Hospitality post-COVID 19: Adapting quickly to better serve customers for revival

Hotels being used as quarantine centers is positively impacting consumer sentiment regarding the sector’s ability to handle the pandemic.

The travel industry connects communities and puts a great deal of emphasis on serving and making new connections with millions of people from different parts of the world every single day. But the same emphasis on people-to-people connection became problematic when governments issued social distancing advisories to curb the spread of coronavirus.

The outbreak spread at different speeds across different parts of the world and understanding the seriousness of the situation, governments across the world have imposed lockdowns ordering billions of people to stay inside their homes.

The strict restrictions and lockdowns imposed by governments across the world have essentially put brakes on the travel and leisure industry forcing many businesses to suspend operations and layoff or furlough staff. Even those that are operating are doing so with a skeleton crew to serve the essential needs of customers.

Airlines and cruise companies dominated headlines ever since the initial days of the outbreak as they were among the first to fall victim to the fallout of this outbreak and ticket cancellations soon converted into hotel booking cancellations for the hospitality sector, which is witnessing an equally tragic impact but with far less hue and cries.

The whole hospitality sector is practically suspended and the impact is far beyond the control of industry players. Lockdowns have restricted movement of people thus directly impacting business in the hospitality sector, which relies on the movement of people, and even before the lockdowns were in place businesses saw a massive drop in revenues as governments were encouraging people to follow social distancing and avoid public places.

The occupancy rates at hotels dropped to historic lows as booking cancellations started piling up, dragging down revenue per available room. Restaurants and pubs also started shutting their doors for dine-in customers due to government advisories and the fear of transmission of virus between employees and customers.

The occupancy rate of hotels in the United States fell to about 22 percent accompanied by a whopping 81 percent fall in revenue per available room at USD 16.5 compared to 2019. In India, the occupancy rate fell to just 11 percent as the government imposed the biggest-ever lockdown restricting the movement of over a billion people in an attempt to curb the spread of coronavirus.

On March 20, the United Kingdom also decided to order its army of pubs, restaurants and other leisure centers to close down in what Prime Minister Boris Johnson described as an extraordinary measure "taking away the ancient, inalienable right of free-born people of the United Kingdom to go to the pub." However, most governments have allowed food joints to accept orders for home deliveries which came as a slight sigh of relief for the businesses that can provide home delivery services but the majority of leisure businesses are looking down a rough road for the next few weeks, if not months.

Mass layoffs can have a broad impact

The hospitality sector is a labor-intensive sector and directly employs millions of people worldwide while indirectly supporting millions of other jobs. These employees are facing a very real risk of massive layoffs and thousands have already been furloughed as the sector fights to survive the crisis.

According to an Oxford study, the sector employs almost 2.3 million people in the US alone and as much as 1 million of them could be laid off due to the crisis. Hoteliers in other countries have also issued similar warnings as lockdowns dry up reserves of companies. The world's biggest hotel operator Marriott International Inc. is starting to furlough what it expects will be tens of thousands of employees, as hotel closings increase financial pressure.

Job losses have a significant human cost as laid-off workers cope with financial hardships and the environment of economic uncertainty worsens the situation. But mass layoffs in any sector also have broad economic consequences and would intensify the negative economic impact due to coronavirus because it would reduce consumer spending and result in a ripple effect across various sectors of the economy.

The struggling sector

The sector has massive exposure to external shocks and often finds itself on the frontline in terms of the impact after an economic slowdown, natural calamities, and disease outbreaks. That is because a significant portion of the sector doesn't cater to necessities of the majority of the population and luring back frightened customers is often not in control of businesses in such events.

Another major reason for ongoing hardships in the sector is high fixed costs which cannot be curtailed in the short-term. The sector sells the experience and the cost of maintaining this experience is often massive. Big hotels, expensive décor and an army of employees to make customers feel important are costly enough.

Apart from that capital costs are huge, which means high installments of interests, and hospitality sector businesses also have to operate in popular geographical locations with enormous rents. Fixed costs in the hospitality sector can easily go as high as 50-60 percent of average revenue, making businesses extremely vulnerable to sudden downfall in revenue.

A crucial driver of economies

The hospitality sector is a crucial part of economies and has witnessed consistent growth after the 2008 global recession. The sector has grown according to the customers' demand and has already weathered Online Travel Agents (OTAs) and sharing economy's disruptive effects to serve at the pleasure of customers even as the dynamics of the sector changed in recent years.

Despite the innovations, the hospitality sector remains a labor-intensive sector, directly employing millions of people worldwide and supports millions of other jobs. The sector is a driver of local economies and boosts revenue for its traditional industries, food producers, repair service providers, and other businesses.

Britain's hospitality industry contributes more than USD 150 billion a year to the economy and is worth more than the automotive, pharmaceuticals and aeronautics industries combined. The sector is the third-largest employer in the country with more than 3.2 million people working in pubs, restaurants, and other outlets. A further 2.8 million work in the wider supply chain.

Governments understand the dire need to save the industry to offset the negative impact from the outbreak and have announced bailouts packages worth billions of dollars. The United Kingdom has announced a USD 400 billion package which offers a year-long business rates holiday to all businesses in retail, hospitality and leisure sector. Small businesses can also get a USD 31,000 cash grant under the package.

The massive USD 2 trillion bailout package announced by the US has a provision for small hotel operators to claim loans capped at 250 percent of a hotel's monthly payroll. These loans are also subject to forgiveness, meaning they don't have to be paid back, if hoteliers re-hire employees by June 30.

But the low market concentration and high competitiveness in the hospitality sector could mean difficulties in ensuring these benefits reach the businesses in need and some experts say might not even be enough.

Future of the hospitality sector

The COVID 19 pandemic is accompanied by mass-scale uncertainty and fear which would lead to new behaviors and beliefs among consumers. In fact, any unfortunate event of a large scale impacts consumer behavior and the hospitality sector has weathered these changes time and again.

After the 2008 global recession, Airbnb gave rise to the world of sharing economy which became a disruptive change in the hotel industry forcing businesses to reassess their business models and provide better value to consumers to stay in the game. The rise of Online Travel Agents (OTAs) was another market disruption that hotels faced in recent years and adapted to it to better serve their customers.

This outbreak coupled with a looming global recession could have a much bigger impact on the market and introduce new disruptive changes that cater to consumer demand but it's very likely that hotels and restaurants will be able to quickly adapt to it because the sector was already dynamic before the outbreak.

The hospitality sector emphasizes group activities and connecting people, making it vulnerable to act as a hotbed for further spread of coronavirus, but despite this, the sector was able to avoid any major controversies, unlike airlines and cruise companies. Many hotels around the world are even offering their properties to be used as quarantine centers and to accommodate healthcare professionals dealing with coronavirus cases, which is positively impacting consumer sentiment regarding the sector's ability to handle the pandemic and will support recovery in the sector once the outbreak is over.

But the sector will have to wary of the rise of digital communication services that could have a profound impact on revenues of the sector. Increased dependency on these services during the lockdown period could lead to a tipping point where teleconferencing is seen as a viable alternative to traveling across the world for meetings. To offset the impact, the whole travel and tourism industry would need to come together to make traveling seem viable despite the rise and improvements in digital communication.

Just like other sectors, the coronavirus outbreak is expected to usher in the adoption of new technologies in the hospitality sector helping it better serve customers. The sector is already tech-savvy due to the latest market disruptions like OTAs which increased competitiveness in the market and forced businesses to adapt to trends to remain relevant.

But the hospitality sector is yet to witness a widespread adoption of robotics despite some impressive technological developments in recent years. Businesses in the sector have been hesitant to adopt them because of fear of losing the human touch and negatively impacting the guest experience.

But the potential change in behavior towards the role that technology will play in day-to-day life after the coronavirus outbreak could lead consumers to accept and embrace robots in the hospitality sector and usher in a new era of possibilities.

Centre of Excellence on Emerging Development Perspectives (COE-EDP) is an initiative of VisionRI and aims to keep track of the transition trajectory of the global development sector and works towards conceptualization, development, and mainstreaming of innovative developmental approaches, frameworks, and practices.