By Rachael Rothman, Jack Corgel, and Christine Bang
Artificial Intelligence (AI) and technology enhancements for hotels promise enhanced customer service, higher margins and expanded research and booking, with improved experiences for guests. Of equal importance is the likelihood that AI and broader technology improvements will materially shift the relationship between hotel brands, third-party management companies and hotel owners, as well as the relationship between the online travel agents (OTAs), metasearch platforms and the brands, owners and managers.
Key Takeaways
Potential implications of artificial intelligence and technology enhancements in the hotel space include the following:
• Introducing AI-enabled machines to perform operational tasks will achieve efficiencies and realize productivity gains among knowledge workers. AI will also substantially increase leisure time available for travel. For these reasons, the number of leisure-oriented hotels will need to grow.
• AI and technological enhancements will lead to further industry consolidation and increasing benefits of scale.
• Hotel brand families are likely to grow their portfolio of strategic partnerships to improve their access to data at scale. The financial and talent resources required will leave many smaller companies at a disadvantage.
• Access to large-scale data will enable hotels to move from offering rooms for a fixed price to making pricing offers based on the total revenue potential of each guest.
• Some online search engines could move more directly into “selling” rather than advertising lodging opportunities, and the race for market share between the OTAs and the world’s largest brands is likely to continue.
• We expect the hotel brands to command higher franchise fees and the OTAs to push for higher commissions in the future. The same is true of third-party managers, where consolidation is likely to continue, and the benefits of scale will remain a key component of the value proposition for hotel owners in manager selection.
• The divide between properties with many amenities and those with very few is likely to deepen. Properties in the middle—those with small wellness facilities or limited paid food and beverage—are more likely to continue scaling back amenities.
• Given today’s cost of capital and pressured Gross Operating Profits (GOPs), we expect owners to wait at least another upcycle before they consider making these investments in earnest. In the initial phases, owners will replace less expensive service labor with higher-cost technical and maintenance labor and replace operating costs with depreciation expense.
AI and technology enhancements will influence the relationship between hotel brands, third-party management companies and hotel owners, as well as the relationship between the OTAs, metasearch platforms and the brands, owners, and managers. Other considerations include which location types and price points will benefit the most or the least under the various macroeconomic scenarios.
Much of the discussion about how AI will impact the U.S. economy centers on job losses and offsetting new and different job creation. Both impacts likely will occur as improving technology and AI permeate all industries. Large productivity gains are expected for many jobs affected but not eliminated by AI.
For decades, workers have been shifting available hours gained through technological advancements from work to leisure. A combination of fewer hours worked and rising real salaries and wages has been a key determinant of the rapid growth in consumer spending and demand for paid overnight accommodations.1
A key question for the travel and lodging industry is whether the efficiencies gained in the labor force—which create free time for workers and improve corporate profit margins—will offset the economic headwinds that could come from widespread layoffs and job obsolescence. If the proliferation of AI and technological enhancements maintains employment levels, resort hotels will benefit from the increase in leisure time. If technology causes large-scale job losses, leisure travel will decline as a knock-on effect of a broader macroeconomic slowdown. The same is not true for business hotels, which could lose demand based on technology enhancements, potentially putting hotels focused on the independent corporate business traveler most at risk. This circumstance might be nothing more than an extreme version of today’s market dynamics.
The price points and locations that will most likely outperform will depend on which jobs are lost and the impact on individuals’ discretionary income. These types of secular changes are not likely to come about within a current 7–10-year investment horizon.
Seventy-eight percent of U.S. hotels are affiliated with one of the roughly 328 hotel brands in the U.S., according to Smith Travel Research/Costar. At the end of 2023, the six hotel brand families tracked in CBRE Hotels’ KPI database own an average of 21 brands each, and they represent close to 60% of all branded U.S. hotel supply. These large brand families have considerably greater financial resources than many smaller industry participants in this market. Companies’ size and financial strength will be essential for making the type of AI investments that should produce sizeable operating advantages and efficiencies, as well as maximizing the benefits of data mining and personalization to drive revenue gains. The financial resources required to compete in the AI race will leave many small and financially weak companies behind.
AI will likely lead to consolidation and increasing benefits of scale. The larger a company is, the greater its access to proprietary data, and in the case of higher-margin, asset-light hotel brands and OTAs, the greater the access to cash flow to purchase data and invest in technology, data scientists and engineers.
Another implication will likely be hotel companies engaging in more partnerships with companies in other industries. The benefits of those partnerships—including hotel co-branded credit cards; status matching for hotels and airlines; car rental companies and hotel partnerships; and access to data and data at scale—have proved significant.
We are now beginning to see partnerships across a broader range of industries. Choice, for example, has partnered with Grubhub, which could make on-site restaurants less of a competitive advantage for some hotels. Hilton and Extended Stay America have recently unveiled partnerships with Target, Restaurants.com and DoorDash to make their points more immediately redeemable for discounts and other merchandise. It will be highly challenging for an independent hotel to compete with these types of relationships that benefit from scale and access to data.
The large tech companies that have access to data at scale but have yet to move directly into selling hospitality are the internet and social media giants. These companies are high-margin, high cash flow and asset-light. Between them, they read your email, know where you live and when you go on vacation, what types of places you researched and chose not to go, when your anniversary is, when your kids were born, who your friends are and even what you ate last night. AI will enhance their ability to make targeted offers that suggest the right place at the right time and at the right price.
As a result of this dynamic, we expect the globally recognized brands to command higher franchise fees and the OTAs to push for higher commissions in the future. The same is true of third-party managers, where consolidation is likely to continue, and the benefits of scale remain critical to the value proposition for hotel owners in manager selection.
Access to these types of data, along with on-property spend data, could also lead to hoteliers pricing the guest rather than the room. In today’s marketplace, a hotel sells a particular room at a particular price, regardless of who is staying in the room. To maximize revenues and profits, it may be beneficial to offer discounted rooms to guests who are likely to spend more at onsite amenities such as the restaurants, spa and pool. Based on past guest folios, and possibly data available via online platforms, it is possible to access the customer’s total revenue potential rather than simply setting a price for the room.
What could AI mean for hotel owners, aside from the increasing likelihood that they will partner with a globally recognized brand partner or a soft brand? AI in conjunction with these national or international partnerships with companies in adjacent industries could continue to concentrate the industry into properties with many amenities and those with few. Those properties in the middle—those with small or limited facilities—are more likely to eliminate those amenities. Just as ride-service apps made hotels outside of walking distance to an event more accessible and attractive, food-delivery and on-demand wellness apps will make lackluster amenities or those with low utilization essentially obsolete.
The technology and AI revolution is already enabling more robotics (for physical tasks) and chatbots (for non-physical tasks) to do operations traditionally performed by humans. With labor constituting around 45% of hotel operating expenses, the desire to substitute technology for labor certainly exists. The early-stage substitution of machines for humans is made possible by significant leaps in machine intelligence. Improvements in technology and the ability to innovate with massive databases will make machines increasingly more useful in hotels. Owners will undoubtedly want to increase investments in technology systems that enhance energy efficiency, preventative maintenance and security and possibly replace aspects of food service and housekeeping with robots. Owners will seek to swap higher-cost labor for less-expensive labor and depreciation expense for operating costs. Overall, guests at higher-end properties will demand more human interaction, reinforcing the idea that properties and capital investment are likely to either gravitate to the higher end of the spectrum or go completely self-service.
Nearly, if not all, hotel departments and functions will become beneficiaries of increasing technological efficiencies and the AI revolution. This means more machines and fewer employees will run hotel businesses. To achieve margin improvement, the operational labor must shrink by more than information technology, engineering and maintenance functions grow, and to improve free cash flow (FCF), the operational cost savings will need to more than offset capital expenditures.
1 Paid accommodations include hotels, short-term rentals, and other lodging service providers such as cruise lines.
