Category: Spring 2016
Creating Memorable Experiences: How hotels can fight back against Airbnb and other sharing economy providers
By Makarand Mody
No one can deny that the hotel industry has a fight on its hands when it comes to the peer-to-peer accommodation market. A recent PWC report showed that while 6% of the US population has participated in the sharing economy for the hospitality industry as a consumer; 1.4% has served as a provider. Following a series of acquisitions, Airbnb is the undoubtedly the hotel industry’s biggest competitor. While much of the discussion that follows uses Airbnb as an example, the underlying logic applies to the broader concept of the sharing economy and its implications for the hotel industry.
Some veterans in the hotel industry have tried to shrug off the emerging threat by highlighting that the sharing economy is a “fundamentally different business” model, serving a whole new set of consumers, and thus not a direct competitor. A recent analysis by Smith Travel Research of Airbnb’s impact on New York City’s five boroughs seems to support this claim by highlighting that “Airbnb might be filling a void in the New York City market by providing a different lodging option at a much lower price point”. Concurrently, the analysis points to the fact that “it is difficult to deny that some demand might be moving from hotels to Airbnb”. An American Hotel & Lodging Association (AH&LA) report about Airbnb host activity found that the most successful and valuable hosts on the site are a rapidly growing class of micro-entrepreneurs – full time hosts and multiple-unit operators, accounting for around 65% of Airbnb’s $1.3 billion revenue in its top 12 markets. There seems to be increasing evidence that the greater room supply created by Airbnb has helped restrain prices that traditional hotels can charge in some markets. Such statistics have resulted in the hotel industry crying foul about not having a level playing field on various accounts, from occupancy taxes to sharing economy providers skirting health and safety standards. Cities and other jurisdictions across the country are engaged in their own efforts to regulate the sharing economy.
Meanwhile, sharing economy operators continue along their way to intensify their fight for the hotel industry’s customers. Now that more consumers themselves comfortable hosting, the supply of operators like Airbnb seems to be growing exponentially, offering renters an unprecedented range of accommodation choices, from a US$15 per night spot on the couch to an $8,000 per night mansion on a sprawling 100-acre property (and everything in between). Consistent with the theory of the Travel Career Ladder (suggested by Philip Pearce and his colleagues), while younger leisure consumers often travel on a tight budget using the sharing economy, tastes and preferences become more expensive as these consumers become older and more settled. Just like hotel companies have their loyalty programs that capture travelers as they progress through their life-cycles by offering a variety of different brands, operators such as Airbnb seem to be performing well at the differentiation game.
What About the Business Traveler?
The business traveler market is expanding for sharing economy providers. While travelers working for themselves or small companies were the most likely professionals to use the sharing economy, more business travelers are using these platforms when big trade shows have filled city hotel rooms; in fact, that’s how Airbnb was originally birthed Recognizing these patterns, Airbnb recently launched its Business Travel Ready initiative that identifies specific listings with a Business Travel badge, indicating that the hosts are providing additional amenities suitable for business travelers. These amenities range from ironing boards to fire alarms and CO2 detectors. The company also formed a partnership with a leading meeting planning management company, Experient, for adding Airbnb room blocks to official MICE event room inventory (Meetings, Incentives, Conferences, and Events), and providing metrics about booking patterns. There also seems to be an increasing “official” acceptance of the company: the San Francisco Tourism Board recently partnered with the company to provide neighborhood tourism materials for local businesses to help attract Airbnb guests. Such official recognition by Destination Marketing Organizations (DMO) is likely to further intensify the hotel industry’s efforts to impose regulations on the sharing economy.
Hotels Advantages vs. Airbnb’s Sense of Community
There are factors that remain in favor of hotels: for reasons of security, hygiene, and uncertain and fluctuating quality, consumers familiar with the sharing economy are 34% more likely to trust a leading hotel brand than Airbnb. A spate of safety-related incidents is likely to keep this statistic in favor of hotels: from the horror story of Jacob Lopez, who was allegedly sexually assaulted and locked in his room in a Madrid Airbnb, to the company being sued by a woman over an alleged hidden camera in a rented apartment, there is likely to be a population of skeptics who are unlikely to rent from strangers. However, the immense popularity of the concept is supported by a host of economic, social, and technological changes in society. A Skift report found these changes to encompass issues pertaining to amenities, diversity and local experiences, a “personal concierge”, a “home away from home” experience, and the ability to develop personal connections/a sense of community. These varied experiential value propositions are evidenced in Airbnb’s strategic platform of “Belong Anywhere”, and, more recently, “Don’t Go There. Live There”; propositions that are changing the way tourists travel within the United States and outside. Thus, while regulation of the sharing economy is likely to level the playing field to a certain extent, the hotel industry must also look to contend with the underlying experiential drivers of consumption that are fueling the popularity and growth of the sharing economy.
Airbnb Research and Training
According to Chip Conley, the inventor of the boutique hotel aesthetic and Airbnb’s Head of Global Hospitality and Strategy, the company’s focus on enhancing the guest experience lies at the very heart of its strategic plans for the future. Airbnb has created a hospitality lab in Dublin to provide training to hosts on standards, and to study hosts and guests together in a physical space in an effort to enhance its experiential offerings. The company has also experimented with providing add-on services such as full-service cleaning and stocking facility for hosts in cities such as New York, San Francisco, and Los Angeles. Recently, Airbnb has been testing hotel-style packaging and amenities – such as local treats, wines, and upgraded bath products – in a select number of highly rated listings in Sonoma, California, to broaden its appeal to travelers who prefer more of a blend of a traditional hotel stay and that of an Airbnb: the comforts of a hotel stay like special amenities and treats as well as instant booking, combined with the more personalized, peer-to-peer, local experience that the Airbnb platform facilitates. Such efforts indicate Airbnb’s intention to turn itself into a full-blown hospitality brand, one that delivers a seamless end-to-end experience when its customers travel. While the company initially disrupted the hospitality business by serving as a provider of alternative accommodation, it is now trying to take this disruption to the next level by competing along the lines of the guest experience.
Applying Extended Framework of the Experience Economy
At such a time, the Pine and Gilmore’s seminal concept of the experience economy can be immensely useful to hotel companies looking to fight back against its sharing economy competitors. When high level product and service quality can no longer be used to differentiate choices for consumers, hotel companies must focus on creating unique, memorable experiences in order to develop a distinct value-added provision for products and services that have already achieved a consistent, high level of functional quality. To demonstrate how this can be done, I not only refer to Pine and Gilmore’s framework but rather extend the four realms of experience to eight realms. Examples are highlighted of what sharing economy providers, especially Airbnb, and hotel companies are doing right in each of these realms that the industry as a whole can learn from and incorporate into their own experience creation efforts. These eight realms are represented in the extended framework of the experience economy.
Pine and Gilmore’s four original dimensions include education, escapism, esthetics, and entertainment. While education and escapism are classified as active dimensions in which participants personally affect the performance or event that becomes part of his or her experience i.e. there is an interactive engagement of the mind and/or the body, esthetics and entertainment are passive dimensions in which participants do not directly affect or alter the nature of the environment presented to them. To these, I add four additional dimensions (highlighted in blue) that capture the essence of the type of experience that the sharing economy aims and claims to facilitate: two active dimensions of localness and “communitas”, and two passive dimensions of hospitableness and personalization. While these dimensions are not exclusive to the sharing economy, providers such as Airbnb attempt to make them their own by providing for and emphasizing these dimensions in how they develop products and communicate their experiences.
Getaway, a startup concept of the Millenial Housing Lab, builds tiny houses, currently outside the Boston and New York City areas, places them on beautiful rural land and rents them by the night to city dwellers looking to escape the digital grind and test-drive tiny house living. The sense of adventure is maintained by the fact that the exact location is only provided to travelers after the booking is completed, serving as a perfect example of Escapism for couples, writing weekends, or those looking to “put a dent in a stack of unread books”. onefinestay is an example of the sharing economy at work from an Esthetics perspective. It offers over 2,500 luxury vacation apartments in London, New York, Paris, Los Angeles, and Rome, each one handpicked for space, character, comfort, and a distinctive design aesthetic. It differs from other sharing economy concepts like Airbnb in that each home is selected for inclusion into the brand’s curated portfolio based on exacting standards of architecture and design. The Liberty Hotel in Boston, part of Starwood’s Luxury Hotel Collection, leverages the Entertainment dimension of the hotel experience by engaging guests into the creative flow of high fashion in Boston. Fashionably Late Thursdays is a weekly event that showcases the collection of a fashion designer or seasonal fashions from a major retailer in a live fashion show format. The show begins at 10 pm, followed by music, mingling, and signature mixes from the bar. Airbnb’s new positioning, “Live There”, focuses on moving the brand beyond stays to creating experiences, which include Education(al) activities in neighborhoods and communities. For example, Ranida, a Thai native and hospitality management grad, working and living in San Francisco, offers 3 hour long group-based authentic Thai food cooking classes, allowing guests and locals alike to learn a new cuisine from someone with a passion for cooking and teaching.
Airbnb’s previous positioning of “Belong Anywhere”, which the company is using to supplement “Live There”, is centered around creating the sense of community and belonging that its travelers seek. Living in someone’s home naturally involves individuals putting themselves out there to meet new people. Airbnb has cleverly used this simple but powerful idea to position itself as a platform that helps people break barriers and truly leverage the socially transformative power of travel. Its sharing economy competitor, HomeAway, on the other hand, claims to offer the most comprehensive selection of rentals for families and groups, allowing them to recreate “home away from home”, a sense of Communitas with those close to you. Guest Personalization is an increasing focus for travel brands, with many hotel companies using their loyalty programs to gather information about their guests in order to enhance the overall guest experience. Moreover, technology such as tracking Beacons and Augmented Reality is likely to play an increasingly important role in the future in terms of personalizing the guest experience. For example, The James Hotels, which has locations in Chicago, Miami, and New York City, offers the James Pocket Assistant, which uses Beacon technology to allow guests to access special offers, view maps, contact the hotel, and request services. The app also lets users take a self-guided tour of the hotel’s art collect and notifies users of special offers and perks based on their location on the property. The Clarion Collection Hotel Tapto in Stockholm offers a walk-in closet where guests are given a selection of their favorite clothing brands to try on. If they find something they really like, they can add it to the bill. Airbnb is jumping onto the personalization bandwagon with a new “matching system” that takes travelers’ preferences into account, matching them with homes, neighborhoods, and experiences that meet their needs.
Standard Hotels provides a masterclass in the use of Localness. Its new website, with a mobile-first mission, leads wholly with lifestyle content about music, food, arts, and other cultural programming, both on-property and offsite. The website reads more like an online travel magazine, with the hotels positioned to serve as base-camp from which to explore “the local” in the cities in which they are located. Airbnb’s Guidebooks and Neighborhoods features do something similar, with stunning photography, local editorial perspective, insider tips from Airbnb hosts, and practical information about neighborhoods worldwide. The eight and final dimension of Hospitableness, which lies at the very core of the hotel industry, is something that sharing economy competitors seem to be leveraging more so than the hotels. These companies claim to offer an alternative to bland, cookie-cutter, inhospitable hotel experiences, with local hosts at the very center of delivering hospitality in its most primal form – creating memorable experiences through good-old fashioned interpersonal contact. For example, an Airbnb host and his wife in San Francisco rent out the second floor of their two-storied house to families, and cook a delicious barbecue in the evening to welcome their weary travelers. My own recent experience in the town of San Luis Obispo in California attests to this dimension. The hosts, a retired couple who seemed truly delighted to have us in their home, did everything from talking all about their family and getting to know more about mine, to providing hotel-like toiletries in the bathroom, leaving croissants and fresh strawberries in the refrigerator, and, most memorably, placing a small welcome sign on a chalkboard on the dresser – a neat little touch. Interestingly, it appears that while the hotel industry, to a great extent, is placing technology-enabled convenience and entertainment at the center of its experience (digital keys, selecting your exact room prior to arrival via app, a robot that stores your luggage, Netflix on your guestroom TV, among others), the sharing economy is using technology to facilitate a simpler, more authentic, down-to-its-roots hospitality experience.
Two other elements of the extended experience economy framework – Serendipity and Ethical Consumerism – can help hoteliers think about the design and delivery of memorable experiences. These elements straddle multiple dimensions, and, as such, can serve as experiential “deltas” that can set one experience apart from another.
The very local, customizable, peer-to-peer nature of the sharing economy experience allows guests to be surprised by their hosts, be it with a bottle of local wine upon arrival, or a stocked refrigerator that satiates the need for that midnight snack (of course, the safety-related incidents mentioned earlier can also lead to unpleasant surprises). Canopy by Hilton, one of the latest additions to the company’s portfolio adds this element of surprise with a property-specific gift to welcome guests on arrival. But hoteliers need to think beyond gifts to add that element of Serendipity to an otherwise predictable guest experience. Last, but certainly not the least, we live in the age of activist Millennial. There is enough evidence to show that this new generation of travelers is more likely to support a company that does it bit for society, beyond the adhoc corporate social responsibility initiatives that make for good PR but are subsequently forgotten. An element of Ethical Consumerism can and should be weaved into the consumer’s experience wherever possible. There is some evidence to suggest that consumers believe that the sharing economy provides opportunities for a responsible form of consumption (and travel). The Airbnb machinery has been awake to this marketing opportunity. A recent NPR article talks about how Airbnb is changing the way global tourists get to know Africa, by connecting them directly to the local economy. The story of Ndosi, a 23 year old from Arusha, Tanzania, is used to demonstrate the company’s “vision” to “create a new generation of micro-entrepreneurs from local hosts to local businesses”. Not only does the article talk about how some tourists staying with Ndosi and his parents “found their family” (Communitas), but also the money allowed him to fund his graduate school education. Many hotels have been doing their bit for the environment for some time now; with towel re-use policies and LEED certified buildings, among other initiatives. Perhaps it is time for hoteliers to think about how the “social” dimension of Ethical Consumerism can be weaved into the guest experience.
A Fundamental Rethink for Hotels
The extended experience economy framework provides hoteliers with a mechanism to create experiential value. By no means does this suggest that hotels do not or are not innovating. The examples provided above are by no means exhaustive; there are many hotels around the world executing unique, innovative features along these dimensions of experience. However, the sharing economy providers have the advantage of a clean slate and seem to be making several of these dimensions their own. The emergence of these competitors means that the hotel industry may need a fundamental experiential rethink to proactively stay ahead of the game. Don’t believe me? Maybe Marriott floating the idea of Element being “an interesting alternative to sharing economy platforms” may convince you otherwise. While one can only wonder how such a transformation of the Element may take place, the framework presented here can serve as a starting point for such a rethink.
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.
By Emily Horton
Hostels: typically one’s mind pictures a grungy dorm-style hotel filled with overstuffed backpacks and its owner, a 20-something college student trekking their way through Europe. Huffington Post’s “22 Things You Should Know Before Staying in a Hostel” list captures popular American beliefs about hostels; they are home to bed bugs, mildewed showers, future life-long friends from around the world, and well-vetted insider information about any given city. Despite many backpackers willing to stay in these ultra-affordable lodgings that are known to lack amenities and sometimes cleanliness, is there more to the hostel consumer than meets the eye?
The Hostel & Lodging Landscape in America
Hostels do exist in America, but according to Hostel World, they account for only three percent of properties [internationally] and 10 percent of global hostel revenue. Aaron Chaffee, Vice President of Hostel Development at Hostelling International USA says this statistic shows Americans’ reluctance to use hostels while in the United States due to a lack of cultural acceptance. Hostels are not remaining stagnant, instead they are rapidly adapting to changing consumer needs to help put American hostels in the lodging landscape.
New desire and needs from hostel consumers are fueling change in the industry. Even just 15 years ago, according to Chaffee, guests were merely looking for a place to rest their heads, kitchens to cook their own food, and a common room to meet fellow travelers. However, during the economic change over the past seven years, Carina Perkins of Big Hospitality reported that as of 2014, consumers drastically shifts towards luxury and budget hotels leaving the middle price range hotels without a large guest base. Many of those mid-range hotels in Europe switched to the hostel market, offering services that the Hostel Trend Report stated millennials are now craving: free wifi, on-site food and beverage, daily cleaning services, social events, bicycle rentals, libraries and media centers.
Along with the evolution of hostels themselves and the change in the hotel market, the introduction of new competition has altered how hostels must address guests’ needs. Airbnb, an online platform where any homeowner or apartment dweller can rent out rooms or entire abodes to travelers, upset the system when it was introduced in the fall 2008. The amenities that Airbnb provides, such as more privacy, home-like feel, cultural immersion with locals, and suitability for group travel, shifted the expectations of future guests. Already homes and apartments, Airbnb’s are designed to be comfortably lived in as opposed to hostel bunk beds with shared shower stalls. Airbnb’s offering is a heavy influence on the shift of hostel amenities and design to its already community-focused and low price value points.
Addressing Latent Needs: Separating Good from Great
During a phone interview, Aaron Chaffee discussed that merely adding new services is not what will draw people into hostels. “It is not just ‘bling’ to add fancy things.” Instead, he said hostels need to strategically look at what guests’ explicit and latent needs are and how to address them in a cost efficient manner. Explicit needs, like a bed, common area, or kitchen, may not be thought about in great detail because they serve as points-of-parity among all hostels. Meeting latent needs is what separates good hostels from incredible hostels. Chaffee explained that a hostel guest will not likely check-out and think, “That reading light, or shelf really made my trip,’ but addressing latent needs can influence a guest to feel, ‘That was a truly great experience.’
Addressing latent needs does not mean using notable architects to design the lobbies and entrances; these amenities could be a library of rental books or electrical outlets in the lockers so guests can safely charge their laptops while away from the hostel. These details are the small necessities that will create a satisfied guest experience; however, guests do not always know how to express these needs. Hostelling International – USA uses a combination of surveys, focus groups, and research studies to address the concept of latent needs. Research of this caliber is not always feasible for an independent hostel, therefore it relies on guest feedback, surveys, and industry trend reports.
The hostel industry experiences classic hospitality barriers of intangibility, inseparability, variability, and perishability with marketing and product explanation, therefore addressing latent needs becomes vital in the comprehensive hostel experience. When a guest books a hostel, he or she can only base expectations off of reviews, photos, or website copy. If a hostel, or any hospitality business, sets the expectations at the correct level, amenities that address latent needs can be used to enhance the value of the experience. These small amenities cannot be gauged by online search; it is near impossible to estimate expectations that a guest does not even know he or she has. Yet attempting to find and meet those needs will improve the consistency of guest satisfaction because there is no variability with most structural amenities, such as the aforementioned reading light. As long as amenities and expectations are well maintained, it can be expected that most guests will be satisfied, therefore increasing the overall value of a hostel stay.
Crashpad: A New American Hostel Experience
Crashpad, based in Chattanooga, Tennessee, is an example of a hostel that has done just that; acknowledged latent needs in order to provide a fulfilling and satisfying experience for a variety of guests. The hostel was started by Boston-area rock-climbing enthusiasts Max Poppel and Dan Rose. The pair relocated to Chattanooga, a rock-climbing mecca in the United States, and noticed a lack of lower priced lodging options (<$100 per night) that still offered the amenities of a budget hotel. At first, the two attempted to start a campsite, but the start-up fees and zoning issues created a more challenging barrier than excepted. A hostel became the best middle ground, offering the comradery of a campsite and running water, year round functionality, and access to a broader age-range of customers. In a phone interview with the author, Bethyn Merrick-Nguyen, General Manager of Crashpad, explained that the company’s target market is focused on outdoor aficionados, which is whom Chattanooga generally appeals to as a whole Most of Crashpad’s employees are avid rock climbers, kayakers, or hikers who can provide expert recommendations to guests.
Environmental & Local-business Friendly
Knowing its clientele are primarily outdoor adventure seekers, Crashpad offers specific types of amenities to its guests, many catering towards latent needs. For example, Crashpad is a LEED Platinum certified for its sustainability and resource efficiency efforts, a quality that is in-tune with its many environmentally conscious guests. Whether staying in a sustainable environment is a latent or explicit need, it is a quality that is appreciated by most of its guests. The poured concrete building with an open concept allows for adequate individual space, quite floors, and less need to open and shut doors. Merrick-Nguyen explained that although most guests do not consciously say that this is a great benefit, no one likes to hear the dorm door opened ten times a night and have their bunk-mate walk over old wooden floors to get there.
Crashpad also created multiple partnerships with local green businesses. The pantry is stocked with local spice blends and coffee beans, the bathroom has hand-crafted soaps, and even the bed frames and concrete sinks were handmade by local craftsmen. The company’s appreciation for local, eco-friendly products permeates through its purchasing patterns, eventually influencing how guests perceive its brand. Crashpad also utilizes its partnership with a local bakery to provide breakfast ingredients for all of its guests at no additional cost. After weighing the costs and benefits, the owners chose to only supply ingredients, giving the guest freedom to create their own meal.
Utilizing the hostel kitchen is just one of the gastronomical options that Crashpad provides. Two years after opening Crashpad, the owners opened Flying Squirrel, a neighborhood restaurant and bar right next door. According to an article on Noog.com, the goal of the hostel is to breakeven while the goal of the restaurant is to generate profit; however, the hope is that the combination of the two attractions in such close proximity will create a close community atmosphere (Morrison). Guest trends show preference to hostels that included attached or in-building food and beverage operations, similar to that of a budget hotel that shares a building or parking lot with a restaurant. However, just as guests’ expectations for accommodations are increasing, their expectations of food and beverage quality are too. The Flying Squirrel is meant to achieve the perfect combination of hostel amenity within a vibrant neighborhood dining scene.
Change in Perception Leads to Change in Demand
As hostels continue to improve and cater to new guests’ needs, a change in American perception of hostels needs to occur in tandem in order to achieve greater success. Chaffee explained, “If you describe a situation where a college student takes a summer trip, or right after graduation someone travels around Europe and they use a EuroRail pass, they stay ____________, and ask them to fill in that blank, people will say hostels. It is not that Americans do not know what hostels are, they just don’t think to use them in America.” Chaffee explained that in Europe, weekend trips are taken more often while children are growing up, and families often use hostels as an affordable, social accommodation with easy access to a city. There is both a plethora of hostels and a high demand from local residents and foreign travelers, creating the perfect model for growth of the hostel market.
In the United States, however, demand is lacking. Even travelers who are just staying one night in New York City rarely think of staying in a hostel. Chaffee attributed this to both a lack of supply and a lack of integration within American culture. Hostels do not maintain a high place of mind for consumers, therefore there is a correlating lack of demand. Lack of demand leads to a gap in hostel supply, overall creating a cycle of decreased supply and lack of demand within the culture. Both Hostelling International USA (HI-USA) and independent hostels are tackling this in their own way. HI USA is placing more emphasis on what hostels can provide besides just an overnight stay, such as broadening cultural experiences. Chaffee explained that HI USA hopes to create an image where an experience at a hostel is seen as a truly authentic one that can create cultural understanding and awareness. He elaborated, “A hostel stay isn’t just an affordable and cheap stay – it offers a new sense of tolerance and a new way to learn about cultures.”
Crashpad’s strategy is helping to erase the stigma that hostels are filled with old sheets and dirty showers. “Getting people in the door is the most important thing to change peoples’ minds of what a hostel is. Most people are very open, some even come in saying, ‘What is a hostel, explain it to me’ and we do,” said Merrick-Nguyen. The company’s website and social media channels provide an inside look at the experience by sharing photos of the design and cleanliness of the building. Additionally, user-generated content on social media allow guests the opportunity to publicize their experience and influence lodging habits, hopefully towards hostels.
Between balancing latent needs and explicit needs, along with creating an overall positive and inviting guest experience for a low cost to the owners and a low price to the customers, running a hostel can seem like a fruitless pursuit with such low demand in the United States. However, with the increase of quality in supply, especially in California and the Northeast, Americans are starting to gain US hostel experience. Combined efforts of the international hostel groups and independent hostels are making task of increasing awareness become more manageable. Through all these changes, hosteling in the United States shows promise of becoming a popular and enjoyable alternative to low cost hotels, especially for those who crave an authentic social experience.
Emily Horton is a recent graduate of the Boston University School of Hospitality. With experience in both front and back of house of notable Boston restaurants, along with experience in social media marketing, she plans on working in all aspects of the food and beverage industry, wherever in the world it may take her.
Rebranding Before the Digital Age: 4 Strategies Used by the Sheraton New York Hotel and Towers During the 1992 Democratic National Convention
By Leora Halpern Lanz, Juan Lesmes, & Erinn Tucker
When a New York City tourist arrives at Times Square, the territory from 40th street to 53rd between 6th and 8th avenues, they become one of the other 330,000+ monthly visitors (Times Square Alliance) of the city’s most popular destination. The pedestrian-only square is consumed by upscale hotels, themed restaurants owned by celebrity chefs, the iconic TKTS booth selling tickets to the 40 Broadway theaters, an array of usual and unusual street performers, and towering neon lights flashing varying content like celebrity news, stock prices, and McDonald’s ads.
In the early 1990s, Times Square and New York City was not the ideal tourist destination that it is today. A fiscal crisis in 1975 was followed by power outages, increased drug usage and crime, and a declining population. By 1990, the city experienced peak homicides of 2,245 in one year. In 1993, Times Square alone reported close to 4,000 crime incidents. While the streets were lined with flashing lights and signs, these risqué attractions, however, were not for the tourists and their families that the area caters to today.
In 1992, New York City Mayor Rudolph “Rudy” Giuliani and the Times Square Alliance made drastic efforts towards the revitalization of the city, combating both poverty and crime. The hospitality industry had much to contribute to these efforts by building new luxury properties, and revitalizing existing New York properties like the Sheraton Centre Hotel. This hotel in particular was not only part of the city’s drastic efforts to turn out its safety and public image, but it simultaneously leveraged its connection to the 1992 Democratic National Convention to lift its own rebrand.
Today, the 38,960,000 annual Times Square visitors account for $4.5 billion in food, retail, and entertainment spending. The downtown destination also provides 385,000 jobs, and fewer than 800 instances of crime occur every year.
The Sheraton Ready for a Rebrand
In 1990, the 7th Avenue Sheraton Centre Hotel in Manhattan was a tired property in need of rejuvenation. Owned by International Telephone and Telegraph (ITT), the property experienced high occupancy rates and was the leading revenue generator for Sheraton. However, Fodor’s and Frommer’s guide books validated the guest point of view: it was an outdated hotel where guests only stayed if deemed absolutely necessary due to its central location and affordable rates. The guests’ perceptions and negative public stigma were indicative of many of the United States Sheraton hotel properties, which included a mixed collection of large city hotels, suburban properties and highway locations. The company instituted a strategic plan focused on renovating existing properties throughout the U.S. and Canada in order to remain competitive in the market.
Between 1990 and 1992, ITT spent $1 billion on capital and renovation efforts in order to elevate hotel quality in North America. Sheraton re-positioned their television and marketing messages, announcing, “We’re spending a billion to make you feel like a million.” ITT allocated 10%, or $100 million, of renovations to its three New York City properties: Sheraton Centre, Sheraton Squire, and Sheraton Park Avenue (respectively renamed Sheraton New York Hotel & Towers, Sheraton Manhattan, and Sheraton Russell). In 1992, the Sheraton Centre and City Squire properties collectively totaled 2,400 rooms. The Sheraton renovations and rebranding concurrently aligned with the rejuvenation of Manhattan’s Midtown West and tourist-driven 42nd Street. This made for an additional opportunity that the Sheraton Centre’s public relations department incorporated into its property’s strategy.
The Sheraton Centre and the Democratic National Convention
The 1992 Democratic National Convention was set to take place in New York City from July 13th-15th. The 1,650 room Sheraton Centre and its primary competitor, the New York Hilton located two blocks away, served as the official hotels of the DNC. The Sheraton Centre publicly capitalized on its DNC connection to help lift its rebrand and renovation messaging. For example, public relations and advertising stated, “The hotel was spending $100 million to renovate and become the new Sheraton New York Hotel & Towers; and we are completing the renovation in time to serve as the headquarters for the Democratic National Convention.” The renovation and DNC connected messaging was further shared with stakeholders, potential guests, and business bookers during the period leading up to the convention.
From Internal Customer to External Customer
Develop an Internal Narrative for Employees
It is important to use a common message to communicate renovation updates to all employees. It was most important for front-of-house employees like bellman and front-desk agents who frequently come in contact with guests; it was also important for back-of-house employees working behind-the-scenes like engineers and sales staff to be familiar with the changes. When employees were knowledgeable and up to date, the internal word-of-mouth assisted in telling the rebranding story.
Without the widespread use of internet and corporate intranets, the public relations and human resources departments developed an internal television channel called the Sheraton Employee News Network (SENN); the station delivered a weekly update on the renovations occurring at both the Sheraton Centre and Squire properties. “Renovation Updates”, a printed periodic internal newsletter also included renovation, rebranding, and DNC updates. Eventually, as the comfort with internet and email grew, department heads sent the newsletters electronically to their respective staff and departments.
Pre-Convention Public Relations Moments
Beginning in February 1992, monthly communication tactics were planned for both properties, some already leveraging the DNC connection.
Sheraton New York Hotel & Towers Rebrand for the External Customer
Hotels draw customers from out of town, traveling for both work and pleasure; it is imperative to employ local public relations efforts and community connections to spread the message when rebranding. For the Sheraton New York Hotel & Towers, visually appealing images of hotel employees on the construction scaffolding and positive relationships with the neighborhood and taxi drivers helped put the property in the public eye.
Convention delegates checked in to the newly rebranded Sheraton New York Hotel & Towers on Friday, July 11, 1992, two days before the official kickoff of the DNC. In an effort to avoid the common practice of only reacting to media inquiries, the hotel’s public relations team proactively capitalized on its role as an official convention hotel prior to the delegate’s check-in. Faxes and direct phone calls, the most available large-scale electronic communications at the time, were used to ensure local businesses and on-air reporters received media advisories of the hotel’s DNC delegate activities and calendar of events. In addition, Sheraton created several marketing tactics to support the strategy of leveraging the national convention to rebrand the property.
Actions Used to Support the Strategy
- Delegate Survival Kit: Red, white, and blue canvas bags with the logos of the newly-named hotels were given to each delegate on the first day of check-in. Each bag included a hand fan to use during the warm temperatures of the July convention, an NYC subway token, a map of New York City, a cup for free lemonade in the hotel lobby, a copy of the “Sheraton Chronicle” detailing hotel DNC activities, and recommended tourist attractions. This merchandising tactic permeated throughout the city; tourists were seen walking with the bags on the first day of check-in.
- Red, white, and blue banner bunting was hung proudly from the exterior of the building. While appearing as a Grand Opening banner, it also signified that the hotel was “the place” to be during the convention.
- A Dixieland jazz band, barbershop quartet, lemonade stands, and doormen dressed in straw boaters and pin-striped vests were deliberately placed at the hotels’ street level entrances. News crews zipping by looking for DNC related activities naturally stopped at the hotel with the help of these activities in full visibility. Guests and passers-by were also intrigued to come inside.
- Politically-themed movies like “All the President’s Men” and “Mr. Smith Goes to Washington” aired on loops in the Sheraton New York lobby sports bar.
- During the convention week, wines from the Clinton vineyards of upstate New York were added to the hotel menus. New York State apples were offered at the front desk along with other small touches to show appreciation for each of the present state delegates.
Leveraging Unexpected Opportunities
Despite strategic planning and preparation, seizing unplanned moments are often the most impactful. On June 3, 1992, Governor Clinton appeared on Arsenio Hall’s popular late night talk show in what became a successful attempt to appeal to young voters. Donning dark sunglasses, Clinton enthusiastically played his saxophone resulting in a successful national performance and campaign milestone. Although presidential candidates may have appeared on late night talk shows in the past, this was the first time a candidate showed a lighter side or less formal ‘presidential image’ that is more common today. The Sheraton’s PR department quickly capitalized on this iconic moment.
2016: The Republican and Democratic National Conventions
During political conventions, while hotels are sold out and host cities are abuzz, a hotel’s public relations, marketing, and operations department’s goals include leveraging its connection to the event while maximizing rate and occupancy opportunities. In addition to the immediate profitability any convention offers, a national political convention may also provide the opportunity to gain greater countrywide recognition for a longer term positive impact.
With the 2016 Republican National Convention in Cleveland, Ohio and the Democratic National Convention in Philadelphia, Pennsylvania, upon us this summer, hotel marketers and their public relations campaigns will focus much more on digital and mobile strategies to leverage the impact these conventions provide. Already, the Democratic National Convention Committee and its host city led a Twitter chat to answer questions specifically for the surrounding food and beverage industry. They also partnered with Google to prepare workshops aimed at helping small businesses enhance their online presence before and during the convention.
The Hilton Cleveland Downtown, the RNC’s headquarter hotel, will find itself in a situation similar to that of the 1992 launch of the Sheraton New York. The brand new $272 million Hilton hotel with 600 guestrooms will open its doors on June 1, 2016, just seven weeks before the convention kicks off. The goal of branding (or rebranding) a hotel by leveraging the exposure of a national convention can bring is the same in 1992 or 2016. Although this summer the available tools are more varied and diverse than 24 years ago, so is the competition for attention with the multitude of media channels and fragmented interests of the country. From a hoteliers marketing perspective, the intrigue of the democratic and republican conventions battling for which candidates and political platforms will represent their respective parties will contend with professional interest as to the public relations success of the host hotels.
Leora Halpern Lanz is President of LHL Communications and a full time lecturer at Boston University’s School of Hospitality Administration. She served as the Director of Public Relations for the Sheraton Hotels of New York from 1990-1999. A graduate of Cornell University with a Masters from Boston University, Leora served for 15 years as Global Director of Marketing for HVS, nearly 10 years as Director of Public Relations and Advertising for the ITT Sheraton Hotels of New York, and nearly 5 years as the Director of Public Relations for the Greater Boston Convention & Visitors Bureau. firstname.lastname@example.org; lhlanz@Bu.edu; @LeoraLanz2
Juan Lesmes is a rising senior at Boston University’s School of Hospitality Administration. His studies and areas of interest include hospitality media relations and integrated marketing communications. Juan’s previous experience includes work at public relations firm DataMedia Communications Group and at digital marketing platform Let’s Get Weddy in London. He is currently working with LHL Communications. Beyond his studies at SHA, he serves as co-founder and marketing coordinator of Boston University’s International Society. After graduation, Juan intends to continue his studies in hospitality marketing and communications.
Erinn Tucker, Ph.D. is an Assistant Professor in the School Tourism and Hospitality Management at Temple University. She has 20 years of corporate and academic experience. Her teaching and research is in the areas of event management and student engagement. She holds a bachelor’s degree in business administration from Florida A&M University, a master’s degree in sport administration from Florida State University and a Master’s in Business Administration (MBA) from Winthrop University and Ph.D. in Hospitality Administration from Oklahoma State University. Email: email@example.com or @erinntucker
By Nicholas Thomas PhD. and Eric Brown PhD.
As the United States approaches mid-2016, seats throughout the Executive, Judicial, and Legislative branches of the federal government are in play. As Republicans and Democrats fight for control, the docket of debatable topics continues to grow. One issue in particular, employee compensation, continues to be one of the most popular in both state and federal level politics. While the federal-level discussion of minimum wage is increasing due to an Executive Order signed by President Obama to shift the minimum wage of Federal contractors and subcontractors to $10.10 (The White House, 2014), and a recent change in the federal overtime regulations, income inequality remains at the forefront of discussions at the state level.
According to two members of the Economic Policy Institute (Cooper & Hall, 2013), the average wage of a U.S. worker has declined over the past several decades. This decrease in wage, particularly for those in low-wage positions such as those found in the hospitality lodging industry, has caused a widening of income inequality among citizens of this country. In addition, while the erosion in wages is occurring, the distance (gap) between minimum wage workers and average United States hourly workers has increased to a ratio of almost three to one. In other words, for every dollar the average American wage earner makes, a minimum wage worker receives $0.37. For a historical perspective, the ratio was approximately two to one ($0.50) in the 1960s. This income inequality negatively affects the individual worker, the national economy, and industries like hospitality that have a high percentage of low-wage workers (Cooper & Hall, 2013).
In January 2016, five states in the U.S. had no established minimum wage, 29 states had a minimum wage higher than the federal minimum wage, 14 states are equal to the federal minimum wage, and 2 states had minimum wages below the federal minimum wage (Wage and Hour Division, 2016).
As the top political official at the state level, the governor of each state has influence on the labor law of that state. Given the two primary political parties, different forms of support for labor legislation, and each state governor belonging to a political party, we hypothesized that states with democratic governors will have higher average wages in 1997 and 2015. Whereas states with republican governors will have lower average wages during those years. While the governor is not the only elected official that influences state-level changes in compensation mandates, they are the most visible figure and have the potential to spearhead legislative changes. Additionally, in their role as governor, they have the ability to veto new legislation as well as proposed amendments that come from the state legislature.
This study aims to examine the inequality in more depth by focusing on the average wages of two common lodging industry positions throughout the United States. The researchers want to establish if relationships exist between these lodging industry employees’ wages and the state governors’ political party affiliations and the cost of living in that state. In addition, the researchers aim to examine the federal minimum wage versus the average wages of these lodging positions.
Hospitality Wages: Are they affected by state governors?
In 2015, the average annual wage for a hotel, motel, or resort desk clerk (“hotel clerk”) was $22,610 and a maid or housekeeping cleaner (“housekeeper”) was $22,990 (U.S. Bureau of Labor Statistics, 2015). With many employees working at, or slightly above, the minimum wage, employees could potentially benefit from an increase in the federal and state minimum wage values. From 1997 to 2012, the average wage of housekeepers nationwide had been slightly below hotel clerks. However, since 2013 the housekeeper position has a slightly higher wage ($0.06 per hour in 2013, $0.15 per hour in 2014, and $0.15 per hour in 2015).
ABOUT THE RESEARCH METHOD & DATA:
The U.S. Bureau of Labor Statistics (BLS) is the primary federal agency in charge of measuring labor market activity. For purposes of this research, the researchers used the Occupational Employment Statistics collected by the BLS. At the time of analysis, data were available on a state-by-state basis from 1997 to 2015. The researchers developed a list of all gubernatorial party affiliations, average wages of hotel, motel, and resort desk clerks, as well as average wages of maids and housekeeping cleaners for every state in 1997 and 2015. The researchers then compared the wages of each occupation by using a t-test to determine if there was a significantly different mean for each group. The researchers used regression analysis to examine data in 2014. In the regression analysis, the researchers included political party, cost of living, and percent of employees covered by a union in each state.
In 1997, there were 17 states with a democratic governor, 32 states with a republican governor, and 1 state with an independent governor. Despite many states under a governor from a different party than in 1997, there were still 17 states with a democratic governor, 32 states with a republican governor, and 1 state with an independent governor in 2015. The researchers did not use Maine in 1997 or Alaska in 2015 because the states had an independent governor.
Table 1: One-tailed t-test of Differences in Mean Between States with a Republican Governor and a Democratic Governor (n = 49-50*)
|Hotel Clerk 1997||$7.02 (0.68)||$7.58 (1.31)||1.98||.027|
|Hotel Clerk 2015||$10.33 (1.28)||$11.61 (2.08)||2.67||.005|
|Housekeeper 1997||$6.91 (0.81)||$7.34 (1.03)||1.82||.037|
|Housekeeper 2015||$10.18 (1.23)||$11.70 (1.89)||3.41||.001|
|*Maine excluded in 1997 and Alaska excluded in 2015 due to having an independent governor.|
For hotel clerks, the t-test was significant in both 1997 and 2015. This significance indicates the average wage for hotel clerks in states with a democratic governor in both years was significantly higher than the average wage of hotel clerks in states with a republican governor. On average, a hotel clerk would make an additional $0.56 per hour in 1997 and $1.28 per hour in 2015 if they worked in a state with a democratic governor. For housekeepers, the t-test was also significant in both years. Again, this indicates the employees made more, on average, when they worked in a state with a democratic governor. On average, a housekeeper made an additional $0.43 per hour in 1997 and $1.52 per hour in 2015 if they worked in a state with a democratic governor.
Considering Cost of Living, Unions, and Federal Minimum Wage
The differences between states with a republican and a democratic governor were significant; however, the findings are not definitive. A regression analysis including the political party of the governor and the cost of living index (COLI) for the state resulted in a significant regression model for hotel desk clerks in 2015 (F(2,46) = 4.45, p = .017). The political affiliation of the governor remained significant (t = 2.44, p = .019), but the COLI was insignificant (t = -1.28, p = .206). The outcome was similar for housekeepers (F(2,46) = 7.76, p < .001), with political affiliation of governor being significant (t = 3.13, p = .03) and the COLI being insignificant (t = -1.82, p = .075).
The political affiliation of a governor alone may not be a good predictor of the average wage of hotel clerks or housekeepers. However, there is a clear difference when examining the differences in wages post-hoc, making the political party of a governor worthwhile in discussion. In particular, when examining the political affiliations from 1997 to 2015, the average wages of employees in states with democratic governors are typically higher, but at the same time they also tend to have a higher COLI.
Federal Minimum Wage Influence in the Lodging Industry
In order to examine how the federal minimum wage influences changes in average wages, the researchers compiled a list of nationwide average wages from 1997 to 2015 of hotel clerks and housekeepers. In addition, the federal minimum wage in May of each year was included as the average wages form the U.S. Bureau of Labor Statistics comes from May numbers.
The federal minimum wage increased after May in 1997, 2007, 2008, and 2009. Each of the increases does not appear to have a direct impact on the average wages of hotel clerks or housekeepers nationwide. Figure 1 includes a graph showing a steady increase in the average wage of both positions. In years where there was an increase in federal minimum wage, the average wages of both positions appeared unaffected. In addition, the disparity between the average wage of all office and administrative support positions, the overarching category the Department of Labor places both positions in, seems to be growing over time. In other words, wages of these two lodging positions are growing at a slower rate than similar positions.
Figure 2 includes the difference between federal minimum wage and those of housekeepers and hotel clerks. It appears that the federal minimum wage influence decreases the gap between minimum wage and the average wage while the average wage continues increasing seemingly unaffected.
Theoretical underpinnings used to illustrate politics in research commonly stem from non-political areas, such as economics (Shavell, 1979; Besley & Case, 2003; Downs, 1957). For example, researchers commonly cite the Principal Agent theory as having applicability to not just economics, but also politics (Miller, 2005). Applied to this research, a state’s governor is acting as an agent on behalf of their constituents (the principal). This idea is somewhat counter-intuitive because an agent, traditionally, works for a principal, yet the governor of a state has significant influence and power over his/her constituency. This relationship presents a challenge because the agent is motivated to act in his or her own best interests to ensure eventual reelection.
A cursory review of Democratic and Republican Parties in the U.S. shows the Democratic Party has a stronger tendency to support workers’ rights compared to the Republican Party. In addition, each party’s platform supports this observation (Democrats, 2012; GOP, 2012). Although both parties show their support for the workforce, the policies they support vary significantly. The Republican Party traditionally focuses more on the development of the economy and the industries that support the restoration of lost jobs (GOP, 2012). The Democratic Party, besides discussing the economy, expressed their point of view by taking a side that favors the rights of workers and not management/ownership (Democrats, 2012). Wilhite and Theilmann (1987) examined the influence of political action committees on legislation and found that democratic members tended to support labor legislation and received more funding from labor unions.
The focus on labor has been a winning key for the Democratic Party in elections, with support from a large number of Americans with income less than $15,000. Fay (n.d.) found the Democratic Party had stronger support from individuals with income of $50,000 or less, and the Republican Party had strong support from individuals with income higher than $50,000.
While the hospitality industry includes a variety of sectors, one sector in particular, the lodging industry is the focus of this research. The lodging industry is continuing to rebound after the Global Financial Crisis (GFC) and common metrics of success are continuing to spur optimism throughout the United States market. Both academic and trade publications are highlighting the fact that operational managers are still concerned about one very critical challenge that continues to plague the industry – effective strategies to manage employees, and more specifically, strategies related to the hourly compensation rates for non-tipped lodging industry employees.
The academic study of politicians at the state the federal level is not a new trend, although the connection to the hospitality industry, and more specifically those issues related to compensation, is limited at best. While the merging of hospitality and political science is an infrequently made connection in the academy, unlike economics and political science, it can be a useful partnership for hospitality industry and academic practitioners. Although some research (Erikson, Wright, McIver, 1989) has shown that an elected state legislature is not good predictor of a state’s public policy, no empirical research exists looking at this fact in hospitality wages.
Research (Ghiselli, La Lopa, & Bai, 2001) has shown that in the hospitality industry, the salary and benefits package is one of the most prevalent reasons employees leave an organization. In previous work, Pizam and Ellis (1999) found a company’s approach to compensating (in terms of monetary and non-monetary benefits) their employees has an impact on turnover intention.
A common theory is that as minimum wage increases, low paid workers tend to see an increase in wages. However, previous researchers have shown it may not affect average wage, but instead decrease the wage inequality for the lower end of the wage distribution (Machin, Manning, & Rahman, 2013) or compress the possible starting wages (Katz & Krueger, 1992). WageWatch, Inc. addressed these issues in their executive summary as well. WageWatch, Inc. indicated an increase in starting wages would cause supervisors to make the same or slightly more than the employees they supervise, which would lead to a need for increased wages of supervisors (WageWatch Inc, 2014).
Pay Differences Between States
There are several reasons why difference in pay based on state may exist, although further research is warranted to provide a more comprehensive analysis of how these differences may affect the overall results. For example, there are dramatic differences in cultures, right to work legislation, cost of living, and dominant industries based in states or regions. In addition, state legislators are the ones who typically present, debate, and vote on new laws that could directly or indirectly influence wages in each state. Each of these on their own, or a combination of multiple dimensions, could be impact this results.
This research conducted an analysis on the average hourly wage of two common lodging industry positions; hotel, motel, and resort desk clerks, as well as maids and housekeeping cleaners. The results highlight that, on average, the hourly wage for these positions, in 1997 and 2015, were higher in states with a democratic governor when compared to states with a republican governor. While the debate on minimum wage’s impact on the wages of non-minimum wage workers is ongoing, this research indicates federal minimum wage increases have little influence on the increases in average wages of these two positions. There are implications of this analysis for hospitality industry practitioners, labor union representatives who are involved in the collective bargaining process, and members of the academy who are responsible for creation or teaching of policy related to compensation, benefits, and overall strategic human resources management.
Nicholas J. Thomas, Ph.D. is an Assistant Professor and Director of the Center for Hospitality Research and Education in the School of Hospitality Leadership located within DePaul University’s Driehaus College of Business in Chicago, Illinois. He teaches undergraduate and graduate level courses related to customer service, human resources, and technology in the hospitality industry. He has frequently conducted industry-focused workshops throughout the United States and Asia. Prior to joining higher education, Dr. Thomas occupied leadership positions in some of the world’s most successful luxury hospitality organizations, with the majority of his career focused on human resources and lodging operations.
Eric A. Brown, Ph.D. is an Assistant Professor in the Apparel, Events, and Hospitality Management department at Iowa State University. He holds a B.B.A. from the University of Iowa in Management & Organization, a M.S. in Food Service & Lodging from Iowa State University, and a Ph.D. in Hospitality Management from Iowa State University. Prior to entering academia, Dr. Brown held various positions in the lodging industry. At Iowa State University, he teaches and researches in the areas of leadership, management, and human resources.
Besley, T., & Case, A. (2003). Political institutions and policy choices: evidence from the United States. Journal of Economic Literature, 41(1), 7-73.
Cooper, D., & Hall, D. (2013). Raising the federal minimum wage to $10.10 would give working families, and the overall economy, a much-needed boost. Economic Policy Institute, March, 2013.
Democrats (2012). 2012 Democratic national platform: Moving America forward. Retrieved from http://www.democrats.org/democratic-national-platform
Downs, A. (1957). An economic theory of political action in a democracy. The Journal of Political Economy, 135-150.
Erikson, R. S., Wright Jr, G. C., & McIver, J. P. (1989). Political parties, public opinion, and state policy in the United States. The American Political Science Review, 729-750.
Fay, B. (n.d.). Economic demographics of democrats. America’s Debt Help Organization. Retrieved from http://www.debt.org/faqs/americans-in-debt/economic-demographics-democrats/
Fowler, L. L. (1982). How interest groups select issues for rating voting records of members of the U.S. Congress. Legislative Studies Quarterly, 7, 401-413
Ghiselli, R., La Lopa, J., & Bai, B. (2001). Job satisfaction, life satisfaction, and turnover intent of food service managers. Cornell Hotel and Restaurant Administration Quarterly, 42(2), 28-37.
GOP (2012). 2012 Republican platform: We believe in America. Retrieved from http://www.gop.com/2012-republican-platform_home/
Katz, L.F., & Krueger, A.B. (1992). The effect of the minimum wage on the fast food industry. Industrial and Labor Relations Review, 46(1), 6-21.
Machin, S., Manning, A., & Rahman, L. (2003). Where the minimum wage bites hard: Introduction of minimum wage to a low wage sector. Journal of the European Economic Association, 1(1), 154-180.
Miller, G. J. (2005). The political evolution of principal-agent models. Annual Review of Political Science, 8, 203-225.
Pizam, A., & Ellis, T. (1999). Customer satisfaction and its measurement in hospitality enterprises. International Journal of Contemporary Hospitality Management, 11(7), 1-18.
Shavell, S. (1979). Risk sharing and incentives in the principal and agent relationship. Bell Journal of Economics, 10(1), 55-73.
The White House (2014). Executive Order — Minimum Wage for Contractors. Retrieved from http://www.whitehouse.gov/the-press-office/2014/02/12/executive-order-minimum-wage-contractors
U.S. Bureau of Labor Statistics (2015). May 2015 National Occupational Employment and Wage Estimates. Retrieved from http://www.bls.gov/oes/current/oes_nat.htm
Wage and Hour Division (2016). Minimum wage laws in the states – January 1, 2016. Retrieved from http://www.dol.gov/whd/minwage/america.htm
WageWatch Inc. (2014). Executive summary. Presented at the AH&LA Board of Directors Meeting and Special Meeting of Members, Washington, DC, March 2014. Retrieved from www.ahla.com/uploadedFiles/BoardBookMarch2014.pdf
Wilhite, A., & Theilmann, J. (1987). Labor PAC contributions and labor legislation: A simultaneous logit approach. Public Choice, 53(3), 267-276.
By Ken Wilson and Liya Ma
The hospitality industry has blurred national borders and transcended cultural barriers ever since transportation methods became available and affordable to consumers. In recent years, as global wealth accumulates, regulations loosen and portfolio diversification becomes more sophisticated, investors from around the world are also increasingly interested in U.S. hospitality as an asset class.
In 2015, total U.S. hotel transactions soared above $43 billion, largely due to full-service hotel sales in key gateway markets such as New York and San Francisco. During the first three quarters of 2015, cross-border hotel investments in the U.S. amounted to $6.4 billion, representing more than 20% of total deal volume, a 165% increase in foreign investment over the prior year period.
Cross Border Hotel Acquisitions YTD September 2015
In October 2014, China’s Anbang Insurance Group caught the public’s attention with its purchase of the iconic Waldorf Astoria in New York for close to $2 billion, and continues to be a highly active player in the market with its pending purchase of Strategic Hotels & Resorts from Blackstone and unexpected participation in the bidding war with Marriott for Starwood Hotels & Resorts in March 2016. Anbang is not alone; over the past 18 months, international buyers have made sizable hotel purchases in major markets such as New York City, San Francisco, and Los Angeles, among others.
Major Hotel Transactions by Foreign Buyers (October 2014 – March 2016)
|Hotel||Purchaser||Purchase Price (millions)||Number of Rooms||Price per key (thousands)||Transaction Date|
|Strategic Hotels & Resorts||Anbang Insurance Group (China)||$6,500(1)||7,532||NA||Pending|
|Sheraton Tribeca New York||Ascott Residence Trust (Singapore)||$158||369||$428||Mar-16|
|The London New York||Abu Dhabi Investment Authority (UAE)||$382||563||$680||Nov-15|
|Fairmont San Francisco||Mirae Global Investments (South Korea)||$450||592||$760||Nov-15|
|Element Times Square||Ascott Residence Trust (Singapore)||$163||411||$398||Jul-15|
|New York Palace||Lotte Hotel (South Korea)||$805||909||$886||May-15|
|Edition New York||Abu Dhabi Investment Authority (UAE)||$343||273||$1,256||Apr-15|
|Baccarat Hotel New York||Sunshine Insurance Group (China)||$230||114||$2,018||Feb-15|
|The Manhattan at Times Square||Al Faisal Holdings (Qatar)||$535||689||$776||Dec-14|
|Marriott Los Angeles Airport||Sichuan Xinglida Group (China)||$160||487||$329||Dec-14|
|Hampton Inn United Nations||KFH Capital Investment Co. (Kuwait)||$72||148||$486||Nov-14|
|Holiday Inn Express Times Square South||KFH Capital Investment Co. (Kuwait)||$63||135||$469||Nov-14|
|Waldorf Astoria New York||Anbang Insurance Group (China)||$1,950||1,413||$1,380||Oct-14|
Purchase price includes corporate management/asset management services.
Source: News articles and press releases.
According to Real Capital Analytics, foreign investors occupy four of the top ten active buyer spots over the past 12 months, a trend that most agree will continue.
Most Active Buyers of U.S. Hotels (Past 12 Months)
|Buyer||Country||Volume (billions)||Number of Properties|
|2. Anbang Insurance Group||China||$6.5||16|
|3. Centerbridge Partners||US||$2.8||22|
|4. Marriott International||US||$1.1||7|
|6. Carey Watermark 2||US||$0.8||5|
|7. Lotte Group||Korea||$0.8||1|
|8. Starwood Capital Group||US||$0.7||65|
|9. Mirae Asset Financial||Korea||$0.7||2|
|10.Carey Watermark 1||US||$0.6||7|
Source: Real Capital Analytics; March 2015 to March 2016.
Characteristics of Foreign Buyers
What makes foreign investment groups different from domestic investors? While each group and each hotel investment is unique, commonalities often shared by overseas investors include:
Long-term investment approach:
Foreign groups who invest internationally tend to do so for longer anticipated holding periods compared to domestic groups. Sovereign Wealth Funds, in particular, are traditionally long-term investors funded by state-owned sources of capital. Similarly, when Anbang Insurance Group bought the Waldorf Astoria, they signed a 100-year management agreement with Hilton International, signaling the buyer’s desire to build a long-term partnership with U.S. expertise.
As illustrated in the Major Hotel Transactions chart, foreign investors prefer core U.S. cities which are considered safe havens, with a particular emphasis on New York City, San Francisco and Los Angeles. However, as prices in these cities continue to rise and available deals are more difficult to find, other getaway cities with direct flights from major world cities and high tourism are gaining traction. For example, hotels in Miami, Orlando, Dallas, Houston, Atlanta, Chicago, and Philadelphia are now on foreign funds’ radar, according to real estate advisory firm Eisner Amper. Foreign investors, particularly from China, recognize the sizable opportunity to ride the wave of increasing tourism to the U.S., which in the case of Chinese tourists are anticipated to double by 2020. This growth in travel, coupled with the growing presence of U.S. hotel brands across the globe, enhances the attractiveness of investing in properties in the states.
Foreign investors prefer luxury hotel investments for a number of reasons: Luxury brands tend to be more established and generally make safer investments compared to newer, lesser-known brands; luxury hotels tend to have higher property values, enabling international funds with large amounts of available capital to invest more efficiently; and, wealthy foreign investors who are used to the luxury hotel experience at home and abroad also prefer to be associated with luxury names in their investment portfolio. Nevertheless, when select-service hotels such as the Hampton Inn United Nations and Holiday Inn Express Times Square South in New York City went on the market, foreign groups were as active as their U.S. counterparts in the bidding process, and KFH Capital out of Kuwait came out the winner.
Why Do Foreign Firms Invest in U.S. Real Estate?
Cross-border investments in U.S. real estate totaled over $78 billion in 2015, compared to less than $5 billion in 2009, according to Real Capital Analytics. Foreign buying in 2015 accounted for 16% of total investment in U.S. real estate, about double the 8% average in the ten years through 2012.
What makes investors want to put out large amounts of capital into buildings on the other side of the world, where they must navigate through operational, legal, and cultural challenges? Factors that allure International investors into buying real estate in the U.S. include the following:
International funds invest abroad in order to diversify their portfolios and hedge currency, political, and regional risk. Real estate is an attractive form of investment given its tangible nature, inflation-hedging track record, and easily-quantifiable valuation. Hotels have become especially appealing to these international investors given their cultural relevance and often historical significance.
Sovereign Wealth Funds in particular are founded with the sole purpose of diversification. For example, the government of Qatar created the Qatar Investment Authority in 2005 in order to manage its oil and natural gas surpluses and protect its reserves from energy-related risk. Even with depressed oil prices since mid-2014, Middle Eastern investors have continued to spend with an outbound focus.
Purchasing hotels in international markets allows investment firms to gain broader recognition, customer base, and market intelligence. For example, Anbang Insurance Group, a relatively unknown player on the global stage, gained worldwide name recognition after its acquisition of the Waldorf Astoria New York, which earned them extensive international press coverage and an award for “Single Asset Transaction of the Year 2015” at the America’s Lodging Investment Summit, an unprecedented acknowledgement of a Chinese insurance company within the lodging industry.
United States as a Safe Haven
In short, foreign capital favors developed economies. North American hotels were the recipient of capital inflows totaling $7 billion in 2015, second only to European hotels with capital inflows of $12 billion, according to Jones Lang LaSalle. The U.S. ranks among top destinations for foreign investment as it remains one of the largest, most liquid, and most stable markets for investing.
As the graph below shows, the U.S. economy has experienced steady growth in recent years at a pace of 2.2% in 2013, 2.4% in 2014 and 2.5% in 2015, whereas growth in major economies such as China, United Arab Emirates, Brazil and Russia have been negatively impacted by difficult global economic conditions.
GDP Growth of U.S. against Major Countries/Regions
The U.S. hospitality sector’s strong fundamentals and favorable demand/supply balance continues to draw international investment into the US now and into the foreseeable future. According to the Chairman of Singapore’s Ascott Residence Trust, whose firm recently purchased two hotels in New York City as their first U.S. acquisitions, “with future demand growth expected to continue to outpace supply, we are confident that this acquisition will further enhance Ascott REIT’s portfolio and Unitholders’ returns.” Ascott targets to increase their U.S. investments up to 20% of their total portfolio by 2017, which represents approximately $570 million of additional acquisitions.
The Multiplier Effect of Real Estate Value Appreciation
As long as real estate maintains value, investors benefit from capital preservation and recurring cash flow distribution. Investors further benefit when real estate holdings appreciate in value. Average growth rate for U.S. hotel values was 7.2% in 2015, and is expected to be 5% in 2016 and 6% over the next 4 years, according to the HVS/STR Hotel Valuation Index.
On top of the multiple layers of benefits, as the global reserve currency, the U.S. Dollar is a safe bet especially for emerging market investors whose native currency may be at risk of depreciating in value. For example, the recent rise and fall of China’s currency is the result of Chinese investors eagerly trying to get their money out of a country they believe is slowing down dramatically.
RMB per 1 USD
The exchange rate of Chinese renminbi (RMB) per U.S. Dollar (USD) rose from 6.05 on January 4th 2014, to 6.54 as of January 4th 2016, representing an appreciation of 8% in the USD’s value against the RMB. Suppose a Chinese investor acquires a U.S. hotel for $200 million in cash in the beginning of 2014. It must first convert its RMB into the Dollar at the 6.05 exchange rate. Applying HVS/STR’s 5% average annual value appreciation, the hotel will be worth $221 million in two years. Better yet, adding the effect of currency appreciation, the Chinese investor’s U.S. Dollar-denominated investment will be worth $238 million in two years. The difference between $238 million and $221 million ($18 million in two years) illustrates real estate’s ability to serve as a currency hedge and to increase value through a multiplier effect.
Hypothetical Example of Real Estate Value Appreciation
|Annual Value Appreciation||5.0%||5.0%|
|Value with Annual Value Appreciation||$210M||$221M|
|Currency Appreciation (cumulative)||5.3%||8.0%|
|Value with Annual Value and Currency Appreciation||$221M||$238M|
Note: This simplified illustration does not reflect cash flow distribution from hotel operations nor factor in time value of money.
More Favorable Regulations
In order to encourage foreign investment, in December 2015, President Obama signed into law a measure easing a 35-year-old tax on foreign investment in U.S. real estate. Under the previous rules of the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), foreign majority sellers had to pay 10% of gross proceeds from all sales of U.S. real estate. Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate, believes the change to be “a huge deal” and will undoubtedly increase the amount of foreign investment in U.S. property.
The U.S. isn’t the only country that is loosening restrictions on foreign investment. The Chinese government, which historically forbade insurance companies from investing abroad, has gradually eased its restrictions and now allows companies to invest up to 15% of their assets offshore. In May of 2014, the Chinese government further lifted a $100 million approval threshold to $1 billion, giving Chinese firms the freedom of investing up to $1 billion abroad without the need for government approval. As a result, according to the Rhodium Group, mainland Chinese investors pumped over $5 billion into U.S. real estate and hotels in 2015, an increase of more than 65% from 2014, a trend that is likely to continue.
What Services Do Foreign Investors Need?
Foreign investors face a number of challenges in the U.S. as they look to purchase and work with hotel investments with operational complexities, especially if they do not have existing local presence or previous hospitality experience. Therefore, it is critical for foreign investors to work with locally-based experts both before and after an acquisition. The following are some of the most important aspects for foreign investors to consider:
Timely and thorough due diligence:
Foreign investors’ deal teams need to report back to their headquarters abroad for approval, and yet must operate within the same time constraint as domestic competitors in the bidding process. To them, time is of the essence, but an overseas investor cannot acquire full market knowledge overnight, and a rushed due diligence process can lead to hidden problems down the road.
In addition, compared to domestic bidders, a foreign buyer may be perceived to have greater uncertainly of closing a deal, or have more pressure in putting out their capital, thus is more likely to be pressured into paying a higher premium.
Therefore, having local representation by experts who are experienced in working with brokers, brands, lenders and third party consultants and who can outline the risks/upside will be essential for foreign firms in the due diligence phase to ensure that they pay a fair price and are able to close the deal.
Negotiate favorable contract terms:
After winning a deal, investors cannot simply leave the contract negotiation to the lawyers. A properly drafted Purchase and Sale Agreement protects the owner’s rights and ensures a smooth transition. As owners and operators have inherently different objectives, the Hotel Management Agreement is crucial in aligning interests and paving the way for a harmonious relationship.
Execution of investment strategy:
Foreign investors need local experts to coordinate and support the ownership group in the many activities that typically follow an acquisition – such as renovation/repositioning, redevelopment, implementation of operational initiatives, and legal/tax advice.
Ongoing monitoring of the operator:
Hotel operators usually get paid a management fee as a percentage of revenue, as opposed to bottom line profit, which gets distributed to the owners. As such, asset managers exist to represent owners’ interest and oversee operating teams, by constantly challenging them to increase revenue, reduce cost, set appropriate annual budgets, and perform capital projects that add short and long term value to the property. As it relates to foreign investors, asset managers can be critical in navigating the litany of likely new issues that arise (labor, legal, brand relations, etc.).
While Anbang’s attempt to purchase Starwood Hotels was not consummated, it demonstrated the enormous appetite for U.S. hospitality assets by global investors. As competition intensifies and price tags increase, foreign investors have to expand their playing field into additional markets and beyond the luxury hotel segment. A new stage of foreign hotel investing may be ahead of us, and whether the next overseas investor becomes our owner, borrower, partner or client, we can all be thinking about ways to reciprocate learning, foster trust, understand their business culture, and mutually benefit from this unique type of relationship.
Ken Wilson is co-founder and Managing Director of CHMWarnick, the leading provider of hotel asset management and investment advisory services. With more than 30 years hospitality industry experience, Ken has provided strategic vision for the company, and has served as a trusted hotel advisor to a wide-range of ownership entities including private equity, public agencies, pension funds, lending institutions, Fortune 100 companies, insurance companies and sovereign wealth funds. As a founder of the original third-party hotel asset management company, Ken has guided a team of hospitality professionals to provide unparalleled services and strategies proven to optimize financial performance and asset value throughout every stage of ownership. Today, CHMWarnick asset manages a client portfolio of more than 50 hotels, with 23,000 rooms, collectively valued at $10 billion. Ken has a successful track record in raising and negotiating equity and debt financing, negotiation of purchase and sale agreements in support of asset acquisition and disposition activity, advising on investment strategies, and hotel management/franchise company selection and contract negotiation. Prior to founding CHMWarnick, Ken was the CEO of Capital Hotel Management, and led the hospitality practice for two international consulting firms. Ken earned a Bachelor of Science in Hotel Administration from the University of New Hampshire, and is an active member of the Hospitality Asset Managers Association (HAMA), The Counselors of Real Estate (CRE) and Marriott International Ownership Advisory Board. For more information about Ken and CHMWarnick, visit www.chmwarnick.com or follow us on LinkedIn.
Liya Ma is a Manager at CHMWarnick, the leading provider of hospitality asset management and investment advisory services. Liya brings 6 years of hospitality real estate finance and investment experience, with expertise in hotel acquisition, disposition, refinancing and corporate strategy. She is responsible for supporting the value creation efforts of CHMWarnick’s asset management portfolio, including more than 50 hotels collectively valued at $10 billion. Prior to joining CHMWarnick she worked for Club Quarters and Magna Hospitality, as well as the lodging/consumer divisions of several international investment banks. Liya has a Bachelor of Science degree in Hotel Administration from Cornell University, a Master’s degree in Business Administration from Yale University and is fluent in Mandarin Chinese. For more information about Liya and CHMWarnick, visit www.chmwarnick.com or follow us on LinkedIn.
By Amir Shani
There is a growing recognition worldwide that the “war on drugs”—the sets of domestic and international policies that are intended to fight the illegal drug trade and discourage the production and consumption of psychoactive drugs—has been an utter failure. The Global Commission on Drug Policy (a panel of 22 world leaders including a former Secretary-General of the United Nations, a former US Secretary of State, and former presidents of Brazil, Columbia, Chile, Poland, Portugal, and Mexico) issued a detailed report (2014) concluding that the war on drugs has resulted in devastating consequences for both individuals and communities and that it should be “replaced by more humane and effective policies shaped by scientific evidence, public health principles and human rights standards” (p. 6). Specifically, the commission calls on governments to “stop criminalizing people for drug use and possession—and stop imposing ‘compulsory treatment’ on people whose only offense is drug use or possession” (p. 8).
But change is in the air. Today, most Americans support full legalization of marijuana (Gallup, 2015), and so far 23 US states have legalized cannabis in some form (mostly for medical purposes), with four states and the District of Columbia also passing legalization of marijuana for recreational use. Other forms of legalization, decriminalization, and less restrictive policy regimes have also been implemented in other countries with impressive results. Prominent European countries have chosen to reform their regulations concerning illegal drugs, abolishing custodial sanctions for the possession of cannabis or for illicit substances in general. Despite pessimistic warnings, this liberalization concerning enforcement has not resulted in an increasing prevalence of marijuana consumption or any other significant negative outcome (Raschzok, 2015). Focusing on the Netherlands, MacCoun (2011) found that the coffeeshop system does not appear to encourage escalation to the use of hard or dangerous illicit drugs (e.g., cocaine and amphetamines), thus refuting the “gateway drug theory.” Studies in the US have also consistently demonstrated that cannabis consumption is not associated with an increased probability of getting into a car accident (e.g., Compton & Berning, 2015).
Despite such reassuring evidence, alarmism about the use of illicit drugs continues in many circles, including the workplace. Tourism scholars and researchers have not delayed to jump on the alarmist bandwagon, enthusiastically endorsing the “war on drugs” rationale and rhetoric. For example, according to Kitterlin et al. (2015), in a recent study published in the International Journal of Contemporary Hospitality Management, employee substance use is a matter of serious concern for the hospitality workplace. Similarly, in two editorials published in the International Journal of Hospitality Management, Pizam (2010, 2012) expressed his deep concern regarding “the unhealthy lifestyle of hospitality employees” (2012, p. 631), as manifested in excessive alcohol consumption and in the use of illicit recreational drugs. Indeed, surveys conducted in Australia and the USA indicate that hospitality employees, particularly those in the food service sector, have an exceptionally high rate of substance use in comparison with both the general population and other occupational groups (ASCC, 2007; Frone, 2013; SAMHSA, 2009). The studies of Belhassen (2012) and Belhassen and Shani (2012) revealed similar patterns in the resort city of Eilat, Israel, indicating substantial consumption of illicit drugs and alcohol among hotel workers.
Prevalent substance use among hospitality employees appears, therefore, to be the norm, but should this be a cause of concern for employers and the industry as a whole? This commentary illustrates the main shortcomings of current references in the hospitality literature to substance use among employees, calling for a cautious and skeptical approach on the part of hospitality scholars and practitioners in the face of a general alarmism regarding the impact of substance use on the workplace.
A clear and present danger?
Kitterlin et al. (2015) have no hesitation in stating that something must be done “to prevent or curb substance abuse” among employees in the hospitality sector (p. 811). In a similar alarmist tone, Pizam (2010) warns that the “dangerous rate of alcohol consumption” of hospitality employees “can lead not only to severe personal health problems including death, but can also cause serious economic harm to the entire hospitality industry” (p. 547). From the point of view of the employer, the hazards of substance use by their employees are manifested as an increased likelihood of workplace accidents and consequent compensation claims, lower productivity, increased absenteeism and a greater staff turnover (Belhassen & Shani, 2012). Consequently, it has been enthusiastically recommended that employers and managers apply a series of precautionary actions to mitigate the “problem,” such as cultivating an organizational culture that bans substance use, introducing employee assistance programs, conducting random workplace drug testing, and adhering to hiring and termination policies that ensure a “drug-free workplace” (Kitterlin et al., 2015). In this regard, although objecting to strong policy enforcement, Zhu et al. (2010) argue that alcohol consumption and illicit substance use among foodservice workers has detrimental impacts on the organization and therefore must be prevented or minimized through the implementation of health promotion programs.
Excessive alarm about the threat of substance use
Despite the decisive conclusions of the above academic studies on substance use among hospitality employees and its consequent implications, such studies nevertheless suffer from some severe drawbacks. In particular, these works often cite disputed figures from questionable sources. For example, Kitterlin et al. (2015) cite “evidence” that substance-abusing employees are 3.6 times more likely to be involved in work-related accidents or injuries, and Belhassen and Shani added that they are four times more likely to file compensation claims. These figures are quoted repeatedly on numerous occasions, although they are based on the so-called “Firestone Study”, which in fact never existed (Morgan, 1987). The “study” is basically an address given by an executive at the Firestone Tire and Rubber Company during a luncheon, based on data that according to White (2003, p. 1896) were “produced out of thin air.” In addition, as noted by Henriksson (1991), other statistics that are often utilized to support alarmist arguments are derived from survey or interview data gathered mainly from heavy drug users, thus skewing the gravity of the problem.
It would thus appear that the consequences of employee illicit drug use in the workplace, particularly with regard to employee productivity, are by no means crisp and clear. In a study conducted at six US worksites, French et al. (1998) found “insignificant relationships (both direct and indirect) between drug use and both wages and absenteeism” (p. 334). Using US national data sets, Foster and Vaughan (2005) found that “abuse-based absenteeism is, at best, an incidental cost to business and is insufficient to justify significant…investments of scarce human resource dollars to achieve an abuse and dependence free workplace” (p. 27). Although some studies did detect a difference in absenteeism rate between drug users and non-users, a report by the US National Academy of Sciences (NAS) noted that “the evidence does not necessarily show that use causes high absenteeism. It is possible that other variables can account for the relationship” (Normand et al., 1994, p. 158). Counterintuitively, in yet another study it was found that nonchronic illicit drug use is not significantly associated with employment and labor force participation (French et al., 2001). More broadly, a review of the scientific literature led Zimmer and Morgan (1997) to conclude that there is nothing in the relevant data to suggest that marijuana (by far the most popular illicit drug) decreases people’s motivation to work, negatively affects their employability, or diminishes their capacity to earn a salary.
Similar results have been obtained regarding other employee performance measures. As stated by Frone (2004), “[d]espite the widely held belief that the use of alcohol and other psychoactive drugs…among employees may negatively affect employee productivity, past review of the literature suggest that this relation is neither consistent nor robust” (p. 129). Regarding workplace safety, the above-mentioned NAS report (Normand et al., 1994) could find no clear evidence that drug use meaningfully contributes to the overall rate of industrial accidents. It was concluded that, similarly to moderate off-duty alcohol consumption, moderate illicit drug intake by employees during off-duty hours is not likely to compromise workplace safety. Frone (2004) noted that since there is no credible scientific evidence to support the assertions that the mere consumption of an illicit substance leads to workplace injuries and accidents, alarmist claims to the contrary should be viewed as unsubstantiated exaggerations.
These findings point to the futility of random drug tests, which mainly identify employees who use illicit drugs and alcohol on the weekend or during vacations, rather than while at work. In other words, a positive drug test indicates neither intoxication nor impairment. It should be mentioned that not only have drug tests proved to be of limited practicality, since they do not measure actual impairment (Normand et al., 1994), but they have also recently been shown to have adverse effect on employee morale, as drug testing is perceived to be a degrading and demeaning act and an invasion of workers’ privacy (Char, 2014). Indeed, in an earlier study on US high-tech companies, Shepard and Clifton (1998) revealed the potential damaging effects of pre-employment and random drug testing, as both were associated with lower productivity. It was posited that the drug testing generates a negative work environment that deters competent applicants and creates an organizational culture of distrust and disrespect. More recently, Mehay and Webb (2007) found negative net benefits of the US military’s “zero tolerance” drug testing policy and consequently advocated the abandonment of this policy in favor of counselling, rehabilitation and educational programs.
Substance use alarmism debunked
It is thus evident that the above alarmist observations and interpretations regarding employees’ substance use in the hospitality industry and its consequences are not consistent with the existing body of knowledge. Most fundamentally, ‘alarmist’ studies have failed to adequately distinguish between substance use and substance abuse. While the former is defined as “taking a drug in such a manner that sought-for effects are attained with minimal hazard”, the latter is regarded as “taking a drug to such an extent that it greatly increases the danger or impairs the ability of the individual to function adequately or cope with the circumstances” (Nicholson et al., 2002). As noted by Nicholson et al. (2013), it has been consistently demonstrated that among the users of illicit drugs, the vast majority are occasional or moderate users (not abusers), being typically normative, well-adjusted and productive members of society. These authors therefore advocate focusing only on the prevention and treatment of drug abuse rather than implementing the current prevalent policy of a “war on drugs,” which targets illicit substance users whoever and wherever they are. In this regard, there seems to be no rational justification for tolerating employees’ moderate off-duty alcohol consumption, but applying harsher standards for the similar use of marijuana, which is the drug most often used (Cook, 2006). Leslie Iversen, Professor of Pharmacology (University of Oxford), sums up the relevant scientific literature on the effects of marijuana by stating that “[o]verall, by comparison with other drugs used mainly for ‘recreational’ purposes, cannabis could be rated to be a relatively safe drug” (2005, p. 69). The in-depth review of Fox et al. (2013) demonstrates that alcohol is clearly a more hazardous drug than marijuana, in terms of effects on driving ability, acute toxicity, health consequences of heavy consumption, and occurrence of addiction. Considering the issue from public policy perspective in Canada, Thomas and David (2009) found that “the health costs per user of tobacco and alcohol are much higher than for cannabis” (p. 13).
Another related issue is the failure of commentators in the hospitality literature to address the context of substance use among hospitality employees rather than the more frequently considered overall drug use. As is argued by Frone (2004), differentiating between off-the-job and on-the-job substance use is essential if we are to accurately assess the relation between illicit drug use and job performance, as on-the-job use is “more predictive of performance than measures of overall (i.e. off-the-job) substance use” (p. 136). He adds that most individuals who use illicit substances do so in such manner that their ability to work is not impaired. Referring to overall use as a meaningful measure is misleading, since the mere consumption of illicit drugs is unlikely to significantly affect workplace safety and other productivity outcomes. Thus, both research and managerial focus should be directed to employees’ on-the-job substance use and/or drug-related impairment rather than to their personal lifestyle choices away from the workplace.
Conclusions and implications
Hospitality managers and scholars should now acknowledge that – as is the case for alcohol consumption – moderate off-duty consumption of illicit substances is the rule and not the exception. The vast majority of users lead normative and productive lives, without deteriorating to substance dependence, destructive behavior and/or impaired performance at work. The privacy and personal habits of employees outside of the workplace should not be infringed, provided that their choices do not result in lost productivity or put workplace safety in jeopardy, as is typically the case for moderate off-the-job illicit drug use. The rate of substance use among hospitality employees is indeed relatively high, but recent alarmist references to the issue in the hospitality literature are based on unreliable figures, with a tendency to disregard counter-evidence and to rely on erroneous stereotypes about both drugs and drug users. Illicit substance users in Western society comprise vast groups of people with diverse socio-demographic and psychological characteristics, along with other individual differences. Thus, making generalizations about how their lifestyle choices impact on the workplace is incongruous and gives rise to exaggerated alarm regarding substance use and its consequences. Such generalizations may also result in recommendations to implement costly employee assistance programs and drug testing, both of which are of little value to employers while having unintended deleterious effects on employee well-being.
In summary, hospitality scholars should avoid unreliable generalizations and instead rely on rigorous empirical evidence that properly distinguishes between substance use and abuse and between off-the-job and on-the-job substance use. Managers and workplace policymakers, for their part, should implement alternative approaches (other than drug testing) for dealing with serious substance abuse. Such measures could include training managers and supervisors to identify (based on deterioration in job performance), confront and refer impaired workers to appropriate intervention programs, conducting impairment testing of employees in specific sensitive positions, and ensuring thorough reference checking of job applicants. According to a report of the American Civil Liberties Union (1999), such alternatives are more cost effective and are not perceived as an unfair infringement of employee privacy. However, future research should assess the validity of these claims in the hospitality industry through empirical studies.
Hospitality employers, for their part, should refuse to join the “war on drugs” by not targeting workers who use drugs recreationally. Although employers may not approve of certain personal lifestyle choices of their employees, imposing their own views on others is both impractical and immoral. “The right to be left alone”, stated the late Associate Justice of the United States Supreme Court, Louis Brandeis, is “the most comprehensive of rights and the right most valued by civilized men.” The private lives of hospitality employees along with their pharmacological tastes should not be an exception.
 This includes excessive and exaggerated alarms about substance use and its consequences, “deliberate ignorance” regarding counter-evidence, and the communication of supposed facts concerning illicit drug use through emotive language.
Amir Shani is a Senior Lecturer in the Department of Hotel and Tourism Management at Ben-Gurion University of the Negev, Eilat Campus, where he teaches courses in ecotourism, hospitality and tourism ethics, marketing research, and marketing for tourism and hospitality.
Dr. Shani specializes in tourism and hospitality ethics, including tourism and the environment, sustainable tourism, ecotourism, and animal use in tourism and entertainment. Other related areas of interest consist of the quality-of-life of local residents in tourism destinations, as well as the occupational wellbeing of hospitality employees. He has also initiated and is involved in research projects focusing on food ethics and its implications for the restaurant industry and culinary institutions. Another of Dr. Shani’s areas of focus is contemporary issues in tourism marketing, particularly destination image, destination loyalty, and the management of tourist attractions.
Dr. Shani’s articles have appeared in a variety of leading tourism and hospitality journals, such as Annals of Tourism Research, Journal of Travel Research, Tourism Management, Journal of Sustainable Tourism, International Journal of Tourism Research, Tourism Analysis, International Journal of Hospitality Management, Cornell Hospitality Quarterly, and International Journal of Contemporary Hospitality Management. He had also contributed chapters for edited books focusing on destination marketing, zoos and tourism, and quality-of-life and tourism.
Dr. Shani has a Ph.D. from the Rosen College of Hospitality Management, University of Central Florida (2009). He earned his B.A. (Summa cum laude) in Management (2003) and an M.B.A. (2005) from Ben-Gurion University of the Negev.
In addition to his academic position, Dr. Shani is a member of the Israeli Freedom Movement, a non-partisan movement that is striving to increase the freedom of the citizens of Israel in the spirit of classical liberalism. Email: firstname.lastname@example.org
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