Airbnb and the hospitality sector

George Sell By George Sell
Uploaded 22 April 2014

A little over a year ago, I was at an industry conference when Airbnb was discussed, and the majority of people in the room hadn't even heard of it.

And as recently as March 2013, a Euromonitor research report titled Airbnb.com Poses Only a Small Threat to Hotel Industry concluded: "The meteoric rise of Airbnb.com, booking more than 10 million nights since its inception in 2007, should not cause the hotel industry to worry about the vacation rental market. Both business models have co-existed for a significant amount of time without infringing on each other's growth. It is likely that vacation rentals will appeal mostly to leisure travellers with lucrative business travellers firmly loyal to hotels, thanks to corporate travel policies, loyalty programmes and the standardised experience a hotel offers. To compete for leisure travellers, hotels have advantages over the vacation rentals that they can emphasise to stem losses in the leisure traveller segment."

It's hard to imagine anyone feels that way now. Let's have a look at the Airbnb phenomenon to see quite how staggering its growth has been.

Airbnb's reach extends to more than 190 countries with more than 600,000 listings, and the site has accommodated 11 million guests since its launch in 2008. It had a record 250,000 guests in one night on New Year's Eve 2013.

And the expansion is unlikely to stop now, especially as the company is in advanced talks with investors over a $400 million funding round, led by private-equity firm TPG Capital. This could potentially value Airbnb at $10 billion, bigger than the likes of Hyatt Hotels ($8.43 billion) and Wyndham ($9.39 billion). Many financial analysts are convinced that an Airbnb IPO isn't too far around the corner.

In January, when Airbnb CEO and co-founder Brian Chesky heard that Marriott planned to add 30,000 rooms to its property portfolio in the coming year, he tweeted: "We will add that in the next two weeks."

As this extremely disruptive snowball picks up momentum on its journey, it is headed directly at the hospitality sector. But many hoteliers and serviced apartment operators are displaying a surprisingly relaxed, in some cases even bullish, attitude.

Christopher Norton, EVP of global product and operations at Four Seasons, says: "Our guests don't want the Airbnb feel and scent." Airbnb doesn't compete with the Four Seasons because its amateur hosts can't match the level of hospitality his hotel's professional concierges offer, and its customers expect a "level of service that is different, more sophisticated, detailed, and skillful." he says.

Richard Solomons, CEO of IHG, says: "We're trusted because we're highly regulated: If we open a hotel, we have food control, security, a building that is safe if there is a fire. In an Airbnb, you have no idea. If they're selling themselves as this big brand that's going to be bigger than Hilton and InterContinental Hotels they ought to be thinking about regulation and leveling the playing field."

Hilton Worldwide EVP Jeff Diskin has said that he "loves what Airbnb is doing," hinting that Airbnb customers are a completely different group from his own.

Bill Carroll of Cornell University's School of Hotel Administration has dismissed the "hoopla" surrounding the Airbnb phenomenon and says: "It's always going to be niche, constrained by how many people want to stay in an Airbnb type of experience." He compared staying in a stranger's home to the stable from the nativity story, joking: "That certainly wasn't a chain property!"

Perhaps those insulated from the immediate effect of Airbnb by operating at the very top end of the market or the security of being part of a huge multi-branded international group aren't overly worried. But I think they should be, and lower down the hospitality food chain there is serious concern.

Vijay Dandapani, president of New York hotel chain Apple Core Hotels, says: "These guys are scofflaws. There's no reason why they should be subjected to a completely different set of rules than the legacy hotel businesses. There are some hotels here who are like ostriches and have their heads buried in the sand, but I am of the view that this is a full-blown threat."

Sean Hennessey, chief executive at hospitality consultants Lodging Advisors says that the budget hotel sector has been hit the hardest. In New York, for example, he said that 80 per cent of the Airbnb listings were for $200 a night or less. He estimates that the 416,000 Airbnb guests who visited New York for the 12 months ending in July 2013, cost the city's hotel industry about one million room nights.

The overwhelming sense I get is that the hospitality industry hasn't fully grasped the implications of Airbnb, and doesn't actually understand it. But the same accusation can't be levelled in the opposite direction, since Airbnb hired former hotelier Chip Conley as its head of hospitality.

Conley is convinced that while the hotel chains ponder how to market themselves to the Millennial demographic, Airbnb has already got them in its grasp. He says: "I was a young guy in my industry when I started, and so a lot of the people who I know are older than me, and generally speaking my age and older are not the Airbnb market, but those people 55-60 years old in InterContinental or at Starwood or at Marriott are saying, 'How do we get those Millennials? Let's build up products for the Millennial generation.' And I guess my response is it already exists and Airbnb has captured that market. Our consumer data on this is phenomenal and Airbnb is in this Millennial generation market. We are clearly a dominant lodging brand in terms of how that generation sees us."

"We are somewhere in between an outlier and a disruptor," says Conley. "I think that the way we're disruptive is less in terms of sheer volume of how we affect the market. I will say this with candour, the way we affect the market is like an Austin, Texas, when South by Southwest happens. Prior to Airbnb being there, if you booked late, you had to actually drive an hour or an hour and a half to your hotel from Austin because there was nothing nearby. So there are markets like Austin during South by Southwest and lots of other markets that I cite where when there is a big convention in town, a big festival, or a conference, that city has a need for more rooms. Airbnb serves that need really well."

"What that means is that it affects not occupancy so much, but it affects compression and the potential to premium price at a hotel as much as they used to. So that's probably where we're a little bit disruptive in a negative way for the hotel business. On the other hand, for the city, it's actually a good thing because the fact that people are not having to drive an hour or an hour and a half each day at the end of a conference or festival is good because it means people are staying in town spending their money," he adds.

The hospitality industry has tried to reassure itself that there are certain areas where they are relatively immune to the impact of Airbnb, particularly business travel and the serviced apartment/extended stay sector. But the upstarts are even knocking on those doors.

Airbnb is actually among the fastest growing accommodation options on expense reports submitted by travellers who use the automated Concur system, which processes $50 billion worth of expense reports a year for 20,000 corporations. Concur executive vice president Mike Hilton says his customers' use of Airbnb has quadrupled every year since 2010 and is on track to hit $1 million this quarter. "That's still a very small share, but if you look at the trend line, it's not too many years away from getting into multiple percentage points. This is starting to become a meaningful alternative for business trips," he adds.

On extended stay, Brian Chesky said only last week: "Ten per cent of our business is long-term stays, and it's growing. I could easily see that being 15 to 20 per cent. Airbnb is even better than the competition on stays of 30 days. Try staying at a friend's house for 30 days and see how they feel. Try staying at a hotel for 30 days and see how you feel."

Chip Conley sees this as a significant growth area for Airbnb: "In some cases we're competitive with the hotel business. In some cases, we are creating new opportunities for people to stay, and stay longer. Our average length of stay is 5 to 5-1/2 days where in most markets the average length of stay is less than half that," he says.

Of course not everything is rosy in the Airbnb garden - the very nature of its model as a facilitator rather than a property owner or manager means it has little control over what actually happens outside the virtual world. There has been a spate of gleeful news stories in the US about properties being used for orgies, and how the site is a favourite with New York prostitutes who save $2,000 a week by taking clients to Airbnb apartments rather than, ironically, hotels.

But the biggest challenge for Airbnb is regulation. It is the biggest gripe for hoteliers that they see an unfair advantage when it comes to taxes, health and safety and so on. It's not a level playing field, they say.

And in many cities, the regulators agree. San Francisco - Airbnb's home town - is worried about landlords who are taking apartments off the market or evicting tenants to rent them out full-time through Airbnb and others, as well as buying multiple units to do the same thing. David Chiu, of the San Francisco Board of Supervisors wants to make sure that, in a city with a shortage of housing that is sending rents through the roof, "short-term rentals aren't cannibalizing our housing stock".

The Board is looking at passing new legislation next week which will mean locals can only rent out their primary residences, or the property they live in at least three-quarters of the year (275 days). Anyone who lives in a building with two or more units and wants to list it on Airbnb will have to apply to be in the city's registry of approved hosts; to remain in that database, the person will have to keep records showing that their property has insurance coverage of at least $150,000 and that they've been collecting taxes from their guests for the city coffers.

Airbnb has had similar issues in New York, particularly over tax. But it is moving quickly to respond. The company is working on getting two bills passed next month that would allow it to collect the 14.7 per cent hotel tax and pass it on to city and state authorities. If successful, it aims to roll out its new tax collection tool across New York State by July 1. It also plans to collect hotel taxes on behalf of hosts in at least two other cities, San Francisco and Portland, Oregon.

It's clear to me that Airbnb and its ilk are a massive threat to the hospitality industry. But like every threat it also offers opportunities. And in my view the serviced apartment sector is in prime position to capitalise on the way Airbnb is changing the way people travel.

Serviced apartments could be seen as representing a transition between the traditional hotels and an Airbnb apartment, offering security and standards as well as local character and service. If business travellers are looking at alternative options - it's a big leap to go from a known and trusted hotel brand to a stranger's apartment in a new city. But a serviced apartment can offer the "home from home" experience as well as the safety net of a regulated and trusted operator, and the value that comes from hotel standard accommodation with unnecessary and unused services stripped out.

Getting involved with the local community is one of the big selling points of Airbnb, and as serviced apartments increasingly add concierge facilities, they can help their customers achieve this.

Michelle Wohl, VP of marketing at reputation management specialist Revinate, has some advice which is as relevant to serviced apartments as it is to hotels. She says: "Alternative accommodation websites like Airbnb appeal to travellers looking for authentic and unique experiences. Instead of sticking to popular attractions and guide book-endorsed restaurants, these travellers seek out neighbourhood eateries and sights off the typical tourist trail. Many seek hosts who can provide them with a taste of local life. Hotels also have an opportunity to provide a glimpse into living like a local. Staff can be encouraged to offer up neighbourhood knowledge and give guests advice on popular hotspots. Little touches like local microbrews and wines in the minibar or rotating exhibits of local artwork in the lobby can add to a distinctive and immersive experience."

Make no mistake, Airbnb has huge implications for everybody in the hospitality sector. Look at it as a way to rethink what you do, make your property better, and market it as a trustworthy and regulated alternative. Just don't get caught with your head in the sand.

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