How can hotels achieve the right kind of growth in a digital age?

A toolkit for fighting commoditisation

www.pwc.co.uk/hospitality-leisure

October 2013

Introduction

Digital and mobile platforms are changing everything…

In 2012, for the first time, over 1 billion international business and leisure travellers were recorded. Changes in global demographics and rapid technological change mean these consumers have different expectations, greater freedom of choice and a high degree of familiarity with digital technology.

By 2017, 88% of people in the UK will have mobile internet access. 1 At the same time, mobile and tablet hotel bookings are already beginning to overtake ‘traditional’ web-based booking. The travel consumer is leading the way in driving technological change.

A recent InterContinental Hotel Group (IHG) survey showed that 43% of adults would choose not to stay in a hotel that charged for the internet, with travellers from China placing the most importance on connectivity, with nearly 47% listing it as the most important thing to them when staying in a hotel for business.3 After IHG offered free wi-fi for its loyalty programme members, Accor and others made this freely available to all customers. Connectivity has become an essential part of the hotel offering, on a par with electricity and water.

…creating lot of challenges (and headaches) for hotels – but also opportunity

While these trends present some opportunities for hotel companies, they also present a complex dilemma because as hotels try to differentiate themselves – from each other and from online intermediaries – the issue is how can they evaluate the optimal channel distribution mix as well as win and keep customers – and do it profitably?

It means conventional hotel business models are being challenged by the emergence of well-established as well as new online entrants mediating between hotelier and guest, and disrupting the traditional patterns of planning and reservations. These players are diluting hotels’ brand visibility, threatening their margins, and weakening customer loyalty by eroding the direct relationship between the hotel operator and even its most regular loyal customers.

Mobile is playing its part here too. In the first quarter of 2013, the hotels.com iPhone and iPad app topped the most popular travel app in both the UK and US, 4 something that the brand has used to its advantage by encouraging repeated use through loyalty points. PhocusWright has estimated that online travel agencies made up about 64% of gross mobile hotel bookings in 2012, compared with 36% for hotels' own mobile sites.

If free wi-fi is not a component of a broader digital strategy, then free wi-fi can become part of the threat of commoditisation, a commoditisation in which the hotel becomes just ‘a room and a router’.

Hotels are fighting back against commoditisation

Hoteliers’ toolkit for fighting commoditisation should include:

• Developing a business strategy for the digital age (as opposed to a digital strategy)

• Recognising the rise of the ‘Digital Native’ segment

• Using social media effectively

• Using digital to take loyalty and personalisation further

• Understanding ‘big data’ by thinking small.

“Mobile booking is becoming a fundamental part of how people travel. Mobile is growing multiples faster than the web did for us a decade ago…”

Fritz von Paasschen, President and CEO,

Starwood Hotels and Resorts2

1 PwC Global Entertainment & Media Outlook: 2013-2017,www.pwc.co.uk/outlook 2 Hotel Analyst Technology & Distribution 19 April 2013 3IHG, The new kinship economy: from travel experiences to travel relationships 4 //www.tnooz.com/article/the-most-popular-mobile-travel-apps-so-far-in-2013/

Travel consumers want mobility, flexibility and easy real-time access to information and to shop and pay safely and easily on the go. They expect seamless connectivity allowing them to access the content they want when they want it across all platforms, and also increasingly expecting seamless transitions between different platforms.

How can hotels achieve the right kind of growth in a digital age? 2

Contents

Developing a business strategy for the digital age 4

Recognising the rise of the digital native segment 5

Using social media effectively 6

Using digital to take loyalty and personalisation further 8

Understanding ‘big data’ by thinking small 14

Contact us/further reading 16

3

Developing a business strategy for the digital age

Rather than just thinking in terms of channels, hotels need a business strategy that focuses on providing the guests with what they want, when they want it Online travel agencies have the advantage of retaining the entrepreneurial, agile mindset of the tech company, combined with lower overhead costs. But they are also investing heavily in developing new business models and concentrating on mobile and last-minute booking. Hotels who fail to do the same could see their margins eroded, and their businesses coming under threat; but those who seize this opportunity are more likely to be able to set the agenda for the sector, rather than lag behind.

Digital technology (including mobile) has the potential to change all aspects of the traveller’s journey – enhancing experiences from before they go, while they’re away and when they return. This opens new possibilities for the hotel brand to forge a deeper emotional bond and loyalty with the traveller/guest.

At the same time the plethora of channels has made it complex for hotels to optimise channel mix and costs. The involvement of the other players in the journey, such as airlines, and the lack of much detailed data filtering through from booking systems makes the challenge of providing a consistent customer-focused approach at every step of the journey even more complex.

We are not advocating a “if you can’t beat ’em join ’em” approach when it comes to the Online Travel Agencies/hotelier conundrum. Hotels can use the opportunities of the digital era to enhance their offering. The opportunities are immense, because unlike other sectors which have already faced a similar threat from new digital competitors – from music to retail to publishing – the hotel industry has an unassailable advantage. However far the new players may encroach on the administrative aspects of finding and booking a hotel, the online operators can never provide the core service at the heart of the offering. The hotel itself will always ‘own the stay’.

The customer experience becomes an opportunity to grow revenue. Those who really understand who the customers are, what they want and what drives their buying decision, have a huge advantage.

We’ve seen from our customer research that 65% of all guests are likely to re-book hotels where they’ve had a great experience, and staff attentiveness ranks as the top driver of great hotel experiences. 5

Delivering memorable experiences reliably all the time, however, requires lots of cross-functional collaboration. For example, a CIO, COO, CMO, and perhaps the ‘Chief Guest Experience Officer’ would need to work closely to enable seamless communications with guests across multiple channels, over time, and across different hotels of the same brand/group.

Rather than thinking in terms of ‘just channels’, hotels need a business strategy for the digital age that focuses on helping the customer achieve the goals they care about, rather than ‘just’ providing a set of inputs.

They need the courage to be the trusted brand of the consumer before, during and after their stay.

How can hotels achieve the right kind of growth in a digital age?

“Digital can play a role in unleashing your potential – Making your eCommerce channels more profitable and developing customer value propositions that are centred on delivering better outcomes for your guests.”

Carlo Gagliardi, Strategy Consulting Partner, PwC

5PwC US Consumer Experience Radar: Hospitality

4

Recognising the rise of the digital native segment The digital generational change is unstoppable

Brands, owners and operators need to reposition their business to deliver what these consumers want – from marketing and sales, to supply chain and risk management, to individual roles, training, guest-centric behaviours, service standards, reward packages and responsibilities.

Hotels must instill a culture of innovation within a business model that can quickly adapt to the opportunities that the digital age can bring. ‘Digital Transitionals’ and ‘Digital Natives’ must be represented at the highest levels in the organisation, including the boardroom, as soon as possible. And behind this, consumer-focused functions must work closely together to support the business strategy. This includes re-defining the sector’s brand function, shifting the emphasis from the classic media-based marketing mindset to a truly service-based guest experience mindset. And for many hotels this type of goal is easier to state than to achieve!

This year, Marriott made a strong statement to the market by announcing it is focusing on what it calls the ‘next generation client’. It announced the appointment of Stephanie Linnartz as Chief Marketing and Commercial Officer, a new appointment that combines the company’s consumer-focused disciplines for the first time, including brand management, marketing, eCommerce, sales, revenue management and consumer insight.

‘Digital Natives’ are defined as the first generation to have grown up in a web-enabled world. Other consumers can be divided into ‘Traditionalists’ (who tend to be older and less familiar with new technologies) and ‘Digital Transitionals’ or ‘Digital Converts’ (who have seen what digital can do and are enthusiastically embracing it). We predict that in less than five years the ‘Digital Natives’ are going to be the biggest segment.

What we are seeing among the ‘Digital Natives’ age group (ages 18-34) or millennials – as they are also known – are two key themes: prolific multi-screen behaviour and sharing on social networks.

According to Aoife Desmond, a team lead for the travel vertical in Facebook, millennials are ‘over-indexed’ on Facebook, meaning they are the most prolific in their sharing.6 They have a:

• desire to see and be seen

• want to cram in as much unique experience as possible

• crave individualism

• prefer to access the Internet by mobile devices

• are eager to provide and receive personal recommendations that can contribute to the building of their identity online

The decline of the traditional consumer and the rise of the digital consumer

6 Keynote speech at Enter 2013 conference in Innsbruck, Austria http://www.tnooz.com/article/facebook-travel-is-behind-other-sectors-with-social-marketing-but-some-brands-have-nailed-it/

Source: Digital Natives Research PwC 2013

5

So the hotel industry understands the power of reviews, and is getting in the game. But beyond this – travel and social actually make the perfect partners. Travel experiences are shared across social networks which are available at every step of a traveller’s journey.

Using social media effectively

The social media opportunity is about so much more than reviews – it’s a new form of interaction and value creation In the current economic climate, the hotel industry cannot rely on traditional drivers of business growth and raising prices may mean travellers just book elsewhere. Brands, hotel owners and operators that are able to capitalise on social media, mobile, analytics and cloud (SMAC) – and put customer experience at the heart of everything they do – can gain significant competitive advantage in the longer run.

It’s well known in the industry that better reviews generate better revenues. This is true in terms of volume of bookings, but also in some cases in the ability to impact prices. A study by Cornell’s Center for Hospitality Research entitled The Impact of Social Media On Lodging Performance (2012) found that online guest satisfaction (as measured by their review score) had a direct impact on the financial performance of hotels. The study showed that a one point increase in a hotel's 100-point ReviewPro Global Review Index leads up to a 0.89% increase in price, a 0.54% increase in occupancy, and a 1.42% increase in RevPAR.

Review Express, a new service from TripAdvisor, will allow hotels to solicit more reviews from their customers, increasing review volume to the benefit of both hotels and TripAdvisor. At the same time, TripAdvisor is also taking steps to better manage older negative reviews that may no longer be applicable as hotels improve their standards or change owners.

Just one example: Facebook is available at every step of the guest’s experience journey, from inspiration, research, booking, then throughout a trip, and also as a reminder of the trip. Around 24 million people in the UK (one third of the population) check into Facebook every day and 82% of them do so on mobiles or tablets. And 63% of generation X travellers and a third of baby boomers share a daily status update while on holiday. Those consumers – through interacting with the brands, posting images, checking in and recommending to their friends – can become powerful ambassadors for the hotel they visit, even if they do not themselves become loyal to that brand or location. Each instance in which your customer interacts with your brand on their social network is another opportunity for you to win new customers, and to increase loyalty and ultimately share of wallet from your current customers.

Social media is also powerful because people (and especially the ‘Digital Natives’) like to share not only simple updates, but also what they wish to achieve and what they have achieved. If a hotel can use social media to associate – in the mind and heart of the consumer – the consumer’s wished-for or actual achievements to the brand of the hotel, then loyalty will be generated.

6 How can hotels achieve the right kind of growth in a digital age? 6

“43% of UK adults say they use more than one device simultaneously ‘everyday’ and 69% of respondents do so ‘at least once a week’, 50% Of 18–34 year olds say they use more than one device simultaneously ‘everyday’.”

(PwC Digital Native Study)

Some key questions your organisation should be asking around Social Media

Do your competitors have a clear Social Media Strategy? 1

If so, how do you formulate/enhance yours? 2

Do you leverage Social Media enough to create/nurture/defend your Brand Equity, Reputation and to promote your Brand Values?

3

Do you use Social Media to connect your guests to one another and to enhance their experiences?

4

Do you know what your ‘Social Media Signature’ looks like? 5

7 7

Using digital to take loyalty and personalisation further

We believe eCommerce is just the First Digital Wave. We see two new Digital Waves of opportunity for organisations to deliver more compelling and branded experiences, achieve advantage and differentiation and generate profitable growth. This will require using digital as much more than just ‘another channel’.

PwC have developed a unique digital innovation model based on Three Digital Waves to explain just how far the digital opportunity has to travel in order to exploit its potential fully.

How can hotels achieve the right kind of growth in a digital age?

Digital identity – bring a new meaning to personalisation

Digital commerce – make the research and buy experiences better (including booking, check-in and check-out)

First Digital Wave

Digital consumption – help guests achieve goals – move beyond research and buy (including the stay itself, and the ability to link different stays)

Second Digital Wave

Third Digital Wave

Improve eCommerce profitability with a better customer experience at the marketing, sales and guest support ‘touchpoints’, better usability, more effective distribution or smarter pricing.

Develop propositions that help customers achieve goals they care about, typically by encouraging guests to share their consumption data. That way you increase customer loyalty, increase revenue and reduce operating costs even further. It’s all about going beyond research and buy, and use digital to deliver and enable different experiences during and after the stay.

Act as a trusted party on behalf of customers to aggregate their digital data (both transaction and consumption data), and to meet their needs through managing and brokering relationships with companies offering products and services. This will take the trend towards personalisation even further, as the ‘Digital Native’ consumer becomes ever more adept at leveraging his/her own ‘digital identity’ and entrusting a partner to manage it. This will secure the right products, services, goals and experiences, at the best price, and it will progressively become a natural way to choose and consume.

Both the Second and Third Digital Waves will require a minimum critical mass of trust between the consumer and the company for the relationship to raise to these levels in the first place. The privacy implications are non-trivial. The crucial difference with the traditional paradigm is that in this model the consumer is not ‘surrendering’, but ‘volunteering’ his/her personal data.

To deserve and nurture this trust, companies will have to use the data only for purposes explicitly agreed upon by the customer, and also offer the customer a ‘no-questions-asked erase button’.

8

Increasing degrees of ‘digital fitness’ required to play and win

Increasing issues, threats and opportunities in the digital economy

Supply chain (operations)

Demand chain

Consumption chain

5-10% Growth

5-10% Efficiency

Innovation and loyalty

+£

(£)

Op

era

tin

g m

od

el

cha

ng

e B

usi

nes

s m

od

el

cha

ng

e

Customer service

Marketing

Sales

Channel integration

Time

eCommerce is used to transact, to advertise, as a marketing platform and to provide self-customer-care

Ongoing operational integration across the Supply Chain, including suppliers and partners

First digital wave: Digital commerce

Third digital wave: Digital identity

Second digital wave: Digital consumption

The next digital wave?

Consumption data is shared with the customer to enable outcomes

Buying brands and digital identities emerge

10-20% Growth

10-20% Efficiency

Innovation and loyalty

+£

(£)

5-10% Growth

5-10% Efficiency

Innovation and loyalty

+£

-(£)

E2E supply chain integration

Source: Profitable Growth in the digital age, PwC 2013

Three key questions your organisation should be asking:

‘How do we set up our business not only to deliver a great service, but also to help customers achieve their goals, and do that efficiently, seamlessly, profitably and in a branded way?’

1

‘What business model do we need to play and win in the digital era?’

2

‘What operating model do we need to play and win in the digital era?’

3

To play and win in the digital economy, companies need to create value on three different “Digital Waves”

9

How can hotels achieve the right kind of growth in a digital age?

Hotels and eCommerce (the First Digital Wave, mainly Research and Buy)

For the hotel industry, well executed eCommerce is of course essential: offering customers the means to transact through the web and – increasingly – through mobile devices. IHG was one of the first, creating a mobile app that they then adapted and updated to meet the needs of their rapidly evolving consumer. More and more, while consumers use traditional web access for their research decisions, those who use mobile to pay for their bookings are doing so closer to their holiday date.

While online channels are a critical means of reaching customers, they are not always executed well. There remains plenty of scope to make it easier and more enjoyable for customers to transact online, via desktop, tablet or mobile. Providing a consistent service across all platforms is crucial for companies that want to adopt smarter pricing models, improve distribution and deliver a better experience at the touchpoints with the guest. This is where hotel loyalty programmes have been able to play – to some extent – a role. According to research by TravelClick in North America, loyalty programme members account for nearly 80% of all room nights booked through a hotel’s website (Brand.com). In contrast, 85% of all room nights booked through a third-party online travel agency (OTA) come from guests not affiliated to the hotel’s loyalty programme.

Going beyond just using digital for research and buy is crucial if hotels want to deliver more value and reverse the trend of commoditisation. The chart below demonstrates what some hoteliers are doing as they increasingly use digital to innovate around experiences, rather than just research and buy (i.e. websites and reservations).

Most of the sector is adapting to the eCommerce First Digital Wave. The more efficient operators are actively using digital to help them do the basics better, whether it’s speeding up check-in and check-out, simplifying the booking process, or showcasing what the hotel has to offer through 360-degree views of rooms and virtual tours online. But the consumer is already expecting more: more interactive content, more real-time location-based offers during their stay and more opportunities to use digital to comment on and enhance their stay experience.

Opportunities for true differentiation

The Second Digital Wave

Travel’s customer lifecycle

The First

Digital Wave

Create a string of experiences and memories that links different stays and create one long term, joined up, meaningful association with the brand

• Hotel mobile apps

• Hotel website and Facebook pages

• Review sites

• OTA sites

• Guest look at friend’s photographs, experiences, reviews recommendations on their own social networks

• Recording experiences via Facebook, Pinterest, Instagram, Vine and Tumblr during and after the journey

• Guests review online during and after journey

• Four Seasons: use of Pinterest and Instagram to engage with consumers

• Hyatt mobile app details local attractions and uses location-based technology

• IHG Concierge Insider Guides iPad app

• Facebook page for guests to check-in and like

10

Source: PwC 2013

An illustrative example of a second digital wave guest experience

Your Guide to all

Resort Services

Hotel Brand – specific property name

Date – Time

My preferences

and goals

My

celebrations

My

journal

My photos

and videos My network

LOGO

Lighting

Sport Local Culture Local Food Adventure

Dining Destinations Wellness

Recommend to friends and ‘like’ on social media

Landmark occasions, birthdays, anniversaries

Personally record experiences

Share photos and videos and mark where guest has been in their travel wishlist

Engage and compare with like-minded individuals

In-room and on-campus connectivity is not only rapidly becoming as crucially indispensable as electricity and hot water. It is also a way to strike a different relationship with the guest, in which connectivity is used to automatically capture the guest’s consumption data and behaviours in a way that 1) helps the hotel segment, profile and serve the guest better and in a much more personalised way and 2) helps the guest achieve goals that the guest cares about. This goal-based level

of engagement can be the key to deliver a new level of differentiated, compelling, branded and profitable experiences.

Free Wi-fi

Everywhere at hotel/on campus

Target segment =

Leisure traveller

Complimentary Hardback

photo album with 100 pics

Powerful and actionable guest experience insight

Personalised guest experiences focus on outcomes

True differentiation

Behavioural and emotional loyalty

11

Source: PwC 2013

PwC

Personalisation with permission

Loyalty programmes can help hotels engage their customers and create a better, more personalised experience.

Some hotel loyalty programmes are moving away from simple points-based programmes to offering specific experiences, products and services unique to members. The rewards system is becoming more flexible and moving away from points-win-prizes based approaches.

Going forward, understanding the goal of the consumer and how this can be achieved in a more targeted way will be an important next step. And that’s where data comes in: and the key is the data that digital can deliver and how that can be used to create genuine personalisation at customer level – personalisation with permission.

Achieving this level of personalisation clearly requires a much higher level of trust from the customer, and that in turn means that only those brands already perceived as trustworthy can take advantage of this. It’s about speaking directly to the consumers rather than harvesting the data behind their back.

A great example of a brand who has done this right and established a personal, emotive connection with the consumer is Nike. Their Nike Plus app is for runners and builds their trust in the Nike brand. The consumer agrees to allow the app to gather their running data in return for helping them achieve their goals. The Nike+ app tracks distance, pace, time among other data points and turns this into a “genie” that helps the jogger achieve goals the jogger cares about.

It’s about using that data to enhance both profitability and loyalty by helping customers achieve their own goals.

Hotels have always tried to give their guests the best possible experience, and asking for feedback is now standard across the industry. But in practice, the guest’s real preferences are often not formally captured, and if they are, they are not used to enhance the customer’s repeat experience.

Digital can offer such an unprecedented depth and breadth of insight about customers and their preferences that it’s possible – and affordable – for companies to offer a genuinely personalised experience. This has the potential to create an unprecedented level of customer loyalty to companies that understand what matters to their customers. Truly innovative brands will seek to exploit the second and third digital wave to further grow revenues, increase loyalty and reduce costs. By using this consumption data effectively and managing the customer’s digital identity, brands can deliver more personal, higher-quality experiences, securing a win-win for themselves and their customers.

How can hotels achieve the right kind of growth in a digital age? 12

Digital technology can transform the end-to-end guest experience The augmented customer/guest

Richer Digital Identity, including real-time guest segmentation, profiling and brokering of third-party services

Goal-based guest experiences Standard

digital unique identifier

Wearable devices and augmented

consumption experiences

Smart devices

Social media

Source: PwC 2013

Seamless eCommerce experience

13

Understanding ‘big data’ by thinking small

A new headache but also an opportunity for growth

‘Big data’ is the story you will have heard among your travel and tourism counterparts. Customers choose when, where and how they interact with you, often across many devices and increasingly across a complex decision-making and purchase cycle. Using the ‘observed’ and ‘volunteered’ transaction and consumption data from the range of digital channels and content gives you the potential to uncover far more insight into your consumers’ behaviours and motivations than ever before. However, it’s easy to become overwhelmed by the volume and fragmented nature of this data flow. The data that flows from the traditional booking systems used by travel agencies for example do not offer a detailed, consistent picture of what your guest wanted when they originally booked their stay. It’s essential that your business is capable of joining up this data in order to get a joined-up view of your customer.

The hotel operators that have the foresight to move forwards will be able to understand the data delivered by digital to offer a more value-added and personalised service, based on a far richer relationship with their customers, and this in turn will lead to a more sustainable and profitable business in the long term.

Think of it as taking the best of customer service that the hotel industry at its best is renowned for and translating this into data analytics – so, a concierge who understands the guests personally and knows exactly what to get them with the most un-intrusive of touches. Or the reception who knows which customers want to get straight to their rooms and those who are open to learning about what spa facilities are on offer or eager to book a restaurant in the local area on their first night. Alternatively, think of the customer who does not want the ‘frills’ of extra service and frankly would like to check-in via their mobile, book their morning wake-up call online and head straight to their room. It’s about thinking in granular detail about consumption – or thinking ‘small’.

Imagine how different a guest’s experience could be, if from the beginning of their research cycle they were asked what their goal was up-front. They would be offered a personalised service on the hotel website that used their past experience and that of a similar segment of consumers to provide useful suggestions for where to go and what to do once they got there (both within the hotel and outside). This service would then be accessed at any time and from any device. Any hotel within that chain would have a nuanced understanding of what that consumer wants. Why should the consumer trust the brand with this information? How can that brand help the consumer achieve their goals?

That’s why connected devices (where connectivity is for example provided by free wi-fi) will play a more important role in the emerging hotel of the future.

Some key questions your organisation should be asking around Big Data

?

?

?

?

?

?

Have you got the right data analytics capabilities?

Who should own Big Data initiatives that straddle the entire organisation?

Are you consciously linking data to business decisions?

Are you consciously changing your processes to capture the right data?

How do you store and protect/recover your Big Data?

Data (big, medium, small) is going to account for an increasing % of your balance sheet and of your reputation– How confident are you that this data is 1) protected and 2) monetised?

14 How can hotels achieve the right kind of growth in a digital age?

Conclusions

Digital is not a ‘bolt-on’

Digital and mobile platforms are changing everything and nowhere more so than in the travel space. While consumers are experiencing innovation in many areas of their lives which enables them to achieve their goals, hotels are currently following not leading the charge. There are huge opportunities for hotels to use the digital era to develop new business models that shape the guest experience, not only at the traditional "transactional touch points" but during the stay itself. At PwC we have a structured process that brings to bear our wealth of knowledge on how to design and deliver "differentiating guest experiences for the digital age". This process combines our experience with your own and with cross-industry best practices to unleash creativity, identify the real opportunities specific to your business and to help you achieve differentiation, emotional loyalty and competitive advantage.

15

Contact us

Robert Milburn

UK Hotels Leader

T: +44 (0) 20 721 2 4784 E: robert.j.milburn@uk.pwc.com

David Trunkfield

UK Hospitality and Leisure Leader

T: +44 (0) 20 780 46397 E: david.trunkfield@uk.pwc.com

Carlo Gagliardi

Strategy Partner

T:+44 (0) 20 780 40430 E: carlo.gagliardi@uk.pwc.com

Liz Hall

Hospitality & Leisure Head of Research

T: +44 (0) 20 721 3 4995 E: liz.hall@uk.pwc.com

16 How can hotels achieve the right kind of growth in a digital age?

Matthew Tod

Partner, Digital Intelligence

T+44 (0) 20 721 35360 E: matthew.l.tod@uk.pwc.com

Ben Downe

Strategy Director

T: +44 (0) 20 780 40146 E: ben.downe@uk.pwc.com

Further reading

17

www.pwc.co.uk/hospitality-leisure

18 How can hotels achieve the right kind of growth in a digital age?

19

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