2. What key trends are you currently noticing?

Thomas: There has been a noticeable shift towards using modular construction techniques within the hotels sector – particularly at the budget to mid-market levels. Hotel concepts at the forefront of this technology include the likes of Marriott’s Moxy, Travelodge, Qbic, CitizenM (the CitizenM Bankside – the group’s first in London – was constructed in this manner). Now the leading Hotel chains of Hilton and InterConti nental Hotels Group are also applying this technology to new projects, in the hope of reducing construction costs and achieving a far quicker and more efficient build process. Whilst this process may not be transferable to the 5-star luxury segment, it has certainly found traction at the 3-star Level.

Mascha: In Europe we see a trend to soft branding and white labelling; compared to the US market unbranded hotels have much bigger share of the market. These hotels are opportunities for the international brands. On the other hand owners of unbranded hotels face pressure from rising costs for OTA, higher Marketing efforts, lack of access to new customer markets and lack of access to – and benefits from – loyalty programs. Soft branding and white labelling are the only way to around hard brand Standards.

There is also a trend from “full service” hotels to “select / focussed” service hotels. The development of existing and new brands reflects this trend.

Migdal: The branded hotel operating companies seem to be moving in the direction of expanded Franchising – particularly in the United States – rather than hotel management agreements. There has been additional flexibility in the financial markets for Hotel development and conversion. This has allowed the development community to finance and build mostly new select service branded hotels under a franchise model with the brand but not brand managed.

The emergence of the franchise model has been a positive development for third party management companies. Most hotel owners do not manage their properties and there remains the need for professional hotel management under the franchise model: Those management agreements can be more flexible and responsive to the needs and desires of the hotel owner.

Boutique and lifestyle lodging continues to grow and a significant reason is the presence of the large branded hotel management companies in that segment of the industry. This involvement is often through the use of a “collection” of independent hotels. The relationship with the brand is essentially that of a franchise, and the triparty relationship among the brand, the owner and the manager continues to mature.

Nunez: A big trend in New Orleans is tourists’ desire to experience the City “as a local.” While travellers will probably make an obligatory walk down Bourbon Street, they are more often searching for a more authentic experience. The hospitality industry should take some marketing cues from this new trend and strive to promote ist brands as dedicated sponsors of local events, music, and artists. New Orleans’ population is also exploding and gentrifying many new areas of the city. This is a great time for brands to expand their presence while also appealing to the traveller’s desire to experience the fringe of New Orleans.

McDonnell: There is an increasing trend toward the Courts imposing liability on commercial hosts for a variety of liability scenarios such as forcible ejections, disputes between Patrons and over Service.

3. Can you outline the local challenges for global brands and services entering your jurisdiction?

Mascha: Global brands are challenged by not signing leases in the current financing environment. Global brands have designed brands for Franchise and although many franchisees are able and willing to sign leases, they struggle because of their lack of financial strength. Investors and financing banks are asking for guarantees, which can hardly be provided by franchisees or make projects simply not feasible. Challenges are also the different regulation for accounting and tax accounting. USALI is used as standard by international companies but is not compulsory for all hotels.

Migdal: The Mid-Atlantic Region – with Washington, D.C. as the primary business driver -remains highly attractive for all hospitality players. The recent opening of the JW Marriott Marquis, the development of the Trump International at The Post Office Pavilion and the ground breaking for the $1b MGM Casino and Hotel at National Harbor are indicative of a robust climate.

Lack of product and development sites remains a challenge. Thanks to the emergence of the limited service branded hotel, developers have been able to find the mid-block infill site as an acceptable and financeable location, but even these locations are disappearing.

The District of Columbia in particular has numerous barriers to entry, such as a building height limitation, land use/zoning challenges and high business and transactional taxes and costs.

Nunez: Global brands need to be aware that the booming “sharing economy” is moving quickly to satisfy visitors’ search for authenticity on a budget. Companies like Airbnb, Uber, Feastly, and RelayRides are utilising user-friendly software applications to offer convenient and low cost accommodation, cabs, and even Dining services by local residents. In Addition to convenience and low-cost, the “sharing economy” gives travellers a chance to connect with one another and with locals. The “sharing economy” is only getting stronger, so global brands need to move quickly to identify and promote the Advantages of more traditional hospitality services, such as privacy, location, and on-site luxury accommodations. I could even envision a future hospitality industry in which global brands partner with individual providers in the “sharing economy” by offering brand-sponsorship that enhances the individual providers’ Services.

McDonnell: British Columbia has a fairly entrenched wine industry which is prevalent in the P?rovincial Liquor and private beer and wine stores. Having said that, there is a strong “foodie” community in various parts of the province that prides itself on ist knowledge of wines and liquor.

4. To what extent can local partnerships play an important role in integration?

Mascha: The best mix is always local experience and knowledge partnered with international know how and branding. The local relationship to authorities, banks, and the local community plays an important role in successful development.

Migdal: A hospitality player has to know the territory. Having the capacity to gauge the pulse of the local neighbourhood can be vital to a project, from initial planning and land use and zoning matters through achieving the Opening Date with strategies in place to quickly gain and then maintain market support that goes beyond the support of guests staying at the Hotel.

The involvement of a local development partner ties in nicely with the emergence of food and beverage offerings as a money maker for the hotel rather than a loss leader. Knowing how to find the right elements to bring customers in from the neighbourhood and not just the guests of the hotel brings lots of good things to the hotel, its owner and its manager. Not only can it enhance profitability, but it can fully incorporate and integrate the hotel into the local market to help solidify market prominence for the long term.

McDonnell: As noted above, the BC wine industry has a strong presence so mutually beneficial relationships (such as grape supply) would be particularly beneficial.

5. Are there any interesting case studies or noteworthy strategies for companies entering a new market?

McDonnell: The Courts in Canada have established new precedents in Commercial Host Liquor Liability requiring a series of hosts to ensure the safe passage home of any intoxicated patron so that he/she does not pose a threat to themselves or the general public. This requires more diligent supervision of service and perhaps a more circumspect approach to the promotion of the product.

6. How important is research & development?

Mascha: Research and development are always important. The hospitality industry is one of the most challenging, as it has permanently to react to changing demands and expectation of its customers. The industry is very competitive and new products and trends are permanently created.

7. What impact does changing demographics of the market Segmentation have on product branding, sales strategies and daily operations?

Mascha: There is a huge impact. As an example the number of travellers from Russia to Vienna has increased yearly in the 2-digit range. Since the Ukraine crises figures went down drastically. New markets in Asia, such as China, require different services and service culture. The loyalty programmes of the big international brands have become increasingly important as they facilitate the access of the local hotels to These markets. Products and brands are being designed to the demands of special interest and lifestyle groups. Brands try to establish emotional links to customers and customers are willing to pay higher prices for branded products– e.g. iPhone/Apple.

Migdal: The financial bottom line for our industry is occupancy, ADR and RevPAR. These cannot be achieved in a vacuum and simply requires market analysis and sensitivities. The guest service bottom line for our industry is service and the delivery of amenities and guest services. Demographic data is essential and should inform the planning of branding, sales and operations. Hotels have to deliver the Services the guest desires (beyond a bed) and therefor owners and managers have to understand what the guest wants.

McDonnell: As the “boomer“ Generation ages, tastes have shifted towards wines, fine scotches and liquors and away from beer and coolers. The consumer now has a more sophisticated palate.

8. How is the hospitality industry adapting to sustainability in an age where customers are becoming ever-more conscientious about the environment?

Thomas: From an operational Point of view, I believe that many Hoteliers have pulled their socks up and now realise that guests expect their choice of hotel to have a sustainability strategy in place and in operation. This should go far beyond the simple Cards in the bathrooms regarding reusing the towels and sheets, and should encompass the procurement of materials and supplies from local sources, recycling of waste water, food and packaging, rainwater harvesting etc.

Where I believe more can be done is in the take up of environmentally sustainable construction practices applied in the development of new projects. LEED certification is gaining in popularity, but owners are still deterred by what are perceived to be high costs associated in gaining accreditation and using the right methods and materials. When first introduced, it was thought that achieving these high construction standards added a premium of c.20% on to costs (ignoring operating savings). However, costs have now come down and in some cases, employing these new construction techniques is cost neutral, with the added benefit of operational savings after the build is completed.

Mascha: From my point of view there is a schizophrenic Approach of the customers and the market to this. The public asks for sustainability, green buildings etc. On the other hand customers complain about hot/ cold rooms and want their towels changed daily. There is definitely a market for “green” hotels. In the resort hotel market the demand is stronger than in city Locations and business Hotels.

Nunez: The biggest trend I see in New Orleans is partnership with local Food suppliers to promote food sustainability. Louisiana has a prominent food culture as well as abundant farming and fishing industries. My father is a commercial fisherman and I’ve always noticed disconnect between the fishermen and the consumers. New Orleans restaurants and chefs are beginning to bridge that gap by participating in the Audubon Nature Institute’s Gulf United for Lasting Fisheries (G.U.L.F.) program and other programs designed to promote the sustainability of Gulf of Mexico fisheries. Many restaurants now identify the local source of the ingredients on their menus and consumers are paying attention.

McDonnell: The use of organic products, freshly made juices as opposed to pre-made container products, recycling containers and utilising recycled napkins and coasters.

9. What strategies can the hospitality industry implement to increase employee Retention?

Thomas: Staff attrition is inevitable in any business and sometimes a Change can be positive as it can bring about fresh ideas and energy. However, it is also a costly process, disruptive to a business, and can take up additional and unnecessary resources in finding replacement staff. So controlling Attrition rates and minimising them is good business practice. One of the problems in many overseas countries (particularly in the Middle East), is the perception that working in the hospitality sector is not a career, and that being an employee in a hotel is demeaning and below one’s social standing. In this case, it is about education to raise the profile of working in the hospitality sector and to demonstrate that it can, and does, provide respectable careers. In more established markets where, the idea of working in hotel is treated with respect, high Attrition rates are often due to lack of career progression and or financial compensation. Targeted training that is relevant to an individual’s career plans can certainly help, as can financial incentives such as bonuses to reward good performance.

McDonnell: The hospitality field is transitional by nature but it appears that job security, pension sharing and long range planning are key for those seeking to make a career commitment to this line of work.

10. Are there any exciting technological developments on the horizon?

Thomas: The hotel sector continues to be the testbed for new technology. A strong and recurring theme now commonly employed across many different chains of hotels has been the integration of personal smart devices (smart phones, tablets etc.) with the booking and check-in process, as well controlling functions in the bedroom e.g. lights, door entry, television channels etc. Whilst this is not new, the level of sophistication regarding the application of these devices is increasing all the time. Indeed, many hotels are now using Google Glasses for guests to improve their experience during their stay, but also for concierge staff in order to give staff members easy access to electronic information whilst maintaining eye contact with guests throughout the entire process.

A trend that I anticipate will gain in momentum will be the personal selection of bedrooms using online applications, much in the same way as we  have become accustomed to choosing our aeroplane seats. This provides the guest with the ultimate in tailoring the holiday or business trip experience to ensure the best view, or the quietest night’s sleep!

Mascha: There is definitely a trend to make greater use of the potential capabilities of smart phones. Check in, room access and check out will be handled just like your airline check in and queuing at reception desks will hopefully be history. The technologies are there, but legal liability issues such as the storage of credit card details have yet to be resolved.

In room entertainment and the Connection to the devices of the customer will further develop video and Music on demand will disappear. Nunez: The “sharing economy” isn’t the only industry utilising social Networking to attract travellers. In Addition to establishing a strong social media presence, hotels now have Access to a social networking platform called LobbyFriend. LobbyFreind allows guests to connect with the Hotel and each other to communicate real  time information and recommendations regarding nearby events, restaurants, music venues, sights, and special offers on a private temporary social network. At least one New Orleans hotel has implemented LobbyFriend and I expect it will spread quickly.

McDonnell: In British Columbia bars now have a system to identify problem patrons and communicate information between establishments, to allow for the refusal of entry and Service.

11. How should risk Management and insurance be tailored to the hospitality industry?

Mascha: To reduce their economic risks owners have to play a more active part in budgeting and forecasting. Business forecasting over longer periods of 12 to 18 months have to be part of risk management. Critical path methods to control the budget achievements on a monthly basis have to be implemented. This requires experienced staff on the owner side or assignment of specialised Consultants.

Nunez: I hate to keep bringing up the “sharing economy,” but its growth  also needs to be acknowledged and addressed by the insurance industry because it is turning millions of private citizens into small business owners overnight. Companies writing automobile and homeowners insurance policies are not currently assessing the risk that that their insureds might be taking on by providing services in the “sharing economy”, namely the increase in automobile passengers and house guests. I recommend that companies include more specific exclusions for coverage of incidents arising out of the insured’s participation as a service provider in the “sharing economy” and routinely investigate whether or not the claim was incurred as a result of the insured’s provision of such Services.

McDonnell: Risk inspections and corresponding warranties on individual locations should be introduced.

12. In an ideal world what would you like to see implemented or changed?

Mascha: Financing structures and tools tailor-made for the hospitality industry would drive the business intensively. Insurance models could replace the traditional bank guarantees as securities.

Migdal: In an ideal world there would be greater consistency in hotel Management agreements, and certain provisions that many consider to be “market” would be in the template of the agreement saving significant time, energy and money in negotiating these provisions de novo in every case.

In an ideal world concepts like term and termination would be more flexible and give owners more authority. In an ideal world there would be greater transparency as to the day to day economics of the hotel.

McDonnell: In British Columbia, more adherence to the “Serving It Right” protocol relating to the Service of alcohol, particularly to young or underage patrons, and the security of the premises.

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