Will Airbnb become a threat to traditional hospitality industry ?

Introduction

Airbnb is an online community that allows people to find / provide a short term accommodation rental service. It launched in 2008, by March of 2015, they had more than 25,000,000 users. Airbnb has successfully become a international community, people from more than 34,000 cities and 190 countries have registered their property on Airbnb’s website (Airbnb,2015). As a young and fast growing company, Airbnb has made big contribution to the “sharing economy” which refers to people who rent physical resources from each other and the deal can be carried out on internet. (The Economist, 2013). As a middleman, Airbnb has huge source of housing/accommodation so it is able to provide various choices for guests. With Airbnb getting widely used among travelers, the business is expanding in all around the world. However, the hospitality industry was designed to provide a lodging service, when a new entrant suddenly appears in the market in a different form, should the traditional hospitality industry worry that Aibnb could become a threat to them?

This report is aimed at presenting two arguments on whether Airbnb will become a threat to the traditional hospitality industry.

Finding and analysis

2.1 Physical evidence.

Physical evidence is a part of a marketing mix, which can be used as a marketing tool in the hospitality industry to give meaning to marketing communication and promote itself (Friesner. 2014) As a Marketing tool, Marketers design and put physical evidence into marketing level, some evidence can even be defined as a unique selling point in the hospitality industry. Service in the hospitality industry is intangible, however, the physical evidence is tangible, guests tend to heavily rely on physical evidence when they book a hotel (DR. Balaji, 2015) guest are more likely to make decisions on what they see, touch and can use in the hotel before they book a stay and this physical evidence allows them to decide which hotel to choose.

2.2 Physical evidence in the traditional hospitality industry and Airbnb

In the hospitality industry, Physical evidence can be categorized into 3 parts they are facility exterior, facility interior and other tangibles. Facility exterior generally includes the exterior design, location, parking lot, recreation facilities and so on. Facility interior is more focused on the inside of the hotel, such as: interior decoration, furniture, equipment in rooms and so on. The other tangibles normally refer to the hotel brand, such as advertisement, signs, amenities, employee grooming and so on (Hoffman et al, 2009) In traditional hospitality industry, the physical evidence classifies the level of the hotel. Based on physical evidence, budget hotels and high-end hotels hold different opinion towards Airbnb.

High-end Hotels normally own a stunning building at a good location and when entering the hotel lobby, you are greeted instantly by beautiful hostesses, bell boys promptly take your luggage and after you enter the room, you are surrounded by a comfortable well designed atmosphere. The hotel room is well equipped with a complete set of facilities, the bed is soft and covered by high quality of fabric and these are just the basic, most obvious signs physical evidence any high-end hotel will provide, in the traditional hospitality industry, physical evidence is mostly standardized. Marriot, four seasons and Hilton hotels all claimed that companies like Airbnb don’t pose a threat to them, because the target market is different, they are high-end hotels that target business travelers, the vice-president of Ritz-Carlton chains is in fact unaware of the existence of Airbnb and said that she has never heard of Airbnb(The Economist. 2014) How come these high-end hotels don’t consider the existence of Airbnb a threat? Because they know there is a lot physical evidence which Aibnb can not provide for guests. There are 5 essential realities business travellers look for while choosing an accommodation. Firstly, the location, according to a survey done by National Business Travel Association and Best Western International, more than 60% of travellers claim that when it comes to choosing a hotel for a business trip, the location is the first factor they are concerned with. Secondly, convenience and hotel facilities, such as: concierge service, spa, lounge, etc enable a hotel to create a unique experience for business travellers. Thirdly, comfort, the ambience a hotel creates for business travellers is comfortable, clean and relaxed, so that they don’t need to worry about their safety problems and hygiene problems when they are on a business trip. Fourthly, they are all connected all the time, referring to technology and online communication, business travellers travel with a business purpose so they need able to access information 24 hours a day. Lastly, in terms of value, hotels do not only offer physical evidence, but customer care and loyalty programs which add extra value to their stay, and make it more attractive for business travellers (Hotelbusinessreview. 2015) to summarize the 5 essential realities high-end hotels provide are mosty physical and it is how they differentiate themselves from Airbnb. All physical evidence which Airbnb provides is found on the filter page of their website. The options for physical evidence include size, neighborhood, amenities, property type and host languages. Size refers to what size of accommodation the guest prefers to, neighborhoods indicates the location of the accommodation, the choices can be limited or various, it depends on how popular Airbnb in the different city. Amenities generally refer to the basic facilities in the room, such as : internet, TV, parking and so on. The property type consists be of a wide variety, people can even find castles, boats, and tents as accommodation choices (Airbnb,2015) Airbnb can hardly compete with high-end hotels based on the choice of physical evidence. In 2012, Airbnb has made a move to add more physical evidence, which is to add key words on their filter list, key words refers to the experience that guest is looking for when they choose an accommodation through Airbnb, so the guest would simply be able to type “ relax”. “ocean side” or any other relevant words to find an accommodation to enrich their specific travel desire ( The New York Times, 2012) Fast Company announced that Aibnb was 6th on the list of most innovative companies in 2014. Fast Company also mentioned that Airbnb will replace Intercontinental Hotels Group and Hilton Hotels to become the biggest hotel chain while actually owning no hotels (Majumdar, 2014) High-end hotels have high fixed costs and operational costs that allows hotels to offer more and better physical evidence. Will the hotel industry allow Airbnb to grab their market share without even owning a single room? There was a case study done by Boston University, the research is concerned with the impact Airbnb has made on the hotel industry, the results confirm that while Airbnb is growing fast in Texas, they didn’t find any significant evidence of Airbnb’s impact on high-end hotels (Byers,Proserpio and Zervas, 2013) Moreover, in 2013, New York City has stated residents can not rent out their property for less than 30 days, which means Airbnb’s business officially become illegal in New York City (CNN money, 2013) As the law has published, it has made a clear difference between Airbnb and the hotel industry, which can protect market share of the hotel industry as well. Therefore, for now, Airbnb hasn’t become a real threat to high-end hotels due to their lack of physical evidence.

Budget hotels often refer one or two star hotels (The Moscow Times, 2011). When people choose budget hotels, they wont have high expectations, also, rather than price, hygiene problems and safety problems become their main concern, compared to high-end hotels, budget hotels lack many basic facilities (Discount Hotels, 2015). So physical evidence in budget hotels is very limited, travellers who choose budget hotels can not be too critical about the exterior and interior facilities and other tangibles. The physical evidence which budget hotels can provide, share high similarities with Airbnb. However, as a hotel, budget hotels still will still have to pay hotel tax, rent, fixed costs and operating costs, on the other hand , Airbnb doesn’t need to worry about these costs (except some cities, for example: New York). As an intermediate agency, Airbnb charges guest 9–12% service fee per booking, the exact amount depends on the length of the stay, and they charge a 3% service fee to the host (Byers,Proserpio and Zervas, 2013) on the booking page, hosts can however post a fee for cleaning ( Airbnb, 2015) Airbnb enables hosts to rent out their own rooms to travellers, so the cost is very little. Therefore, the accommodation price on Airbnb is very competitive compared to hotels, people often find that the price is even far cheaper than in city hotels, less spending on accommodation enables a guest to travel more or stay longer in a place (6 sqft,2014)However, budget hotels often offer the lowest room rate in the market, the room rate can be similar to the price on Airbnb. In order to attract guests, Airbnb emphasises that Aibnb provides accommodation for guests but it also offers an enriching travel experience (techcruch, 2014) A frequent Airbnb user admits that using Airbnb does not only allow them to find a cheaper accommodation to stay at but it also allows them to truly experience the authentic local culture (Lodging, 2014) Airbnb is positioning themselves as an online social community, which provides a platform for hosts and guests, they are able to communicate and check each other’s reviews online, that helps hosts and guests build trust between each other (hotel news now, 2014) so when guest enters the host’s accommodation, its more like staying at friend’s place, and allows guests to have a better customer experience. Besides that, Airbnb adds a more unique value to the accommodation itself. From the filter page of Airbnb, firstly, people can select the location of accommodation, city center, close to the train station or anywhere else, as long as its on the list of filters, people can freely choose their ideal location. With the consideration of cost, budget hotels have a limited choice on locations, Airbnb is far more flexible. Secondly, the type of accommodation, where guests can find a whole apartment, shared room or even a private room in a shared apartment on Airbnb (Hotel news now, 2014) moreover, you can find all kinds of different properties to stay at, such as : Castle, tent, tree house. However, budget hotels can only provide very limited selection of room type, normal just single room and double room, furthermore, the hospitality industry has set a standard for all types of hotels, so the layout of a room isn’t much different from one to another. Thirdly, facilities, such as: washing machines, swimming pools, kitchens and so on. For budget hotels, they are not able to provide too may facilities in the hotel due to their positioning in market and target market. From exterior facility, interior facility and other tangibles, Airbnb enables people to choose what kind of physical evidence they want , even in a limited area, moreover, Airbnb provides a personal unique experience for every guest, which budget hotels can not compete with. According to the hotel revenue investigation done by Boston University, in Texas, Airbnb has cut 5% of their revenue from budget hotels from 2012 to 2013, the investigation indicates if Airbnb keep growing at their current pace, by 2016, the revenue they can take from budget hotels could reach 10% (Byers,Proserpio and Zervas, 2013) the president of Apple Core hotels in New York has admitted that the rise of Airbnb brought a direct impact on their revenue, the financial performance became worse when Airbnb entered the market (The economist, 2014) to summarize, Airbnb can be a big threat to budget hotels, on one hand, Airbnb doesn’t need to make provision for huge investment and high fixed costs, on the other hand, compared to budget hotels, Airbnb doesn’t belong to the traditional hospitality industry, the way they run is more flexible thus the guests choice is far less limited.

Conclusion

It’s difficult to say if Airbnb is a threat to the traditional hospitality industry, because according to author’s research, on the one hand, so far, Airbnb hasn’t made significant influence on the revenue of high-end hotels because of exterior facilities, interior facilities and other tangibles, Airbnb can’t provide as much physical evidence that high-end hotels can provide, so it doesn’t necessarily count as a competitor as you have nothing to compare with. On the other hand, budget hotels target price sensitive guests, however, Airbnb isn’t a real hotel, there is no high fixed cost, so they are able to provide an even lower price, furthermore, Airbnb emphasis on a personalised experience to each guest, while the physical evidence is so limited in budget hotel, Airbnb enables guests to choose the physical evidence they need while looking for accommodation. Therefore, budget hotels should be careful of Airbnb’s increase in market shares, and there is quite a lot of evidence that proves that it can directly make an impact on budget hotels’ revenue. In 2014, Airbnb started working with concur to target business travellers, and it has gone well so far, there is nearly 10% of Airbnb users travel for business purpose including Facebook, there are more than 35 companies already using the new portal “business travel on Aibnb”, clearly they are starting to grab the market share from high-end hotels. In my opinion, high-end hotels should no longer ignore the existence of Airbnb but rather change their business strategy to adapt to the ever changing business environment. This is the best way to prevent Airbnb from becoming a surprisingly impactful competitor.

Reference list

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