Category: Fall 2018

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. 

Creating Community One Meal at a Time

October 31st, 2018 in Fall 2018, History, Restaurants 1 comment

By Dana Searle

Doctors heal.

Professors educate.

Psychologists listen.

Entertainers excite.

I get to do all of the above, on stage each night, as I serve dinner.  They say the best way to a man’s heart is through his stomach. I think the same is true no matter the gender; a meal shared is a memory made.

It is precisely this notion that led me to study hospitality administration and commit to a successful career in the industry, but more importantly, to embody a lifestyle of hospitality. I would define this as one of humanity – a moral foundation and compass, or what I would refer to, as being a compassionate, altruistic human being, who selflessly cares for others.

It can be argued that the hospitality industry began during the 15th century with the opening of the first hotel in France, or later around 1765 in Paris, with Monsieur Boulanger opening the first known restaurant. Hospitality, seen through my lens dates much farther back though, to the times of Abraham and Sarah.

We learn from Genesis 18:1-9 of the Old Testament, “The Lord appeared to Abraham by the oaks of Mamre, as he sat at the entrance of his tent in the heat of the day. He looked up and saw three men standing near him. When he saw them, he ran from the tent entrance to meet them, and bowed down to the ground. He said, ‘My Lord, if I find favour with you, do not pass by your servant. Let a little water be brought, and wash your feet, and rest yourselves under the tree. Let me bring a little bread, that you may refresh yourselves, and after that you may pass on—since you have come to your servant.’ So they said, ‘Do as you have said.’ And Abraham hastened into the tent to Sarah, and said, ‘Make ready quickly three measures of choice flour, knead it, and make cakes.’ Abraham ran to the herd, and took a calf, tender and good, and gave it to the servant, who hastened to prepare it. Then he took curds and milk and the calf that he had prepared, and set it before them; and he stood by them under the tree while they ate.”[i]

The lessons that Abraham provides us with here are plenty. Abraham does not wait for a plea of aid. He not only advances, but he runs to the strangers and petitions them to be his guests. In preparation, Abraham offers the first, best portions – “choice flour” and a calf “tender and good”. He doesn’t just throw a meal together; he and Sarah prepared a feast. Hospitality fosters good relationships, and Abraham and Sarah’s hospitality provides an early biblical insight into the way relationships and breaking bread go hand in hand. These strangers gained a deeper understanding of each other by sharing a meal and an extended encounter. This remains true today. When people break bread and gather around the table together, they often grow to understand and appreciate each other more intimately. Better working relationships and more effective communication are often born out of hospitality.

Fast forward a few thousand years and today, the hospitality industry employs around 292 million people globally, roughly 1 in every 10 people on the planet.[ii] Trends and data suggest these figures will continue to rise and with that, technological advances and implementation within the industry are aiming and executing to provide faster, smarter and more cost efficient service. On top of the impact that the industry makes on our economy, hospitality as an accredited curriculum has gained major esteem and there are over 240 Bachelor’s degrees in Hospitality Management offered in the United States alone.[iii]

The phrase “time is money” has never been truer than today. You can check out your own groceries at the store (that is, if you left your house, given that leaving is no longer necessary with instant delivery services), order coffee from your phone to avoid wasted time spent in line and even order a meal and pay for it all without the need for an actual, human server. For many, this looks and feels like progress; to me, all of this “efficiency” is an alarming step in the wrong direction.

Today’s generations are blessed with many gifts such as longer life expectancies, easier access to medical supplies, clean water and healthier foods and ingenious technologies unlike any we’ve ever experienced. With all this advancement, we are also witnessing some of the most backward political times filled with racial inequality and widespread hatred as well as a drug crisis, a country riddled with mental illness and an inability for many to effectively communicate with one another. When was the last time you heard a piece of “Breaking News” with a positive subject or outcome? Yeah, I don’t remember either.

Now, more than ever, if we were to truly look around and listen, we would understand that this is the time to stand up for what is right and to look after one another. Deep down, community and sense of belonging is what we all crave. Why must it take a violent catastrophe or natural disaster to remind us to stand united?

Malcom Gladwell, critically acclaimed author of Outliers, begins with an introduction titled “The Roseto Mystery”.  The first chapter explores the story of a community in Pennsylvania that had roots in the town of Roseto, Italy before migrating to America. The newly formed community of PA Rosetans became somewhat of an anomaly because during that time in the 1950s when heart disease was an epidemic, people from Roseto, were essentially unaffected. After ruling out diet, exercise and genetics as possible causes for the rarity, doctors fascinated with the case concluded that it was due to the rich culture and the traditions that they brought with them from their Italian village that they were insulated from the pressures of the modern world. The Rosetans stopped to chat with each other in the streets, cooked meals together and lived with multiple generations under one roof. This social lifestyle had major benefits on their health. The doctors had to sway the medical community “to realize that they wouldn’t be able to understand why someone was healthy if all they did was think about an individual’s personal choices or actions in isolation. They had to look beyond the individual. They had to understand the culture he or she was a part of, and who their friends and families were, and what town their families came from. They had to appreciate the idea that the values of the world we inhabit and the people we surround ourselves with have a profound effect on who we are.” [iv] Community, cooking and caring contributed to thousands of people living longer, better lives. Certainly, those three things could continue to help us thrive, if we allow them to.

Feeling that you are cared for, is a basic, essential human need. It is one that I get to deliver every night as a hospitality professional, engaging in thoughtful conversation and delivering mindful and timely service.

Perhaps one of the greatest restaurateurs of our time, Danny Meyer, says, “…Food is secondary to something that matters even more. In the end, what’s most meaningful is creating positive, uplifting outcomes for human experiences and human relationships. Business, like life, is all about how you make people feel. It’s that simple, and it’s that hard.”[v]

As a passionate and driven career server in fine dining, each night brings me new guests with endless possibility for life altering exchanges and a deliverable experience that could and often does make a lasting impact. With this great responsibility comes awesome reward, not just monetary, but something bigger and deeper than that. What’s infinitely better than an excellent gratuity, is the sense and assurance that you’ve made your mark on somebody’s life, while serving a meal. It’s the warm hug or tight handshake after the bill is signed, accompanied by a “you make a difference” or “your service is unlike anything we’ve ever experienced and made our night” that inspires me to leave my footprint on the world through the art of delivering genuine hospitality. I couldn’t agree with Meyer more when he said “I had begun to understand that business and life have a lot in common with a hug. The best way to get a good one was first to give one.”

While being nice doesn’t always equate with being successful, Danny Meyer certainly cares for others and succeeds in business. His philosophy of “enlightened hospitality”, encompassing the idea that focusing on the welfare and happiness of your employees will in turn lead to well cared for and satisfied guests, is right on the money. Who doesn’t want to feel like they are appreciated and cared for? We all do! It seems elementary to me. Treating others kindly is one of the first things we’re taught!

Many of today’s most successful companies share core values and philosophies which resonate on exceptional treatment of employees and awareness of customer needs. It should come as no surprise that a majority of them rate highest when it comes to customer service as well.  In a letter to shareholders before going public in 1998, founder and CEO of Amazon, Jeff Bezos stressed a focus on “customer obsession rather than competitor obsession” as a core ingredient in success of Amazon.[vi]

At a time when so many news headlines pertain to the airline industry, it’s refreshing to see that “The mission of Southwest Airlines is dedication to the highest quality of customer Service delivered with a sense of warmth, friendliness, individual pride, and company spirit.” Southwest is the only airline that has a mission statement posted prominently on their website and ranks higher in customer service ratings than any other.[vii]

The Ritz-Carlton famously exclaims “We are Ladies and Gentlemen serving Ladies and Gentlemen” and abides by their Three Steps of Service: A warm and sincere greeting, use of the guest’s name along with anticipation and fulfillment of each guest’s needs and a fond farewell.

With the above stated, the findings in the chart below should come as no surprise at all. We are living in a time in which entertainment and commerce options look drastically different than they have in the past. Particularly in the restaurant business, when hundreds of new operations open annually and a fraction of those survive to see year two, consumers and guests have a plethora of options. The stellar food may be served in an inviting and appealing environment, but if guests aren’t made to feel like they are valued and cared for, there’s no need to return.

[viii]

How blessed are we as hospitality professionals to work on and in a business which also works on ourselves? How lucky am I to have the opportunity each night to transcend class, cultural and geographical boundaries through the sanctity of dinner service?

The golden rule of treating others the way we wish to be treated is not foreign to many, nor is the idea that each day life should be lived as though it is our last, as tomorrow is never promised. I challenge you, however, to try and live by the words of the great philosopher Plato, (which are permanently etched on my forearm), “Be kind, for everyone you meet is fighting a hard battle.”

Each night when guests are seated at my table, a chit informs me of their name, any celebrations occurring, party size, dietary restrictions or other pertinent information. What no technology could ever tell me is how long my guests have been saving their money for this special evening, what tragedies they’ve recently experienced, or how badly they need a listening ear and a warm meal.

Despite our countless differences, we humans share far more in common. In order to persevere through the challenges of the day to day, we must look after each other. Let us follow the examples of Abraham, the Rosetans and Meyer to do what is critical for all of our well-being, create community: albeit for one meal – and to make a meaningful impact on the beautiful world in which we live.


PDF Version Available Here


References
[i] https://politicaltheology.com/the-politics-of-inhospitality-genesis-181-15-j-leavitt-pearl/
[ii] https://www.torontosom.ca/blog/tourism-and-its-impact-on-the-global-economy
[iii] https://www.bachelorsportal.com/study-options/269779255/hospitality-management-united-states.html
[iv] Gladwell, Malcolm. Outliers. New York: Little, Brown and Company, 2008. Print.
[v] Meyer, Danny. Setting the Table. New York: HarperCollins Publishers, 2006. Print.
[vi] https://www.cnbc.com/2016/05/13/5-key-business-lessons-from-amazons-jeff-bezos.html
[vii] https://www.business.com/articles/southwest-airlines-great-customer-service/
[viii] https://www.superoffice.com/blog/good-customer-service-yields-customer-loyalty/

Dana L. Searle is a proud hospitality professional with a  strong background in hotel/restaurant openings and food and beverage operations. She graduated from the School of Hospitality Administration at Boston University in 2010 and has since been involved in many facets of the business. Dana was part of the opening team at the Ames Hotel and has  worked with notable companies including Walt Disney World, Coca-Cola Refreshments, Yelp and Cameron Mitchell Restaurants. She is extremely passionate about service and the impact that she is able to make on guests, strangers and colleagues daily through a warm smile and genuine altruism. She is currently based in Boston and would love to continue to inspire others through public speaking, staff trainings and creative writing. 

 

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
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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.