Oct. 13, 2017, 1:56 p.m. | William Colbert | Deal Review

How Millennials are Changing Hotel Development

How Millennials Are Changing Hotel Development

 

For close to ten years, analysts and pundits have been predicting how dramatically millennials would change how businesses understand consumer behavior. As millennials enter their peak earning years, aided no doubt by the second longest period of economic growth in U.S history, it’s becoming clear how massive the shift actually is.

 

The first way in which millennials differ from previous generations is that they’ve shifted away from a strong desire for material purchases. In exchange, they’ve increasingly focused on more intangible and difficult to quantify experiential purchases. According to Harris Group, 72% of millennials are spending more of their money on trips to Machu Picchu, shark diving off the coast of Africa, and JetBlue flash sales to semi-exotic destinations, compared to Gen X and baby-boomer generations. This is no doubt aided by the rise of comparison travel sites like Kayak, but also by Airbnb which dramatically reduces the barriers to traveling to unique destinations that have been traditionally less popular.

 

Since its launch in 2008, Airbnb has grown into an estimated $31 billion hospitality booking business, its size rivaling established hotel chains like the Wyndham Hotel Group, Hilton Worldwide Holdings, and Marriott International & Starwood Hotels. Airbnb owns no real estate and has no plans to do so.

 

Two prevailing trends, luxury’s changing face and the decentralization of the hospitality industry led by Airbnb, have resulted in massive repositioning and commercial development efforts by both Marriott and Hilton. Their motivations hinge on an existential crisis- how to stay relevant in a world where attainable luxury and breathtaking experiences are only a click away. Legacy hospitality angst has resulted in development legends like Ian Schrager and Hilton’s CEO working together with cutting-edge designers and young researchers to create a more holistic hotel experience. The result is a more commercially viable luxury experience that's both eminently marketable and aligned with modern trends.

 

What Once Was Old Is a New Hotel Experience

 

The high-end luxury hotel experience was once a staple of a well-planned trip, executed by jet-setting (or train-setting) global elite. Grand hotels with extravagant lobbies, lavish traditional cocktail bars, and costumed staff fell out of fashion outside of historically opulent hotels or bespoke boutiques. However, in 2013, Ian Schrager announced a visionary partnership with Marriott hotels to bring the boutique and traditionally unattainable hotel experience to the masses with the EDITION hotels.

 

“By editing and rethinking the business model and getting rid of all those things that people really don’t care about that are superfluous and leftovers from a bygone era,” Ian Schrager told Fortune Magazine in 2017. He continued, “They [guests] don’t care about those traditional signposts of luxury. They’re completely changed. Because people have changed. But for some reason, the luxury approach in hotels hasn’t changed.”

 

“My industry is realizing that. It’s an emphasis on creating a unique experience. It’s an emphasis on the product, and I think the public benefits.”

 

Schrager has a devoted interest in a throwback notion of the role of the hotel as a luxurious community center. “What we’re doing now, and started doing 20 years ago—that the rest of the industry abandoned—is the way the hotels were done 100 years ago,” he says. “Then the real estate guys got a hold of it, and they didn’t know how to make money with food and beverages and the public space, so they cut it out.”

 

For Schrager, this new approach to hotel development isn't just about the commercial end game. “The primary idea is luxury for all. I think that is an important idea. It’s revolutionary. It’s taking luxury and democratizing it and making it available to everybody. People aren’t giving up anything that they might expect to find in a luxury hotel. Not only in terms of service, but in terms of style, panache, food and beverage, and entertainment.”

 

The entertainment factor is critical to the idea. Not only does it make hotels more than a place to sleep, but it also allows them to profit from this additional revenue stream, which traditional hotel companies don’t know how to do. This shift is similar to what is happening in other sectors of commercial real estate development like malls, where entertainment is increasingly becoming a way to generate additional revenue. But for hotel developments, entertainment also provides an important social function- that interaction is what people demand because they spend so much time on social media engaging in experiences. The entertainment factor is ultimately how hotel development plans to compete with Airbnb, as Airbnb cannot control the experiential aspects of a stay with any sort of consistency.

 

How Hotel Developers Are Fighting Off an Assault from Airbnb

The most obvious threat to the traditional hotel industry is, of course, the rise of Airbnb and their more established counterparts. Since its founding in 2008, Airbnb has recorded more than 160 million guest arrivals and now has over 3 million listings worldwide in some 65,000 cities. In March, the San Francisco startup was given a valuation of $31 billion by its investors. Among hotel companies, only Marriott’s $40 billion market value is bigger, and they’re poised to keep it that way.

 

This determination drove Marriott’s Arne Sorenson to complete a $13.6 billion acquisition in September 2016 of Starwood Hotels & Resorts, which added such iconic brands as St. Regis, Westin, and W to Marriott’s roster, as well as profitable budget properties such as Four Points. Prior to the purchase, Marriott stood in a virtual tie with Hilton as the world’s largest hotel company; now it towers over the field. The merger added 381,440 hotel rooms, swelling Marriott’s total portfolio to 1.2 million—50% larger than Hilton’s, and 62% greater than the room count at third-place InterContinental Hotels of the U.K. Today one-in-seven hotels in North America, and more than one in 14 worldwide, are controlled by Marriott.

 

So the answer to Airbnb’s lack of overhead is sheer volume- to be everywhere and to make the Marriott experience ubiquitous. The aim is to make Marriott hotels the centerpiece of what Sorenson is calling a golden age of hospitality and travel that’s driven by a growing Chinese middle class and the preference of the millennial generation for making memories (and snapping Instagram pics) over shopping.

 

Sustainability Is the New Luxury

 

Entertainment is, however, only one experiential way for hotels to engage with their younger and increasingly affluent guests. Eco-conscious millennials and their values are driving trends in luxury travel.

“Millennials are twice as likely to support brands with strong management of environmental and social issues, and expect brands to not only manage their impact but communicate it,” says Diana Verde Nieto. She is co-founder and CEO of Positive Luxury, an organization that recognizes “luxury lifestyle brands that not only take pride in their craftsmanship, service, and design, but also care for their employees and suppliers, and work hard to protect our planet”.

This echoes Credit Suisse’s 2017 Global Investor report, which states that millennials are driving sustainable practices in various industries. “Companies must deliver good social and environmental performance and engage in sustainable practices or their future growth could be at risk,” writes research analyst Julie Saussier in the report.

Contemporary luxury has evolved as the wealthy have. Once, rural landowners who appreciated expensive possessions, the ultra-rich are now urban and seek luxury that is an escape from polluted, connected environments.

Despite its evolution, luxury is still that which is exclusive, and by this definition, providing luxurious getaways is all the more difficult in an urbanizing world. Barefoot luxury promises experiences that cities can’t.

What’s important to discern for commercial developers and hoteliers is how great the shift in consumer consciousness is. No longer are people fixated on a single notion of what amazing travel is. The dovetail created by technology is presenting new opportunities to think about the relationships between commercial hotel development, entertainment, the environment and social media in ways never imagined to remain exciting, relevant, and profitable.