Faculty Research: Where Should Hotels go (and Grow) Next?
January 28, 2020
Hotel operators face a dilemma: They need to grow, but in a world increasingly saturated by Airbnb and other private rental options, opening in the wrong location can be a costly mistake.
In the field’s first comprehensive empirical study of how destination characteristics affect hotel performance, Isenberg School of Management Professor Albert Assaf and colleagues set out to identify and rank the factors that make or break a hotel investment. “Competition is intense, so hotels struggle to pick their next international destinations,” says Assaf, who studies the economics of the tourism industry and serves as editor-in-chief of the journal Tourism Economics.
He and colleagues Alexander Josiassen (Copenhagen Business School), Linda Woo (Isenberg), and Frank Agbola (Newcastle Business School) analyzed five years of data encompassing 50 destinations and 560 hotels across 249 brands. Their conclusions? Operators should look for markets without a lot of existing competition, in countries where the government allocates spending appropriately on social fundamentals including infrastructure, education, healthcare, tourism, etc. Of all the factors studied, spending fairness—where funds were distributed across a lot of sectors—had the strongest correlation with high performance, according to the paper, “Destination Characteristics That Drive Hotel Performance: A Atate-of-the-Art Global Analysis,” which was published in Tourism Management in 2017.
What Matters Most
While government spending had the strongest correlation with high performance, local competition was actually the most influential factor in the study: “Airbnb is a problem,” Assaf says. “The number of accommodations was the biggest negative driver because of supply and demand. It outweighed the gains from fairness in government spending.” He adds, “Overall, hotels do not tend to look at the big picture. They look at their specific locations and they cluster together so any strategy that helps hotel operators think more broadly about performance is useful.” Clustering tends to depress hotel performance because it increases competition and flags the market’s potential to Airbnb hosts.
No-Go for Hotels
Besides taking a hard look at the number of competitors, what else should operators be wary of? High tax rates, high fuel prices, and easy hiring of foreign workers—all three dragged down hotel performance in the study. Assaf and colleagues write, “Locations that were not performing well on these measures created the worst environment for hotels to grow or improve their performance.” Two of these factors—tax rates and fuel prices—place economic burdens on visitors. In some destinations, mandatory occupancy fees add significant surcharges to visitors’ bills. It’s not clear why low regulations on hiring foreign workers should impact performance, but it may be a service issue. “Relying on more local and highly qualified labor seems to be a better strategy for hotels,” Assaf and colleagues write.
The Greenest Pastures
In addition to fairness in government spending, Assaf identified three other market factors that helped hotels thrive. In order of importance they are: education system quality, international arrivals per capita, and disposable income. In an industry that’s labor intensive, a good education system creates a trained local workforce. “A workforce of employees with a variety of skills, knowledge, and innovative abilities gives many hotels a competitive edge,” Assaf and colleagues write.
International arrivals per capita correlates to strong foreign tourism, which was a critical performance booster for hotels. But not all revenues came from visitors. Assaf speculates that local disposable income helps hotels because it means “the destination has a steady and reliable source of affluent guests” even in the off-season.
In general, the study highlights the importance of macroeconomic due diligence because the most influential factors Assaf and colleagues identified (such as government spending, tax rates, and education system quality) are outside the hotel operator’s control. “Entering a new market is a big commitment,” Assaf observes. “Operators need to make the smartest decisions they can.”