The hotel industry has undergone seismic shifts over the past two decades. New competitive threats and business model innovations have reshaped an industry known for its stubborn resistance to change. Yet creativity, calculated risks, and strategic adaptations have allowed leading hotel chains to not just survive upheaval but thrive.
Traditional Owner-Operated Hotels
Hotels were traditionally owned and operated directly by major brands like Hilton, Marriott, and Hyatt. Companies built or bought properties outright, hired all staff, and managed every aspect of the guest experience.
This model allowed hoteliers to fully capture income generated. But it also came with downsides:
- Huge capital requirements – Developing and acquiring hotels demands significant upfront investment. Constructing a new hotel can cost $30 million to over $100 million.
- Slow growth – Developing real estate is slow. It takes 2-3 years on average to build a hotel. Geographic expansion is limited by construction pace.
- High fixed costs – Owner-operated hotels carry substantial fixed costs like labor, property taxes, maintenance, utilities. Costs remain even at low occupancy.
- Operating risk – As owner-operators, hotel companies bear the full brunt of economic cycles. A decline in travel demand directly hits their bottom line.
- Low ROI – The capital intensity and operating costs of hotels make ROI elusive. Properties often take decades to recoup the initial investment.
This model constrained growth. Expansion required ongoing access to capital and tolerance for risk. Operating challenges mounted during industry slumps.
The Franchise Model Transformation
In response, hotel companies began franchising their brands decades ago. Under this model, entrepreneurs own and operate hotels while paying royalties and fees to chains in exchange for brand affiliation.
Franchising shifted hotels to an asset-light, fee-based business model:
- Entrepreneurs take on the cost, effort and risk of development.
- Brands expand by selling franchise rights rather than costly real estate transactions.
- Brands earn income from royalties vs. volatile hotel earnings.
For hoteliers, franchising enabled faster, lower-risk growth:
- Rapid expansion into new markets without capital constraints
- More stable revenue from franchise royalties regardless of economy
- Insulation from operating costs and real estate risk
- High return on capital since no assets owned
Today over 95% of hotels across major brands operate as franchises. The results have been staggering:
| Brand | Franchised Hotels | Franchised Rooms |
|---|---|---|
| Marriott | 7,642 | 1,048,342 |
| Hilton | 5,685 | 775,877 |
| IHG | 5,817 | 809,494 |
| Wyndham | 8,092 | 716,727 |
Core hotel brands like Courtyard, Hampton Inn, Holiday Inn Express and others are virtually all franchised. Owners pay 10-20% of room revenue as royalties.
By reducing volatile operating income in favor of fees, franchising provides stable, scalable cash flow for brands.
Management Contracts
Beyond franchising, brands offer management contracts for owners seeking turnkey operation. Hotel companies run day-to-day operations,while the owner retains title.
Owners pay a base fee (~3% of revenue), incentive fee (10-20% of profits), and reimbursed costs.
Management contracts allow brands to capture income without risks of ownership. Contracts are flexible and cancelable by either party.
Wyndham, in particular, shifted to a 95% franchised and managed model. They sold off their last directly owned hotels in 2021 to focus purely on fee-based income.
The Airbnb Challenge
The rise of Airbnb posed a competitive threat with its home and apartment rentals. Airbnb structurally disintermediated hotels by:
- Lowering barriers – anyone can list their property on Airbnb with minimal friction. No major capital or approvals required.
- Expanding supply – Airbnb adds new types of units (homes, apartments, condos) beyond hotels. Their global supply eclipses major hotel brands.
- Differentiated experience – Offering more space, privacy, and novelty compared to traditional hotels.
- Lower costs – Operating costs are lower without large staff or lavish amenities to maintain. Enables cheaper rates.
Airbnb’s asset-light platform model gave it scale and cost advantages. At its peak in 2021, Airbnb offered over 6 million listings – more than double the combined rooms of the top five hotel brands.
But hotel brands adapted their business models long ago to compete as asset-light platforms. In reality, Airbnb validated rather than disrupted the franchise and management models.
Why Hotels Aren’t Scared
Pundits predicted Airbnb would decimate hotel chains. But hotels show no signs of panic. Here’s why:
They already operate as platforms – Franchising and management contracts make hotel brands structurally similar to Airbnb’s platform. Both drive growth through demand-side scale rather than supply-side. Airbnb did not introduce a new model but rather mirrored existing hotel economics.
Different target segments – Hotel brands are optimized for business travelers who value consistency, rewards programs, and centralized billing. Airbnb caters more to leisure “experience” travelers. The segments have limited overlap.
Core capabilities endure – Hotel brands still excel in their core competencies like managing housekeeping, optimizing revenue per room, delivering high-touch service. Airbnb competes on price rather than service.
Regulation evens the playing field – Airbnb initially gained share by avoiding hotel taxes and regulations. Increased regulation of short-term rentals has since leveled the competitive environment.
Make no mistake – Airbnb upended the traditional vacation rental and B&B industries. But hotel giants had insulated themselves decades ago by going asset-light. Their business models inherently resisted disruption.
What The Future Holds
Looking ahead, hotels must continue balancing consistency and innovation to thrive.
On one hand, hotel brands are doubling down on their core strengths – business travel, rewards programs, full-service amenities. Business travel in particular is projected to drive lodging recovery post-COVID.
But brands are also evolving to capture shifts in consumer values. Examples include:
- Local flavor – More hotel restaurants and bars tapping into local food and beverage culture vs. cookie-cutter chains.
- Boutique and lifestyle hotels – Brands like Canopy by Hilton and Moxy are entering this category with stylish, design-focused properties.
- Wellness – Brands expanding fitness amenities along with partnerships with spa, yoga and fitness brands to attract wellness travelers.
- Sustainability – Initiatives aimed at eco-conscious travelers like hydration stations, linen reuse programs, waste reduction protocols.
- Smart design – Optimizing lobby layouts, mobile check-in, and tech integration to blend consistency with flexibility.
While hotel giants doubled down on loyalty programs and direct booking campaigns to compete against OTAs like Expedia, they did not try to build the next Airbnb. Their future lies in perfecting the hotel model rather than attempting to beat Airbnb at its own game.
Brands that master the integration of hospitality, loyalty and tech will lead as consumer values continue evolving. But for full-service hotels, the core foundations of quality service and reliability never go out of style.
Timeline of Key Events
- 1960s – 1980s – Hotel chains begin shifting to an asset-light model with franchising and management contracts
- 2008 – Airbnb founded during the recession when homeowners sought income from extra space
- 2011 – Airbnb reaches 1 million nights booked
- 2014 – Airbnb surpasses Hilton and IHG in room count
- 2016 – Hotel chains accelerate franchise growth, selling off owned assets
- 2021 – Wyndham completes transition to 100% franchised and managed units
- 2021 – Airbnb hits record gross booking value of $46.9 billion
- 2022 & Beyond – Airbnb aims to enhance host support and improve consistency as competition heats up with hotels. Hotels continue balancing consistency with lifestyle-oriented innovation.
While ongoing evolution remains necessary, the core foundations of hospitality that powered the world’s most successful hotel brands for over a century will likely endure. Wherever travel demand exists, there lies opportunity for hotel brands nimble enough to adapt their models, capabilities, and partnerships to ever-changing consumer values.