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Boutique Hotels Beware: The Hotel Industry Gets a New Frenemy

By Kyle Killion

Longtime hotel industry rival, Airbnb, continues to make headlines with its latest offering. In an effort to own more vacation accommodation bookings, the company, which built its business on being the anti-hotel alternative, now offers more boutique hotel listings than ever before. But, even as Airbnb adds more hotels into the mix, hotel brands are not featured. Despite this, there is a lot that hotel brands can do to stay competitive in the sharing economy.

Why are hotel brands letting Airbnb win?

Hotels have experienced strong growth since 2008, but alternative accommodations like Airbnb and HomeAway have been chipping away at their market. Phocuswright projects private accommodation bookings will grow from 12% to 16% of total bookings this year. The trouble is that the amount of pressure being felt within the hotel industry to adapt doesn't meet the danger that faces them. This is the opening that vacation rentals are exploiting.

The response to the rise in vacation rentals falls into two extremes: denial and alarm. The denialists argue that vacation rental companies like Airbnb serve a different customer — someone hungry for local flavor and authentic experiences that can be achieved by renting an extra room in a home or apartment. However, the majority of bookings are with hosts who offer more than one listing, essentially running unlicensed hotels [1]. Plus, travelers are predominantly looking for entire homes or apartments [2]. And, while Airbnb brags about its hosts as a major differentiator in the crowded travel accommodation marketplace, the most likely scenario is that the host and guest never meet in-person, creating an experience similar to a hotel without a front desk.

The alarmists correctly point out that vacation rentals are barely regulated, taxed or scrutinized compared to hotels, similar to what the delivery industry faces from Uber and Lyft. While hotels enjoy advantages like prime locations, often more desirable than the residential properties of vacation rentals, they are often outweighed by regulatory forces. In this case, the location may be outweighed by the at least 15% price advantage of not having to pay an occupancy tax, a notable revenue stream for cities, helping them build and maintain communities around these tourist destinations. A benefit of Airbnb's significant lobbying investments. Not only does the concept of Airbnb being a mom and pop home sharing site no longer hold true, communities are losing out on funding that directly translates into economic development.

How are hotels battling back?

The hotel industry has a difficult balance to maintain. It needs to appear unruffled by vacation rentals to the public while appearing proactive to investors who are increasingly concerned about vacation rentals. The playbook so far has been focused on lobbying.

We've gotten a glimpse into the lobbying playbook recently. The laws that have emerged have ranged from outright bans to simple tax collection. In my opinion, the bans help no one because short-term rentals do meet a real need, and by obstructing them hotels suppress innovation. There is a balance to be struck through registering and taxing short-term rentals instead of outlawing them entirely so that both consumers and the travel industry benefit.

Real regulatory change is just starting to happen in places like New York and most recently in San Francisco where Airbnb had to drop 50% of its listings. Airbnb will have to add hotels to make up for its lost inventory and when that happens they will no longer have a price advantage because they are selling at the same rates as everyone else.

If hotels can level the playing field and get local governments to tax and regulate vacation rentals as hotels, it will be a big win for local communities, hotels, and even consumers who will be paying more, but getting more safety in return. Hotels will know that they have fought their way out of this quagmire when they are on equal tax footing with vacation rentals. The first step is happening now with municipalities setting up laws to tax individuals. The next step is when municipalities require the sites selling short-term rentals to report the taxes that should be collected.

So what should hotels be doing to compete?

Regulatory changes will take years, if not decades to come. So hotels also need to be thinking about changes they can make today to remain competitive.

Focus on what it means to stay at a hotel: Location, amenities, and service. An average Airbnb host cannot compete with an established hotel in these three areas. The hotel industry as a whole should be playing up these attributes:

  • Location: Location is consistently rated the most important factor in accommodation purchasing decisions. Most hotels have an advantage with central locations and easy access to transportation. Vacation rental maps often look like a donut around the center of the city because they are in residential neighborhoods.
     
  • Amenities: While some vacation rentals may have a pool they definitely don't have a spa. Hotels have great services like restaurants, spas, clubs onsite. We know that travelers want these amenities because of the companies that focus on getting vacation rental customers access to hotel amenities.
     
  • Service: Service is one of the hotel industry's biggest strengths. The staff that sometimes is seen as a cost center is really one of the most valuable distinguishing factors in favor of hotels. The amazing recommendation from a concierge and the attentive staff member are what travelers remember. Most Airbnb hosts don't have the time to cater or are even in the same city as their listings. The hotel experience is the luxury experience, with an entire staff at a guest's beck and call. Plus, issues such as broken plumbing, inoperative air conditioning, that would normally just result in getting a new room can't be solved by hosts that don't have the ability to move customers around.
     

Give the people what they want. There are plenty of hotels that have a large portion of suite inventory, most of them with the ability to convert to a multi-room suite. And still, hotels continue to lose families and group vacationers to short-term whole home and apartment rentals. One big reason is that friends and families can book multi-room inventory easily on these home share platforms. They can have the shared kitchen, living room, balcony where they can be together.

Even in a place like New York, 35% of Airbnb's listings are two or more bedrooms. The truth is hotels already have the kind of inventory that can attract these customers, but most of that inventory is paid for only 30% of the time. This is because of legacy technical reasons, lack of marketing the best hotel inventory, and inter-departmental turf wars.

One of the things we've done is create ways to get around these limitations thereby giving travelers exactly what they want — the space and multi-room inventory akin to an Airbnb with the safety, service and quality assurance of a hotel. 

Hotels are already seeing the difference that multi-room inventory makes. Two-bedroom connecting suites are booked 3.3X times more than regular suites. For the consumer, this kind of inventory means getting what they want at better prices — travelers can save up to 36%, compared to similarly sized stays elsewhere.

Where do we go from here?

As an industry we need to remember that travel is about the people. Airbnb succeeded by bringing the human element back into travel, not from just "staying like a local" but by providing a space for people to stay together. Today's travelers want to reconnect with their friends and families. The traditional hotel mindset of one-size fits all one king, two queen hotel room needs to change.

Eventually, Airbnb will start adding hotel inventory to their site just like the major OTAs now include vacation rentals. The catalyst here will be when short term rentals start getting taxed at the same rate as hotels. When that happens, what it means to be a hotel will fade away unless we do something about it. For those of us who love hotels, we won't let that happen. Let's get to work and adapt!

Sources:
[1] AIrDNA.co shows that for the month of Mar 2018, there are a significant number of hosts who manage multiple listings on Airbnb. 19% hosts in New York manage more than one listing while in Las Vegas the number is as high as 36%. In other words, these are unlicensed hotels taking customers away from traditional hotels.
[2] The popular belief that Airbnb bookings are mostly shared room or private room bookings is also not true — most are actually entire place and multi-room bookings. AirDNA.com data shows that 52% of New York listings are entire homes or apartments while Las Vegas is 68% entire home/apartment listings.

About Kyle Killion

As co-founder and head of product at Suiteness, Kyle brings a wealth of experience in entrepreneurship, business building and innovation to the team. He’s held senior product management positions at Apartment List, Yelp, and Coupa, as well as co-founded maccontrol.

Contact: Divya Mulanjur

divya@suiteness.com

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