Hospitality Sector Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The hospitality sector of the economy comprises two distinct but related industries, the hotel industry and the restaurant industry. The term is also often used to describe a larger system of companies that are interrelated conceptually or operationally in the food, beverage, travel, tourism, transportation, cruise, casino, theme park, leisure, and real estate industries. Globally this larger travel system employs more than 75 million people and represents almost 4 percent of aggregate gross domestic product.

The traditional value proposition for the hospitality sector is the provision of temporary lodging and prepared food away from home, but this has gradually expanded to include a variety of service and entertainment offerings. The term hospitality refers to the relationship between companies and consumers, which serves as a substitute for the rapport between hosts and guests in private homes.

The business of hospitality can be traced to early recorded history, for example, the tabernae (taverns or inns) of ancient Rome. Until recently, the hospitality sector was highly fragmented and lacked sophisticated management systems. However, as the demand for hotel and restaurant services expanded during the 20th century, several hospitality companies developed significant scale and scope, and the principles of managerial capitalism were gradually institutionalized. The multi-unit “chain” concept became increasingly dominant, and franchising was widely adopted as an expansion and financing technique. The late 20th century was characterized by the increasing segmentation of the industry, by the entry of chain operators into upscale segments, and by significant acquisition and consolidation activity. Notable moments include the listing by Sheraton on the New York Stock Exchange in 1947, and the inclusion of McDonald’s in the Dow Jones Industrial Average in 1985.

The hotel (or lodging) industry provides accommodations for travelers and related services such as onsite restaurants and spas. In the United States, the hotel industry generates annual revenues of more than US$125 billion and comprises more than 47,000 separate locations or “properties” with more than four million guest rooms. The industry is segmented vertically by price and amenity level (from “luxury” to “economy”) and horizontally by usage patterns (such as “transient” or “extended stay”).

The largest global hotel companies include Accor, Best Western, Carlson, Choice, Hilton, Hyatt, InterContinental, Marriott, Starwood, and Wyndham. With the exception of Best Western, each of these is a holding company with a portfolio of subsidiary brands. Examples include Marriott (which owns brands such as Ritz-Carlton and Courtyard) and Starwood (which owns brands such as Sheraton and Westin).

The restaurant (or foodservice) industry offers prepared food and beverage products away from home. In the United States, the restaurant industry generates annual revenues of more than US$500 billion and comprises more than 945,000 separate locations or “units.” The industry is segmented vertically by price and amenity level (from “fine dining” to “quick service”) and horizontally by style of cuisine (such as “French” or “barbecue”).

The largest global restaurant companies include Brinker, Darden, McDonald’s, OSI, Wendy’s, and Yum. Several of these are holding companies with portfolios of subsidiary brands. Examples include Darden (which owns brands such as Olive Garden and Red Lobster) and Yum (which owns brands such as Kentucky Fried includes specialty food retailers (such as Starbucks) and contract foodservice operators (such as Aramark, Compass, and Sodexho). Restaurants within hotels are considered part of both industries, and therefore are doubled-counted in many industry statistics.

A Complex Industry

The structure of the hospitality industry is complex, with five distinct components. The first component is the ownership of the business itself. “Independents” are single-unit companies owned by independent entrepreneurs. “Chains” are multi-unit companies that often have a mixed ownership structure, with both “company-owned” locations and “franchised’ locations in the same system.

The second component is the brand or name that appears on signage at each location, which is also called a “flag” in the hotel industry. For independents, the brand is owned by the independent business associated with each location. For chains, the brand is owned by a central corporate entity and loaned to each location for a specific period under a franchise or licensing agreement.

The third component is the daily operation of the hotel or restaurant. Independent locations are either self-managed by owners or managed under contract by an independent management company. Company-owned chain locations are usually managed by employees of the chain. Franchised chain locations may be self-managed by the local franchisee, managed under contract by a “third-party” management company, or managed by employees of the franchisor under a “management contract” arrangement.

The fourth component is the underlying real estate for each location, including both land and building. In the restaurant industry, leasing is more common than owning and many restaurants are located within retail space. In the hotel industry, most companies emphasize branding and operating activities, and rarely hold significant ownership interests in the real estate underlying their hotels. Most hotels are owned by the real estate developers who originally initiated the hotel projects, or by real estate investors and syndicates (such as “real estate investment trusts” or REITs).

The fifth component is the distribution system used to connect supply and demand within the marketplace. In the restaurant industry, this function is disorganized and informal. In the hotel industry, the distribution system is quite complex and sophisticated. Independent hotels typically operate their own reservations activities, but may also engage independent reservations services or join independent marketing consortia. Chain properties rely on the central corporate entity to provide distribution through its “central reservation system” (CRS) or proprietary Web site. Separate companies known as “global distribution systems” (GDS) provide interconnectivity between the various hotel reservations systems, travel agents, airline reservations systems, and internet travel sites.

Management And Measures

Professional management is now standard in many parts of the hospitality industry, especially within upscale segments and chain companies. Managers are recruited from undergraduate business schools, specialized hospitality management schools (such as the Cornell Hotel School), or culinary management programs (such as the Culinary Institute of America). Principles of management, control, and finance are similar to those used in other industrial sectors with four notable exceptions.

First, although hospitality offerings represent a hybrid of both intangible services and tangible products, elements of service and experience tend to dominate the value proposition, especially in upscale segments. As a result, the principles of service management (including human resource management and the design of service delivery systems) are critical to the success of any hospitality venture.

Second, regardless of the exact nature of ownership, real estate is embedded within the hotel industry. Hotel properties are capital intensive and purpose-built, meaning they cannot be converted easily for other uses. As such, real estate finance expertise is critical for corporate executives, asset managers, and senior operational managers in the hotel industry. Real estate finance expertise is less important in the restaurant industry.

Third, the hotel industry is characterized by constant supply (over the short term) and variable demand (due to factors such as seasonality), making synchronization of supply and demand difficult. As a result, the hotel industry has adopted variable pricing or “yield management” systems from the airline industry. This has evolved into an integrated system of forecasting, capacity analysis, variable pricing, and promotional marketing known as “revenue management.” Variable pricing is less important in the restaurant industry.

Fourth, the hospitality sector has several specialized performance measures. These include capacity utilization calculations (such as “occupancy” percentage in the hotel industry and “turns” ratio in the restaurant industry), revenue per transaction calculations (such as “average daily rate” or ADR in the hotel industry and “average check” in the restaurant industry), and calculations that compare revenue to capacity (such as “revenue per available room” or REVPAR in the hotel industry and “revenue per available seat” or REVPAS in the restaurant industry).

Bibliography:

American Hotel & Lodging Association, 2007 Lodging Industry Profile, www.ahla.com (cited March 2009);
“A Century of Investing,” Wall Street Journal (May 28, 1996);
Clayton W. Barrows and Thomas F. Powers, Introduction to Management in the Hospitality Industry (John Wiley & Sons, 2009);
Florence Berger and Judi Brownell, Organizational Behavior for the Hospitality Industry (Pearson Prentice Hall, 2009);
Conrad Lashley, Paul Lynch, and Alison J. Morrison, Hospitality: A Social Lens (Elsevier, 2007);
Alan J. Liddle, “Top 100,” Nation’s Restaurant News (June 25, 2007);
National Restaurant Association, Restaurant Industry Facts 2008, www.restaurant.org (cited March 2009);
Andrew K. Sandoval-Strausz, Hotel: An American History (Yale University Press, 2007);
Karyn Strauss, “Hotels 325,” Hotels (v.41/7, 2007);
John R. Walker, Introduction to Hospitality, 4th ed. (Prentice Hall, 2006);
World Travel & Tourism Council, World: 2007 Travel & Tourism Economic Research, www.wttc.org (cited March 2009).

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