Impact of covid-19 on the hotel trade

Jean-François Gagne is a Partner at Aldema Partners, a consulting and management business specialising in the tourism/leisure, luxury, hospitality, and media sectors. He also teaches at Paris Dauphine - PSL, a partner of Le Cordon Bleu institute, and in various Business Schools and Engineering Schools. He shares his hospitality industry expertise with us, as he discusses the impact of the current Coronavirus crisis on the hospitality sector.

What impact is the Covid-19 crisis having on the hospitality industry?

The magnitude of the crisis in the hospitality sector is unprecedented. Lots of figures are being bandied around but none of them are confirmed, making it difficult to build a true picture. There is, however, a very recent study, from the beginning of April 2020, which gives us a first insight. Carried out by Phocuswright, it examines Singapore’s hotels in March 2020. The study found that the Revpar (Revenue Per Available Room) had fallen by 75%, year on year, when compared with March 2019. This figure combines a 60 % drop in hotel occupancy rate and a 30% drop in room prices. This indicates that we are firstly faced with the impact of a fall in demand, which has dropped dramatically and whose short-term forecasts continue in the same direction. The occupancy rate registered in Singapore for June 2020, in the same study, is 50 % lower than June 2019.

How will consumer habits be affected?

Hoteliers are faced with drastically reduced incomes and substantial fixed costs which remain unchanged (wages, credits and any loans). Just like the rest of us, they are asking themselves how consumers are going to behave when the time comes. This is unknown territory: nobody really knows what form the tourism sector will take in the “future” world: will people want to travel? Which will be the destinations of choice (more or less constrained when borders reopen and the uncertain future of air travel)? What will be the length of stays? What will be the level of spending and therefore differentiation between different hotel categories? For hotel managers, it is currently almost impossible to make contingency plans for the future by drawing up business hypotheses (volume, duration) which would enable them to make a plan for getting through the current situation. Let’s be clear, this does not mean that they are not going to overcome the problems! It means that, at this moment in time, it is impossible to predict what will happen in the future and this is extremely worrying for a hotel owner…

What will the economic landscape be like for hotel industry players?

This is a global crisis and yet all the players will not be impacted in the same way. There are three key factors which will be of vital importance. The first factor is countries in which some of the losses can be covered by global schemes: partial unemployment in France and Germany, for example, reduces the costs of a manager. To a lesser extent is a hotel manager’s insurance cover. The number of litigations concerning insurance for business interruption is soaring in the United States and may lead to negotiations between the two parties, the business owner and the insurer.

Secondly is the geographical area in which the activity in general or the hospitality activity in particular will resume, when health conditions are favourable. We are, of course, thinking of China, where economic activity is restarting and recent data on car sales is encouraging. When will hotels witness a boom and take advantage of it? Closer to home, in Europe, we are also seeing what is at stake in terms of opening the borders this summer. Consumption in the hospitality sector, and more globally in the leisure sector, between June and September, will be distributed very differently depending on the movements which will be allowed in Europe this summer. If borders are opened, a certain percentage of customers will go south for their holidays. Closed borders will lead to an exceptional summer season for German, Dutch and Scandinavian hotels.

Lastly, the crisis will have a different impact on hotel chains. Large groups are, of course, impacted. Accor’s share price, for example, has fallen by more than 35 % since the beginning of the year. However, they have enough cash flow and have been driving their development with franchising over many years, enabling them to limit the use of their own equity. As such, the franchisor is not liable for the losses of the franchisee. Many of the most difficult management decisions in the hospitality industry will probably be faced by small business owners.

Is it possible to see a change of model in the hospitality sector?

This question is being asked at many different levels. The question concerns certain management tools and methods, which are widespread in the hospitality sector. Dynamic pricing, for example, to optimise Revenue Management, is being called into question. This is due to the fact that we find ourselves in a critical time, in terms of demand, and that this type of tool has been built for optimising using a given model. Such tools will, of course, become useful again once the market returns to normal levels.

Still focusing on management tools, it is possible that hotel managers will include much tougher environmental constraints when building their strategic plans in years to come. Perhaps they will focus on the concept of hotel capacity in order to absorb two external crises. We must recognize that, for the past 30 years, tourist industry players have been impacted by a series of crises.

One of the questions that has arisen from the crisis is the need to call into question the globalisation of the hospitality model. Why not take this to an even deeper level? The possibilities are endless. Many hoteliers – not all – make their living thanks to international customers, therefore customers of different nationalities and cultures find themselves in the same hotel. They have had to define what they would like to offer to their customer, fine tune the offer and train their staff to meet the needs of this international clientele. If the balance shifts in the long term (customers travelling from one side of the globe to the other, mass tourism etc) the hotel industry’s globalisation model could be transformed. More regional and less global approaches could emerge. Only the future will tell…

To go further...

Le Cordon Bleu Paris and Université Paris Dauphine-PSL combine their expertise in an MBA Hospitality and Culinary Management. The programme is aimed at experienced managers to train future leaders in the luxury hospitality and international restaurant industry who are keen to develop their strategic and management skills.