MorningWord 08/19/14: Long Stay Hotels?

by Enis August 19, 2014 9:37 am • Commentary

Creative destruction is still alive and well in the global economy.  In fact, a novel idea can spread much more quickly in the internet age, disrupting entire industries over the course of just a few years.  The media, advertising, and retail sectors are grappling with the rapid-fire changes brought on by technology, as I noted in last week’s MorningWord post.

You can add the hotel industry to the list.  Airbnb is spreading like wildfire around the world, far outpacing the ability of the cost-heavy hotel companies to adjust.  Bloomberg had a brief video expose outlining the speed of the threat (h/t to Global Macro Monitor):

Marriott wants to add 30,000 rooms this year.  We will add that in the next two weeks.
– Brian Chesky,  Airbnb CEO

Aug. 18 (Bloomberg) — Airbnb, the site upending the hotel industry, is the darling of the sharing economy. Can the old-world hotel industry do anything to hold off this juggernaut? Bloomberg’s Cory Johnson looks at the numbers driving Airbnb. (Source: Bloomberg)

(click here if video is not observable)

The ability of an internet company to grow exponentially is why the incumbents in a given sector are so hard pressed to adapt to the upstart.  Airbnb is adding rooms at an incredible pace, oversupplying historically lucrative markets for hotel companies.

Up to this point, the hotel firms have been able to maintain their own sales and profit growth even as Airbnb has encroached on their turf.  Marriott (MAR), Starwood (HOT), Wyndham (WYN), and Hyatt (H) have all made new all-time highs in the past couple of months.  Annual EPS growth has generally averaged over 20% in the past 3 years, with annual sales growth above 5%.  So far, Airbnb’s ascent has been in conjunction with the hotel behemoths, as the overall hospitality pie has grown.

However, the hotel industry is not sitting idly by as Airbnb expands.  Executives are clearly concerned, and they are starting to assign some lobbying dollars to get municipalities and federal officials to crack down on Airbnb.  The story they spin is one of dangerous, unregulated rentals that can lead to criminal activities and long-term breaches of zoning laws and rental norms.  And what about the untaxed rental income from those renting out their rooms?  Of course, while these concerns are legitimate at the extreme, in the vast majority of cases, Airbnb’s regulation based on reputation is a sufficient buffer that satisfies its customers and stakeholders.  The real concern of hotel executives is the long-term competitive threat.

In that vein, it’s a script that has played out on numerous occasions in the past 2 decades.  The newspaper industry was not too concerned when online news first started, as newspapers had the big budgets, the legacy customer base, and had survived the prior threats from radio and television just fine.  The TV industry is still in denial even as hours spent watching live TV declines and online streaming takes up an increasing proportion of consumers’ time and budget.  The hotel industry is still in the early days of dealing with the disruptive threat, with the big cash cows of business and high-end travel still secure from Airbnb’s reach at the moment.

Not all traditional hoteliers will lose.  Some boutiques have benefitted from the increased potential customer base as Airbnb members have started comparing rentals with traditional hotel rooms.  In addition, the service expands the capacity for a city to host guests, increasing travelers that might not have arrived due to price discrimination and fixed capacity.  That flexibility leads to winners as well as losers.

In my mind though, Airbnb is a serious threat to the largest incumbents.  Given the elevated valuations and still robust growth projections of the traditional hotel names, investors might want to consider the risk that the rental market poses to their long-term growth and profits.  Those slow to adapt could be looking back 5 years from now and wondering where they went wrong.