What Level of Digitization is Optimum for the Hospitality Industry?
By Max Starkov
Tuesday, 20th February 2024

Recently, a major hotel chain top executive stated that 'Hospitality will never be fully digitized', I agree 100%.

Hospitality, like all other industries with physical assets, simply cannot be fully digitized, including industries such as agriculture, construction, manufacturing, commercial real estate, healthcare, etc.

Even Amazon, the most digitized company on planet Earth has over 500 million square feet of owned and rented physical warehouses.

The McKinsey Global Institute Industry Digitization Index

Digitalization is the future of hospitality, there is no doubt about it! The old-fashion theses that only human-provided service is excellent customer service is being debunked as we speak! Whether hoteliers like it or not, the hospitality industry is moving from low-tech and high-touch to high-tech and high-touch.

But what kind of high-tech and high-touch? Achieved with fewer, well-trained and well-paid employees using technology to provide stellar service. AI, mobile technologies, contactless experience, automation, robotics, IoT, blockchain, etc. can help fewer well-paid, educated and trained humans to deliver far superior customer service than a team of overworked, underpaid, undertrained and overstressed humans.

The question here is: what level of digitization is optimum for the hospitality industry?

The McKinsey Global Institute Industry Digitization Index ranks hospitality AT THE BOTTOM of the economic sectors as far as digital transformation is concerned, above only Construction and Agriculture and Hunting. HUNTING!

We have a long way to go before we even reach the average rate of digitization of the broader economy. Unfortunately, there isn’t even a single hotel executive to define and specify what the end goal for the industry should be. Is our aim to reach at least the digitization level of Retail Trade? Or Utilities? I believe we should aim higher and reach the ratings of Finance and Insurance and Professional Services.

In my view, the main reasons for hospitality lagging in digitization the broad economy are a) systemic underinvestment in technology and digital marketing, and b) lack of education and professional development to create the professionals that can lead the industry’s digital transformation.

Here are the facts:

1.Technology investments:
Normally, hoteliers spend on technology 2.5%-3% of net room revenue, including payroll for the IT personnel.

Technology spending in U.S. hospitality during the pandemic shrank significantly compared to 2019, dropping to as low as 50% in 2020 and rebounding slightly to 70% in 2021 of the pre-pandemic level. In 2022 hoteliers invested in technology less than 2.75% of room revenue (STR).

Even worse is the drop in payroll (wages and benefits) to hotel IT personnel, which during the pandemic ranged at 46%-50% of the 2019 level, and is still way below the pre-pandemic levels.

Compare this to technology investments of 15%-17% of revenue for Expedia or Booking.

2. Digital Marketing Investments:
Digital marketing of the hotel product is an important prerequisite to the digitization of hospitality and for the creation of adequate digital presence of the property or hotel brand to be able to engage, acquire and retain the digitally-savvy travel consumers.

In the pre-pandemic, hotels used to spend on marketing less than 2.5% of net room revenue, including payroll for the sales and marketing staff. STR data shows that marketing spending in U.S. hospitality during the pandemic dropped to as low as 50% in 2020 and rebound slightly to 54% in 2021 compared to 2019. Last year the digital marketing spend is still way below 2919 levels.

Equally troublesome is the drop in payroll (wages and benefits) to hotel sales and marketing staff throughout the pandemic, at levels 50%-60% of the 2019 levels.

Compare this to Expedia's investment of 50% -55% of their net revenue on Sales & Marketing throughout the pandemic and last year.

Technology and Marketing investments in Europe and APAC are even worse than in North America.

The fact of the matter is that instead of providing a more sophisticated, more advanced home-away-from-home experience like they did in the past, most of today’s hotels offer only sub-par home-away-from-home experience. Travel consumers have better technology at home than what they find at hotels.

Due to all the lingering economic uncertainties, I do not expect that hoteliers will increase their technology and digital marketing investments in 2024.

So why are we surprised that hospitality ranks only above construction and agriculture and hunting in digital transformation?

Unfortunately, I do not see things changing in our industry until all stakeholders: owners, brands and operators realize that our tech-and digitally-savvy customers (travel consumers, corporate travelers, meeting organizers, SMERF group planners, social event planners, etc.) are demanding hospitality to become a technology-powered service industry from the current sorry state of being low-tech and high-touch industry.

Max Starkov
Hospitality & Online Travel Tech Consultant & Strategist

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