Category: Business Practices

Green Hotels: An Overview

March 20th, 2019 in Business Practices, Design, Hotels, Real Estate, Sustainability, Winter 2019 0 comments

By Minu Agarwal and Prashant Das

In this article, we adopt a real estate perspective and explore the sustainability implications of hotels. First, we provide a background on sustainability, describe how it relates to the hotel sector and synthesize literature on the economic implications of sustainability. Further, we provide and explain trends on sustainability certifications, LEED in particular, in the US context.

 

What is Sustainability, Why is it Important?

The latest report by the inter-governmental panel on climate change (IPCC) has estimated that human activity has resulted in 1°C of global warming above pre-industrial levels[1]. The report calls for reaching and sustaining net zero CO2 emissions to prevent further rise in global temperatures beyond current projections. Buildings contribute nearly a third of the greenhouse gas emissions and US buildings, in particular, contribute 38% of the total national greenhouse emissions[2]. Governments, organizations and individuals are thus increasingly aware that buildings are critical part of addressing an increasingly urgent challenge -climate change. Growing knowledge of the impact of buildings on the environment and their occupants has led to wide scale reconsideration of how buildings are built and operated.

At the same time humans spend increasingly more time inside buildings[3] and thus buildings have a large impact on our health, productivity, and wellness. Several sustainability metrics have thus been developed to address these and other issues.

 

How is Sustainability Incorporated in Real Estate?

A real estate asset could be perceived in terms of its building mass as well as the behavior of the people occupying it. Sustainability could be achieved from both standpoints. For example, using environment friendly materials and design will enhance the sustainability from the building standpoint. Similarly, improving business processes (such as sourcing local material and employees for hotel operations) may enhance sustainability from the human behavior perspective. While the definition of sustainability interventions may differ from one context to another, organizations such as the United States Green Building Council (USGBC) have devised building project certifications for various types of buildings, climates and geographical locations. USGBC was constituted in 1993 as a membership based non-profit organization. The Leadership in Energy and Environmental Design (LEED) certification, administered by the USGBC is continually re-examined by a large body of volunteer committees comprising of building professionals, developers and building systems manufactures. A wide range of parties are involved with the intent of keeping the rating system current and market relevant. Earlier in 1990, the Building Research establishment (BRE) developed the Building Research Establishment Environmental Assessment Method (BREEAM) rating system in the UK.

Since their inception, sustainability labels such as LEED and BREEAM -among several others- have grown in their acceptance rates and are increasingly popular design and performance assessment tools for building projects. While BREEAM is the oldest whole building sustainability rating system, LEED can be regarded as the most widely adopted system on several counts[4]. It has been used in over 165 countries and in many parts of the world it is being adopted at a wider scale[5]. For example, the City of Vancouver and City of New York have recently passed laws[6] that require LEED certification at a pre-specified level to be achieved by all new-construction projects that meet specific byelaw criteria.

LEED regulates and certifies a building’s design or operations validating the buildings as less harmful to the environment compared to a standard building. LEED rates a project’s performance based on a pre-defined multi-criteria-credit system. The most important credit category relates to energy use and atmospheric emissions, the Energy and Atmosphere category (EA). The next big category of credits is related to human health which ensure minimum thresholds of daylight, thermal comfort, air quality and visual connection to the outdoors, the Indoor Environmental category (IEQ). Water-use is the third big category promoting efficiency in use and recycling, the Water Efficiency category (WE). LEED also examines the environmental impact of building projects within and beyond the site boundary and includes the environmental cost of daily transportation and site development, the Sustainable Sites category (SS). Projects with access to public transportation and pre-existing infrastructure receive additional credit.

These rating systems have a profound impact on the design and construction of a building and the ratings achieved are not simply a by-product of the design process. One study[7], for example, examined two residential projects in Italy and found them to score much higher on ITACA, a local rating system, but much less on the LEED system. Thus, designers must be much more efficient to earn the LEED label. LEED rating system has also duly recognized this and USGBC has released several different tracks that have been tailored to different building types and geographical locations.

How do Sustainability Labels Enhance Real Estate Performance?

Initial motivations for incorporating sustainability in real estate were primarily driven by the notion of corporate social responsibility (CSR). As such, sustainable real estate was considered an investment in the society and thus, a cost center. However, over the years, academic studies reported several economic benefits of sustainability in real estate.

Studies have shown significant association between green labels and commercial real estate performance metrics. Green-labeled properties show superior performance in terms of topline[8] (revenue, rental rate), bottom line[9] (net operating income), occupancy rate[10], operating expenses[11], and asset valuation (transaction price[12], capitalization rate[13]).  Some studies also report indirect financial benefits of green-labeled properties such as reduced absenteeism[14] among the occupants, superior marketability[15], better perceived indoor air quality[16], and higher occupant productivity[17]. Besides, green-labeled buildings are less volatile in terms of pricing and rental rates, providing a potential hedge against the property market cycles[18].  Although opting for green labels may add up the investment costs by up to three percent[19], the multiple benefits from the topline, bottom line and valuation may facilitate a payback within a few years.

Sustainability Trend in Hotels: What to Expect and Why

Although tourism and hospitality industries were among the earliest to recognize the importance of sustainability in business, much less is documented about the financial benefit of green labels in hotels. A Beijing (China)-based study reported nearly 7% increased room rate and 20% less complaints about indoor air quality in green hotels[20]. A US based study[21] reported that although green labeled hotels enjoy significantly higher rental rates (ADR: average daily rate) the corresponding occupancy rate are significantly lower such that the revenues are not different from non-green-labeled hotels. The study argues that the revenue managers potentially become too optimistic with room pricing but should be able to benefit from increased revenue by keeping the same (or only marginally higher) room rate in green-labeled hotels. The bottom-line benefits (through reduced operating expenses) and pricing benefits (through reduced capitalization rates) may lead to further financial benefits. However, these benefits have not been scientifically documented yet. A recent study[22] reports a somewhat positive (yet statistically insignificant) pricing effect of LEED label in US hotels, but argues that with a larger number of green hotels being transacted, the price premium in LEED-labeled hotels may become significant.

While other commercial real estate assets have longer-term occupants (owner-occupiers or tenants), hotels are occupied for very short tenancies (usually a day or a few more). Therefore, the motivation for green hotels needs to be analyzed differently. Due to their short tenancy, the enthusiasm for green hotels among hotel customers may be dominated by an expectation of superior comfort or experiential benefits. However, green hotels may not necessarily provide these amenities. In specific types of hotel (airport, conference, etc.) dominated by large, similarly-minded corporate clients, the CSR motivation may still exist, but will be relatively muted due to the presence of retail customers. On the owners’ side, the attractiveness of green labels will be correlated to tangible financial benefits, such as higher revenue, lower expenses and higher valuation. However, beside higher ADR, there is scant scientific evidence on other financial benefits of green hotels. Therefore, we should expect relatively modest popularity of green label in hotels which will gradually grow as more scientific evidence emerges supporting the financial benefits of going green.

What are the Trends for LEED labels in US hotels?

In December 2018, the USGBC database recorded over 112 thousand US-based projects of which nearly 1,600 included hotels. Anecdotal evidence (from reviewing the Real Capital Analytics reports) suggest that nearly 10% of commercial transactions are related to hotels, but less than two percent representation of hotels in the USGBC database is remarkable.

First, the projects are “registered” with the USGBC for a LEED label consideration. Exhibit 1 summarizes the US-based properties on which the certification decision has been taken by USGBC. We also extract statics on hotel-specific projects. Nearly 30% (34,743) of the 112,000 projects have been certified with less than 0.04% (39) projects which were “rejected” certification for some reason.

Exhibit 1: Summary of LEED Certification Decision on US-based properties

LEED Level All Properties % Hotels %
Denied 39 11
Certified 7,929 23% 134 29%
Bronze 3 0.01% 0.00%
Silver 11,694 35% 178 39%
Gold 12,182 36% 126 28%
Platinum 1,894 6% 9 2%
Grand Total 33743 100% 458 100%

Data source: USGBC, based on data up to 1 December 2018.

The review process may take anywhere from a few months to over twelve years to complete after which a “certification” decision is taken. The average time for all properties is 2 years. Hotels, on average, need 3 years for certification processing. However, the processing time for hotel projects varies in a narrower range (up to 8 years). Exhibit 2 presents the trend of property registration and certification. The trends were reinforcing until the financial crisis. Academic research reports this as the “market acceptance” of LEED certification[23].

Exhibit 2: Number of Projects Registered and Certified for LEED in the US over time

Data source: USGBC, based on data up to 1 December 2018.

The number of projects registered waned in the aftermath of the crisis, but has witnessed increased enthusiasm in later years. 2017 and 2018 witnessed relatively smaller number of projects being registered of certified. The two peaks in number of registered projects seen in years 2009 and 2016 coincide with the years of change in versions of the LEED rating system. Registrations under version 3 (also known as LEED 2009) closed[24] on Oct 2016. Version 3 was launched[25] in 2009 marking the close of version 2. Release of new versions thus appears to be a driver for the timing of the registration depending on choice of the version of the rating system. Risk-averse parties may rush to register in the old version to avoid any unforeseeable changes in the new upcoming versions of the rating system. Some parties may wait to be registered in the new version to maintain the market-edge. Exhibit 3 presents the same analysis focusing on hotel projects.

Exhibit 3: Number of Hotel Projects Registered and Certified for LEED in the US over time

Data source: USGBC, based on data up to 1 December 2018.

USGBC awards different “levels” of LEED certification to projects based on the “points” achieved by them. It thus recognizes various degrees up to which a project may demonstrate achievement of the various sustainability goals. Currently there are four available levels of certification namely: Certified, Silver, Gold and Platinum requiring a minimum of 40, 50, 60, 80 points respectively. While the lower three levels of achievement appear equidistant in terms of additional points needed, the incremental design effort and cost may not be so. The energy related credits (EA category) are the strongest indicators of certification level achieved[26]. Additionally, projects needed a mean increase of 3.51, 5.46, and 11.59 in EA credits in order to graduate from certified to silver, silver to gold and gold to platinum. Similar trends were found on the site related (SS) category as well, the next strongest category of credits after EA to indicate level of certification.

A large number of LEED credits deal with indoor environmental quality. While in the current version of LEED, 35% points are directed towards climate change related concerns, 20% deal directly with health and comfort of the occupants. LEED and other similar rating systems thus have a strong synergy with hotel buildings. Hotels can potentially derive direct financial benefits by ensuring comfortable and positive experience of the hotel guests.

Exhibit 1 provides the detailed breakup across the levels of certifications. Hotel project certification rates are lower at Gold and Platinum levels compared to their peers. In terms of mean credits achieved per category, hotels are among top performers[27] only in the SS category credits which tend to be location driven. Energy-related expenses usually constitute a small part of hotel cash flows. The impact of location on hotel valuation is substantially higher. Thus, the importance of SS credits reflect an environment-friendly trend. On EA category, considered important for achieving higher certification levels, hotels were found to be the lowest achievers along with residential property types. This could explain the drop in Gold and Platinum level certification for hotels.

Conclusions

Although academics in tourism economics were among the earliest to study the importance of sustainability, scientific evidence on the economic benefits of sustainability in this sector is still emerging. Some recent studies within the hospitality sector hint towards positive effects of sustainability on business.

Survey-based studies are unequivocal about the positive impacts of going green in hotels: the customer satisfaction as well as the customers’ willingness-to-pay increases. Besides, less customers complain about the indoor air quality when the subject hotel is green[28]. However, positive customer opinions about green hotels may not necessarily translate into their buying behavior. Unlike other commercial assets (e.g. offices), hotel occupants have much shorter tenancy and may assign relatively lower premium to pricing unless the advantages of green-ness to them are concrete.  If going green compromises on the occupant comfort, the green attributes may have an adverse effect on revenues. Some studies[29] have shown positive impact of green attributes on hotel room rates. However, the room rate must interact with the corresponding occupancy rate to generate revenues. It appears that hotel operators overreact to the green labels in terms of increased room rates. Such a behavior results in lower occupancy rates and an insignificant impact on the revenues. Further, concerns have been raised about higher expenses associated with green hotels, in LEED buildings in particular, which lead to lower bottom line.

We find that the enthusiasm for sustainability label in hotels has been relatively low, but the trends have been upwards in recent years. The need for hotels going green cannot be emphasized enough. However, the green strategic plan must include considerations about occupant comfort and requires a more tactical revenue management so as to maintain higher level of occupancy.


PDF Version Available Here.


END NOTES
[1] “Global Warming of 1.5 ºC” Accessed December 6, 2018. https://www.ipcc.ch/sr15/
[2] Bond & Worzala (2014)
[3] Klepeis et al. (2001)
[4] Wilkinson (2011)
[5] “LEED | USGBC.” Accessed December 6, 2018. https://new.usgbc.org/leed.
[6] Vancouver, City of. “Passive Design Toolkit,” Accessed December 6, 2018. https://vancouver.ca Low energy intensity building requirements for certain capital projects LEED law, Pub. L. No. LL31/2016 (2016).
[7] Asdrubali et al. (2015)
[8] Miller, Spivey & Florence (2008) ; Eichholtz, Kok & Quigley (2010) ; Wiley, Benefield & Johnson (2010); Das, Tidwell & Ziobrowski (2011); Reichardt, Frantz, Rottke & Zietz (2012); Zhang, Liu, Wu, Zhang (2017)
[9] Pivo & Fisher (2010)
[10] Fuerst & McAllister (2009) ; Eichholtz, Kok & Quigley (2010) ; Reichardt, Frantz, Rottke & Zietz (2012)
[11] Chapell & Corps (2009); Dorsey & Reid (2012)
[12] Miller, Spivey & Florence (2008)  ; Eichholtz, Kok & Quigley (2010); Das & Wiley (2014)
[13] Pivo & Fisher (2010) ;
[14] Miller, Spivey & Florence (2008)
[15] Chapell & Corps (2009)
[16] Zhang, Liu, Wu, Zhang (2017)
[17] Dorsey & Reid (2012)
[18] Das & Wiley (2014); Das, Tidwell & Zioborwski (2011)
[19] Dorsey & Reid (2010)
[20] Zhang, Liu, Wu, Zhang (2017)
[21] Robinson, Singh, Das (2016)
[22] Das, Smith & Gallimore (2017)
[23] Das & Wiley (2014).
[24] “Is LEED 2009 the Most Current Version of LEED? What Is LEED V 3? | U.S. Green Building Council.” Accessed February 4, 2019. http://www.usgbc.org/help/leed-2009-most-current-version-leed-what-leed-v-3.
[25] “LEED Registration Close and Sunset Dates | U.S. Green Building Council.” Accessed February 4, 2019. https://www.usgbc.org/articles/registration-close-and-sunset-dates.
[26] Wu et al (2017)
[27] Wu et al (2017)
[28] Zhang et al (2017)
[29] Zhang et al (2017), Robinson et al (2016)

REFERENCES
Asdrubali, F., G. Baldinelli, F. Bianchi, and S. Sambuco. “A Comparison between Environmental Sustainability Rating Systems LEED and ITACA for Residential Buildings.” Building and Environment 86, no. Supplement C (April 1, 2015): 98–108. Bond, S., & Worzala, E. (2014). Green Buildings. Private Real Estate Markets and Investments, 234.
Chappell, T. W., & Corps, C. (2009). High performance green building: what’s it worth. Investigating the Market Value of High Performance Green Buildings: Cascadia Foundation.
Das, P., & Wiley, J. A. (2014). Determinants of premia for energy-efficient design in the office market. Journal of Property Research, 31(1), 64-86.
Das, P., Tidwell, A., & Ziobrowski, A. (2011). Dynamics of Green Rentals over Market Cycles: Evidence from Commercial Office Properties in San Francisco and Washington DC. Journal of Sustainable Real Estate, 1-22.
Das, P., Smith, P., & Gallimore, P. (2017). Pricing Extreme Attributes in Commercial Real Estate: the Case of Hotel Transactions. The Journal of Real Estate Finance and Economics, 1-33.
Dorsey, T. A., & Read, D. C. (2012). Best practices in high-performance office development: the Duke Energy Center in Charlotte, North Carolina. Real Estate Issues, 37(2-3), 26-31.
Eichholtz, P., Kok, N., & Quigley, J. M. (2010). Doing Well by Doing Good? Green Office Buildings. American Economic Review, 2492-2509.
Fuerst, F., & McAllister, P. (2011). Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Values. Real Estate Economics, 45-69.
Klepeis, N. E., Nelson, W. C., Ott, W. R., Robinson, J. P., Tsang, A. M., Switzer, P., … & Engelmann, W. H. (2001). The National Human Activity Pattern Survey (NHAPS): a resource for assessing exposure to environmental pollutants. Journal of Exposure Science and Environmental Epidemiology, 11(3), 231.
McGrath, K. M. (2013). The effects of eco-certification on office properties: a cap rates-based analysis. Journal of Property Research, 30(4), 345-365.
Miller, N., Spivey, J., & Florance, A. be formed about the costs and benefits of green in-vestment, yet a single case is seldom the prototyp-ical mean and there exists rauch local variation that adds to or reduces the marginal costs of going green. The current study goes well beyond case.
Reichardt, A., Fuerst, F., Rottke, N., & Zietz, J. (2012). Sustainable building certification and the rent premium: a panel data approach. Journal of Real Estate Research, 34(1), 99-126.
Robinson, S., Singh, A. J., & Das, P. (2016). Financial impact of LEED and energy star certifications on hotel revenues. The Journal of Hospitality Financial Management, 24(2), 110-126.
Robinson, S., Simons, R., & Lee, E. (2017). Which Green Office Building Features Do Tenants Pay For? A Study of Observed Rental Effects. Journal of Real Estate Research, 39(4), 467-492.
Wiley, J., Benefield, J., & Johnson, K. H. (2010). Green Design and the Market for Commercial Office Space. Journal of Real Estate Finance and Economics, 228-243.
Wilkinson, Sara, and Anita Bilos. “A Comparison of International Sustainable Building Tools – An Update,” Vol. 17. Gold Coast, 2011.
Wu, Peng, Yongze Song, Wenchi Shou, Hunglin Chi, Heap-Yih Chong, and Monty Sutrisna. 2017. “A Comprehensive Analysis of the Credits Obtained by LEED 2009 Certified Green Buildings.” Renewable and Sustainable Energy Reviews 68 (February): 370–79. https://doi.org/10.1016/j.rser.2016.10.007
Zhang, L., Wu, J., Liu, H., & Zhang, X. (2017). The value of going green in the hotel industry: evidence from Beijing. Real Estate Economics.

Minu Agarwal is a PhD candidate and researcher at LIPID Lab for interdisciplinary research in building performance and architectural design process at EPFL (École polytechnique fédérale de Lausanne), Switzerland. She acquired her MS in Sustainable Design from Carnegie Mellon University (USA) and a Bachelor in Architecture from Indian Institute of Technology, Roorkee (India). Earlier, Minu worked as a sustainability Consultant with IES Ltd. (Atlanta) and Buro Happold (New York) among other companies. She has been an entrepreneur and served as an external reviewer for the Green Building Certification, Inc. (GBCI).

 

Prashant Das, PhD is an Associate Professor of Real Estate Finance at Ecole hoteliere de Lausanne (Switzerland) where he also serves as a member of the Academic Board and the Acting Director of Hospitality Finance, Real Estate and Economics (H-FREE) Institute.

How Can Single-Unit Restaurants Strive for Powerful Online Presence?

March 20th, 2019 in Business Practices, Marketing, Restaurants, Technology, Winter 2019 0 comments

By Leora Lanz and Jenna Berry

With the age of technology in full swing and the use of social media at an all-time high, digital marketing is not only recommended, but also necessary. The following list of recommendations will ensure that an independent restaurant’s online marketing presence will survive and thrive in the competitive nature of today’s world.

GOOGLE: According to Andrew Gazdecki, Founder of Bizness Apps and Member of the Forbes Technology Council, over half of “near me” searches result in a store visit. With mobile searches for restaurants rising, google presence is extremely important. Through organic content, paid advertising, and Google My Business, an independent restaurant can easily stay in line with its competitors.

  • Organic Strategies: According to Digital Marketing Specialist at Net Affinity, Sophie Tremblay, Search Engine Optimization (SEO) is “the strategy...used to increase the authority, visibility and presence of a website organically in search engine results” (HSMAI, 2017). She further explains that three aspects of a business must be in check to achieve successful SEO: the website’s structure, content, and relative authority. In order to monitor and enhance SEO, there are several online tools that analyze a website’s ranking, including Google Search Console, SEO Profiler, Moz Bar, and Screaming Frog. Utilizing these services will help drastically improve organic rankings for single-unit restaurants that do not have a strong corporate funding background.

Additionally, reviews are essential for organically improving rankings. Restaurants with better ratings and more reviews are naturally placed higher in Google results (Next Restaurants, 2016). Therefore, it is important to encourage guests to leave reviews after a positive dining experience. Independents that utilize signage and messaging in the restaurant to generate reviews will encourage guests for more reviews, affirming that the restaurant takes pride in its business -- that it is confident most reviews will be positive. Volume and quality are both important here.

In a mobile search, organic listings will not usually be visible until the user scrolls at least once or twice. “The likelihood of a single-unit restaurant appearing in the top five or ten listings for anything other than brand terms (ie; the restaurant’s name) is negligible,” shares Principle of Boston-based C77 Consulting Seth Cargiuolo. “Unless the restaurant has significant buzz, perhaps gleaned through earned media or mentions in prominent local food scene outlets – or if the chef has gained fame or notoriety – relying on organic presence is not an effective strategy. Paid advertising, aggressive push for positive reviews, and maintaining a strong Google My Business listing are essential.”

  • Paid Strategies: As soon as budget can be allocated, a paid advertising presence is essential; unless digital marketing talent exists within the business already, securing expert help from an agency geared toward smaller-budget, local small businesses is highly advised. Gazdecki emphasizes the importance of keeping tabs on competitors, and he explains that one of the most effective ways to do this is to study the competition’s keywords and know their target audience. Once the competition has been analyzed, a single-unit restaurant can purchase keywords on Google Ads. Knowing which words are relevant will help a restaurateur gain insight on which specific keywords are necessary to purchase.
  • Google My Business: Claiming a “Google My Business” page is an essential step for enhancing a restaurant’s presence on Google. This feature allows a restaurant to create a small profile that will appear on the right side of Google after the restaurant is searched. The profile includes a map of the restaurant’s location, the address, hours, contact information, user reviews, and even directions to the restaurant. According to editors at Essential Marketer, Google My Business is vital as it allows users to search in their local area with ease, and lays out all of the information in a clean, readable way. Follow the link to https://www.google.com/business/ for step by step support in creating a Google My Business profile. After the profile is complete, potential diners will be able to find an independent restaurant’s information in a pleasant, user-friendly manner.

WEBSITE: In research shared by editors at Restaurant Engine, approximately 80% of people have searched for a restaurant on a mobile device. This proves that the efficiency of mobile layout for a single-unit restaurant, as well as the security of this restaurant’s website, is crucial. As the Senior Marketing Consultant at Southcoast Marketing Group, Todd Philie stresses the importance of mobile website format. If a restaurant does not have quick mobile speed or attractive mobile layout, it will deter customers that could have been easily attained. Some tactics that will help improve mobile performance include:

  • Menu Revisions: According to Brad Shorr at Food NewsFeed, designing a mobile-first menu is necessary. Most consumers searching for food on the go do not want to look at a PDF menu because it is small, difficult to read, and slows down mobile speed. For this reason, the creation of a list menu will be sure to attract more customers.
  • Attractiveness/User Friendliness: Knowing that the majority of users will view a website on a mobile device, it is essential to structure content in an easy to read, easy to understand format. “Keep copy simple, clean and direct,” adds C77’s Cargiuolo. “Know your audience and consider the user experience before all other factors. Ensure that the most important information for your desired customer is prioritized and easy to find.” For example, if the restaurant has a superior cocktail menu, craft beer selection or wine list, and the desired customer truly appreciates that offering, make sure it is continually updated and featured prominently on the site. Or if the focus is locally sourced ingredients, find a way to highlight the mission and the farms or ranches involved. Or if the restaurant caters to vegan-friendly or gluten-free customers, ensure that information is highly visible, easily found. Investing in professional photography is key to increasing a restaurant’s visual appeal.

  • Format: According to editors at Bentobox, two of the main categories that are most important to consumers when deciding where to eat are menus and location. As mentioned above, the menu should always be in list format and never PDF. In regards to location, there should not only be a section designated for contact information, but the address and phone number should also be anchored at the top or bottom of the website.
  • Action Steps: Adding the ability for a customer to take the next step is imperative. A clear call to action for the desired action is recommended. Open Table is great for reservations and a variety of tools exist to enable online and SMS (text message) based ordering for take-out and delivery. A statement as simple as “reservations recommended” next to the phone number can serve as an action step.
  • Food Delivery and Additional Online Presence: Particularly in urban areas, more and more customer want the restaurant to come to them. UberEats, DoorDash, GrubHub and Eat24 make it easy for restaurants at any price point and also enhance the digital visibility for the restaurant.
  • Generate New Revenue Channels: “Online Ordering and To Go catering are tremendous areas of opportunity for independent restaurants, and the mobile site needs to make this seamless and easy to execute,” shares Roger Drake, Principal of Drake Public Relations and Marketing. “The infrastructure of Online Ordering and To Go business generates another 15-25% in revenue for many independents; having operational procedures in place to insure the order is correct at the point of purchase, as well as a follow up “thank you” goes a long way in building business and competing with chains who generally will not take the time to do this.”

 

In addition to mobile features, the security of a website is vital to a single-unit restaurant’s online marketing presence. Editors at Restaurant Engine define a Secure Sockets Layer (SSL) as having a padlock and introductory https:// before a website address. It has been proven that secure restaurant sites are better ranked on Google, because Google naturally pushes these sites higher. In addition, it is increasingly important to secure a website to prevent personal information from being stolen. This especially pertains to restaurants that take online orders, because names and credit card information can be easily stolen with no SSL. In conclusion, it is not only important, but also necessary to secure a restaurant website to ensure safety and security.

INSTAGRAM: Staying current and consistent across all social media platforms is important as social media is a dominant force in today’s society. According to the Mediakix team, Instagram began as a photo sharing platform but has evolved into a “bona fide recommendation engine.” Additionally, Lisa Flores, Director of Sales and Marketing for Boston’s Columbus Hospitality Group and founder of the Society for Event Planner Restaurant Venues (SERV) emphasizes the importance of Instagram as she states, “Food and restaurants are so visual and social media allows people to form a personal connection to the restaurant.”

“And finding the employee who can set up lighting and mood in executing photos on Instagram, especially with food, will increase their reviews and recommendations as well,” adds Drake.  Implementing the following Instagram recommendations will increase overall awareness of a single-unit restaurant.

  • Hashtags: Creating a unique hashtag allows a restaurant to tell a story through its Instagram posts. This will thus drive more traffic through the Instagram page and allow potential customers to envision their future experience at the restaurant.
  • Influencers: Catarina Chang, co-owner of the premier Korean restaurant Koy, located at Boston’s Faneuil Hall Marketplace, explains, “Working with multiple food bloggers and influencers gives us a lot of exposure to their audiences and, in exchange, we have the opportunity to build our own audience.” Influencers are individuals who are able to control consumer’s buying habits through social media as they are perceived as an expert in their industry. It is important that single-unit restaurant owners reach out directly to local influencers to ask for a post on their page in return for a free meal at the restaurant. This is a low-cost tactic that will generate a significant return on investment.
  • Promoted Ads: Instagram allows business accounts to pay money to promote their posts. These ads place an independent restaurant’s Instagram on the feed of individuals who do not already follow the account. The ads have the potential to reach hundreds of thousands of users depending on the budget and settings that are chosen. Follow the link to https://business.instagram.com/advertising/ for a step by step explanation of creating promoted Instagram ads.
  • Stories: The “Stories” feature on Instagram allows brands to post highly engaging picture and video content that disappears after 24 hours. “Users are accustomed to sharing and consuming less-staged and more authentic life moments in this format and thus the requirements for high-cost photography and videography from a brand are lessened,” shares Cargiuolo. “Brands, including many chefs and restaurateurs, use this feature to bring customers behind the scenes, sharing scenes from the kitchen and working with staff or suppliers. This allows viewers to experience the preparation of the food and beverage as well as the human side of the brand.” Stories are also an excellent way to tease or announce special food and drink offerings or events. Customers who like to be “in the know” can take advantage of limited-time offerings and will want to follow the brand.

  • User Generated Content (UGC): Leveraging UGC is an excellent way to build awareness and recognition. A memorable Instagram handle can help when a guest posts a photo of their meal or experience; it assists with brand recognition and opens the door for a “share-ability” with customers’ friends and networks. Clearly display on menu boards, cocktail napkins and get the name out.
  • Contest: One of the most effective ways to increase overall brand awareness for a single-unit restaurant is through the use of social media campaigns. According to SEO and Content Marketer Gordon Donnelly, running a contest on Instagram will increase follower counts and overall interest in the restaurant. Contests that encourage the use of user-generated content are a natural fit for the restaurant business. Setting a $50 minimum as a benchmark for gift cards and giveaways will be sure to boost participation (Wordstream, 2018).

While these tactics are all important for maintaining a popular Instagram page, the use of a scheduling tool is equally as critical. According to Colby Hutchinson of Best Western Hotels and Resorts, determining a rollout strategy is necessary to achieve and maintain a successful social media presence (Hotel Management, 2018). It is important to determine who will respond to and manage replies to comments, and who will prioritize this in addition to their other daily work. Once this has been determined, the frequency of the posts will be set in stone and lead to a more efficiently-run social media page.

FOOD FOR THOUGHT: Restaurant staffing is a challenge and an intern will help take the pressure off of other employees. Hiring an intern is beneficial when there is not another person who can take on the responsibility of online digital marketing. An intern could assist with social media posts, menu revisions, and keyword research, among other things. This would allow full-time restaurant employees to focus on their jobs and relieve stress for everyone involved. Or perhaps, hire an hourly employee part time (10-15 hours per month) just to focus on social strategy and execution. This will be money well spent.

Along with an intern, there are multiple outside professional services that can and should be utilized for independent restaurants. We are not here to advocate for these specific tools, but rather suggest them as helpful outside resources. Peter Venti, Director of Operations for Cambridge, Massachusetts-based Real Food Consulting, encourages small restaurant owners to “Invest in a sales and marketing tool that truly fits the strategy and capabilities of the restaurant, because focus and alignment can help overcome a small budget and level the digital playing field.”

Yext, for example, is one online platform with a mission to “give companies control over their brand experiences across the digital universe of maps, apps, search engines, voice assistants, and other intelligent services.” Used by major brands like Taco Bell and Rite Aid, Yext offers a variety of products and services that will boost a restaurant website’s ranking. In addition to Yext, Whitespark is a similar online platform that promises to “improve rankings, drive business, and fast-track your success in local search.” Among its services are a data aggregator, local search audit, and citation building tool. These services will help enhance a restaurant website and identify opportunities for optimization and increased visibility.

Whether an intern or an outside service, there are several options for creating a powerful online presence. Hospitality marketing constantly evolves and is dynamic, and therefore marketing for independent restaurants must always be maintained. It is key to understand consumer trends, competitor habits, and the needs and wants of a specific restaurant audience. Single-unit restaurants that prioritize online marketing will be successful and prosperous in the long run.


PDF Version Available Here.


REFERENCES
Allen, Ben. “Getting Your Restaurant’s Website To The Top Of Google.” Next Restaurants. 12 December 2016.
“Does My Website Need To Be Secure?” Restaurant Engine. 16 October 2018.
Donnelly, Gordon. “7 Proven Hacks to Turn Any Restaurant into an Instagram Powerhouse.” Wordstream. 1 November 2018.
Gazdecki, Andrew. “How To Create A Big Online Presence For Your Small Business.” Forbes. 20 April 2018.
“Google My Business – How Important Is It?” Essential Marketer. 17 April 2018.
“How Instagram Has Fueled The Success Of Restaurants And Bars.” Mediakix. 30 June 2017.
“How Many Customers Use Mobile Devices to Find Restaurants?” Restaurant Engine. 8 August 2018.
Hutchinson, Colby. “5 steps for leading your social-engagement plan.” Hotel Management. 21 December 2018.
Shorr, Brad. “How to Make a Restaurant Website a Better Marketing Tool.” Food NewsFeed. December 2017.
“The 5 Most Important Pages for Any Restaurant Website.” Bentobox. 30 May 2018.
Tremblay, Sophie. “SEO for Independent Hotels: What, Why and How.” Hospitality Sales and Marketing Association International. 18 April 2017.
Whitespark. https://whitespark.ca/.
Yext. https://www.yext.com/.

Leora Halpern Lanz, ISHC, is principal of LHL Communications, a hospitality-focused marketing communications, branding, and media relations advisory. She is also a full-time faculty member at Boston University’s School of Hospitality Administration (SHA), teaching advanced strategic marketing and digital marketing for hospitality at the undergraduate and graduate levels. She was named among the Top 25 Minds in Hotel Marketing for 2016 by the Hospitality Sales & Marketing Association International and was named 2017 Professor of the Year by the student government of SHA.

 

Jenna Berry is a student at Boston University in the School of Hospitality Administration (SHA May ‘19). She worked in the event sales department of five-star Hotel Café Royal while studying abroad in London, and her current internship at the Boston Convention Marketing Center continues to further her interest in the event sales industry. She is the Vice President of the Boston University chapter of the Eta Sigma Delta, the International Hospitality Management Honor Society.

The Necessity of Error Management Training in the Hospitality Industry

March 20th, 2019 in Business Practices, Hotels, Restaurants, Trends, Winter 2019 0 comments

By Priyanko Guchait

Mistakes and errors come in all shapes and sizes. In 2015, a number of major hotel corporations fell victim to cyber breaches. Hyatt Hotels Corporation’s payment processing system was breached and affected 250 hotels in about 50 countries. In that same year, data security incidents also occurred in Hilton Worldwide Holdings Incorporated and Starwood Hotels & Resorts Worldwide Incorporated. Similarly, 2015 was also not kind to the restaurant segment of the hospitality industry (Chipotle Mexican Grill) where a series of outbreaks, including Norovirus, E. coli, and Salmonella Newport, sickened more than 490 people. While these negative incidents sound extreme, they often occur as a result of ignoring minor mistakes and errors that occurred earlier.

What is more damaging is that such errors and mistakes are not always reported and documented, and thus no measures are taken to prevent them. As a result, over time, these problems become bigger and bigger, leading to critical incidents with extreme negative consequences. While these more critical incidents make it to the news and tarnish the reputation and business of the companies, there are many other seemingly smaller mistakes and errors that occur in the hospitality industry very frequently such as overbooking, dirty rooms, incorrect reservations, incorrect billing, serving the wrong food, food safety errors, recipe errors etc.  If these problems are not managed, these small mistakes and errors will become more critical and damage the good name or ruin the business of companies as well.

The Need for Error Management Practices:

Hospitality organizations are faced with the possibility of errors, mistakes, and failures every day. The negative consequences these can produce include stress, accidents, loss of time, faulty products, quality and performance problems, negative word-of-mouth, customer dissatisfaction, increased costs, and loss of revenue. Since it is the duty of managers and owners to protect the profit margin, taking a proactive approach to mitigate these mistakes and errors is often attempted in organizations by the use of sophisticated technologies, rigid systems, and strict policies focused on controlling employee behavior.

However, the truth is that total elimination of errors is impossible, and it is very difficult to predict what and when specific errors will occur. Error results from physiological and psychological limitations of humans. In hospitality organizations, often times errors occur because of the very nature of the work (high work load, time pressure, fatigue, poor interpersonal communications, imperfect information processing, and flawed decision-making). Errors may also occur due to equipment malfunction and through no fault of an individual, but still the individual may be responsible to resolve the error. Errors can also happen anywhere in a hospitality organization, with external errors involving customers – both front of house (e.g. checking guests into rooms that are not cleaned), back of house (housekeepers forget to report items that need repairs) – and internal errors involving employees, managers, and department (incorrect accounts billings and payments, or scheduling errors resulting in inferior customer service). Therefore, it is important that hospitality organizations not only focus on error avoidance, but also on error management.  In other words, management and owners need to start asking the question of “what needs to be done after an error has occurred.” Error management is an approach that attempts to deal with errors and their consequences after an error has occurred. It is essential that organizations, managers, and employees develop this mindset that even after meticulous planning and training, things can still go wrong, and people need to be prepared to contain and resolve the problem, continue to provide the best service to guests, and learn how unexpected events can cause errors.

Minimizing Negative Consequences; Increasing the Positive:

Error management is both error prevention and error containment as it focuses on minimizing the negative consequences of errors by early detection, quick error correction, and on preventing similar errors in the future by analyzing the causes and learning from errors. Open communication about errors is a critical error management practice, as it allows for the development of shared understanding about errors, potential error situations, and effective error handling strategies. Many quality-award winners such as Ritz-Carlton use error management strategies – first, they make efforts to identify the errors (service failures) and then resolve the customer problems (service recovery), next they use error data to make decisions on process improvements to increase customer satisfaction in the future.

Therefore, for a successful operation, error management is crucial as it focuses on decreasing negative consequences (e.g. time loss; customer dissatisfaction) and increasing positive consequences (e.g. learning and innovation). The goal of error management is for employees to exhibit positive behaviors to handle the situation rather than panic, get stressed, blame others, or freeze, so that they can correct errors quickly and effectively, learn from the situation, seek feedback, share information so others can learn, and anticipate errors to handle it proactively in the future. However, while error management has proven to be prevalent and useful in aviation, manufacturing, and medicine, it has a notable potential positive impact in the hospitality industry. Research has demonstrated that error management practices influence organizational performance positively, irrespective of industry, and it also affects employee outcomes such as reducing job stress, increasing service recovery performance, exhibiting more helping behaviors, increasing engagement and creativity, and lessening turnover intentions in the lodging and food-services contexts/industry.

Advocating for Error Management Training:

Conventional training usually focuses on teaching the correct way to perform skills during training. Traditionally scholars and practitioners have focused on two types of training which are based on a negative perception toward errors, which considered as consequences of poor analysis, design, and lack of prerequisite behavior. The first type is errorless training. Errors are not mentioned in the errorless training process, because it is believed that error is not necessary for learning to occur. Instead, the focus of the training is to train employees to strictly follow the rules. Information regarding how to handle the potential error situation is not mentioned in the training process. In other words, the trainees are not exposed to any error-related elements as if errors didn’t exist in the workplace.

The second type of training is error avoidance training which is designed to prevent errors from occurring, and participants are not informed about the positive functions of errors. Trainees are encouraged to avoid making errors during the training process. Step-by-step instructions are provided to guide trainees to learn in an error-avoidant way. In both these training types, errors are framed as indicators of failure and lack of competence. Since errors are interpreted as having a negative effect on learning, it leads to self-doubt, dissatisfaction, stress and frustration among employees.

Researchers have recently become interested in investigating the effectiveness of error management training (EMT). This training type considers errors as a natural by-product of active learning and recognizes the potentially positive functions of errors. EMT acknowledges that workers will invariably commit errors for a variety of reasons. Errors are inevitable in the hospitality industry and often service providers do not know how to manage the error once it occurs. Error management training prepares employees to anticipate error occurrence and take preventive measures proactively to stop errors from happening and also prepares employees on how to manage and resolve errors effectively and efficiently once it occurs. According to EMT principles, training programs should not be designed to restrict error occurrence but rather should incorporate errors and train for them. EMT is predicated on the assumption that trainees should learn how to deal with errors rather than to avoid them.

The goal of EMT is to help trainees redefine errors as learning opportunities for which emotional and cognitive coping strategies are available. Errors are reframed as beneficial occurrences rather than stressful calamities. Errors are especially important in the training and learning process in that error can have an informative function for the learner, as they pinpoint where knowledge and skills need further improvement. The central premise of EMT is that the learning of complex cognitive skills is best accomplished in environments where trainees can actively engage in exploration, problem solving, hypothesis testing, making mistakes, and learning to recover from mistakes. EMT is likely to increase employee knowledge and by attending to errors and learning error management techniques, trainees are likely to have a deeper understanding of the job, process, and task knowledge than would otherwise be possible. Increased knowledge and understanding may reduce the risk of committing similar errors in the future.

Error management training leads to transfer performances. Transfer implies that knowledge, skills and attitudes are transferred from one task or job to another. Two types of transfer can be distinguished: (a) Analogical transfer refers to problem solutions that are familiar or analogous, and (b) adaptive transfer entails using one’s existing knowledge base to change a learned procedure, or to generate a solution to a completely new problem. From a practical perspective, adaptive transfer is more relevant in the hospitality industry because of the characteristics of the service products (e.g. simultaneity of service product production and consumption, coproduction of service product between customers and employees) and because errors are inevitable. For example, in a hotel, not all complaints of guests could be foreseeable during orientation. Back on the job, however, employees (trainees) may encounter unexpected problems while dealing with guests’ complaints and, in contrast to the protected training situation, might not have any Passistance at all. Therefore, employees are more likely to come up with unique solutions to unique problems and be more prepared and competent to handle difficult situations.

Scholars have noted three processes through which EMT can impact performance: emotional, cognitive, and motivational. Researchers found empirical support for the notion that EMT increases employees’ tendency to use two self-regulatory skills: Employees learn to exert “emotion control” aimed at reducing negative emotional reactions (e.g., stress, frustration) to errors and setbacks, and they engage in activities that involve planning, monitoring, and evaluating one’s progress during task completion and revision of strategies. Such activities are instigated because errors prompt learners to stop and think about the causes of the error and to experiment with different solutions. Finally, EMT creates a mind-set of acceptance of errors (high error tolerance) which can help to increase employee motivation.

EMT will be more effective in improving task and recovery performances (error identification, resolution, containment) compared to error avoidance or errorless training. Compared to employees who receive errorless or error avoidance training, employees who receive EMT will demonstrate high task and recovery performances because these employees are more likely to: (a) control negative emotions after failures/errors/mistakes and stay focused on the task (emotional process); (b) understand sources and causes of failures and come up with new solutions and improved procedures (cognitive process); and (c) be intrinsically motivated to deliver superior task and recovery performances (motivational process). Therefore, employees who undergo EMT are more likely to demonstrate increased knowledge, better task and recovery performances, and enhanced motivation and moods compared to traditional training methods.

Lessons for Hospitality Leaders:

Managers/trainers need to note some characteristics of EMT. Error management training aims to improve transfer performance, not training performance. In fact, training performance may be worse in error management training in terms of error rate, efficiency, or training time because participants are not directly guided to correct solutions. Instead, employees experiment, explore, make errors, and sometimes arrive at wrong solutions. Thus, managers need to hold a more positive view towards errors during the training process. Finally, when assessing the training effectiveness, the managers should not only focus on the evaluation at the end of the training process, but also how the training results have been applied to the work setting in the future. Compared to errorless and error avoidance training methods which concentrate on the problem solutions that are analogous to training process, the error management training focuses on the generation of new solution to new/unexpected problems.


PDF Version Available Here.


Key References
Frese, M., & Altmann, A. (1989). The treatment of errors in learning and training. In L. Bainbridge & S.A. Ruiz Quintanill (Ed.), Developing Skills in Information Technology. (pp. 65-87). New York: Wiley.
Frese, M., Brodbeck, F., Heinbokel, T., Mooser, C., Scheiffenbaxim, E., & Thiemann, P. (1991). Errors in training computer skills: On the positive function of errors. Human Computer Interaction, 6, 77-93.
Frese, M., & Keith, N. (2015). Action errors, error management, and learning in organizations. Annual review of psychology, 66, 661-687.
Guchait, P., Neal, J., & Simons, T. (2016). Reducing food safety errors in the United States: Leader behavioral integrity for food safety, error reporting, and error management. International Journal of Hospitality Management, 59, 11-18.
Keith, N., & Frese, M. (2005). Self-regulation in error management training: Emotion control and metacognition as mediators of performance effects. Journal of Applied Psychology, 90, 677–691.
Nordstrom, C. R., Wendland, D., & Williams, K. B. (1998). “Tor err is human”: An examination of the effectiveness of error management training. Journal of Business and Psychology, 12, 269-282.
Guchait, P., Simons, T., & Pasamehmetoglu, A. (2016). Error Recovery Performance: The Impact of Leader Behavioral Integrity and Job Satisfaction. Cornell Hospitality Quarterly, 57, 150-161.
Van Dyck, C., M. Frese, M. Baer, & S Sonnentag. (2005). Organizational error management culture and its impact on performance: A two-study replication. Journal of Applied Psychology, 90, 1228-1240.

Priyanko Guchait, PhD. is a tenured Associate Professor in the Conrad N. Hilton College of Hotel and Restaurant Management at University of Houston. He is an innovative researcher and hospitality educator. Dr Guchait is the author of more than 40 peer-reviewed journal articles, book chapters, conference proceedings and magazines. Dr. Guchait currently teaches Human Resource Management, Leadership, and Organizational Behavior at the undergraduate level, and Multivariate Data Analysis at the Ph.D. level. He taught at the University of Mississippi and The Pennsylvania State University before joining Hilton College in July 2012. Dr Guchait currently serves as the dissertation/thesis chair and in committees for Master’s and PhD students. He serves as the faculty advisor of Eta Sigma Delta—the International Hospitality Honor Society. Dr Guchait also serves as the Chair of Innovation lab in the Hilton College. He serves on the editorial boards of journals including IJCHM and reviews for several journals. Additionally, he is currently serving as Director of Marketing for WFCHRIE. Dr Guchait brings three years of work experience in hospitality management to his classroom.
Highlights
  • University of Houston’s 2012-13 New Faculty Research Award
  • Best Paper Award at the Southern Management Association conference in 2013
  • Provost’s Excellence Award in 2015
  • Stephen Rushmore/HVS Faculty Research Award in 2016
  • Best Paper Award at the ICHRIE conference in 2016
  • Best Paper Award at the WFCHRIE conference in 2018
  • Eta Sigma Delta Chapter Distinction Award

Failure is Not Fatal: Actionable Insights on Service Failure and Recovery for the Hospitality Industry

March 20th, 2019 in Business Practices, Hotels, Restaurants, Winter 2019 0 comments

By Lisa C. Wan and Elisa Chan

The service industry accounts for more than 70% of global GDP and continues to grow. This growth of the service sector in the foreseeable future is partly fueled by the rapid development of service technology (e.g., artificial technology (AI), chatbots, and automated self-service technology) in the digital age. Service performance is pivotal to consumer satisfaction, however, it is characterized by heterogeneity and intensive human involvement, and therefore service failure is almost inevitable (Chan and Wan 2008; Zeithaml, Parasuraman, and Berry 1990). Consequently, service companies must derive service recovery strategies that would help them mend the broken service promise in case of a service failure. For example, how can customer dissatisfaction be reduced in the event of a service failure? When a service was not performed well for a guest at a hotel, should the General Manager apologize in person? Or send a hand-written apology or an email to the customer? Is a private or public service recovery more effective? Does a service failure matter for an observing (potential) customer? How would a customer witnessing a service failure react to the situation and the service recovery effort by the hotel? Does service technology curb service failure due to its ability to offer standardization? Or does it create new challenges for service failure circumstances and service recovery strategy?

In this article, we seek to address each of these questions by discussing the most notable research findings concerning service failure and recovery. More importantly, we offer some actionable insights derived from existing academic research. The key takeaway is that while service failure is inevitable, proper service recovery effort will not only fix the problem but also enhance customer satisfaction beyond the current as well as potential customer’s expectation.

Insights from Classic Service Failures and Recovery Research

Service failure refers to an instance when customers experience dissatisfaction as a result of an actual service performance not meeting expectation. There are some factors that can reduce consumer dissatisfaction in service failures. For example, a clean and organized service environment, a pre-existing customer-company relationship, and the type of service failure.

Service Environment

One classic research has showed that simply providing a clean, neat and organized service environment can reduce consumer dissatisfaction when service failures happen. (Bitner 1990). Interestingly, a clean and organized environment conveys a professional image that make consumers attribute the cause of the failure as a random event. Consequently, they are less likely to blame the firm for the mistake. If the service environment is unclean and disorganized, the reverse is true: consumers become more dissatisfied with the mistake.

Customer Relationship

Building positive and strong customer rapport is another important strategy because customers tend to be more forgiving of mistakes when they have a positive, pre-existing relationship with a service provider (Jones, Mothersbaugh, and Beatty 2000).  This is especially true for consumers from Asian cultures (Hui, Ho, and Wan 2011).

If a customer treats a service provider as a friend (as opposed to a business partner), he/she will be even more tolerant of the service mistakes due to trust (Goodwin 1996). This trust, however, can be a double-edged sword. When customers have high trust for the service company and it fails to deliver on an explicit promise (e.g., “I guarantee you”), customers would feel betrayed and become angrier (Wan, Hui, and Wyer 2011). But if the service promise is implicit (i.e., “I try my best to help”), customers would be more forgiving. Perhaps counterintuitively, this implies that companies are best to avoid offering service guarantees to loyal customers who consider them more than just a business partner, but as a friend.

The Type of Service Failure

Service failures can be classified into outcome and process failures (Chan and Wan 2008; Smith et al. 1999). An outcome failure involves a loss of economic resources (i.e., money, time) and a process failure involves a loss of social resources (i.e., social esteem). To illustrate, a flight delay would be an outcome failure but an inhospitable flight attendant would be a process failure.

Cross-cultural research has shown that when an outcome failure happens, Asian consumers are less dissatisfied than their Western counterparts. When a process failure occurs, however, the reverse is true (Chan and Wan 2008; Chan et al. 2009). The main reason is because, when compared to Western consumers, Asians are more sensitive to social resources and face concern (i.e., care about one’s social image in front of others), but they pay relatively less attention to economic resources.

The two types of service failures also have implications for service recovery. Consumers prefer to receive recovery resources that match the type of failure that they suffer (Smith et al., 1999). Consumers prefer compensation and a speedy recovery when an outcome failure happens. However, they prefer an apology and an organization-initiated recovery when a process failure happens. Moreover, offering a compensation accompanied by a personal handwritten note (vs. an impersonal typewritten note) from the service provider would boost consumer recovery satisfaction and even reciprocal customer behaviors like more tips (Roschk and Gelbrich 2017).

In fact, the majority of previous research has focused on customers who are directly involved in service failures, scant attention has been paid to studying observers’ reactions to service failures. Observers are the potential customers for a service firm. In the digital age, it is very easy for an unhappy customer to post a negative review online via messaging apps, and this online complaint can be viewed by many others. Notably, customer online complaints have increased 800% over the years between 2014 and 2015 (Causon 2015), and this definitely captures much research and practitioner’s attention.

Insights about the Role of Observers (Potential Customers) in Service Failure Recovery

Since service failure is defined as incidents between the focal service provider and customer, past service recovery strategies research has largely focused on the effectiveness of the various means of recovery efforts for the focal customer’s loss and in restoring this customer’s satisfaction level (Wan, Chan, and Su 2011). While it is important to know how a customer involved in a service failure responds to different recovery strategies, recent research suggests that it is also crucial to examine how an observer (potential customer) witnessing a service failure evaluates the recovery effort. Although there is no reported figure of the financial cost associated with service failure, the consequence of service failure and ineffective service recovery are expected to be increasingly costly due to the prevalence and influence of online distribution and social media channels (e.g., TripAdvisor, booking.com, Instagram, Twitter, etc.).  The monetary costs of losing a hotel guest or restaurant patron can include a direct cost represented as in the short term as the value of a repeat customer and in the long term as customer lifetime value. But the prevalence of online channels, such as TripAdvisor, and Booking.com, implies that the monetary costs of a service failure could also include an indirect social cost due to negative word-of-mouth permeated through negative online reviews. As such, it is expected that the detrimental effects of ineffective service recovery may go beyond those impacts on the customer involved to the observers (e.g., potential customers reading online reviews; Chan, Wan, and Chu 2018; Noone and McGuire 2013; Wan, et al. 2011).

In general, the scant research which focused on the observer (potential customer) has found that a service failure which happened to another customer does have an impact on the observer’s evaluation of, and by extension, intention to engage with the service provider (Chan et al. 2018; Wan, et al. 2011; Wan and Wyer, forthcoming). More interestingly, the contagion impact of a service failure to the observing (potential) customers has been shown to have psychological rather than rational underpinnings. One study showed that the extent to which an observing customer assigns blame to the service provider reflects a defensive mechanism. In particular, when the observing customer witnesses a negative event (i.e., saw or read about a negative service experience), feeling of threat would arise. This feeling would trigger a self-protective motive manifested as the observing customer’s heightened motivation to avoid possible future harm by assigning more blame to the perpetuator of the negative event (i.e., the service provider; Wan, Chan, and Su 2011).

The robustness of the defensive mechanism in the role of an observing customer in service failure is further supported by the finding that an observing customer’s perceived personal similarity with the customer involved accentuates the blame assignment for the service provider. Past research reported that when the observing customer perceived more personal similarity with the focal customer of the service failure, more blame was assigned to the service provider (Chan et al. 2018; Wan, et al. 2011). Moreover, the psychological state that drives this pattern of blame attribution is a sense of vulnerability felt towards the chance that the same failure would befall oneself, as opposed to negative emotions felt towards the negative experience associated with the observed service failure (Chan et al. 2018). In addition, this line of research suggests that personal similarity can be instigated by a variety of factors, such as the focal customer’s age (e.g., a younger person vs. an elderly) and ethnicity (e.g., Asian vs. Cassian), customer status (e.g., VIP status at the focal service company). More importantly, the increased blame assignment to the service provider in the aforementioned studies would further hinders key customer outcomes, such as perceived service quality, likelihood to use the service, and intention to choose the focal service provider, which could hurt the company’s bottom line.

Taken together, this body of research suggests that a company’s service recovery should not be limited to the customer involved in the failure, but extended to those who observed it. For example, service firms can consider offering a public apology or recovery on social media channels after service failures, it may help in alleviating the feeling of threats that the observing customer may experience. Moreover, after the service recovery had been performed to the customer involved, extra attention maybe devoted to other customers as well. If a food order has been placed incorrectly, for example, after apologizing to the patron involved, the server may ask those sitting nearby about their orders and food. This act of concern may soothe any uneasiness emerged out of witnessing someone else’s negative experience.

Service Failure and Recovery in the Technology-Infused Era

The recent surge in technology-infused services has brought new opportunities and challenges to the service industry as a whole. But what are the implications, if any, with respect to service failure, and by extension, service recovery? There is admittedly very limited research in this area. But we hope to offer a few key takeaways for mangers based on our current knowledge:

  1. Companies must remember that while technology-enabled service standardization does not curb service failure. But service failure resulted from service technologies may often be the customers’ own fault (e.g., inability to use technology, not following instructions, etc.). Companies’ must focus on how to better educate customers on the operations of the service technologies and assist customers to prevent such service failure.
  2. Customers using self-service technologies tend to attribute success to themselves but failure to the company. To illustrate, a recent study found that Apple Pay users became more satisfied with the service provider if the payment was successful because it made them look cool; on the contrary, those users became more dissatisfied if the payment was unsuccessful because they felt embarrassed (Liu and Mattila, forthcoming). This suggests that companies’ service recovery effort would not only need to fix the problem but also to alleviate the negative emotions (e.g., embarrassment, anger, etc.) the customer experienced.
  3. Recent market studies have repeatedly found that many customers consider themselves reluctant participants in adopting service technologies. Companies may need to handle service failure and recovery differently for customers who are receptive to technology from those who are reluctant participants. One may expect that those who felt that they did not have a choice may be even more dissatisfied and thus require extra recovery effort.

 PDF Version Available Here.


REFERENCES
Bitner, Mary Jo (1990), “Evaluating Service Encounters: The Effects of Physical Surroundings and Employee Responses,” Journal of Marketing, 69-82.
Causon, Jo (2015), “Customer Complaints Made via Social Media on the Rise,” The Guardian, May 21, https://www.theguardian.com/media-network/2015/may/21/customer-complaints-social-media-rise/.
Chan, Elisa, Lisa C. Wan, and Maggie Chu (2018), “How Potential Customers Respond to Service Recovery Strategies,” Conference Proceeding, the SERVSIG Conference, June 14-16, Paris, France.
Chan, Haksin, and Lisa C. Wan (2008), “Consumer Responses to Service Failures: A Resource Preference Model of Cultural Influences.” Journal of International Marketing, 16 (1), 72-97.
Chan, Haksin, Lisa C. Wan, and Leo Yat-ming Sin (2009), “The Contrasting Effects of Culture on Consumer Tolerance: Interpersonal Face and Impersonal Fate,” Journal of Consumer Research, 36 (2), 292-304.
Goodwin, Cathy (1996), “Communality as a Dimension of Service Relationships,” Journal of Consumer Psychology, 5 (4), 387–415.
Hospitality Technology (2011), “2011 Hospitality Industry Self Service Tech Study,” Research Report, June, http://ncrpr.ncr.com/web/rsdmkt/docs/Hospitality_technology_report.pdf.
Hui, Michael K., Candy K. Y. Ho, and Lisa C. Wan (2011), “Prior Relationships and Consumer Responses to Service Failures: A Cross-Cultural Study,” Journal of International Marketing, 19 (1), 59-81.
Jerger, Christina and Jochen Wirtz (2017), “Service Employee Responses to Angry Customer Complaints: The Roles of Customer Status and Service Climate.” Journal of Service Research, 20 (4), 362-378.
Jones, Michael A., David L. Mothersbaugh, and Sharon E. Beatty (2000), “Switching Barriers and Repurchase Intention in Services,” Journal of Retailing, 76 (2), 259-74.
Liu, Stephanie Q. and Anna S. Mattila (forthcoming), “Apple Pay: Coolness and Embarrassment in the Service Encounter,” International Journal of Hospitality Management.
Mick, David Glen and Susan Fournier (1998), “Paradoxes of Technology: Consumer Cognizance, Emotions, and Coping Strategies.” Journal of Consumer Research, 25 (2), 123-143.
Noone, Breffni M. and Kelly A. McGuire (2013), “Pricing in a Social World: The Influence of Non-Price Information on Hotel Choice.” Journal of Revenue and Pricing Management, 12 (5), 385-401.
Roschk, Holger and Katja Gelbrich (2017), “Compensation Revisited: A Social Resource Theory Perspective on Offering a Monetary Resource After a Service Failure.” Journal of Service Research, 20 (4), 393-408.
Smith, Amy K., Ruth N. Bolton, and Janet Wagner (1999), “A Model of Customer Satisfaction with Service Encounters involving Failure and Recovery,” Journal of Marketing Research, 36 (3), 356–372.
Su, Lei, Lisa C. Wan, and Robert S. Wyer (2018), “The Contrasting Influences of Incidental Anger and Fear on Responses to a Service Failure?” Psychology & Marketing, 1-10.
Wan, Lisa C. (2013), “Culture’s Impact on Consumer Complaining Responses to Embarrassing Service Failure,” Journal of Business Research, 66 (3), 298-305.
Wan, Lisa C., Elisa K. Chan, and Lily L. Su (2011), “When Will Customers Care about Service Failures that Happened to Strangers? The Role of Personal Similarity and Regulatory Focus and Its Implication on Service Evaluation,” International Journal of Hospitality Management, 30, 213-220.
Wan, Lisa C., Michael K. Hui, and Robert S. Wyer (2011), “The Role of Relationship Norms in Responses to Service Failures,” Journal of Consumer Research, 38 (2), 260-77.
Wan, Lisa C. and Robert S. Wyer (forthcoming), “The Influence of Incidental Similarity on Observers’ Causal Attributions and Reactions to a Service Failure?” Journal of Consumer Research
Zeithaml, Valarie A., A. Parasuraman, and Leonard L. Berry (1990), Delivering Quality Service: Balancing Customer Perceptions and Expectations, New York: Free Press.

Lisa C. Wan (Ph.D. The Chinese University of Hong Kong) is an Assistant Professor of the School of Hotel and Tourism Management at Faculty of Business Adminitration, The Chinese University of Hong Kong. She also is the Director for the Centre for Hospitality and Real Estate Research at The Chinese University of Hong Kong. Her research focuses on services marketing and service failure, cross-cultural consumer behavior, and online consumer behavior. Her work has been published in Journal of Consumer Research, Annals of Tourism Research, International Journal of Hospitality Management, Journal of Hospitality and Tourism Research, Journal of International Marketing, Journal of Business Research, and Psychology & Marketing etc.

 

Elisa Chan (Ph.D. Cornell University) is an Assistant Professor in Marketing at the École hôtelière de Lausanne, HES-SO // University of Applied Sciences Western Switzerland. Her research focuses on consumer value and experience in service settings, social and external influences on consumer evaluation and choice, and internal marketing. Her work has been published in Cornell Hospitality Quarterly, International Journal of Hospitality Management, Journal of Consumer Behavior, and Journal of Applied Psychology. She also serves on the Advisory Board of the Hospitality Sales and Marketing Association International (HSMAI) for the Culture and People division in Europe.

My Head in the Clouds (computing): A Case Study of a Restaurant Group Embracing Off-Site Technology

October 31st, 2018 in Business Practices, Fall 2018, Millennial, Restaurants, Technology, Trends 3 comments

By Tyler Titherington

I am a restaurateur.  I’m behind schedule.  Again.  Not because I am disorganized or have too much to do, more so because I have a hierarchy of tasks that are addressed based on priority.  Guest needs are my first priority, staff needs are a close second and everything else last.  There is a tertiary hierarchy in the last basket as well.  Some tasks with a lower priority fall through the cracks.  Not because they are unimportant, but rather there just was not enough time.  The truth is that I am obsessively organized.  I love “To Do” lists, calendars, flow charts and the accomplishment of tasks.  I eat projects for breakfast, while living on the edge of chaos and complete catastrophe.  Short staffed?  Yawn.  Drains flooding?  Been there, done that.  POS system crash during service on a weekend?  Bring it.  I am the duck – calm above water and feet moving nonstop below.  However, how do I manage all the curveballs and still manage to gain time without compromising any of my other priorities?  It is very simple – adapt and embrace technology wherever possible, specifically, cloud-based computing solutions that allow one to be in many places at one time.  These applications simplify daily tasks for management teams and staff, which will ultimately leverage senior management down to focus on the bigger picture.  Maybe even get a day off…

Over the last 10 years or so, the increased availability of cloud-based computing solutions (using network computers over the internet rather than property-based hard drives) has been a major paradigm shift for many industries.  However, as with most technological advances, the restaurant industry has been very slow to adapt.  Tight margins, resistance to change, and fear of unknown outcomes have long driven the restaurateur’s decision-making process.  However, with increased options, cheaper costs, and ease of use, that mindset is quickly becoming a thing of the past.  Restaurant operators are beginning to embrace cloud-based solutions for everything from Point of Sale and Tableside Payment to Menu Design and Scheduling.

Our foray into cloud computing began with an unfortunate set of circumstances that the entire industry was facing.  The year was 2010 and the impending doom of PCI Compliance was upon us.  At best, our network infrastructure was dated and we needed to act quickly to get it into compliance.  Like most operators, our hand was forced and we had no choice.  What is PCI Compliance?  The answer depends on who you ask.

Your guests have never heard of it and have no idea what it is.  Most restaurant operators will tell you that PCI Compliance is an almost unachievable set of network security standards designed to protect the credit card giants, who already charge them way too much for credit card processing and continually squeeze them with a plethora of monthly fees.  The definition of PCI Compliance is below, according to PCI ComplianceGuide.org

"The Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards designed to ensure that ALL companies that accept, process, store or transmit credit card information maintain a secure environment.  The PCI Security Council Card focuses on improving payment account security throughout the transaction process. It is an independent body that was created by the major payment card brands (Visa, MasterCard, American Express, Discover and JCB.).”[i]

PCI DSS is mandatory for any and all businesses that accept credit cards.  It involves a process of assessment, remediation and reporting.  Operators must identify network vulnerabilities, physical vulnerabilities, and operational vulnerabilities that could result in a credit card breach and fix them.  In summary, it is a painfully tedious, extremely time consuming, and potentially expensive process.

It is extremely important for the security of our guest’s payment information, both for ensuring trust with our customers and limiting legal liabilities.  In 2017-8, major retail stores including Home Depot, Macy’s, Sears, Kmart, Best Buy and Lord & Taylor made headlines across the country for data breaches possibly compromising customer’s credit card personal information. The restaurant industry is also plagued with security breaches, including large chains such as Darden (Cheddar’s), Panera Bread, Sonic and Arby’s. The number of customers whose credit card information may be compromised totals into the millions.[ii]

At Grafton Group, the process of obtaining Credit card security involved working directly with our IT vendor and POS vendor to achieve PCI compliance.  The first order of business was to get our network infrastructure in order.  Some of the major network upgrades that we undertook were upgrading wiring, locking down patch panels, securitizing external ports, adding wireless access points (WAPs), and replacing firewalls. The WAPs and new firewalls were the heart of the upgrades and would ultimately allow us to operate unencumbered in the cloud.  The new access points give our guests their own network and prevent them from accessing ours.  The security firewalls prevent intrusions and also allow our IT vendor remote access so they can make changes without actually being in the restaurant.  What used to be a scheduled visit from our IT vendor that may have taken weeks, is now a simple email and can often be addressed online in minutes.  In a nutshell, PCI DSS forced us to upgrade our network, which ultimately allowed us to operate in the cloud.  This unintended outcome to a painful requirement was truly a blessing in disguise and it pushed us into new territory – the cloud!  Being in the cloud has allowed us access to exciting applications and services that would otherwise be unavailable to us.

IBM defines cloud computing as “the delivery of on-demand computing resources — everything from applications to data centers — over the internet on a pay-for-use basis.”[iii]  For our purposes, these on demand computing resources primarily consist of “SaaS” or Software as a Service.  Here are some of the areas where cloud computing can streamline our operation.

Point of Sale

POS systems are the most interesting area of cloud-based solutions for restaurant operators.  Legacy systems such as Positouch, Micros, and Aloha are bulkier, more expensive, and much harder to program and implement.  There are quite a few cloud-based POS options, most notably Boston-based Toast.  Toast has done a great job streamlining and simplifying the interface for both front and back end users.  Management can access the system remotely for screen programming, troubleshooting or reviewing sales.  It is extremely intuitive, like using a smartphone, thus needing very little training. As wireless POS solutions evolve, legacy systems will eventually be phased out.  It is only a matter of time.

Tableside Payment

EMV (Europay, MasterCard and Visa) is another set of regulations that are coming to the restaurant industry. “EMV is a global standard for cards equipped with computer chips and the technology used to authenticate chip-card transactions.”[iv]  Used in Europe for years, the credit card never leaves the customer and all transactions are processed tableside with a handheld device. One example of an EMV compliant, cloud-based device for tableside payments that we at Grafton Group are currently analyzing and plan on implementing is Pay My Tab.  Pay My Tab will fully integrate with our POS system and eliminates many bulky PCI DSS requirements. Many similar systems are already in use at quick service operations, where guests and staff have easily adapted to them.  In addition to tougher security, the implementation should decrease payment time, eliminate paper receipts (emailed instead) and simplify the process for management to search for specific receipts.

Reservations and Floor Management

There are a variety of solutions for reservations and floor management systems.  Our firm has been using OpenTable for over 15 years, so when they rolled out their cloud-based system, GuestCenter, we were early adopters.  This has been one of the single best applications in terms of roll out, ease of use, and seamless integration.  It is iPad-based and eliminates all the wiring and host stand real estate.  It is compatible to smart phones that allows for remote access, allowing management to check flow of service, identify unique reservations, and make sure that waitlists are being managed appropriately.  Soon to come is an interface with POS systems that automatically applies any “guest notes” from GuestCenter to the server’s check, such as special occasions, etc. Most importantly, due to its intuitive design, our millennial hosts use the system seamlessly.

Private Event Management

Private events are the foundation of most full service restaurant operations.  They are the difference between a good week and a great week.  However, it can be a very confusing process with all of the moving parts.  In order to stay organized, we use TripleSeat to manage leads, create BEOs and track our events calendar. The cloud-based event management system allows our Private Event Coordinators to respond at any given time from anywhere, giving them a leg up on the competition, giving them the opportunity to earn fees for each event.  Since our coordinators receive an administrative fee for each event, they enjoy responding when available off-site; good communication is key for making sure work-life balance is maintained.

Bar at the Russell House Tavern in Cambridge, MA. Photo: graftongrouphospitality.com

Inventory

An area which the cloud has really saved our restaurants time is with food & beverage inventories.  No more paper and no more transposing paper to spreadsheet.  Inventories can be uploaded in real time using a tablet, laptop or even a smart phone. BevSpot is used for both our food and beverage inventories.  We have also given access to our accounting firm, in order to reduce bulky invoice scans and uploads.  All information can be entered into the cloud and accessed by all of our approved users.  It also allows for multiple people to take inventory simultaneously.  One person can be on the bar, another in the walk in fridge, and another in the liquor room, all at the same time.  In addition to being a major time saver, it has helped Grafton Group to reduce sitting inventory by a significant amount across all properties.

Scheduling

Staff scheduling is a weekly administrative headache for managers, but there are cloud-based scheduling applications that lessen the pain. We have found HotSchedules to fit our needs as it interfaces with our POS system and allows our firm to do some creative reporting in regards to budgeting and forecasting, as well as taking employees requests and requirements into consideration.

Email and File Sharing

Grafton Group has come a long way from sharing access to a desktop version of Outlook and toggling between accounts.  We were able to eliminate our main server entirely and now we use Office 365 for our email and file sharing needs.  Not only is this highly securitized, it has redundancy so our information is always backed up.  We access both our email and files from anywhere in the world.  This has greatly improved productivity and allowed our management teams to communicate in real time.

Grafton Street in Cambridge, MA. Photo: graftongrouphospitality.com

Computer Hardware

Our office hardware now consists of much less expensive “Network Computers”, which do not require expanded memory for giant programs, CD drives for downloading drivers, or expansion slots for extraneous drives.  We can purchase more computers at a reduced cost and our managers no longer have to share computer access in the office.

Menu Design

For our menu design need, we have found InDesign to be the most efficient program, which is part of the Adobe Creative Cloud.  This program can now be selected a la carte from Adobe’s menu of programs and paid for on a month to month basis for under $20.  This is much more palatable than paying $600 for the entire Adobe suite.

These are just a handful examples of how cloud computing has impacted our operations and ultimately saved time for our management team and staff.  Ten seconds here, 5 minutes there, an hour tomorrow - it adds up to impactful chunks of time that can be better spent elsewhere.  We have only scratched the surface as an industry - we will see more and more options for cloud-based solutions to real world restaurant problems. Although the solutions highlighted above create efficiency and save time, they do not serve guests and they don’t understand the art of hospitality.  It is imperative that as restaurateurs we continue to create a positive environment, embrace innovation, and engage and train our employees in the art and skill of hospitality.

There are some things you will never have time for in the restaurant industry, regardless of cloud-based advancements.  “Lunch”, for example, I have heard is a meal that takes place in the middle of the day.  For me, “lunch” is the sandwich that I eat in 30 seconds somewhere between 2pm and 6pm standing over a trash can in the back of the kitchen.  There is no technology for that…


PDF Version Available Here


References
[i] "PCI Compliance Guide FAQ." PCIComplianceGuide.Org. September, 2018. https://www.pcicomplianceguide.org/faq/#1.
[ii] Green, D. and Hanbury, M. (Aug. 22, 2018). “If you shopped at these 16 stores in the last year, your data might have been stolen.” https://www.businessinsider.com/data-breaches-2018-4
[iii] "What Is Cloud Computing?" IBM.com. September, 2018. https://www.ibm.com/cloud/learn/what-is-cloud-computing.
[iv] Kossman, Sienna. " 8 FAQs about EMV credit cards." CreditCards.com. August 29, 2017. https://www.creditcards.com/credit-card-news/emv-faq-chip-cards-answers-1264.php.

Tyler was born and raised in Portland, Maine and has lived in the Boston area since attending Boston University.  After graduating from the Boston University School of Hospitality Administration, Mr. Titherington operated a handful of bars and restaurants in Boston.  He has been with Grafton Group since October 2007. 

Restaurant Delivery: Are the “ODP” the Industry’s “OTA”? Part II

October 31st, 2018 in Business Practices, Fall 2018, Restaurants, Trends 0 comments

By Christopher Muller

In Part 1 of this analysis of the restaurant delivery system we looked at the owner/operator models which still offer some measure of control over price and quality.  This is fast becoming an issue with the rise of the Ghost Kitchen where the ODP is an integral part of the equation.  Here we present the larger challenges from the dominant ODP control of the marketplace.  It is good to remember that most of the ODPs themselves are still looking to find profits in what they do, a suggestion that those profits will need to come at the expense of the restaurant providers in one way or another.

5. The Aggregator or On-Line Delivery Provider (ODP) - No Driver Fleet

If someone were to say, “Let me take care of all of your delivery problems for a small cut of your revenues” many restaurant operators, especially those eager to get into the market with the least amount of upfront investment, would jump at the chance.  Enter the On-Line Delivery Provider with a business model built upon a brand name customer-facing APP, website or phone number and an enormous amount of back office computing power to drive order volume.

At its core, to be successful the Aggregator needs to be a world-class matchmaker for food orders, with both a large customer database of users and a broad assortment of restaurant menus offered in major cities.  Like many of what MIT’s Bill Aulet calls an Innovation Driven Enterprise (IDE)[1] the cost of customer acquisition is the key hurdle in entering this distribution channel. What it doesn’t need is its own fleet of employee delivery drivers. Capitalizing on the DIY gig economy, drivers are hired on a contractual basis, working as independent delivery agents with their own vehicles.

The barrier to lowering this high cost of entry has favored early market entrants and large well-funded digital innovators.  Worldwide, the fastest growing ODP is Uber Eats, the natural extension of car service provider, Uber, with its existing enormous data base of users, an ever expanding fleet of drivers, and the understanding for a driver that delivering food with an APP-based pre-payment system is considerably faster and easier than dealing with human passengers.

The upside for restaurant companies using an ODP such as Uber Eats, from those as dominant as McDonalds or as small as the local pizzeria, is that there is no need to hire and train non-core employees.  As touted by Uber Eats delivery service can begin almost immediately upon signing up.  The downside, that has a potential for long term impact, is two-fold.  The fee structure for traditionally low margin restaurants can be between 20-30% of a menu item price, leaving little to cover remaining expenses.  Worse though is that the restaurant gives away its brand and trade dress image to the company making the delivery to the front door.  McDonalds hamburgers may be in the bag, but the name on the ordering APP and the uniform on the person handing it to the customer says Uber Eats.

6. The Consolidator - Bulk "Bus Stop"

As noted, the most expensive single piece of the delivery puzzle is getting food from the restaurant to the front door, what is called “the last mile.”  One proven way to minimize that expense is to have the customer meet the food delivery at a central drop-off spot (see: Amazon [2]).  A start-up, Yun Ban Bao, in New York City is taking advantage of ethnic Chinese food deserts through direct targeted marketing using the dominant Chinese online service provider, WeChat.  By doing so it is creating a captive delivery market with the advantage of pre-ordering and payment.[3]

Taking online requests for delivery on the next business day, then consolidating orders using a bulk delivery model, Yun Ban Bao is lowering the cost of delivery while maintaining control with its own fleet of drivers.  It advertises a data analytics service for smaller restaurants as well as being a revenue growth accelerator for restaurants in suburban locations which otherwise could not find new or broader market opportunities.

Using a pre-arranged group delivery network, often outside parks, office towers or apartment buildings, the system mirrors a bus route, not the more traditional taxi route model of one-on-one delivery.  This also affords the network of restaurants a way to lower operating costs by controlling the production process in advance.

7. The Aggregator ODP - Owned Fleet

Some of the largest ODP players started in the delivery business by controlling their own fleets of employee managed delivery drivers.  The global leader, Just Eat,[4] has used this model throughout the UK, Europe and worldwide.  But it also has worked directly with restaurants who have their own in-house deliver fleets to create a broad partnership.  Just Eat acts as the online ordering platform, but then allows the local branded company to be the face at the door.

The ability to present a standardized customer facing brand identity means that trust may be established with the customer directly.  While this can come at the risk of the restaurant losing its direct brand relationship, what Just Eat has been able to master is the collection of a vast customer database of its users.  It has created a relationship with many of its restaurant partners to assist them in finding ideal store locations, menu item design and creative targeted pricing and promotions programs which would not otherwise be affordable or even available to smaller companies.

For these ODP companies, the costs for maintaining their own fleets or working as a hybrid with a local restaurant creates a higher operating expense, but these are often offset with a higher fee share from both the restaurant and the consumer.  It also creates a competitive advantage by building a broader network of restaurants to choose from for the customer, which builds long term loyalty and habitual purchase behaviors.

8. The ODP Aggregator - Dark Kitchens

One of the greatest threats to the bricks and mortar restaurant delivery partners is the emerging concept of a Dark Kitchen.  This is a space created by an OPD to facilitate the lowest cost per delivery mile from restaurant kitchen to the highest density of users.  While this is similar to the Cloud Kitchen model, in this case the OPD establishes a cluster of small dedicated but competitive restaurant kitchens in a single site.  A Dark Kitchen is also similar to the trending food hall concept, but comes with no direct customer interaction—no walk-in guest visits these production facilities.  In the UK this was pioneered by Deliveroo with its urban RooBox or Editions concepts.[5] Partner restaurants rent portable kitchen space from the delivery service and pay a larger percentage fee to cover the build-out costs for their space.  Restaurants staff the kitchens at their own expense, as well.

Earlier this year, Grubhub invested $1 million in Green Summit Group (see Ghost Kitchen in Part I), a startup with nine virtual restaurants operating from a single kitchen. DoorDash is renting extra space from the Santa Clara Fairgrounds in San Jose, Calif., and making it available to foodservice operators who want to create delivery-only options. In Los Angeles, Postmates leased a commissary kitchen space so its restaurants can reach new customers. And UberEATS is exploring the concept with Poke Café in Chicago — a virtual restaurant serving Hawaiian poke bowls.

“We can work with existing restaurant partners to create delivery-only menus. (They would) appear as entirely new restaurants on the UberEats app,” Ambika Krishnamachar, UberEats product manager, said in an article on Mashable.[6]

And again, while on its face this appears to be a positive opportunity for independent or chain restaurants to lower costs or disaggregate the dine-in from the delivery production process, it is not cost free.  In fact, as a logical progression would suggest, the OPD Deliveroo service has realized that the actual local restaurant in this mix is not a necessity for success.  Instead by using its own “innovation fund” it will to go directly into the restaurant business itself, creating “from scratch” concepts by working with celebrity chefs and data mining information from its enormous customer data base. [7]

As more of the OPDs look to find profits to pass along to the aggressive investors who have funded rapid growth, they will inevitably look to cut out the middleman and provide meals themselves to increase margins. The kitchen that may actually go “dark” is the local one on the corner down the street in an independent restaurant.

Conclusions

This is undoubtedly both an interesting and a challenging time for the restaurant industry and the Online Delivery Providers who are feeding from it.  Neither side seems to have figured out how to make the new consumer demand for off-site delivery work to their complete advantage.

It is impossible to believe that any restaurant can survive if it gives away up to 30% of its top line revenues when the average net profit is less than 10%.  No amount of increased volume in sales will make up for that.  As Cameron Keng wrote in his column “Why Uber Eats Will Eat You Into Bankruptcy” in March, 2018:

Based on the average profit margins above, every restaurant that engages Uber Eats will lose money on every order they take. The more orders coming from Uber Eats, the more money a restaurant would lose.[8]

At the same time, while it is hard to get exact information, it appears that almost none of the largest On-Line Delivery Providers, in any of the described segments is actually showing a profit.  Uber Eats is only profitable in 27 of its more than 100 urban markets,[9] and while Deliveroo’s sales rose in 2017 to £277 million ($356 million), the company lost an astounding £185 million ($237 million).[10]  Yet Uber Eats is offering over $2 billion to purchase/merge with Deliveroo.

Finally, as Jonathan Maze wrote in his Bottom Line column in early October the restaurant industry is simply unprepared for what appears to be a tectonic shift in traditional restaurant segments, consumer behavior, labor utilization, Real Estate valuation and investor interest.

If delivery is the future of the restaurant business, the restaurant business as it is currently constructed is in trouble.

The service is growing rapidly. But it’s increasingly replacing existing restaurant business rather than taking business away from grocers or other food retailers. [11]

As we noted in the beginning, it took the lodging industry almost 20 years to begin to make this kind of tectonic change and it is nowhere near complete.  A few very large hotel companies, through merger and acquisition, have consolidated enough power to start the move away from handing over all of their pricing to the OTA’s.  In economic terms, hotel companies are trying to go from being Price Takers to Price Setters.

At this early stage of the restaurant OPD’s domination of the delivery cycle, it is not clear that any restaurant organization is large enough to break the fever, especially now that McDonald’s is partnering with Uber Eats.  While it may appear that the On-line Delivery Provider is a restaurant’s partner, friend or even savior, it is none of those.  In fact, in order to become profitable the OPD is looking to become a direct competitor.

What is certain is that few restaurant companies, and certainly no independent operations, can survive the next two decades letting third parties dictate what convenience and price mean.  In fact, this might be a good time to get out of the house and go visit your favorite local restaurant.  Sacrificing some convenience for a great experience is a good value and that restaurant may not be around the next time you want to show up.


PDF Version Available Here


References
[1] See Bill Aulet, Disciplined Entrepreneurship,
[2] The Financial, October 25, 2018,  https://www.finchannel.com/~finchannel/business/76317-amazon-expands-grocery-delivery-and-pickup
[3] Menqi Sun, WSJ, September 9, 2018, https://www.wsj.com/articles/how-to-get-food-delivered-from-your-favorite-faraway-restaurant-1536516000
[4] See https://www.just-eat.com/
[5] James Cook, Business Insider, April 5, 2017, https://www.businessinsider.com/deliveroo-editions-pop-up-restaurants-roobox-2017-4
[6] Tim York, The Packer, March 23, 2018, https://www.thepacker.com/article/rise-virtual-restaurant
[7]Sophie Witts, Big Hospitality, May 21, 2018, https://www.bighospitality.co.uk/Article/2018/05/21/Deliveroo-to-create-own-restaurant-brands-using-5m-fund#
[8] Cameron Keng, Forbes, March 26, 2018, https://www.forbes.com/sites/cameronkeng/2018/03/26/why-uber-eats-will-eat-you-into-bankruptcy/#778a3b0621f6
[9] Ibid., DealBook, September 21, 2018
[10] BBC News, October 1, 2018, https://www.bbc.com/news/business-45707700
[11] Jonathan Maze, Restaurant Business Online, October 17, 2018 https://www.restaurantbusinessonline.com/financing/delivery-could-force-changes-restaurant-business-model

Christopher C. Muller is Professor of the Practice of Hospitality Administration and former Dean of the School of Hospitality Administration at Boston University. Each year, he moderates the European Food Service Summit, a major conference for restaurant and supply executives. He holds a bachelor’s degree in political science from Hobart College and two graduate degrees from Cornell University, including a Ph.D. in hospitality administration. Email: cmuller@bu.edu

Restaurant Delivery: Are the “ODP” the Industry’s “OTA”? Part I

October 31st, 2018 in Business Practices, Fall 2018, Restaurants, Trends 6 comments

By Christopher Muller

The entire restaurant industry, from the simplest quick service joint to the most complex fine dining jewel, is caught in a veritable frenzy of delivery.  It may be, unfortunately, a very risky path to travel for the uninitiated restaurant operation, but delivery is driving the investment community to a fever pitch. [1] We have entered into the time of the restaurant On-Line Delivery Provider (ODP) which mirrors in many ways the On-Line Travel Agent (OTA) which has so disrupted the lodging industry.

In two complimentary BHR articles here, we present a look at the 8 different models of restaurant delivery and how they are affecting both senior management and customer choices.

A Quick Lesson From Pricing History

For observers of the global Hospitality Industry this should send up warning flags.  In a galaxy far, far away, the Lodging industry managed revenues by using simple seasonal or attribute pricing models (On-, Shoulder- and Off-Peak rates, or premiums for “A Room With A View”) and sold some limited excess inventory through a network of independent Travel Agents (at an onerous 10% commission!).

Then, as the Internet expanded, and the travel market imploded after the 9-11 tragedy, a new and exciting model emerged - the On-Line Travel Agent (OTA) acting as a third party aggregator appeared.  Hotel companies willingly gave open access to all of their unsold room inventory to the OTAs (Expedia, Travelocity, Priceline, Booking.com, Kayak, Trivago, etc.) to sell directly at deep discounts, often between 25 and 30% off posted Rack Rates.  Occupancies rose, but Average Daily Rates plummeted, and profits quickly diminished.  Hotels, relying on the old pricing models were caught competing “with themselves” and watched as formerly loyal customers switched their buying habits and loyalties to the OTA that gave them the best rate.  Customers could scroll through pages of prices, often for the exact same room in the same hotel, searching for the cheapest rate.  Hotel rooms, instead of being unique destinations became interchangeable commodities.

It has taken almost twenty years, but through brand consolidation and a total system-wide transformation into a Revenue Management based pricing model, the hotel business has been transformed and the OTAs are being aggressively challenged for dominance. This should be a lesson for the restaurant owner/operator, the OTAs drove nothing but price as a decision attribute, the ODPs are poised to do the same thing with both price and convenience, unfortunately restaurants probably won’t have decades to recover.

Today’s Restaurant Delivery Frenzy –The Rise of the ODP

Whether it’s the savvy but shape-shifting Millennial, the rapidly aging Baby Boomer, or the rising young digital native from the i-Generation, it seems that customers in all shapes and sizes just want to have their meals brought to them at home, the office, or somewhere in between.  Breaking the code of the delivery model—becoming the customer’s choice of who serves up breakfast, lunch or dinner at home, work or play—has emerged as the Holy Grail of the foodservice business. But it may be more like the other mythic Dark Ages metaphor, the Plague, potentially killing upwards of 30% of existing restaurant units.

So, what exactly is “delivery” today, how did it evolve into such a big, expanding component of the restaurant offering and what are the implications going forward for the industry?  Just how do the On-Line Delivery Providers, the ODP, dominate the market?

We can begin by agreeing that delivery is a distinct and rapidly growing distribution channel, although it has been around in one form or another for a very long time.  And while not exactly a new technology, nor necessarily a profitable one, the exploding market for the delivery of food is poised for an inevitable shake out as it quickly approaches a mature phase consolidation.[2]

In late 2018 delivery is all about instant gratification, not just for the diner but some would suggest for the restaurant as well. At first glance, it all feels so simple and easy. But like so much in restaurant management, there is more than one way to get something done, even the simplest of things.

Emerging Key Success Factors

Like so many emerging business models in the on-line digital age, food delivery is developing its own metrics and factors to be considered and mastered. While still evolving, among these now are:

  • Addressing the profit challenges of “The Last Mile” in the delivery chain
  • Minimizing the high cost of Customer Acquisition
  • Developing an integrated APP, website, tablet and smartphone ordering platform
  • Designing the most effective delivery driver fleet system
  • Establishing an attractive and competitive user fee basis
  • Creating positive and immediate Brand recognition
  • Building a proprietary Knowledge Base of data storage, analytics and access

Delivery of food, especially from a restaurant to a consumer, has become a multi-billion dollar segment of the industry.  Some are predicting that it will overtake the traditional dine-in segment completely within a decade, although the complexity of getting it right and turning a profit while doing so, can still be elusive even for the largest players.  And of course, no one should forget that Amazon is over in the corner waiting to see how things evolve in an online delivery world they basically invented.

Traditional and Controlled

As noted, the delivery of food from a restaurant directly to a local customer is not a new idea although traditionally the customer came to the restaurant and picked up or carried out their food order.  Both delivery and carry-out were best suited to a restaurant with a simple, easily transported menu.  Where a significant amount of the value of the meal was the dining experience and table service, meals to go were often comprised of a package of leftovers or the long gone term “doggie bags.”

Here is a look at four models with some measure of control for restaurant owners and operators over the quality and profitability of their offerings.

1. The Independent - One Shot

As a service provider a restaurant may decide that in order to meet the needs of its local customer base it should provide a delivery option.  At one time, only a few restaurants in an urban core would have delivery offers and these might typically be delicatessens or Chinese restaurants with few seats and a very strong focus on offering takeout options. The food can be cooked, boxed, wrapped and brought quickly to an office or apartment within a few blocks on foot or by bicycle.

This model is the most basic - a caller, the kitchen, and an employee bringing hot food directly to the customer.  The restaurant controls the quality, manages the relationship with the diner and absorbs the full cost and all the revenues.  It typically comes with higher operating costs for labor (primarily from an in-house paid delivery driver fleet) and with premium rent from the need for an attractive customer-facing retail space.  On the plus side, all local customer information may be controlled by the restaurant and there are no fees to share with an outside third-party service.

But as the independent operator reaches for the brass ring on the delivery merry-go-round, they also need to be careful not to lose their grip on their existing ride.  A new distribution channel can be much more challenging that just taking a customer order.  As noted by Jennifer Marston:

…restaurants are under pressure to adapt…More and more, that means altering the physical restaurant space so it can better accommodate this influx of new orders. Extra meals require extra bodies to cook and package the food, after all, not to mention extra space for third-party devices, and somewhere to put completed orders waiting to be picked up by a delivery driver.[3]

An interesting twist on this single restaurant model of trying to find a way to both control and expand the delivery system while maintaining some measure of profitability is one recently proposed in the restaurant trade magazine Restaurant Business Online:

He (CMO Nabeel Alamgir) explained that Bareburger is already striving to convert customers ordering through third parties’ apps into users of the chain’s own channels. Patrons of an Uber Eats or Postmates might be offered a 10% discount on their next order if it’s placed through Bareburger’s website. The chain can afford a discount that deep because the financial impact is still less than the 20% or 30% discount an outside service typically charges.

Alamgir noted at the start of the panel’s presentation that a service started by restaurants for restaurants would have been an attractive alternative to some of the third-party giants. “Let’s make our own platform. Let’s make our own Grubhub,” he said.[4]

2. The Cloud Kitchen - A Hub & Spoke System

It can be argued that today’s focused delivery channel began in earnest when Domino’s offered up a “30 Minute or Free” guarantee in 1973.  In order to make this guarantee effective, the company created a hub and spoke system, in effect building a series of franchised units in low cost locations. They were characterized by being geographically market-centered but with no need for a “High Street” customer facing address.  This was directly in contrast to the overwhelming market advantage owned by Pizza Hut and its network of “Red Roof” full service pizzerias with their focus on dine-in and takeout service.  But the competitive advantage that came from having units with no dine-in, limited customer carry-out, and which were serviced by a central commissary set in motion the shift away from the traditional eat-in model.

“The reality is, when the red roof restaurant was created, the idea of delivery wasn’t part of the concept,” said Pizza Hut chief executive David Gibbs, a 26-year veteran at parent company Yum Brands…”so in many cases, our business has outgrown the capabilities of those restaurants…”[5]

Now, four decades later Domino’s is the world leader in delivery, pizza or otherwise.  It has done this by controlling the entire process or what is called the “full stack” in the delivery cycle.  Now describing itself as an IT and logistics company that sells pizza, the backbone of the system is that they control the customer ordering process, the production quality process, and through a vast franchise network the delivery process.

Next to come, using new GPS and AI technologies, Domino’s predicts that it will be able to make deliveries not just to a formal building address, but to anywhere a customer can be located by tracking their cellphone, even if that is a park bench or a blanket on the beach.

But Domino’s is not the only leader to be expanding its Cloud Kitchen delivery system. Already designed on a commissary production system model, giant fast casual leader, Panera Bread, tested delivery in Boston and then announced an expansion across the United States in early May, 2018 with a system based upon using its own delivery drivers. [6]  Following the trend in October the largest chicken sandwich chain, Chick-fil-A, announced it was beginning to test the hub and spoke model of delivery in Nashville, TN and Louisville, KY.

Chick-fil-A is opening two new restaurants that don’t have something you commonly associate with the chain: seats. 

Chick-fil-A, the Atlanta-based chicken sandwich chain, is testing catering and delivery locations in Nashville and Louisville, Ky., that will open this month.

The locations, according to an announcement on the chain’s website, have no dining rooms or drive thru’s and are designed to be hubs for catering and delivery orders. The restaurants will not accept cash, either.[7]

The Cloud Kitchen model can be very effective for restaurant companies with large enough scale, whether in a single city or across a region, to take advantage of a single production kitchen site with remote staging kitchens.  Ultimately the “full stack” control from order to front door can come from as few as three restaurants or as many as 3000. This also means that the foundation is laid for vast proprietary customer data collection and eventually data mining by the most forward-looking operators.

It can be argued that the Food Truck movement of the past decade is a subset of the Cloud Kitchen model.  By most local health code laws, food trucks must have a “home kitchen” or commissary for their bulk production that meets all health and sanitation code requirements.  In many urban centers, to be successful a food truck company needs to have multiple trucks on the road acting as a distribution network.  While this is also a classic Hub & Spoke model, it comes with similarities to a model in the next article, #6 The Consolidator, with distribution on a bus stop route and not a one-to-one last mile taxi route.

3. The Ghost Kitchen

One further refinement of the Cloud Kitchen is the Ghost Kitchen.  As delivery becomes more of a threat to the traditional dine-in restaurant option, some suggest that this model, in fact, is the future of restaurants—basically a highly efficient hybrid of menu concepts, specialized production and logistics, and low labor cost with no eat-in customers.

In that way, this model is identified by three key components.

First, it removes the dining room or takeout from the restaurant completely, working out of a kitchen whose location is based on nearness to its core customer market yet in a typically low rent out-of-the-way space.

Second, it does not hire any paid employees to deliver, instead making use (through partnership or agreement) of the many third-party delivery companies like GrubHub, Postmates or Doordash.

Third, and possibly the most important, because of the flexibility of only needing an APP, website or traditional telephone ordering system, more than one cuisine can be produced in the same kitchen space.  Easy to prepare, cook and deliver foods such as salads, sandwiches, Asian and other ethnic dishes, or gourmet pizza can all be offered while cross-utilizing similar ingredients in creative menu offerings.[8]

This can best be described as an “order only” restaurant.  The most prominent or well-known of these Ghost Kitchens would be Green Summit (see transition to #8 Dark Kitchen in Part 2).  While garnering a good amount of press, the celebrity chef David Chang’s Maple, closed its operation in 2017 with some assets moving to London and the delivery company Deliveroo.[9] Chef Chang sold the physical kitchen space, Ando, to Uber Eats after ceasing operations in January, 2018. [10]

Because no customer ever sets foot through the front door the owners can put all of their investment in kitchen equipment and the technology of ordering.  A Ghost Kitchen offers customers large menu choices, and just as its cousin the Cloud Kitchen, has the option to keep track of its own proprietary customer data set through the direct ordering process.  The tradeoff is that ownership sacrifices the customer interface at delivery of the Cloud Kitchen model.  Operating and start-up costs are low and efficiency can be very high.  The risk is that a large portion of the margin (sometimes up to 30%) from market-driven menu prices is taken by the delivery partnership, who also control the brand image when customers receive their orders off-site.[11]

4. Virtual Restaurants

Along with disrupting the taxi business, Uber Eats is about to globally disrupt the restaurant delivery business.  As of October, 2018, Uber Eats had over 1600 “virtual restaurants” around the globe, with almost 1000 in its US partnership portfolio.  The majority of these are not the Cloud or Dark Kitchen models mentioned above, but are existing restaurants with new brands that only exist through Uber Eats. This model, while charging very high fees to the restaurant, allows them to technically not compete with themselves in the home delivery marketplace.  Uber Eats gains more menus to offer, and limits any need for an investment in a commissary space.

For SushiYaa, Kim says the virtual restaurant concept has been transformative. “Because this concept worked so well for us, we actually changed one of our restaurants from a sushi buffet concept to a regular restaurant with 8 different virtual restaurant brands inside it. The buffet sales weren’t doing so well and the delivery side was doing better, so we thought — let’s change it completely so we’re focused more on delivery.” From a sales standpoint, he says it’s “almost as if we have another restaurant without paying additional rent and labor, even though [Uber Eats] takes about 30 percent.”[12]

One other type of Virtual Kitchen involves the licensing of existing restaurant recipes and menu items in a curated virtual model.  The start-up concept Good Uncle is using this to compete in the university meal plan segment, offering a range of pricing options for higher quality prepared meals, delivered by their own delivery fleet using the bus stop common drop off method.  This is a limited menu, limited target market, which benefits from a direct marketing approach, lower operating costs, and uses both a subscription and premium fee based pricing system.[13] It is a Virtual Kitchen because there is no restaurant or other customer facing facility, it exists only online.

Part One - Conclusions

Delivery models, some traditional, some evolving, offer many opportunities for restaurant operators, especially those in the QSR and Fast Casual segments, where speed and price and convenience are the drivers of consumer choice.

The challenge in today’s delivery market is how owners and operators can maintain both high quality and long-term profitability in the products/services they offer.  For many meals, the time and distance from kitchen to table can be more than 30 minutes or multiple miles. Quality of presentation and flavor may quickly diminish.  More importantly, where the medium annual profitability for restaurants across all segments in the USA is considerably less than 10%, losing up to 30% of top line revenues is not a path to a successful future, (even if total sales increase by 20%).


PDF Version Available Here


References
[1] Heather Haddon and Julie Jargon, The Wall Street Journal online, October 24, 2018, https://www.wsj.com/articles/investors-are-craving-food-delivery-companies-1540375578?mod=cx_picks&cx_navSource=cx_picks&cx_tag=contextual&cx_artPos=4#cxrecs_s
[2] Liam Proud, DealBook, NYTimes, September 21, 2018, https://www.nytimes.com/2018/09/21/business/dealbook/uber-eats-deliveroo.html
[3] Jennifer Marston, The Spoon, July 31, 2018, https://thespoon.tech/delivery-is-making-these-restaurants-literally-redesign-the-way-they-do-business/
[4] Peter Romeo, Restaurant Business Online,  Oct. 19, 2018 https://www.restaurantbusinessonline.com/operations/3-big-changes-looming-restaurants
[5] Karen Robinson-Jabos, Dallas News, Jan 6, 2016. https://www.dallasnews.com/business/business/2016/01/06/pizza-hut-is-ditching-the-iconic-red-roof-for-a-more-modern-look
[6] Janelle Nanos, Boston Globe, May 7, 2018, https://www.bostonglobe.com/business/2018/05/07/panera-expanding-its-delivery-service-cities/sZg4pO0yTw9cEdYpv514tL/story.html?event=event12
[7] Jonathan Maze, Restaurant Business Online, Oct. 09, 2018 https://www.restaurantbusinessonline.com/financing/chick-fil-opening-new-delivery-focused-prototype
[8] Neal Ungerleider, 01.20.17 Fast Company  https://www.fastcompany.com/3064075/hold-the-storefront-how-delivery-only-ghost-restaurants-are-changing-take-out
[9] Closing announcement from Maple, May 8, 2017 https://maple.com/letter/
[10] Whitney Filloon, Eater, October 24, 2018, www.eater.com/2018/10/24/18018334/uber-eats-virtual-restaurants
[11] See the online Audiopedia site https://www.youtube.com/watch?v=BKO5JFbqKTA
[12] Ibid, Eater, October 24, 2018
[13] See https://www.gooduncle.com/

 Christopher C. Muller is Professor of the Practice of Hospitality Administration and former Dean of the School of Hospitality Administration at Boston University. Each year, he moderates the European Food Service Summit, a major conference for restaurant and supply executives. He holds a bachelor’s degree in political science from Hobart College and two graduate degrees from Cornell University, including a Ph.D. in hospitality administration. Email: cmuller@bu.edu

Airbnb and the Hotel Industry: The Past, Present, and Future of Sales, Marketing, Branding, and Revenue Management

October 31st, 2018 in Business Practices, Fall 2018, Hotels, Marketing, Sharing Economy, Technology, Trends 0 comments

By Makarand Mody and Monica Gomez

For a long time, the hotel industry did not consider Airbnb a threat. Both the industry and Airbnb claimed they were serving different markets and had different underlying business models. Over the years, as Airbnb become more successful and grown to being larger than the companies in the hotel industry, the rhetoric has changed. The hotel industry began to realize they had something to worry about.

A stage of denial was followed by the American Hotel & Lodging Association (AH&LA) attacking Airbnb by sponsoring research to demonstrate its negative impacts on the economy and lobbying governments to impose taxes and regulations on homesharing. The association is arguing for a level playing field between homesharing and hotels (and rightly so). The next stage of this battle involves competition and integration. Not only are hotels looking to add homesharing-like attributes and experiences to their properties, to more effectively compete with Airbnb, but are also looking to tap into the platform-based business model that underlies Airbnb’s success.

 

The Past: How does Airbnb impact the hotel industry?

Airbnb’s disruption of the hotel industry is significant, both existentially and economically. A recent study by Dogru, Mody, and Suess (2018) found that a 1% growth in Airbnb supply across 10 key hotel markets in the U.S. between 2008 and 2017 caused hotel RevPAR to decease 0.02% across all segments. While these numbers may not appear substantial at first, given that Airbnb supply grew by over 100% year-on-year over this ten year period means that the “real” decrease in RevPAR was 2%, across hotel segments. Surprisingly, it was not just the economy but also the luxury hotel segment that was hard hit by Airbnb supply increases, experiencing a 4% real decline in RevPAR. The impact of Airbnb on ADR and occupancy was less severe. In Boston, RevPAR has decreased 2.5%, on average, over the last ten years due to Airbnb supply increases. In 2016 alone, this 2.5% decrease in RevPAR amounted to $5.8 million in revenue lost by hotels to Airbnb. Brands that felt the impact the most were those in the midscale and luxury segments, with a decrease in RevPAR of 4.3% and 2.3% respectively. These supply increases are also fueling Airbnb taking an increasing share of the accommodation market pie. For example, in New York City, Airbnb comprised 9.7% of accommodation demand, equaling approximately 8,000 rooms per night in Q1 2016 (Lane & Woodworth, 2016). As a whole, Airbnb’s accommodated demand made up nearly 3% of all traditional hotel demand in Q12016.

Buoyed by a growth rate of over 100% year on year, Airbnb now has over 4 million listings, with the U.S. being its largest market. The company also has significant room to grow in other countries, particularly emerging markets in Africa and India. The company has run into some competition in China, with local rivals Tujia and Xiaozhu. Also, within the U.S., the good news is that Airbnb will not grow at 100% indefinitely and will eventually plateau as it reaches a saturation point (Ting, 2017a). In view of this, the company has turned to alternative strategies to continue to increase supply. It is now targeting property developers to turn entire buildings into potential Airbnb units, through its newest hotel-like brand, Niido. Currently, there are two Airbnb branded Niido buildings in Nashville, TN and Orlando, FL with over 300 units each and Airbnb plans to have as many as 14 home-sharing properties by 2020 (Zaleski, 2018). Niido works by encouraging tenants to list their units on Airbnb, with Airbnb and Niido taking 25% of the revenue generated.  Airbnb has also clearly evolved from its original premise of “targeting a different market” to attracting segments traditionally targeted by hotels, such as the leisure family market, business travelers, and the upscale traveler, as evidenced through its latest offering, Airbnb Plus. These homes have been verified for quality, comfort, design, maintenance, and the amenities they offer. They also have easy check in, premium internet access, and fully equipped kitchens. Their hosts are typically rated 4.8+, and go above and beyond for their guests. Through Airbnb Experiences, travelers can partake in everything from the great outdoors—hiking and surfing—to “hidden” concerts and food and wine tours.  In addition to these products, Airbnb has also “created” its own segments of travelers: novelty and experience seekers who are looking for unique and unconventional accommodation like yurts, treehouses, and boats, all things that a traditional hotel company cannot provide.

 

The Present: Understanding what consumers want lies at the heart of the battle between hotels and Airbnb

There are larger societal trends that are impacting what consumers seek travel, and we think this has implications for the Airbnb and hotel dynamic. These trends include:

  • A shift to a “new luxury”—seeking out unique, authentic experiences that serve as a launchpad for self-actualization—fueled by an increased wealth gap in the United States.
  • An increased mobility, particularly among previously under-represented groups in the United States (the black travel movement, for example) and the global traveler (more Indian and Chinese international travelers than ever before).
  • The changing nature of brand loyalty: from long-term relationships to consumers’ needs for instant gratification and personalization.
  • Changing nature of “ownership”: In a post-consumerist society, the emphasis on “access-based consumption” has put a spotlight on wellness and well-being, beyond materialism.
  • A co-everything world where work, play, and life blend into one seamless mosaic: Technology has changed the way we live our lives, and how we are connected to work, to each other and to the things that drive us. An upcoming 5G world and the IOT is only likely to accelerate the pace of change. Take LiveZoku (https://livezoku.com/), for example: is it a residence? A hotel? A WeWork? A space for the local community? A thriving food and beverage destination? It’s all of these things.

What do these trends mean? They require marketers and experience designers to re-think what the travel experience means to the customer. The notion of the experience economy was created by Pine and Gilmore in 1998, and included four dimensions: escapism, education, entertainment, and esthetic. Leveraging one, or ideally, more of these dimensions creates memorable experiences for customers, which in turn results in brand loyalty. This dynamic has been fairly well-established in the academic literature. However, Airbnb has changed the game for the experience economy by emphasizing the sharing lifestyle and a sense of community, cleverly incorporating the above highlighted trends into its communications with customers. Because of Airbnb popularity and success, six new dimensions have been incorporated into the experience economy, in the context of the travel experience: personalization, communitas, localness, hospitableness, serendipity, and ethical consumerism, as was presented by Mody in 2016.

Interestingly, in a recent study by Mody and colleagues (Mody, Suess, & Lehto, 2017), the researchers found that Airbnb outperformed hotels on all the dimensions of this new, expanded, accommodation experiencescape. Airbnb outperforms hotels in the personalization dimension because of its wide array of homes and locations, enabling genuine micro-segmentation and the “perfect match” between guest and host (Dolnicar, 2018). Moreover, no one home is similar to another, giving customers a unique experience every time, enhancing the serendipity associated with an Airbnb stay. Airbnb elevates the sense of community that consumers seek, particularly when sharing space with other travelers and/or with the host, and allows consumers unparalleled access to “the local”—that café or cute little store that only locals know about. However, there are areas where hotels hold their own. For example, the pathways between these dimensions and memorability were just as strong for hotels as for Airbnb, emphasizing the need for hotels to engage customers by leveraging the “right” dimensions for the brand—dimensions that align with the brand’s mission, story, and personality.

One such dimension where hotels perform just as well as Airbnb is hospitableness, as confirmed in a study by Mody, Suess, and Lehto (2018). More “investor units” on the Airbnb platform means that the host is often not present when guests arrive to the home; moreover, all communication is done electronically and with someone who “manages” the Airbnb unit and doesn’t necessarily own or live in it. In turn, hotels that leverage the human factor—the welcome of a friendly check-in agent, the helpfulness of the concierge,  the warm greeting and genuine interaction between guest and food and beverage staff—create more positive emotions, which subsequently lead to higher brand loyalty. It is imperative that hotel brands really think about the high-tech, high touch experience they are looking to provide, particularly in the golden age of brand proliferation that we live in.

 

From a non-experience standpoint, regulation is another bone of contention that merits close inspection. After years of denying that Airbnb was a competitor, in 2016, the American Hotel & Lodging Association first began an extensive lobbying effort for the imposition of taxes and regulations on Airbnb that level the playing field. Over the last couple of years, the voices of the hotel lobby and other community groups have translated into governments taking some action, in the U.S. and abroad. However, in a study of regulation across 12 European and American cities, Nieuwland and van Melik (2018) found that governments have been fairly lenient towards short-term rentals with little to no (meaningful) regulations thus far. Moreover, regulations have been designed to alleviate the negative externalities of Airbnb on neighborhoods and communities rather than to level the playing field between Airbnb and hotels. Another challenge with regulating the peer to peer economy has been enforcement. In New York City, under the Multiple Dwelling law, it is illegal for a unit to be rented out for less than 30 days unless the owner is present in the unit at the time the guest is renting. However, it is still possible to find “entire homes” on Airbnb in New York City, even though, in principle, these typically include homes where the host is not present during the guest’s stay. Moreover, Nieuwland and van Melik (2018) and Hajibaba and Dolnicar (2017) have found that regulations tend to be very similar across cities, without accounting for the specificities of a particular location, which makes the process perfunctory and superficial. There also remains the danger of over-regulating Airbnb, given that there is still very little knowledge about effective ways of regulating these innovations in the sharing economy, thus stifling their potential. Avoid over-regulation is critical, since Airbnb has significant welfare effects in the economy. In addition to stimulating travel to previously inaccessible markets, Airbnb also creates customer surplus (Farronato & Fradkin, 2018), an important economic value measure. Moreover, other research has suggested that the average resident is not as negative towards the Airbnb as media rhetoric might suggest (Mody, Suess, & Dogru, 2018). The need for a data-driven approach to Airbnb regulation remains paramount.

 

The Future: Competing with the sharing economy requires re-thinking the brand and the experience

While regulation is outside the control of the hotel industry, the brand and the customer experience are not. We contend that these are the areas where hotel companies’ efforts need to be focused. Hotels need to re-think the brand promise, both for the parent brand as well as individual brands in the portfolio, and how it defines and shapes the guest experience. Recent research by Mody and Hanks (2018) indicates that while Airbnb leverages the authenticity of the travel experience—by enabling local experiences that provide a sense of self and sense of place, hotel brands that are perceived as being authentic—original, genuine, and sincere—can generate higher brand loyalty. Thus, while it’s hard to compete with homesharing in terms of experiential authenticity, brand authenticity is a pillar on which hotels can build a strong foundation for loyal brand relationships. This is particularly important because while Airbnb promotes experiential authenticity as a key reason to use the brand, most travelers tend to stay with the brand for much more functional requirements, such as space and price (Chen & Xie, 2017; Dogru & Pekin, 2017)

There is no one definition for or manifestation of an “authentic” brand. It’s a perception, a feeling that consumers have about what you stand for. An authentic brand has at its core the brand promise, an authentic value proposition that gives consumers a raison d’etre for associating with the brand. However, what an authentic brand does require is effective storytelling. A brand is perceived to be authentic, if it has an authentic story that feeds it. Brand stories can come from many sources: a brand’s values, personality, heritage, uniqueness, or its quest and purpose. What is important is telling compelling and coherent stories across the brand’s various touchpoints to engage consumers at a visceral, emotional level. Taking off industry blinders, and looking for inspiration outside the hotel industry, is critical. Tom’s Shoes is an excellent example of leveraging its quest—One for One—in creating a compelling brand story. As another example, in an industry typically focused on the in-store, “physical” experience, Burberry has set the gold standard for authentic, digitally-led and emotive storytelling, by looking within and leveraging over 150 years of history (Watch the YouTube Video here). In this vein, we think that Fairfield Inn and Suites’ return to “where it all began”—the Marriott family’s Fairfield Farm in the Blue Ridge Mountains of Virginia— to craft the brand experience of the future, from a design and communications standpoint, is an excellent example of leveraging authenticity and crafting a compelling brand promise (Ting, 2017b).

Another idea that lies at the heat of the brand promise is what we call the experiential value proposition, or EVP. For the longest time, hotel marketers have relied on the guest room as the primary source of value for the guest. But think about the last time you traveled. Was it the prospect of the hotel room that got you excited about your trip? Or was it everything that the hotel enables you to do – the experience outside the guestroom? From experiencing art and music in the lobby to its proximity to the must-do craft beer garden, hotel marketers must realize that it’s the complete package—what’s inside and outside the room—that customers use as cues for making  their decision to choose an accommodation. We call this proposition offered by the hotel—what’s inside and outside the guest room, enclosed within an experience of hospitableness and a connection to humanity—its EVP. We present the EVP in Figure 1.  The EVP mirrors the value paradigm of the modern traveler, something that must be reflected in the hotel brand’s sales, marketing and pricing and revenue management efforts. Thinking about a brand through the lens of the EVP paradigm has the power to re-orient the customer’s mindset from one of price-shopping to experience-shopping.

 Figure 1. The Experiential Value Proposition Framework

How does a hotel marketer apply the EVP paradigm? Its application can open up many avenues. Hotels can start by rethinking the design of their primary digital channels, led by the website by adding more rich, vivid content that goes beyond the guestroom, in order to better integrate aspects of the wider hotel and local experience. The Standard Hotels serves as an excellent example (http://www.standardhotels.com/) Its website feels more like a local lifestyle and culture magazine than a digital media property “selling” a hotel room. The website’s rich images and stories draw the visitor into wanting to learn more about what the brand has to offer. While not every hotel can or would want to go the Standard way, since the brand has its own distinct voice and personality, there is a case to be made for going beyond static images of beds in guestrooms, which tend to blend into one indistinguishable whole after a point, particularly on OTA websites. When was the last time the image of a hotel bed excited you to want to stay there? Yet, when you look at the imagery put out by most hotels, this is what marketers still focus on.

Placing an emphasis on humanity and providing a sense of hospitableness can also enhance a brand’s EVP. Instead of technology replacing the human connection, the industry needs to look for ways in which technology can actually free up employees so that they can spend their time crafting more personal and unique experiences, delighting guests instead of performing routine transactions. Moreover, if the human connection is what people seek out when traveling with Airbnb, why is it that hotel confirmation emails still get sent out by automated systems that highlight the “facelessness” of the hotel entity. Why not use that as an opportunity to truly welcome the guest; a simple touch such as a welcome letter from the GM with his/her photo, or that of an employee who is “assigned” as “your personal host” during your stay can go a long way in emulating the human connection that the sharing economy enables.

The design of the hotel’s public spaces can be used to enhance the guest’s experience of “communitas”. Ian Schrager would agree (Schaal, 2017). After all, with much of Airbnb’s supply being dominated by investor units that provide little or no host contact, what better an opportunity for hotel brands to show that they are the original connectors of human beings? Sheraton has been wise in incorporating some of these communal elements into its brand makeover by introducing productivity tables and studio spaces and a day-time coffee bar that transforms into a bar at night. In terms of another design element, Airbnb’s attractiveness to family and group travelers can be offset by offering connecting and/or multiple rooms for one price, with other experience value-adds thrown in (as with the Marriott family room connecting rooms package.

Finally, the role of the loyalty program cannot be emphasized enough. Loyalty programs must move beyond programmatic levels to being able to leverage data from guest history, social media, and other marketing data sources, powered by predictive analytics, to personalize and individualize the guest experience of the brand. In an age of instant gratification, the loyalty program has to be gamified to unlock value-adds and offer creative bundling.

At the level of the hotel company, beyond the individual brand, the hotel industry has started participating in the home sharing business and is increasingly looking to integrate these platform business models. For example, while Accor purchased Onefinestay, Marriott has teamed up with Hostmaker to create Tribute Portfolio Homes, a partnership that was recently expanded to four European cities (Fox, 2018). From an organic brand development standpoint, Accor’s newest Jo & Joe brand mimics the sharing economy within the confines of a traditional hotel space. Other, more innovative and bold ways of integrating the sharing economy ethos into a hotel could include offering an “Airbnb floor”, an antithesis to the club floor, one that would not offer housekeeping and other hotel services and thus be offered at a lower price. With hotel brands becoming “branded marketplaces” for accommodation and not just hotel rooms, perhaps there is merit in listing hotel rooms on alternative accommodation platforms. HomeAway is already adding hotels to its platform through the Expedia Affiliate Network, while Airbnb is making a push for bed-and-breakfasts and boutique hotels. Homesharing providers hope that by adding these options to their listings, they will fulfill their goal of being “for everyone”, while allowing independent and boutique hotels to reap the benefits of branded distribution at a lower cost than traditional OTA brands.

In sum, hotels must adopt a sales, marketing, and revenue management approach that is both strategic and tactical.

At a strategic level, hotel brands need to re-think their story, and how they portray and fulfill their authenticity and brand promises. At a tactical level, it’s the experience and value beyond the guestroom that must be factored into what is presented to current and potential guests, what they are charged for it, and how it is leverage to create “memorable memories” that lead to higher net promotor scores and brand loyalty. We present a graphical summary of the past, present, and future of Airbnb vs. hotels in Figure 2.

Figure 2. Summarizing the past, present and future of Airbnb vs. hotels


PDF Version Available Here


References
Chen, Y., & Xie, K. (2017). Consumer valuation of Airbnb listings: a hedonic pricing approach. International Journal of Contemporary Hospitality Management, 29(9), 2405–2424. http://doi.org/10.1108/IJCHM-10-2016-0606
Dogru, T., Mody, M., & Suess, C. (2018). Adding evidence to the debate: Quantifying Airbnb’s disruptive impact on ten key hotel markets.
Dogru, T., & Pekin, O. (2017). What do guests value most in Airbnb accommodations? An application of the hedonic pricing approach. Boston Hospitality Review.
Dolnicar, S. (2018). Unique Features of Peer-to-Peer Accommodation Networks. In S. Dolnicar (Ed.), Peer-to-Peer Accommodation Networks: Pushing the boundaries (pp. 1–14). Oxford: Goodfellow Publishers Ltd.
Farronato, C., & Fradkin, A. (2018). The Welfare Effects of Peer Entry in the Accommodation Market: The Case of Airbnb.
Fox, J. (2018). Marriott expands homesharing program in Europe. Hotel Management. Retrieved from https://www.hotelmanagement.net/own/marriott-expands-homesharing-program-to-3-european-cities
Hajibaba, H., & Dolnicar, S. (2017). Regulatory Reactions Around the World. In S. Dolnicar (Ed.), Peer-to-Peer Accommodation Networks: Pushing the boundaries (pp. 120–136). Oxford: Goodfellow Publishers Ltd.
Lane, J., & Woodworth, M. (2016). The Sharing Economy Checks In: An Analysis of Airbnb in the United States. Retrieved from http://www.cbrehotels.com/EN/Research/Pages/An-Analysis-of-Airbnb-in-the-United-States.aspx
Mody, M. A., Suess, C., & Lehto, X. (2017). The accommodation experiencescape: a comparative assessment of hotels and Airbnb. International Journal of Contemporary Hospitality Management, 29(9), 2377–2404. http://doi.org/10.1108/IJCHM-09-2016-0501
Mody, M., & Hanks, L. (2018). Parallel pathways to brand loyalty: Mapping the consequences of authentic consumption experiences for hotels and Airbnb.
Mody, M., Suess, C., & Dogru, T. (2018). Not in my backyard? Is the anti-Airbnb discourse truly warranted? Annals of Tourism Research. http://doi.org/10.1016/j.annals.2018.05.004
Mody, M., Suess, C., & Lehto, X. (2018). Going back to its roots : Can hospitableness provide hotels competitive advantage over the sharing economy ? International Journal of Hospitality Management. http://doi.org/10.1016/j.ijhm.2018.05.017
Nieuwland, S., & van Melik, R. (2018). Regulating Airbnb: how cities deal with perceived negative externalities of short-term rentals. Current Issues in Tourism, 0(0), 1–15. http://doi.org/10.1080/13683500.2018.1504899
Schaal, D. (2017). Ian Schrager Calls Out Hotel Industry’s Airbnb Strategy as Misguided. Skift. Retrieved from https://skift.com/2017/12/08/ian-schrager-calls-out-hotel-industrys-airbnb-strategy-as-misguided/
Ting, D. (2017a). Airbnb Growth Story Has a Plot Twist — A Saturation Point. Skift. Retrieved from https://skift.com/2017/11/15/airbnb-growth-story-has-a-plot-twist-a-saturation-point/
Ting, D. (2017b). Marriott and Choice Take Varied Approaches to Reviving Classic Midscale Brands. Skift.
Zaleski, O. (2018). Airbnb and Niido to Open as Many as 14 Home-Sharing Apartment Complexes by 2020. Retrieved from https://www.bloomberg.com/news/articles/2018-08-14/airbnb-and-niido-to-open-as-many-as-14-home-sharing-apartment-complexes-by-2020

Makarand Mody, Ph.D. has a varied industry background. He has worked with Hyatt Hotels Corporation in Mumbai as a Trainer and as a Quality Analyst with India’s erstwhile premier airline, Kingfisher Airlines. His most recent experience has been in the market research industry, where he worked as a qualitative research specialist with India’s leading provider of market research and insights, IMRB International. Makarand’s research is based on different aspects of marketing and consumer behavior within the hospitality and tourism industries. He is published in leading journals in the field, including the International Journal of Contemporary Hospitality Management, Tourism Management Perspectives, Tourism Analysis and the International Journal of Tourism Anthropology. His work involves the extensive use of inter and cross-disciplinary perspectives to understand hospitality and tourism phenomena. Makarand also serves as reviewer for several leading journals in the field. In fall 2015, he joined the faculty at the Boston University School of Hospitality Administration (SHA). He received his Ph.D. in Hospitality Management from Purdue University, and also holds a Master’s degree from the University of Strathclyde in Scotland.

 

Monica Gomez is a graduate student in the School of Hospitality Administration at Boston University. She received her Bachelor's degree in Tourism, Recreation, and Sport Management from the University of Florida and has held previous internship positions in hotel operations and event management. She is a member of the Hospitality Sales and Marketing International Association and is interested in hotel revenue management.

Sustainability In Hospitality? How Legality and Authenticity Impact the Rationale for Integrating Sustainable Practices

June 6th, 2018 in Business Practices, Spring 2018, Sustainability, Uncategorized 0 comments

By Christian E. Hardigree, J.D.

Today’s hospitality conversations are rife with dialogue about sustainability, initiatives ranging from linen reuse programs, to donating toiletries, to auto dimming lights, to food sourcing, etc.  Hospitality practitioners’ quest to define the ROI (return on investment) is often at foiled by a concept that includes intangible metrics and differing definitions of what “sustainability” really means.  The oft-used “Triple Bottom Line - People, Planet, Profit” embodies the commonly agreed upon themes of sustainability, which include ensuring a healthy environment, improving economic prosperity, and implementing social justice initiatives that ensure the well-being and quality of life for current and future generations.

Companies struggle to determine what role they play in advancing and addressing social and global challenges while enhancing their brand, ensuring consumer loyalty, and expanding their market share. Many companies evaluate and refine their efforts for engaged brand activism, particularly through marketing, which they balance with efforts to implement higher standards for suppliers, improve equality among workers, and keep pricing competitive – falling in line with the general categories of most corporate social responsibility efforts: 1) environmental efforts; 2) philanthropy; 3) ethical labor practices; and 4) volunteering.

The “Arms Race” of Corporate Social Responsibility Reporting  

For many companies, particularly in hospitality, corporate social responsibility (CSR) reporting has emerged as a key business approach to articulate the benefits to the company’s stakeholders through strategic initiatives.  According to the Governance and Accountability Institute, sustainability reporting by S&P 500 companies increased from 19% in 2011 to 85% in 2017.[i]

Companies now appreciate the marketing value of CSR reporting, particularly as a mechanism to attract and retain customers. Increased societal pressure for greater regulation and transparency, coupled with research showing that consumers demonstrate a preference toward companies they perceive are more responsible, have resulted in a new “arms race” with companies are making operational decisions that are more tightly linked to ethical values, environmental stewardship, and respect for the human equity.  They want to ensure those efforts are known to their stockholders, investors, and the public.

qualityscore

While many CSR disclosures are currently voluntary in the United States, there are increasing requirements mandated by various statutes.  Such mandates, commonplace in the European Union, are increasingly required in the United States.  In particular, there is growing market demand for a more responsible and transparent corporate supply chain.  Current statutory requirements range from the Mandatory Reporting of Greenhouse Gases rule for large emitters of greenhouse gases to the California Transparency in Supply Chains Act of 2010 to ensure that large retailers and manufacturers provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains.[ii]  The Dodd-Frank Wall Street Reform and Consumer Protection Act, which impacted virtually every part of the US financial services industry also includes provisions for certain reporting on their exercise of due diligence in the source and chain of custody of certain minerals that are associated with armed conflicts in and around the Democratic Republic of the Congo, minerals that are associated with the manufacturing of devices such as cell phones, computers, and digital cameras.[iii]  Most recently, the European Union’s sweeping Global Data Protection Regulations (GDPR) went into effect May 25, 2018. Intended to give EU citizens greater control of their own, widely-define personal data, GDPR has far reaching implications for any company doing business with citizens of the EU.  For the hospitality industry, new processes are required to be implemented to protect things like IP addresses and cookie data, similar to the protections currently provided to ensure privacy for addresses and social security numbers. In the three months prior to GDPR going into effect, it was estimated that 79% of companies were unprepared.[iv]  The mandatory disclosure landscape is changing fast, and hospitality is challenged to keep up.

Not All Changes Are Mandated

As consumers are holding corporations accountable for effecting social change in their business practices and beliefs, ultimately impacting the bottom line, companies refine their sustainability initiatives as a result of public advocacy, stockholder proposals, or consumer feedback. A 2017 study by Cone Communications illustrated some key elements, including:[v]

  • 63% of Americans are hopeful that businesses will take the lead to drive social and environmental change in the absence of government regulation
  • 78% want companies to address important social justice issues
  • 87% will purchase a product because a company advocated for an issue they cared about; and
  • 76% will refuse to purchase a company’s product or services upon learning it supported an issue contrary to their beliefs

To illustrate, on February 6, 2018, in a commitment associated with improved packaging in betterment of the planet, Dunkin’ Donuts announced it would phase out the use of polystyrene foam cups by 2020 and replace them with double-walled paper cups, estimated to have a net impact of eliminating over a billion cups annually from the waste stream.[vi] This was on the heels of McDonald’s announcing in January that it would phase out the use of foam packaging in all global markets by the end of 2018.[vii]  Straws and stirrers make up over 7% of plastic found in the environment, an issue initially addressed (and banished) by George McKerrow, co-founder of the restaurant chain Ted’s Montana Grill, that has gained widespread attention as consumers are reminded that we use 500 million straws a day, a habit that widely impacts wildlife and the oceans.[viii]  Just this month, Bon Appétit announced they were banning plastic straws from their over 1000 café locations in 33 states.[ix]  As cities like Miami and Malibu have banned single use straws (and in Malibu, banned all single use plastic utensils and stirrers), we find some municipalities are forcing hospitality businesses to incorporate sustainable practices.

Avoid Greenwashing

As hospitality companies seek to out-promote each other, they would be well-advised to avoid greenwashing – today’s version of “snake oil”, more akin to “eco-fraud” – when a company holds itself out as more environmentally friendly than it actually is in practice.  Clearly consumer preferences demonstrate an increasing trend for purchasing products and services that are sustainable – for their impact on the environment, in how they are manufactured, and/or how the workers are treated. Between 2009 and 2010, the number of “greener” products increased by 73%.[x]  In order to capitalize on this trend, many brands are trying to competitively out-do each other with their eco-credentials – exaggerating their claims, or at times, completely manufacturing them.  In legalese, greenwashing may amount to deceptive marketing, misrepresentation, and/or fraud.

gogreen

In the “sins” of greenwashing, hospitality entities would be wise to avoid vague, over-reaching, or unverifiable assertions.  Hotels increasingly encourage their guests to embrace green practices – shut off lights, reuse towels, avoid changing the linen as frequently, etc. Research by faculty at Washington State University found that a perceived ulterior motive of a hotels’ environmental claims evoked consumer skepticism, which negatively influenced consumer’s intention to participate in the linen reuse program, as well as negatively effecting the consumers’ intention to revisit the hotel.[xi]  At a time when as many as 79% of travelers agree that eco-friendly practices is an important factor in their choice of lodging, companies risk losing valuable repeat customers if their motives are self-serving.  As a result, to avoid the negative aspects, hoteliers are cautioned to install comprehensive green programs, train their staff to implement practices, and ensure their green claims are accurate and not overreaching, perhaps through third party certification.

For Goodness Sakes, Don’t Greenwash the Food

Greenwashing is of particular concern in today’s environment, particularly in the context of food.  For example, in 2016, organic food sales jumped 8.4%, to over $43 billion, while overall food sales only increased 0.6%.[xii]  Similarly, organic non-food items jumped 88% to $3.9 billion in sales. As restaurants and hotels are asked questions by their customers about the source of their products, facilities need to be aware of the claims they are making to ensure they are not overreaching or deceptive, as greenwashing has become the “flavor of the month” in consumer class litigation.  Claims challenging products advertised as “natural” are the most frequent suits encountered.

greenfood

While no definition of “natural” is provided by the FDA, food products in the US labeled as “natural” make up roughly $40 billion in sales, and are growing by an average of 6.6% annually.  According to Food Navigator, there were 20 food labeling class actions pending in federal court in 2008 - a number that rose to 425 by 2016.  Cases that specifically focus on “natural” claims increased by 22% from 2016 to 2017, notably with suits against General Mills’ Nature Valley bars and Dr. Pepper Snapple’s Mott’s Apple Sauce. Of particular note is that three quarters of federal court food class actions are in four states: California (36%), New York (22%), Florida (12%), and Illinois (7%).[xiii]  Many of the suits are rooted in claims that items such as high fructose corn syrup, high maltose corn syrup, soy flour, soy lecithin, and GMA yellow corn flour, as well as synthetically derived vitamins, are not “natural”, and thus such claims are fraudulent.[xiv]  Overreaching statements can be a source of eroding consumer confidence, destroying customer loyalty, and/or litigation.

Conclusion

Sustainability initiatives will continue to be an imperative part of a hospitality entities’ brand, evaluated by all stakeholders. In order to ensure consumer confidence, it is imperative that those initiatives be authentic in their implementation, supported by third party verification, and in alignment with the legal requirements of the jurisdiction.  In doing so, our efforts in supporting the three E’s – environment, economic, and equity – our industry will collectively rise in to improve the future for ourselves and for future generations.


PDF Version Available Here


References
[i] Retrieved May 30, 2018 from https://www.ga-institute.com/press-releases/article/flash-report-85-of-sp-500-indexR-companies-publish-sustainability-reports-in-2017.html
[ii] 40 CFR Part 9; and California Civil Code §1714.43
[iii] https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf
[iv] Retrieved April 6, 2018 from https://www.forbes.com/sites/forbestechcouncil/2018/03/27/u-s-businesses-cant-hide-from-gdpr/#33b76ef052c8
[v] Retrieved April 6, 2018 from http://www.conecomm.com/research-blog/2017-csr-study
[vi] Retrieved April 16, 2018 from https://news.dunkindonuts.com/news/dunkin-donuts-to-eliminate-foam-cups-worldwide-in-2020
[vii] Retrieved April 16, 2018 from https://www.bizjournals.com/chicago/news/2018/01/10/mcdonalds-phasing-out-foam-packaging-this-year.html
[viii] Retrieved May 30, 2018 from https://www.forbes.com/sites/megykarydes/2018/05/23/the-future-of-take-out-exhibit-how-we-can-eliminate-packaging-waste/#37a1213c7580
[ix] Retrieved May 31, 2018 from https://www.npr.org/sections/thesalt/2018/05/31/615580695/last-straw-for-plastic-straws-cities-restaurants-move-to-toss-these-sippers
[x] Retrieved April 6, 2018 form http://sinsofgreenwashing.com/index5349.pdf
[xi]  Rahman, I., Park, J., & Geng-qing Chi, C. (2015). "Consequences of “greenwashing”: Consumers’ reactions to hotels’ green initiatives"International Journal of Contemporary Hospitality Management, Vol. 27 Issue: 6, pp.1054-1081https://doi.org/10.1108/IJCHM-04-2014-0202
[xii] Retrieved May 31, 2018 from https://www.foodbusinessnews.net/articles/9394-u-s-organic-food-sales-jump-more-than-8
[xiii] Retrieved May 31, 2018 from http://www.instituteforlegalreform.com/uploads/sites/1/TheFoodCourtPaper_Pages.pdf
[xiv] Examples include Janney et al. v. General Mills, 3:12-cv-03919, U.S. District Court for the Northern District of California; Rojas v. General Mills, Inc. 3:12-cv-05099, U.S. District Court for the Northern District of California; Bohac v. General Mills, Inc., 3:12-cv-05280, U.S. District Court for the Northern District of California; Van Atta v. General Mills, 1:12-cv-02815, U.S. District Court for the District of Colorado

haridgree

As Founding Director and Professor of the Michael A. Leven School of Culinary Sustainability and Hospitality at Kennesaw State University, Dr. Hardigree oversees the Bachelor of Science degree program which houses over 260 majors and services over 1500 students enrolled in classes each semester.   Addressing both “sustainability on the plate” as well as “sustainability beyond the plate” in terms of water, waste and energy efficiencies, this highly relevant management program provides a competitive advantage and discernible point of differentiation as the epicenter for teaching, research and best practices in sustainable culinary and hospitality management. The flexibility of the program’s curriculum allows students to emphasize careers in beverage management, event planning, specialized cuisines, and the hotel industry.
Christian conducts research and presents nationally at industry conferences as related to her areas of expertise, including food safety, risk management, sustainability, workplace violence and employment/management issues.  She is a national expert on bed bug litigation, speaking across the country on the subject.
After obtaining her B.S., cum laude, from the William F. Harrah College of Hotel Administration at UNLV, Christian obtained her Juris Doctorate from the Walter F. George School of Law at Mercer University, focusing on employment discrimination, arbitration/mediation, and labor management relations.  She is of counsel with the law firm of Parnell & Associates.  Christian serves on a variety of committees and advisory boards, including the ConServe Sustainability Advisory Council for the National Restaurant Association, the KSU Brian Jordan Center for Excellence and Professional Development at LakePoint Sporting Community, and formerly on the Women in Lodging Advisory Council for the American Hotel & Lodging Association.

 

The Digital Future of the Tourism & Hospitality Industry

May 31st, 2018 in Business Practices, Cooking, Restaurants, Spring 2018 0 comments

Hotel Room Computer

By Martin Zsarnoczky

Digitalization is among the most important changes in our rapidly evolving world. Digital innovations and technological novelties are engines of development and show their impact everywhere, especially in the field of manufacturing, ICT and other service industries. Given the fact that tourism is based on the cooperation between a wide range of services and products, the benefits of the digital revolution in the sector are quite obvious.

Our living environment is a combination of online and offline spaces that co-exist together, defining our everyday habitat. In tourism, the special use of spaces has always been a unique feature of the industry, and as of today, the spaces of the digital world have become part of it. The rapid development of the digital world brings novel and innovative solutions into the digital tourism spaces by the day. Peer-to-peer communication is outstandingly important in the technological environment of tourism. This type of communication, together with the spreading of smart devices have revolutionized scheduling, administration and finances, and also opened new horizons for the introduction of innovative sales and marketing technologies in the whole tourism industry. As a result of the digital revolution, the international development trends in tourism have opened the way for novel solutions like cloud-based booking sites or information and experience sharing via digital platforms.

In line with the new trends of travelling, there is a dynamically growing demand for special tailor-made offers beyond mass tourism, as conscious consumers expect personalized solutions that answer their individual needs. As of today, the vast majority of tourism market stakeholders have access to detailed information on their consumers and can closely follow and track consumer behavior and its changes. These novel systems of personalized products and services are available thanks to various flexible follow-up techniques like CRM client databases. The cloud-based CRM client database systems – ones that create offers by analyzing previous sales records and demographic data – have evolved rapidly. As of today, they can analyze huge datasets by big data analysis and scaling methods in a cost effective and anonymous way, searching for significant event points. Although big data research is based on working with large samples, it is the most efficient method to reveal individual personal preferences (Stadler, 2015).

How did sharing economy pave the way to personalized tourism services?

In previous decades, the results of digital development have opened the door for the real life implementation of shared economy theories. It was almost ten years ago that Chris Anderson (2009) introduced his pricing theory in digitalization, basically suggesting giving away products for free, based on the principle of shared goods and resources. Although at the time Anderson’s theory was considered as a technological solution, the principle of digital sharing have induced serious social changes as well. One of the most important positive messages of shared economy is the maximum use of resource capacities for the purpose of social well-being (Sundararajan, 2014). Social well-being is also a key priority in tourism, because a well-managed tourism industry brings profit not only for the business operators but also for the local communities.

In the sharing economy model, the stakeholders – who are also consumers at the same time – offer their excess capacities for collective use in order to maximize the exploitation of their goods and resources. These economic processes consist of so-called hybrid transactions with maximum capacity use (Hyde, 2007), for both commercial and social purposes. An important drive in the evolution of collaborative consumption theory was the realization of the fact that using or possessing the same consumer goods can result in different advantages. The core element of the model is that sellers offer their excess capacities, while the consumers in need use them in return for payment. In the sharing economy (based on the aforementioned primary idea), more and more industrial, commercial and service providers offer innovative solutions.

The principle of sharing is not a new idea in the tourism industry. In the case of some accommodation services, seasonal price reduction has always been a practice. Hostels and youth hotels have always been popular – these facilities are often used as dormitories throughout the academic year and lease their rooms for backpackers in the summer season, when the students are away. Of course, these seasonal options would not have been enough for creating a new market sector; the dawn of the new business era was marked with the emergence of wide platform solutions like Airbnb, Booking.com, Agoda, etc.

Casa de la Musica Hostel Budapest. Photo by Martin Zsarnoczky

Casa de la Musica Hostel Budapest. Photo by Martin Zsarnoczky

In the strategy of digital platform tourism businesses, consumers are considered as partners in the business activities. This shared operation can be best defined as a postmodern business model. Although the complex idea of postmodernism is quite difficult to describe, its main characteristics – shared participation and the subjective passion of each contributor – can lead closer to understand the phenomenon. It is clear that postmodernism will change some processes of the classic market laws in the near future. While "shared experience" has become a key marketing term for selling goods and services, specialized offers inevitably lead to a market fragmentation that will result in the fragmentation of users as well. In a disintegrated market, consumers will behave differently in fragmented times and spaces, paving the way for personalized services and tailor-made solutions. At the same time, individualism has become the key characteristics of the younger generations (McCrindle et al., 2009); a phenomenon that will have to be taken into account whilst creating business strategies. Due to the emergence of individualism, more and more young people are trying to create something unique that can serve the long-term benefit of the community. Their drive for creating businesses based on their own ideas and experience accounts for the increasing popularity of start-up businesses. These aspects of uniqueness, community thinking and experience-centered approach hold a huge opportunity for the future of the tourism industry.

The Future: AI, VR/AR, Blockchain

While looking through their photos, tourists usually have a positive experience remembering their travels, experiences and the destination they had visited. Some specialized digital technologies can offer this assumed positive experience in a searchable and changeable form. With regards to real life objects, their connections and relations, there is only a limited amount of information available in a format that could be handled by computers. The main problem is that computers need sufficient coding solutions created by artificial intelligence to be able to store, handle and organize information. The methods of coding for tourism experience purposes affect the speed, efficiency and knowledge/experience-based computing abilities of today’s computers.

According to the forecasts of product development strategies in various industries, almost all of our everyday objects and equipment will be accessible through the internet in the future. As a result, all devices that are capable of two-way communication will belong in the framework of IoT (Internet of Things). The devices of the future, unlike the devices of today, will communicate in a bidirectional way, where robust safe data handling, personalized differentiation and sufficient decision management will be part of the user experience. As a result of the continuous data collection during the use of these devices, all relevant information will eventually end up in a final centralized system at the top of the dataset.

Previously, tourism used to be an industry based on personal relations and connections, where the trends - and therefore travelers’ decisions - were set out by a limited number of large international tourism and travel enterprises. As a result of the digital revolution, the transparency of "hidden markets" had been revealed and numerous other factors have to be taken into account (Fig.1.).

Figure 1. Influencing factors of traveler’s decision. Source: Zsarnoczky, (2017a)

Figure 1. Influencing factors of traveler’s decision. Source: Zsarnoczky, (2017a)

The early development of ICT resulted not only in the better capacity utilization of airlines, but also on the compatibility of the prices; and soon, the emergence of the discount airlines had led to the innovation of the whole industry and forced out efficiency in all segments. The novel travel recommendation sites (Expedia, Orbitz, Kayak, etc.) were created with the aim to make travelers’ decisions easier; however at the same time, a lot of tourism service providers who could not keep up with the new challenges were forced out of the market. Although the new trends like travel packages (including car rental) or taking into account the reviews of previous travelers (Lonely Planet) were from many aspects opposite to the former business models, the rapidly increasing popularity of online offers required quick and user-friendly tourism product development from the industry.

With the arrival of Google, which was able to rank the sites’ appearance in internet searches, a fierce competition begun between blogs, tourism recommendation sites and price-comparing OTA systems. The bidirectional communication started with the use of cookies 2.0; since then, consumers have become an integral part of the business models, because businesses who seek to be successful in the long run, need to know their customers’ demands in detail. The development of digital services require the identification of the user, information on their individual preferences and a decision-based calibration (by AI). In AI-based decision making solutions, the former decisive factors are replaced by a virtual personal assistant, which is able to map the consumer’s preferences based on their digital footprint, and create an optimal personalized offer from the available big data systems (Fig. 2.)

Figure 2. Virtual Personal Assistant – VPA. Source: Zsarnoczky, (2017a)

Figure 2. Virtual Personal Assistant – VPA. Source: Zsarnoczky, (2017a)

The technological development cannot be stopped; however, with sufficient flexibility and openness, tourism businesses can prepare for the upcoming challenges. In the tourism of the future, the new consumers will bring forth new priorities and new demands. As a revolutionary approach, the members of the IoP (Internet of People) community offer their free time in order to reach joint IT/industrial goals, where frameworks are created in line with the preferences of other people, for a yet not specified consumer segment (Miranda et al., 2015). Beyond innovative technologies, whole new spaces have opened in tourism, completely different from the usual destinations. University researchers[1] have been carried out to study the possibilities of online tourism spaces and their opportunities for the tourism and hospitality industry. In virtual reality, with a special "glass", the user can look into an optional tourism space, from which the real world is completely shut out. The Augmented reality is a different technological solution, where digital elements are projected into a real life space.

In 2011, the interior designers of cafés only used and re-designed the existing design panels; today, the traditional living spaces are often combined with the online world. Carneval Coffee Budapest. Photo by Martin Zsarnoczky

In 2011, the interior designers of cafés only used and re-designed the existing design panels; today, the traditional living spaces are often combined with the online world. Carneval Coffee Budapest. Photo by Martin Zsarnoczky

The newest technological developments and the innovation in the use of living spaces are all connected to the alternative payment options that can be used in tourism as well. The emergence of Bitcoin and other cryptocurrencies has led to the creation of a novel payment system. The Blockchain payment system is a shared database, which records a continuously growing list of data blocks, preventing any counterfeiting or alteration of the data. One block consist of a list of transactions and the results of computations made by the stored programs. For example, if a customer buys some cryptocurrency or any other kind of currency, and then transfers it to anywhere in the world to another partner, who exchanges it instantly, both partners can avoid any loss caused by exchange rate fluctuations; furthermore, the whole transaction takes only minutes instead of the usual couple of business days. This solution can mean a revolutionary innovative payment option for everyone in the tourism industry.

The applicability of the blockchain system is independent from currency rates. In the case of cryptocurrencies, it is not the exchange rate that really matters - instead, the true value of the currency lies in the safety of the blockchain technology and in the authentic, transparent, unalterable and decentralized recording system (Pilkington, 2016). This payment system offers a new level of encryption safety and intervention-free operation, and the data handled in the system cannot be modified in any way. Another huge benefit of the system is that the transactions are realized without any intermediate agents, thus eliminating any additional transaction costs. By the time of the "maturity" of blockchain payment solutions, today’s large service intermediators like Airbnb, Booking.com, Agora, etc. are foreseen to lose some of their market positions, as consumers and service providers will probably deal with their transactions directly.

Will Artificial Food be the next meal on the table?

With the worldwide population boom, the demand for food is also increasing. To satisfy this growing need for food, the extension of agricultural areas is required for food material production, and at the same time, sufficient land management is needed for animal husbandry. The greatest challenge of sustainable agriculture lies in the fact that the agricultural areas can only be further expanded at the expense of forested lands. In addition, the current changes in the environment has also led to the decrease of fishing possibilities, another difficulty in the availability of food materials.

Shrimp in pasta shell. Made and photo by Martin Zsarnoczky

Shrimp in pasta shell by Martin Zsarnoczky

The decreasing resources of food materials will force the food production industry to re-think their former concepts. New technologies like 3D food printers can even bring the fast food era to an end. The novel inventions of food production and food engineering - like artificially flavored drinks, chocolates and dairy products - have been on the market of more than a decade now, and so far, they have not had a negative effect on the common taste of consumers.

In the concept of 3D food printing,  popular sweets and delicacies are synthesized by a layered printing technology, using the various pre-mixed powders, flavorings, fixers and oils that are stored in the "toners" of the printer. These artificial foods are already available: specialized franchise restaurants like the Food Ink chain offer a wide variety of printed meals for consumers who are curious about the future of gastronomy. It is also likely that with the next generation of the food printers, we will be able to calibrate the nutritional values and energy content of the meals.

The 3D food printing technology is not only important for HoReCa businesses, but holds a great opportunity for the health industry, too, especially in the field of special diets and medication. Using 3D food printing for these purposes can increase cost-effectiveness, efficiency and sustainability, thus supporting the food industry and hospitality and tourism businesses alike.

The option of personalized 3D food printing is just one of the innovative technological solutions in the tourism and hospitality industry. The Henn-na Hotel [1] in Huis Ten Bosch, Japan is the first hotel in the world, where customers are served exclusively by robots. At another Asian location in China, there are 24/7 cafés that follow the no-staff business model of Amazon Go. As for the restaurant market, the Chinese food brand Wufangzhai has recently opened the first unmanned restaurant[2] in Hangzhou, capital city of east China's Zhejiang Province.

The question is: how long will it take until food production and consumption will need no human resources at all?

Summary

For innovative enterprises, the efficiency of interactivity is of key importance for the success of their business. The rapid development of ICT solutions has brought immense changes in the tourism industry. Previously, consumers’ decision making was mainly affected by the industrial environment. The era of digital tourism spaces – preceded by theme parks and thematic destinations – started with the emergence of information websites; however, this targeted information flow used to be one-directional with narrow choices. In today’s digital era, the new generation of commercial activities take place in VR or AR spaces, and the instant analysis of the customer’s reactions and behavior support the enhancement of their buying willingness. The traditional decision making processes are gradually being replaced with personalized offers, further increasing the importance of AI.

With the development of shared economy, greater emphasis is put on social well-being, as user experience slowly becomes more important than ownership. This new approach is also expressed in novel forms of payment, which can seriously decrease the profits of intermediate activities. The new trends do not seem to be problematic in the tourism industry, mostly because in this sector, the exact costs and incomes are not clearly visible yet. On the other hand, the quality development of the 3D printing technology holds a great opportunity for the tourism and hospitality sector. The development of digitalization has finally reached a level where it can truly support the cost-effectiveness and sustainability of industrial food production, paving the way to the future of tourism and hospitality businesses.


PDF Version Available Here


References
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Martin Zsarnoczky, Ph.D. has several years of experience in the huge tourism and hospitality industry. He has worked with P&O Princess Cruises, Intercontinental and Marriott Hotels in Budapest. Between 2005 and 2015, he was the founder, developer and CEO of Casa de la Musica Hostel and Event’s Hall, one of the largest multifunctional private tourism & hospitality businesses in Budapest downtown. He holds a BSc degree in Tourism and Hospitality from the Budapest Business School, and graduated at MSc/Med level as Teacher of Economics in Tourism and Hospitality. During his studies, he had spent short a term mobility period  at Utwente University in the Netherlands, and later earned his Ph.D. in Regional Sciences at Szent Istvan University. At the moment, he is still very active as an entrepreneur and is actively involved in community development. He is also a board member of the Budapest Chamber of Commerce and Industry, and works as a mentor for the Young Entrepreneurs Association Hungary. With regards to his academic career, he is a full time assistant professor at the Institute of Marketing and Media at the Tourism Department of Corvinus University of Budapest.