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How will sharing economy affect the mid-market hotel segment in the Middle East?

10 April 2018

The sharing economy, also called peer, access, or collaborative economy, refers to the concept of shared resources like rooms, services, skills, or cars, between individuals – with the transaction facilitated by the internet. In his book titled ‘The Sharing Economy’, subject expert Arun Sundararajan explains the transition to what he describes as “crowd-based capitalism”—a new way of organizing economic activity that may supplant the traditional corporate-centred model.

 

Venture capital investments in sharing economy companies

 

Companies that have successfully employed the concept of sharing economy include Uber, Lyft, Zip Car, Careem and Airbnb. These companies recognized a need for an alternative to the traditional options.

Also read: The role of mobile wallets in the growth of the GCC banking industry

Sharing economy activities fall into four broad categories: recirculation of goods (eBay and Craigslist), increased utilisation of durable assets (Uber, Lyft, Careem, Airbnb), exchange of services (Task Rabbit), and sharing of productive assets (Skill share). The concept has already made its mark on the vacation rental market, with 9% of travellers opting for options such as Airbnb as opposed to traditional hotels. The market is gaining more widespread use as trust in these services increases. Companies such as HomeAway and Airbnb already represent 50% of the vacation rentals market.

 

Market share of Airbnb in vacations rentals market

 

components of sharing economy

 

Airbnb and traditional hotels

 

Airbnb and the global hospitality industry

Airbnb has witnessed unparalleled growth over recent years. The company started with 3,000 rental listings in 2009 and reached 2.3 million listings in 2016, representing a 153% growth.  In addition, Airbnb’s monthly active users more than doubled between the first quarters of 2014 and 2016. U.S. bookings grew 45% in the first quarter of 2016 when compared to the same time one year earlier. Use of the company’s mobile app also doubled between 2014 and 2016. Airbnb bookings are estimated to reach close to 60 million by 2020. Overall, Airbnb’s revenue leapt 89% as of July 2016 relative to the same time the previous year. Morgan Stanley estimates that the number of overnight stays in Airbnb accommodation will account for 6% of total hotel nights in America and Europe in 2018 – a figure that stood at 4% in 2016.

Airbnb bookings are estimated to reach close to 60 million by 2020 Click To Tweet

 

Airbnb's rental listings

airbnb revenue growth

 

Airbnb total room nights

 

According to a recent report based on the 10 cities with the largest Airbnb market share in the US, the launch of Airbnb led to a 1.3 per cent drop in hotel nights booked and a 1.5 per cent reduction in hotel revenue. In addition, hotel guests found that Airbnb provided better accommodation at lower prices than hotels.

 

airbnb perfomance

 

Airbnb total bookings

 

A 2015 report by HVS Consulting & Valuation on the financial impact of Airbnb on the hotel industry in New York has pointed to some alarming statistics for global hoteliers:

  • Hotels lose approximately USD 450 million in direct revenues per year to Airbnb.
  • Between September 2014 and August 2015, 480,000 hotel room nights were reserved while over 2.8 million room nights were booked on Airbnb.
  • By 2018, Airbnb room nights will reach 5 million per year.
  • Many hotel employees are losing their jobs because of decreasing demand for hotels. Airbnb rentals are less labour intensive than hotels because they do not require the same level of service. Over 2,800 jobs are directly lost to Airbnb, a loss of over USD 200 million in income for hotel employees.
  • Over USD 108 million of food and beverage revenues (USD 88 million on food and USD 20 million for beverages) are lost because travellers choose to book with Airbnb.
  • In New York City, the loss in hotel room nights costs local, state and federal governments USD 226 million in lost tax revenues per year. The total effect of Airbnb on the hotel industry and the government in NYC is about USD 2.1 billion annually.

Hotel performance vs Airbnb performance

 

Airbnb vs the Middle East hospitality industry

The Middle East hospitality market is growing. As per a report by Top Hotel Projects, the region is expected to increase the current hotel supply by 238,963 rooms over the next five years. Europe, in comparison, is expected to add 214,743 hotel rooms over the same period. According to the report, the UAE and KSA are set to experience the greatest hospitality development in the region.

 

expected increase in hotel rooms bookings

 

Furthermore, the greatest growth in hospitality in the region is in the luxury sector. According to research by STR, the Middle East luxury segment had 101,140 rooms in the luxury segment as of January 2017 with an additional 12,571 rooms in the pipeline. In comparison, the midscale chains have 33,905 rooms with an additional 2,897 rooms under construction.

 

Middle East hospitality market

 

The UAE is expected to lead the GCC’s luxury hospitality segment till 2022. In the mid-market segment, however, Dubai’s hotel market prices are likely to be impacted by 4,200 short-term vacation rental options available on Airbnb.

“On a broader view, holiday homes are a new industry segment that has been embraced positively by many Dubai residential property owners. The unprecedented growth of this sector in a such short period may impact on the budget hotel market. However, some would argue that it is actually creating new demand from visitors willing to pay a little more than budget hotels”, says Haider Tuaima, Head of Real Estate Research, ValuStrat

While most parts of the world feel the competitive pull of guests between hotels and Airbnb, the Middle East conversely enjoys a rapid boost in hotel development due to numerous factors. In Dubai, for instance, the Department of Tourism and Commerce Marketing (DTCM) has set stringent rules before owners can list their properties on websites like Airbnb. To sublet a property, the consent of the landlord and a license to operate are required. DTCM also lays out a set of rules and requires an AED 5,000 fine if any of these rules are broken.

 

So, what lies ahead for Middle East’s mid-market hotels?

 

  • Heart of innovation: Technology

Sharing economy vacation rentals like Airbnb are tech-driven and their system allows them to keep a close tab on the entire user journey from both the guest and host sides. Since every phase of the user experience is completed through Airbnb’s channel, they are able to leverage data to improve the guest experience, build their product and find new growth opportunities. This has catapulted them to a $31 billion valuation, with millions of users around the world.

 

market value of airbnb

 

Despite most hotels having a presence on Booking.com, which allows a similar user journey to that of Airbnb’s, they also allow bookings through their official websites. In addition, hotels typically allow phone reservations, email reservations and walk-in reservations. As a result, their data is more fragmented and therefore harder to track. To make the process smoother, hotel chains should invest in a cloud-based communication channel across departments to ensure that data collected from various channels is compiled. The latter would allow them to improve user experience.

In an era of mobile computing, it is also imperative for hoteliers to focus on improving the experience on mobile using virtual 360 tours, connected location maps or voice search enabled operations. The mobile apps should not just be limited to making the booking but should assist with every activity that guests partake in at the hotel including concierge services, laundry, Wi-Fi, room service, room ambience control through IoT. Mapping all the activities on the app allows the guest to be in complete control and grants hoteliers invaluable data that will help fuel future growth.

Research by Oracle finds that a typical hotel guest spends at least 12 to 15 minutes trying to figure out how to operate or adjust the temperature, lights and other room functions. To enhance guest experience, hoteliers are exploring voice-activated solutions. Wynn Las Vegas was the first resort in the world to place Echo, Amazon’s voice-activated smart speaker, in all of its 4,748 guest rooms to control room environment. Nine Zero Hotel in Boston takes it a step further with eye-scan enabled locks for guest rooms.

Hotels should also use digital payments such as mobile wallet payment, Apple Pay, Alipay and Masterpass and not restrict themselves to credit card payments. This provides guest with greater financial liberty and convenience.

 

  • Personalized Hosting Experience

 When booking a room or a house on Airbnb or HomeAway, a guest automatically feels like they have made an acquaintance in the city before arriving. This new acquaintance can help recommend authentic experiences to guests and act like a travel guide. Often, Airbnb hosts help make reservations for guests which provides a personalized experience and builds trust.

The personalization element of vacation rental experiences creates a need for hotels to do something similar. Hilton partnered with IBM by using their Watson platform to develop ‘Connie’ – a robot concierge. Connie gathers knowledge to inform hotel guests of tourist attractions and offers them dining recommendations.

Additionally, digital innovation and social media gives guests higher service expectations. Hoteliers should therefore invest in technology that allows a more personalized experience during check-in, room service and other interactions. For instance, a guest’s name should be displayed on devices and dietary requirements should be stored in the system when dining on the property.

 

  • Customer Care Priorities

 Not only does Airbnb allow cheaper accommodation, but it also allows guests to feel at home with different amenities including kitchens, washing machines and sometimes even free bicycle rentals. Amenities are often the deciding factor for travelers in selecting a hotel or a vacation rental space making it important for mid-market hotels to focus on the latter. Virgin Hotels uses short videos to showcase hotel amenities and highlight the absence of hidden fees – a factor that often makes guests lose trust in hotels.

 Airbnb has recently introduced Airbnb Plus – a more direct competitor to hotels with a more standardized style of service that is verified for quality and including a set of amenities one might typically find in a hotel. Airbnb Plus has an average nightly rate of $200, as opposed to the $100 average for standard listings. The competition therefore becomes stronger for hotels, creating a need for better customer care through innovation.

 

  • Focus on Millennials

 Studies show that a large number of Airbnb guests are Millennials or “new gen” renters, who are also the prime market for midmarket hotels. As a result, large hotel chains are working to better cater to Millennial guests.

Hilton Worldwide plans to build a new brand called Tru by Hilton to focus on mid-market hospitality seekers. Tru focuses on creating a lively, energetic and interactive experience for Millennials.  It is said to be technology focused, with most key functions controlled on a smartphone app. Similarly, Marriott has been expanding Moxy – a new hotel chain created especially for the Millennial traveller. The hotels, which initially launched in Europe, combine a contemporary design and “approachable service” at a reasonable price.

Hotels should also use VR to connect with travellers, especially tech-savvy Millennials. They could provide virtual room tours to prospective guests, showing them what to expect before they book their stay at the property.

 Digital nomads –  younger creative class, a sub-segment of Millennials who are untethered and apt to bounce between big cities – need certainty when booking longer-term stays. Companies like ‘citizen M’ are ready to cater to this segment by pushing a more holistic, social experience, with large common areas and check-in kiosks meant to make the experience more seamless and social (and reduce the need for additional staff).

Read next: Can PropTech propel Middle East’s real estate market?

 

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