Resetting the Hotel Industry (2010)

Resetting the Hotel Industry !1
Resetting the Hotel Industry
Akira J. Park
National University

Abstract
The globalization of hotel industry and increased competition is raising the labor cost and
creating a shortage of well trained employees. And the shortage of competent employees is
making it harder for hotels to keep the high quality of service. Also the growing numbers of
technology savvy consumers is changing the service expectations. This study will purpose a
solution to resolve these problems with the implementation of technology. And the rational for
automated hotel operations with minimum human resources to meet the new needs of modern
consumers.

Table of contents
Solving Labor Problems with Technology in Hotel Industry 4
Method 7
Results 8
Future Consumer Behavior 8
Labor Cost and Turnovers 11
Discussion 12
References 17
Appendix 21

Solving Labor Problems with Technology in Hotel Industry
The success of hotel business is largely dependent upon the quality of employees.
According to Jang (2008), this is because the service quality depends on the attitudes and
behaviors of employees who have direct contact with customers. (Jang, 2008) This is reason
why the hotel industry spends great amount of its resources training and improving their
workforce. For example, the hotel chain Shangri-La established Shangri-La academy to better
serve the needs of their training program. And within this academy, there are mockups of
restaurants, kitchens, front desks, and guest rooms so the trainees could role play and gain first
hand experience. (Gamble et al., 2009) However, even with implementation of training
programs it could not solve the problem of high turnover rates.
The hotel industry is notorious for low employee retention. In the recent study by
Moncarz, Zhao, and Kay (2009) the hospitality industry has reported the annual turnover rates
ranging from 32% to 300%. And the cost of average turnover was $3000 to $10,000 for hourly
employee and over $50,000 for managers. (Moncarz et al., 2009) When one hotel executive was
interviewed regarding the high turnover rate, the response was “It is just the way things are in
this industry.” (Lashley, 2001) In the hotel industry, the 32% turnover rate is considered normal
and acceptable.
Another major issues within the hospitality industry is the labor shortage. When Choi,
Woods, and Murrrmann (2000) looked at the supply and demand of labor force, it was clear that
there were shortages of qualified employees. And they suggested that labor shortages will get
worse in the future. (Choi et al., 2000) The cause of labor shortages are due to several factors.

The internal factors are labor intensive work, low wages, and the limited promotion
opportunities. (Jang, 2008) The external factors are caused by globalization and increased
competition. The new hotel properties are being built everyday. With new property, it requires
new employees to operate it. But the quantity of labor force in the local areas are limited.
Therefor the new hotels are left with two options. Either migrate employees from other locations
(Choi et at., 2000) or steal employees from competition by offering them higher wages. (Baum,
2008) At the external side of problem is changing consumer behaviors.
The main difference between the future consumers and the current consumers will be the
use of technology. And the implementation of personal technology such as smart phones, GPS,
augmented reality, and wireless access to Internet will only increase as time goes by. To put it
simply, the future consumers are tech savvy and are able to use them to their advantage. The
recent study found that more than 50% of US travelers now book everything online. (Travel 2.0,
2006) This behavior is very different from 10 years ago when the online booking was still in the
infant stage. And the usage of personal technology will only increase in the future.
When looking at the hotel industry, it is clear that labor problems are serious matter. The
combinations of high turnover rate and labor shortages can significantly limit the growth of hotel
business. And the solutions to these problems were currently limited to training programs,
offering higher wages, or just accepting them as cost of doing business. (Gamble et al., 2009) If
the human resource is the main problem, then it may be time for the hotel industry to move past
the traditional labor force and take advantage of available technology.

Implementation of technology can be applied to all aspects of hotel operations from food
and beverage operations to rooms operations. And internally, unified database system through
out the hotel operations can solve logistic problems. This study will focus on rational for
replacing traditional human resource with implementation of technology to automate routine
functions within the hotel operations. And at the same time meet the future demand of
consumers need for efficiency.

Method
To understand the current state of labor related problems within the hotel industry and
technology implementations, various literatures were reviewed. The range of literature reviews
included peer reviewed articles, professional journals, thesis, periodicals, and research reports to
name a few. And to predict the future consumer trends and behavior, the data from Euromonitor
International was used. The reason for the usage of Euromonitor International was due to their
outstanding reputations among professionals and up to date informations. The data from
Euromonitor International were mostly from 2008 to 2009. Having the latest data was critical of
this study due to need for the most accurate forecast of the future. Also to better illustrate the
problems hotels are facing, the financial data from Shangri-La Hotels was used as examples.

Results
Future Consumer Behavior
The Tourism & Hospitality Research (2001) conducted think-tank workshop for 3 years
periods. And they concluded that technology will be the most important competitive weapon for
any hospitality company. The study also pointed out that the current business model used by the
hospitality industry is out dated and is in need of change. Some of the other findings from the
think-tank workshop was that consumers are willing to change providers at a whim based on
their needs and are less likely to be brand loyal. Therefor the brands will continue to erode and
the industry will head towards commodity market. And the future consumers will be very tech
savvy. (Connolly & Olson, 2001) The change in the consumer behavior is very important to
hotel business. Therefor it is critical for hotel industry to adapt to evolving consumers needs or
face becoming obsolete. To better illustrate the future trends, it is important to first look at three
countries. The South Korea, China, and Japan.
According to Country Pulse - South Korea (2009), the South Korea’s population
currently are 48.6 million people. And out of 48.6 million, 35.7 million people have the access
to the fastest broadband infrastructure in the world. Not only that, the S. Korean population are
also very proficient at use of technology. By results of the technology focused lifestyle, there is
now a new terminology called Generation 1M. The 1M stands for 1 Meter, as in all the
relationship are formed within a 1 meter radius of the computer. And recently the South Korean
Employment Information Service defined the jobs of future as robotics. They stated that
humanoid robots will most likely be available commercially by the year 2020. (Country Pulse -

South Korea, 2009) By being the most wired country in the world, the South Korea is glimpse of
future infrastructure and how the consumers embrace the technology.
If South Korea has the fastest broadband infrastructure in the world, then China has the
largest Internet population in the world. (Travel and Tourism - China, 2009) China has recently
received a lot of attention due to Beijing Olympics of 2008. But more importantly, China will
continue to be the most rapidly growing country in the world. In the study Consumer Lifestyles -
China (2008), it states that China will become the most significant country for tourism by 2020.
It goes on to state that Chinese travelers will over take Japanese and American travelers as the
main source of international tourists. (Consumer Lifestyles - China, 2008) As with South Korea,
Chinese are also very focused on personal technology. Chinese mobile-commerce or m-
commerce is growing at rapid pace. Consumer Lifestyles - China (2008) predicts that the
consumption of products such as travel tickets, cinema passes, food, beverage, and other small
goods will be dominated by the m-commerce in the near future. (Consumer Lifestyles - China,
2008) With China being the largest tourists group in the future, it is critical for hotel industry to
understand the Chinese consumer usage of technology.
Japan, unlike China and South Korea, have been a major player within the tourism
industry for quite some time now. Largely this is due to Japan being the second largest economy
in the world based on GDP. But just like its neighbors, Japanese consumers are changing their
consumption behavior of technology. In the recent data by Travel and Tourism - Japan (2009),
40% of people who booked travel products used PC and their mobile phones. The data showed
that popularity for booking via mobile phones was increasing rapidly and it accounted for 29%

of total bookings in 2008. (Travel and Tourism - Japan, 2009) The data illustrate the proficiency
use of technology in Japanese consumers. And the usage of online bookings will increase as
time goes by.
The South Korea, China, and Japan’s populations are moving towards self service and
technological focused product consumptions. In USA the picture does not look all that different.
USA consumers in general are not as tech savvy as above mentioned countries, and they do not
have the comparable broadband infrastructure. But the consumers need for the efficient service
through technology are the same. Travel and Tourism - USA (2009), states that sales of travel
related products over the Internet will gain more popularity as consumers become more
comfortable with usage of technology. (Travel and Tourism - USA, 2009)
Based on consumer data, there are few common trends among modern consumers. The
future consumers will increasingly use personal technology such as mobile phones, PC and
Internet. Also the future consumers will be very proficient at use of available technology and
expect access of their technology wherever they go. The future consumers are comfortable to do
everything them self if that means faster service. For the modern consumers, it is all about value,
efficiency and speed.

Labor Cost and Turnovers
The Shangri-La, the luxury hotel chain in Asia was facing growing pains of hotel
business. According to the data by Campbell and Kazan (2008), growing labor cost (20% of
gross operating revenue), raising turnover rate, and increasing competition from the rival hotel
chains was limiting their growth potential. For example, due to higher minimum wage in the
west, gross profit margin was 20% to 25% compared to the Asia’s 35% to 45% where labor cost
was lower. Not only that, traditionally Shangri-La hotels were able to keep 1.5 guest to
employee ratio, but in the west they could only manage about 0.8 guest to employee ratio due to
hight labor cost. The problems does not stop there. Shangri-La hotels suffered from the
common problems among hotel chains. The performance of guest service varied from hotel to
hotel considerably. To solve this problems Shangri-La invested heavily in the employee training
programs. However, this made their employee highly desirable by its competition as well.
Consequently, Shangri-La now faced with employee retention problem as well due to
competition stealing Shangri-La employees. (Gamble et al., 2009) The problems related to
human resource is nothing new in the Hotel industry. But the globalization and increasing
competition is high-lighting the labor related problems.

Discussion
After reviewing the industry data and various studies done regarding the hotel labor
issues, it is clear that just focusing on employee training or other traditional methods do not
work. These traditional methods does not solve the high turnover rate and shortage of labor. The
source of the labor problem is due to increased competition and outdated service model of hotel
industry. The solution then is to adapt to the needs of modern consumers and at the same time
reduce the numbers of labor intensive positions within the hotel operations. This can be done by
focusing on the technology and self service model.
For the most part, self-service model is considered low-end part of customer service. The
hotel industry in general have the idea that quality guest service have to be personal with tacit to
tacit interaction. But this is not true in the age of modern era. Consider the new generations and
future consumers who never knew a world without the Internet or smart phones. To this
generation, automation and “click now, get it now” mentality is considered normal. And
anything less than that is considered bad service. To the future consumers, the old way of service
through human interaction is considered slow and unproductive. There is a reason why people
choose e-mail (text message) over phone calls or standard mail. Best example is the use of ATM.
People will choose to use ATM over seeing the bank teller for one reason, speed. Interaction
through ATM machines are a lot quicker, and in the consumers eyes, this means better service.
To the future consumers, the old service model of hotels will seem like a relic from the past era.
By positioning the hotel business to technologic centric service model, it could meet the
future demand of consumers while solving the labor related issues. For better understanding,

front desk operations can be looked at as a example. Instead of hiring 50 front desk employees,
hire 10 employees instead. But these 10 employees job is not to check-in the guests. That job
will be handled by kiosks or touch screen point of sale machines. The job of 10 people would be
to supervise and assists customers who can not operate the machines. There are multiple benefits
to this setup. Kiosks will be able to communicate multiple languages, always on (Never sick),
and can be updated with new marketing materials or new standard of service without any
trainings. The check-out procedure can be done within the guest rooms. Each room will have a
computer which is connected to the main data base. And when guests are ready, they can review
the bill and pay from their own room. By replacing most of the front desk human labor with
kiosks and in-room computer, it just solved three main problems. One, high turnover rate can be
solved by offering the 10 employees higher wages. Two, the labor shortages can be solved due
to not requiring large numbers of employees on day to day operations. Instead the hotel would
be operated by fewer, but higher quality of employees. And third, it can meet the modern
consumers need of efficiency by allowing them to easily check-in and check-out on their terms.
When checking-in, the consumers can pick and choose the best room for their needs. By
empowering the guests, the hotel is improving the quality of guest service. After all, a great
guest service is about meeting the needs of hotel guests.
Taking the same front desk department as example, simple calculations results in cost
benefits of replacing human labor with technology. To make the data easy to understand,
employee benefits and other costs outside of labor will be omitted. Under the traditional hotel
operations, 50 front desk agents would be hired with $20,000 a year salary. This would result in
total cost of $1,000,000 in labor cost alone. Under the new technology focused operations, only

10 front desk agents would be hired with annual pay of $40,000 a year. This would result in total
labor cost of $400,000. The labor cost saving per year would be $1,000,000 - $400,000 =
$600,000. Also by paying double the standard labor rate, the hotel would be able to retain
employee while able to hire top quality employees. Now to the cost of technology
implementation.
Again, taking the same front desk example and under the new technology focused
operations, front desk would require 10 kiosks. (Equivalent to having 10 front desk agents 24/7)
The cost of kiosks are $2000 each. So the total cost comes out to be $20,000. Installation and
setup fees are $100 per kiosks, which would be $1000 total. This means the total cost of
technology for the front desk would equal to $20,000 + $1,000 = $21,000. Now by taking the
total labor cost saving of $600,000 and subtract the technology cost of $21,000, the total front
desk labor cost saving would be $579,000 a year. This means that even if hotel replaced the
kiosks every year with latest model, the savings from the labor cost would more than pay for it.
And the same type of savings could be found in other departments of Hotel as well.
The technology can be applied to every aspects of hotel operations. On the food and
beverage side, automated kiosks can be used for order and payment of meals at restaurants with
no need of waiters or waitress. Instead of order takers, there will be guest service specialists who
will bring food and assists guests with any needs. This model can be applied to room service,
bar and lounge, and every food and beverage outlets. The advantage of self order system is
many, but few key advantages are that there are no language barrier, no mistakes or wrong

orders, and guest satisfactions of being speedy and efficient service. With proper fusion of
technology, guest service can be improved while reducing the labor costs.
Not all human labor can be replaced, or at least, not yet. Departments such as
housekeeping, stewarding, culinary, catering, sales, accounting, IT, etc are very important part of
hotel operations. However, the logistics of operations can be greatly improved with technology.
As of now the guest and events information are stored separately through out the departments.
There are no single unified data base. This lack of communications among departments is source
of inefficient operations. At every point, anyone who have clearance to these data should be able
to access them without relaying on other departments. And by creating a one department
(Knowledge Management) who will over see all the data within the hotel should be able to
standardize the information and improve logistics within the hotel operations.
Now lets go back the problem facing Shangri-La hotels. Shangri-La’s average labor cost
is 20% of gross operating revenue. With everything else being equal, if the labor force can be
cut in half, that will save Shangri-La’s labor cost by 10%. At the same time the problems of
hight turnover rate will be reduced while keeping the quality of guest service variance constant.
The reason is that Shangri-La would be able to pay their employees higher wages. And since the
consumer interaction will be mostly done through a kiosks, it will be able to reduce the service
quality variance among different hotels. Considering the fact that the labor related issues will get
worse in the future due to globalization, this is the time to start preparing the hotel operations to
meet the future demands.

The future landscape of hotel industry will be unforgiving to any organization that does
not have any sustainable competitive advantage. Implementation of technology is the key to
operate hotel properties efficiently. As of now, the hotel’s operations are too dependent on the
human labor. This might have worked when there was plenty of work force and low labor cost.
But the external environments have changed. Therefor it is crucial for hotel business to embrace
the technology or become obsolete in the near future.

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