The globalization of the hospitality and tourism industry

Introduction

In recent years, U.S. hotels have been expanding their brand into the global market. Just forty years ago, the idea of ‘global enterprise’ in the industry was ludicrous. However, with new markets opening and expanding in other countries, the U.S. lodging industry has seized the opportunity and has already begun expansion into the international market. Currently, the U.S. lacks any further growth prospects partially as a result of the suffering U.S. economy and as prospects grow internationally, it is the perfect time to seize the moment.

Purpose ofthe Study

How will a lodging brand grow when the growth opportunities are limited in its home market? The literature review will describe step by step the procedures and measures taken into account when hotel companies expand internationally. This perspective will aid the reader in understanding with greater clarity how the U.S. hotel industry’s international market flourished to become what it is today and the future that lies ahead.

The International Environment

The globalization of the hospitality and tourism industry has accelerated under the pressures of advances in technology, communication and transportation as well as the deregulation of the industry and the elimination of political barriers. In addition, global economic development, and the growing competition in a global economy. Environmental scanning is defined by Byars as “the systematic methods used by an organization to monitor and forecast those forces that are external to and not under the direct control of the organization or its industry.” It is a systematic process to collect information, interpret trends and events, and provide possible courses of action for the hospitality firm. The general or external environment consists of many forces that exist outside the boundary of the organization. These forces are sociocultural, economic, technological, political, and ecological.

The sociocultural dimension helps to define the attributes of society and aid the hospitality manager in interpreting how his/her business will be affected by social and cultural changes. Demographics (age structure, sex, race, education, language, income levels), culture (family, reference groups, feeling and reaction shaped by social class, and learned patterns of behavior), psychographics (interests, habits, opinions, and personality characteristics), social factors (relationships, attitudes, values, opinions and beliefs), education, and nationalism are several factors which are included in the sociocultural dimension.

When scanning the economic environment, factors such as the gross national product (GNP), income distribution, foreign exchange rate, monetary and fiscal policies, financial and investment markets, taxation and tariffs, trade/industrial factors, and labor markets must be considered. “With the lifting of regulatory restrictions by many industrialized countries, the financial markets of previously separate national capital markets are now integrated into a global financial market. As a result, many capital-rich multi-national companies in all industries have taken advantage of interest and exchange rates and expanded through mergers and acquisitions globally.” (Zhao & Merna 14) Global economic policies and developments play a critical role in the hospitality and tourism industry.

Technology is the utilization of available knowledge and techniques to produce products and services. The industry’s demands for new technologies are focused on the attainment of convenience, speed, efficiency, control, and the ability to meet labor shortages. It must recognize technological advancements such as communication, transportation, safety/security, food/nutrition, equipment, and computers. “In the hotel industry, high-tech hotel equipment has been grouped into two categories: (1) systems to maximize profits; and (2) systems to maximize guest service. (Zhao & Merna 18) It is extremely important for the hospitality manager to realize the level of technology and technological capabilities within the host country in order to assess the advantages or disadvantages the hotel may face.

The political environment includes political systems, regulations, laws, and political stability and risks within a country. Political stability is not inherent with a specific type of government or degree of economic development, or with capitalism or communism, and therefore the awareness of a host country’s internal and external political environment is necessary in environmental scanning. A wide range of barriers exists that can limit worldwide travel. Restrictions on visas, administrative delays in obtaining licenses to begin building work or the management of hotels by foreign hotel companies, and discrimination in favor of national businesses are examples of such barriers. However, government incentives can encourage many corporations involved in the tourism business to extend their activities to encompass recently industrialized countries.

Scanning and evaluation of ecological issues will assist the manager in assessing individual responsibility for and liability to environmental damage, in integrating environmental affairs with operations, and in developing policies and professionals to manage environmental issues.

Location, Location, Location

Choosing where to develop is very important and political stability is always the primary concern. Developers typically us a four step process to determine the opportunities of expanding in a foreign country. In order to analyze the business environment, it requires a very detailed study of the political, economic, social, and cultural aspects of the desired country. Similar culture and language between the U.S. and other foreign countries make things easier when planning, developing, managing, and controlling the foreign hotels. Also, the physical proximity of the hotels and areas of prospective guests is another important condition. If the distance is far, then the hotel company must take into account the forms of transportation in the surrounding area of business. Prospective developers need to take into consideration the attitude of the target country toward tourism and international hotel companies. Some areas see tourism as an intrusion upon their country. Therefore, understanding the people in the target country before expanding is very important. After considering the question of political stability, market potential is for owners the next most important question to look into. Basically, the higher the market potential, the more willing a developer will be to support the project from start to finish. Market analysis consists of identifying the different markets, analyzing present and anticipated market conditions, and estimating occupancy rate and potentials. The third step in this four part process is forecasting sales to determine the economic viability of the project. Factors which affect the forecast are the market trends, number of hotels competing in the same group, the strength of competitors, potential market share, seasonality, anticipated ADR and occupancy, and planned sales and marketing strategies. The last step in the process is assessing profitability of entering the foreign market against the risks which may be involved. Political stability and government requirements can be a few of the factors which incur risk.

With the realization that a strong overseas presence helped domestic hotel properties gain a fraction of the foreign travel market, the U.S. began looking into the expansion of its hotels. The prediction around 1970 was that the Asia – Pacific region would be the fastest growing economic area influenced by the “exotic locales, shopping opportunities, and beautiful beaches in many areas, in addition to the region’s flourishing commercial centers and expanding markets, made it a natural for visitors from all over the world. Nearly every hotel chain of stature pursued development in the area.” (Gee 34) Today, hotel expansion is geared towards Asian countries such as China and India.

Lodging Brand Expansion into India

Two engines are driving hotel construction in India: the country’s surging economy and the country’s great lacking number of hotel rooms. “Nearly half of the new projects are luxury hotels which account for about $1.58 billion in investment.” (Hayward 31) Also, major events such as the Commonwealth Games in 2010 and the Cricket World Cup in 2011 will add to the already high demand for hotel rooms. Most hotels are developing in cities such as Mumbai, Bangalore, Kolkata, Delhi, and Chandigarh. Large hotel chains are seeking to capitalize on the undersupplied markets where demand has pushed room rates dramatically higher in the past year. “In Bangalore, for example, are some of the highest in the world, due to the dearth of supply and a sharp influx of travelers. Smith Travel Research pegs year-over-year rate increases in Central, South, and Southeast Asia at more than twenty-five percent.” (Business Travel News) With the hotel growth spurt coming to India, Hilton and Marriott have recognized that the middle class is approaching three hundred million people. As India continues to prosper, the middle class is certain to become even bigger. “Layer on top of that the fact that only thirty seven percent of hotels worldwide are branded, and the incentive for the big chains is clear.” (National Real Estate Investor) Hilton’s principal role will be to manage its properties. The hotels will mostly be a mixture of the Hilton Garden Inn brand geared toward business travelers. Hilton’s overseas expansion will help a greater number of potential guests around the world become familiar with the Hilton brands, benefiting owners of U.S. Hilton hotels when international travelers visit the United States. Marriott plans on focusing on the expansion of its Courtyard brand for the large middle class population in India. However, there are some difficulties facing India’s domestic market, the main problem being space shortage. “The infrastructure in India has always been its bane. The country’s ability to deliver a regular water supply is often tested, and water tankers regularly ship in water when the taps run dry. Power cuts in most metropolitan cities of India are a daily occurrence. The hotel industry is also posed with these hurdles on an ongoing basis.” (Mathews 2)

Lodging Brand Expansion into China

The Asia-Pacific region which is an area that is growing rapidly in terms of inbound and outbound tourism is attractive to many leading U.S. and European hotel groups. These markets provide great opportunities for hotel expansion that have not gone unnoticed. “In 2002 alone, more than forty hotels opened under the brands of just the following four global hotel groups: Accor, Marriott, Six Continents, and Starwood.” (Jogaratnam & Tse 4) Even with all this development, opportunity still exists in many Asian markets. Hong Kong, Malaysia, China, and Singapore are now home to major international and regional hotel brands (i.e. Hilton, Hyatt, Marriott, Mandarin Oriental, Peninsula, and Shangri-La). “Demand for hotel accommodation in Singapore is so strong that the Singapore Government has announced a number of new sites for hotel development, equating to approximately an additional 6,000 new rooms.” (Asia Pulse) “InterContinental Hotels Group, one of the world’s largest hotel companies in terms of room numbers, announced yesterday it will launch a franchising business model for its Holiday Inn Express hotels in China to help expand its local portfolio more quickly.” (Shanghai Daily)

“We plan to increase our China presence to a total of 125 hotels covering four of IHG’s brands by 2008, with the Holiday Inn Express brand contributing a significant part,” said Kieron Ritchard, vice president for IHG’s China strategy. (Shanghai Daily)

It is seen that Intercontinental is taking advantage of these opportunities to expand its hotels disregarding the current status of the economy and not letting it influence expansion into Asian countries entirely. Also, the Beijing Olympics has been a tremendous impact on creating a blossoming and lucrative tourism industry. “China’s booming economy and this year’s Olympics, to be held in Beijing, have made immediate contributions to the activity, and the Shanghai World Expo, to be held in 2010 also factors in.” (Gilligan 1) There is an enormous amount of business and leisure travel activities, and with this growth comes the construction of new hotels. “A lot of hotels are looking for international brand affiliation. When you have a Western brand in the front of the hotel, you have credibility immediately for that hotel.” (Taulane 46)

Maintaining the Brand Image

“Expansion-minded chains have three conventional choices: (1) expand existing markets at home, (2) create new products to fill market niches, or (3) develop new markets abroad. The most progressive hotel chains have adopted all three strategies at various times, alternatively or concurrently.” (Gee 167). The more locations a chain has, the more loyalty and familiarity it can build among existing and future customers. With the brand name abroad in other countries, it offers a type of reassurance for travelers looking for reliable hotel services and to first-time tourists who are seeking comfort in a foreign atmosphere. However, since tourists are continually searching for new experiences, new places, and new accommodations, creating a sense of loyalty to a particular brand name is difficult. Therefore, to maintain client loyalty to a particular brand, “the following factors must be taken into account: (1) each brand must be defined so as to conform to certain specifications that must be adapted to the chosen market segment; (2) each brand must be created to conform to consistent quality standards, so as to attract different market segments; (3) each brand’s image must be used in a consistent way by all the chain’s hotels.” (Cunill 150) Currently, Marriott International is looking to global markets with its new Edition brand, an upscale boutique chain being created in partnership with Ian Schrager. But the company is also looking to some of its other upscale brands, such as Renaissance, Ritz-Carlton and J.W. Marriott, to grow its global presence. With development taking place throughout the globe, maintaining consistency within each brand has become a major priority for franchise companies. “As such, Hilton recognizes the need to align itself with partners with a proven track record and to closely monitor its properties worldwide. The need to maintain brand standards while accounting for the differences that each market presents is a key for successful expansion into new international markets. “Consistency of the brand is more difficult in a down time because people don’t have as much capital to invest,” said Goldman. “As a truly global company, we have the challenge and opportunity to create a guest experience that is consistent around the world, but still caters to the specific needs of a given market” added Turner.” (Nessler 1)

According to Dr. James F. Downey, Professor of Hospitality Management at Lynn University, there are five important factors which have the greatest effect and are extremely important before taking into account the idea of expansion. The first of these five factors is the commercial leasing vacancy rates. If commercial leasing vacancy rates are low, businesses occupy more real estate property, which contribute to the commercial business traveler’s need for hotel accommodations. “Similarly, when rates on the second factor — unemployment rates — are low, businesses are at labor capacity, thereby again contributing to the need for these businesses to accommodate their employees. Airline, rail, cruise, limousine and other transportation growth also contribute to lodging demand, if their rates are high. Likewise, increases in retail, eating and drinking sales have positive effects on stimulating room demand since they are all tied together.” (www.resorttrades.com). One of the most critical points one needs to remember about expansion is timing. Timing of an expansion can be related to a corporate timetable, international business trends, or the availability of the right opportunity. Either way, the company should gauge which domestic strategies should be directly transferred to foreign markets, which ones should be modified for export, and which strategies should just be eliminated in order to be successful.

Lodging Structure

Structurally, hotel companies involved in the international hotel industry usually are categorized in three possible ways.

“Corporate hotel chains – hotel organizations that have their own brand or brands which may be managed by the corporate chain or by a conglomerate.
Voluntary associations – independently owned and operated hotels that join together primarily for marketing reasons.
Conglomerates – companies that manage corporate brands or independent unbranded hotels.” (Gee 176)

Out of the three, conglomerates are the ones making the most impact on the international hotel industry through merger and acquisition. Usually the owners of one company merge with another company to reduce competition, to increase the company’s efficiency and profitability, to improve stability of results, and to find an outlet for surplus funds and/or an outlet for investment when a good opportunity arises. In return, executives allow their companies to be taken over in order to increase their growth capacity through the addition of new resources, increased efficiency, and a raised value of shares.

Seven Theories on Mergers or Acquisitions

There are seven different theories which are used to achieve different objectives with a merger and acquisition. With the efficiency theory, acquisitions and mergers are carried out to obtain financial, operational, and managerial synergies. “Although financial reasons have been most commonly used as a justification, thereby generating the greatest number of theoretical and empirical studies, they may not be the main reason behind mergers and acquisitions.” (Cunill 76) Through the monopoly theory, mergers and acquisitions are carried out to improve companies’ competitiveness. Horizontal mergers can reduce market competition, whereas vertical mergers and those that lead to conglomerates can create situations in which competition is restricted. With the raider theory, either no negotiation has taken place between the companies involved or, if there had been any, it led nowhere. According to the valuation theory, acquisitions and mergers are carried out by executives who have access to more accurate information on the real value of the company to be taken over that that can be found from the investment market. The empire-building theory is based on the idea that managers have only one aim in mind which is to maximize their use. This will increase as the firm achieves greater market power. The least developed theory would be the process theory. It attempts to justify acquisitions and mergers by attributing them to the limited rationale of management teams that make this decision. The last theory is the economic disturbance theory. This theory upholds the idea that acquisitions and mergers succeed each other in waves. Caused by economic disturbances, it modifies the individual behavior patterns and expectations.

Franchise Agreements

The cost-benefit relationship of management contracts and franchise agreements are studied thoroughly before hotel owners choose an affiliation. “The franchise contract includes at a minimum (1) the use of a shared name and common layout, design, and presentation for the premises where the franchisees run their businesses; (2) shared know-how; and (3) ongoing technical and commercial support, given to the franchisees by the franchiser.” (Cunill 111) With a hotel franchise contract, the franchisee operates under the same brand image and with the same methods as its parent hotel chain, the franchiser. A franchise contract is usually active for a period of twenty to thirty years for a fixed annual amount. Employees from the franchising company carry out regular inspections to check for full compliance with its corporate regulations and with the production process. Noncompliance with either aspect is considered a breach of contract to be alleged, on the grounds that the hotel may discredit the franchiser. Franchise contracts are designed to benefit the franchiser. They offer initial assistance to franchisees; hotel franchisers also offer a system of finance for the business and consultancy in the design and construction of hotels. They also offer booking services, public relations assistance, quality control programs, publicity campaigns, and marketing programs to help their franchisees. However, certain franchising fees do apply. These fees include an initial fee (a fixed sum per room which covers the cost of an analysis of the existing or potential hotel and expenses incurred prior to the hotel’s inauguration), a yearly fee (usually a percentage of the gross room revenue in exchange for the use of brand names, logos, and graphic material), a marketing fee (based on a percentage of the gross room revenue), a reservation fee (a fixed amount for each booking made), and other variable fees to cover different backup services. A master franchise program is well-suited for international development since the person responsible for development and support of the brand in the designated territory. “Typically there is a large, nonrefundable development fee, often adding a substantial immediate boost to the franchisor’s revenue, with the potential for a steady stream of royalties without substantial on-going obligations.” (Fitzgerald & Schott 17) It is more knowledgeable, experienced and connected in the culture and business of the designated territory. However some challenges which come along with the master franchise program. It can be a significant disadvantage due to the franchisor’s substantial loss of control over the system resulting from the transfer of responsibility. Another challenge is the difficulty in enforcing system standards. This is because “…delegation of virtually all operational responsibility to the master franchisee. The franchisor will also have to anticipate and plan for its response to a master franchisee’s failure to meet its development schedule.” (Fitzgerald & Schott 17)

Management Contracts

“A business management contract can be defined as a contract under the terms of which a company agrees to manage another one, on behalf of and at the risk of the latter, in exchange for financial remuneration. (Cunill 127) The owner does not make any operational decisions but holds the responsibility to supply the necessary capital and to meet the payment of expenses and debts. The management company receives a fee for its services and the owner receives the remaining profits after all the costs have been deducted. Management contracts for hotels are long term, covering periods of up to twenty-five or thirty years. The long periods are sufficient to cover the length of the loan taken out by the developer. Management contracts must be designed to suit each individual situation, with special attention to the agreement fees. The contract has to cover matters such as the provision of capital by the management company, the budget and expense limits, accountancy and financial conditions, the length of the contract, a possible renewal clause, the conditions for the cancellation of the contract, services to be provided by the management company, and the minimum annual amount to be spent on advertising, maintenance, replacement furnishings, equipment, and other related items. The contracts should also clearly state that it is an agreement between an owner and a hired manager, not a leasing contract.

Management Contracts and Franchise Agreements for International Hotels

Certain international hotel chains prefer management contracts while others prefer franchising. “Holiday Inn and Ramada engage in more franchising, while Inter-Continental, Westin, Hyatt, Hilton, Sheraton, and Four Seasons prefer management contracts; these latter companies are philosophically opposed to selling the use of their names without having day-to-day management control. Historically, franchising has been more prevalent in the middle and lower tiers of the hotel industry.” (Gee 229) This is because hotels in this segment can be run by an owner/operator. “For Asian owners who have been more involved in operations than their Western counterparts, greater control typically means shorter management contracts. Fearful that the owners may be looking for nothing more than technology transfer (and, perhaps, to hire away a few executives), many operators are making contract duration a top priority in negotiations, preferring to make concessions elsewhere.” (The Cornell Hotel and Restaurant Administration Quarterly 20) The greatest degree of control for the owner over a brand affiliated hotel would be franchising. Because of this, Asian owners have become interested in these franchise-type management contracts.

Multi-Unit Franchising

For many franchisors, multi-unit franchising may be the next logical step in the expansion of their system. Before heading for the multi-unit path, franchisors must conduct the internal and external due diligence necessary to analyze whether or not multi-unit franchising makes economic and business sense for their system. “The franchisor should focus on where its system is in its evolutionary process, what goals multi-unit franchising will help satisfy, whether there are unique aspects of its system or industry that may impact its multi-unit development plans, and whether it has the resources and infrastructure to support its plans.” (Fitzgerald & Schott 18) However, instead of using multi-unit franchising as part of a comprehensive plan, franchisors use it in reaction to enthusiastic inquires from prospective franchisees. “More than likely, all U.S. franchisors who have been around for any length of time have been approached by foreign prospects who, for a large up-front fee, want to acquire the development rights for a particular county or countries.” (Fitzgerald & Schott 18) Although tempting, the franchisor should conduct a thorough analysis. Franchisors should set minimum development schedules that are reasonable. To help ensure that development schedules are reasonable, franchisors should conduct meaningful due diligence and get in-depth business plans from prospective franchisees. “…However it may still be difficult to determine what is “reasonable”. Accordingly, a franchisor may want to consider dividing the development period into intervals and negotiating in good faith a separate development schedule for each interval. Franchisors may also want to consider imposing minimum performance standards as a condition to the development of additional units.” (Fitzgerald & Schott 18)

Labor Strategy in International Hotel Management

“Hilton Hotel Corp. has increasingly derived a greater share of revenues from managing and franchising hotels than it has from owning them. The company owns about sixty of the two thousand eight hundred hotels it manages…” (Gilligan 4) Owning properties means that Hilton is better able to monitor talent and promote deserving employees; it gives people the opportunity to build careers. “With any growth come growing pains, and in China’s ever changing market, a definite problem that has emerged is a shortage of skilled workers – from front line staff to experienced management positions. The explosion of new properties compounded by an influx of internationally based companies from other industries caused the demand for skilled, multilingual employees to surge.” (Taulane 48) Wanting to keep certain people while at the same time needing a peripheral workforce presents management with a complicated motivational obligation – managers have to get the best out of people with loose job tenure. Training and growing your own skilled people can be expensive, but leaving it to the labor market runs the risk of market dysfunction. “In the case of labor strategy, we are thinking about people, skills, motivation, knowledge, how work should be organized, control, and authority. These are the bricks that make up any organization.” (Riley & Jones 301) There are seven dimensions of the organization: stability, occupational value differential, training capacity, rewards, knowledge base, intergroup relations, and morale. For international hotel companies, the common policy is to allow ‘local conditions’ to predominate because of labor laws. Managers must carefully question each of the dimensions of the organization when reviewing strategy. A policy manual lays down policies and procedures. One problem which all hotel companies share is the cost of developing employees to become supervisors and managers. Employees are valued in their early employment for their technical skills rather than for managerial skills. “A common problem in the development of hotel managers is that they often see their self-identity in the original technological terms. This is a barrier.” (Riley & Jones 310) The role of the strategy is to ensure that career management knows the career path and to ensure helping people grow on their career path. “The international dimension adds further problems. There are three problems. The first is that management has a different value and style in different cultures. Second, rates of learning vary from country to country. What is unskilled work in some countries can be regarded as skilled in another. Third, the culture of international hotels is basically Western European, so training takes on the additional burden of culture transfer as well as teaching skills and knowledge.” (Riley & Jones 310) Therefore, when developing a labor strategy, forethought, questions, and a vision are required.

Future Predictions of Lodging Brand Growth

While many of the big hotel companies have until now built significant presences in major foreign capitals and other cities through large, center-city hotels, they are now growing globally by introducing their middle-market and extended-stay brands in countries that deeply lack such lodging product, such as China and India. However, there are two countries that maybe turn into hotel-development hot spots in the future too. “Vietnam is becoming a low-cost manufacturing alternative to China, which should continue to strengthen the economy there, said Patrick Ford, president of Lodging Econometrics Inc. And casino-hotel development in Singapore is increasing as the island nation strives to compete with Macau.” (Gilligan 2) Las Vegas Sands Corp. is currently building The Marina Bay Sands, a casino/gambling resort, in Singapore because it is a tourist destination, a financial center, and a meetings location.

Findings and Limitations

The major studies in the subject mostly concern the development of hotels internationally. Much scholarly research is concentrated on China and India as these currently are the two major areas where the growth and development of the hotel industry is readily apparent. The economies in these countries have vastly expanded in the past few decades as they industrialized. With their modernity consisting of rapid transit, luxury restaurants, high-class shopping, entrepreneur opportunities and other attractions, there has been a huge influx of tourists and business travelers. This inevita