By Francis J. Nardozza, National Hospitality Industry Director, Summer 1995

Get ready for sweeping changes to affect the lodging industry The organization and business operations of hotel companies will be reshaped to satisfy the changing needs of constituents. This is due in part to rapid technological advances in information and communications, as well as a transformation of the capital base of the lodging industry. Customers and stakeholders will demand seamless access to hotel company business information and processes. Heightened business interdependencies between hotel companies, their suppliers, and marketing and service representatives, will undoubtedly blur corporate lines. Major changes will take place in the way the lodging industry accesses and deploys financing and venture capital. This article will explore some of these forces of change.

Consumer Needs

Nearly every business and most individuals in the United States have already entered the electronic age of information and communications. Laptop computers, cellular telephones, beepers. and interactive communication devices have all become commonplace tools and we re]y heavily on them. Within the next few years, consumers will have unlimited direct access to most channels of market and business information and distribution. Consumers will want to handle daily activities and business transactions without leaving their homes or offices using their own personal computers. Buying and selling goods and services, paying bills, researching topics of interest, handling banking transactions, and planning daily personal and business activities are all part of this change.

What implications does this have for the lodging industry? Well, for starters. many individuals will want to book personally-tailored vacation packages and business itineraries using direct links through their own personal computers. This will require full access to on-line facility data bases and vacation catalogs, as well as price lists. Also. they will need direct access to hotel and airline rooms and seat inventory control systems. This alone could revolutionize the marketing and sales paradigm for the lodging industry.

Technological advances in information and communication will cause hotels to make dramatic chances in the way they serve and physically accommodate guests. Count on it, interactive computing and multi-media devices will be as commonplace in hotel rooms of the future as present-day remote control televisions and touch-tone telephones. Guests will want the option of avoiding interaction with hotel service and clerical personnel by using these devices. Just think, no more waiting in line to check in or out of your hotel room. No delay while waiting for the hotel operator or some other service clerk to answer the telephone to schedule your wake-up call, take your room service order or book your restaurant reservation. No need to call for additional towels, or to order a shoe shine or dirty laundry pick-up. You can do all of this by touching a few icons on your television screen.

Technological advancements may alter the physical design and space allocation of hotels in the future. Quite possibly, a computing and multimedia room will be required on every floor of every full-service hotel. Possibly. the amount and size of meeting rooms and auditoriums will change as guests wishing to participate in large conferences from the comfort and convenience of their guest rooms. may wish to use interactive video conferencing devices and remote response terminals, to participate. Another possibility is that the front desk area could be cut hack to a small greeting kiosk and the remainder of the space put to more productive use such as retail space.

Many new sources of revenues could result from these changes. Direct guest room linkups to a wide variety of online entertainment and informational networks will be a standard requirement in the future. This could mean large access fees for hotels. Rental or usage charges for peripheral devices could also mean big business.

Are most hotel companies now gearing up for these changes? Some are, but most are not. A number of hotel companies presently are focusing their attention on redesigning or participating in new global distribution systems. These will better link hotel companies, airlines, travel companies, and rental car companies to each other--but not directly to the consumer. Just think of the marketing opportunities that exist today for hotel companies to reach customers directly using international computer networks, on-line bulletin boards, and direct "E-mail" advertising. A few innovative hotel companies have already seized this opportunity.

Stakeholder Needs

Owners, investors, lenders. and suppliers all want and are demanding more timely information on which to base their business decisions and monitor their business interests. Many hotel companies are finding that stakeholders particularly owners and lenders- want to check-in directly to the flow of business and financial information. Think about demands for information that might come up in the future. Hotel lenders may want on-line access to hotel treasury and cash management systems to daily sweep bank accounts and monitor compliance with covenants of loan agreements. Investors may want up-to-the-minute financial statement information to gauge investment performance and make daily investment decisions. Suppliers may want on-line access to perpetual inventory records to automatically trigger purchase orders and shipments. Already, travel agents. meeting planners. and tour wholesalers want on-line access to room inventories and pricing information. To accommodate these needs. major changes in the business and accounting information systems of hotels and hotel companies will have to be implemented.

Organizational and Operational Needs

Sweeping organizational and operational changes will occur in the lodging industry. The need for large headquarters facilities with multiple departments and large technical support staffs will greatly diminish because of technological advancements in information and communications. In marketing and sales, huge competitive advantages can result from setting up “state-of-the-art" customer databases with interactive communication linkups. Through the use of wide area networks and other linkages. individuals will be able to share information and experiences between locations rapidly. and set up multi-location workgroups to facilitate problem-solving. This will significantly reduce the need to cluster technical support staffs under one roof. The ability exists to link suppliers seamlessly with hotel companies using "E-mail" and knowledge management software. For the first time, outsourcing for a wide variety of technical and business support functions, such as payroll and personnel management, purchasing. and new business deveIopment, is a viable option for most hotel companies. Outsourcing may also make sense for MIS technical support, corporate sales, asset management. food and beverage technical support services, and many other administrative and technical support functions.

For hotels, the entire organizational and operational structure may change as a result of technological innovation. Front-office functions could be minimized or eliminated. Universal service representatives could tend to virtually every guest need from a single work station. As already mentioned guests will likely be able to initiate many service functions directly using interactive guest room devices. This could change the service staffing requirements and mechanical resources to more productive activities. such as better execution of guest requests. This also holds true for many back-office functions. Through better uses of technology, many hotels 5 can approach elimination of many of the clerical functions presently performed in the back offices of hotels.

Capital Access and Capital Deployment

The capital base of the U.S. lodging industry is quickly shifting from Main Street to Wall Street. More and more hotels are being acquired by large investment funds. They typically match small amounts of equity with large amounts of secondary funds obtained from the sale of debt and equity securities on Wall Street. This includes funding from REMICs, REITs, initial public offerings. and high-yield note offerings. These sources of funding will continue to be the most viable and efficient means of raising capital for the hotel industry in the future.

In addition, traditional funding sources such as banks, credit companies, and insurance companies are already returning to the market to make loans. However, they too are planning to raise funds for lending through the sale of mortgage-backed securities on Wall Street.

The shift in capital is expected to have a dramatic effect on the future underwriting of hotel loans and investments. No longer will the game be to convince the lender's credit committee or the investor's capital committee to do the deal. Now the game will be to convince the independent agencies rating the securities that the deal is good, since they are the ones that Wall Street investors rely on to rate the underlying securities. Underwriting parameters will continue to be tough in the future since virtually all loans will ultimately be sold in pools to investors as securities. Lenders will want to be sure that every loan meets the minimum underwriting criteria set by the investment bankers who sell the loans to investors. After the loan is made, a far greater amount of periodic business and financial information will be required from the borrower. This is to allow for secondary sales of the mortgage-backed securities on Wall Street. Possibly, future loan agreements will require the borrower to provide quarterly and annual financial statements and reports similar to Form lOQ and 10K required by the SEC a heavy Compliance burden for borrowers.

Foreign capital will continue to play a very important role in the U.S. lodging industry. If the equity for a deal is not coming from Wall Street. chances are pretty good it is coming from Europe. the Middle East. or Asia. This is particularly true for deals involving large luxury hotels in major U.S. cities. For budget and limited service hotels and motels throughout the United States. Asian-American investors account for a large portion of the capital. In the future, we may see capital increasingly coming from ibis group for middle market and luxury properties.

In Summary

Sweeping changes are affecting the lodging industry. most related to technological advancements in information and communications. The big challenge to the lodging industry is whether or not it can quickly adapt to these changes. And adapting requires dramatic change in organization and operations. Opportunities exist for innovative hotel companies to tap into several new channels of market distribution to gain tremendous competitive advantages. The entire standard pattern for hotels and hotel company operations requires reshaping to satisfy' future consumer and stakeholder needs. As a direct result of meeting these needs. the lodging industry will realize marked guest service improvements. operational efficiencies, and hopefully, increased profits.

Welcome to the age of information and the benefits and challenges it will bring to the lodging industry.

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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