Hospitality in the Modern World
Back in 1975 I was asked to teach hospitality economics to the students at Cornell’s Hotel School, arguably the best school in the world for hotel management. It was not so challenging devising hospitality examples or cases to highlight important economics principles, though getting these abstract concepts into the heads of students fixated on “flush and gush” courses and wine-tasting was a bigger obstacle. The concept of mean reversion and diminishing returns were some of the hardest concepts for budding hoteliers to grasp. Given the tendency for first-time hotel investors to lose their shirts on hotels so that the next owner can have a reasonable go at it, should have held more interest to these students. I look at the money poured into the look and feel of these grand facilities and wonder how anyone could reasonably envision making money on their investment.
As I sit here in the Swissotel lobby in Istanbul, and remembering what life in Europe was like when I went to high school in Rome fifty years ago, I am struck by how far the hospitality world has come in those fifty years. Grand hotels have existed for much longer than that, but the process has refined itself inordinately such that people come and go from these grand hotels with such ease. They are able to enjoy the grandness of the experience in small snippets rather than for longer extended stays, which was more the norm in days gone by. Add the use of Expedia, hotel.com or Trivago and I get totally lost in the profitability math of making these behemoths work.
We are staying in this hotel for what will amount to three nights, having extended the planned visit by one day up-front. That already feels like a long time and I feel like an old hand around the place, recognized by the breakfast room server and the lobby attendants. The buffet alone cannot possibly have its costs covered by the room rate, but it is all included, so I guess it must. The marble and furniture of the lobby are hard to imagine being adequately amortized over a normal useful life, and yet there is no added charge for them. I know enough to know how one makes this all pencil-out in a projection, but I also know how far reality of per-person spend falls short of projections, or at least how easily that can occur. Keep in mind, Istanbul is a BIG city with enough Eastern and Western commerce going on that it can undoubtedly support lots of hotel rooms. Central Istanbul alone has 817 hotels, of which over 50 are 5-star rated. That’s over 56,000 rooms. That compares to 107,000 rooms in New York City, headed soon to over 130,000. Granted that New York is the #1 urban tourist destination in the world, but it is also half the population of Istanbul. Hotel room occupancy and average room rate are the key parameters that drive both hotel profitability and new hotel construction. Within the hospitality industry, these are not arbitrary or casual statistics, they are very precise and standardized data that is widely and uniformly available and used to drive the business.
Despite all of that, people will be people and egos will drive decisions despite data to the contrary. The tendency to build great monuments to people’s perceived sense of opportunity and importance is as old as the Pyramids. But pyramids are intended as monuments and hotels are monuments only to egos or senses of excessive exuberance. There is a place for luxury hotels, but does Istanbul really need or can it support 50 5-star luxury hotels? I know nothing of the data on Istanbul hospitality, but here’s what I do know now:
– Istanbul has a new huge airport that looks strangely familiar to the new huge China airports. Remember China’s Belt and Road infrastructure policy certainly includes Turkey in its long term plans.
– I’ve stayed in four of the 5-star hotels in Istanbul (it will be five by the end of this trip) over the past two years and so far, none of them have been at all busy or even close to full. My guess is that occupancy runs well below 40% on average.
– One of these hotels is more elegant and grander than the next. No expense was spared at any of them. I note the St. Regis, where my associate was brought a cappuccino with his picture infused in the milk foam. This was a technology, regardless of whether or not you consider it frivolous, that no one had ever seen in the U.S. or Europe. Money was being spent to differentiate.
– They all make more money on their F&B than they do on their rooms, between services and maintenance.
This upcoming trip through Turkey will give us a wide range of perspective on Turkish hotels. Our guides have carefully chosen each and are familiar with them all. They are organized to fit our travel route and the places we prefer to stay for more than one night (both in the southern vacation areas). We will stay at five beach hotels, one that is as grand as an Istanbul 5-star, two that seem very Spartan and two that seem like modern boutique hotels. We are then staying at two hill town guest houses. The one odd-ball hotel is the last one of the ride in Cappadocia, which is partially carved into the caves of the local fiery spires.
It will be an interesting experience if for no other reason than the diversity of hotels on the roster. Some will be in small villages, some in larger towns. All I’m sure will be comfortable and have all the modern conveniences. When I lived in Europe fifty years ago, European hotels were one hundred years behind U.S. Holiday Inns or Howard Johnson’s. They were charming and full of character, but light on everything else, particularly electronics. Today I watch on TV as American homeowners buy properties on the beach in Europe and Turkey and they have granite counters. Stainless steel appliances, including dishwashers (something that didn’t even exist in Europe at the time) and networked WiFi as well as ultramodern bathrooms with subway tiling, Grohe faucets and rain-shower shower heads.
Gone are the days of the little Greek island with the Mama Mia 10-room rustic inn. Now that place is a Relais & Chateaux that costs $700/night, minimum 3-night stay. There is no longer American or European Plan for dining. Everything is strictly a la carte except for the one free bottle of water per person in the room.
But that’s alright. We can’t blame the world for giving us what we wanted. Hospitality in the modern world demands it.