The hotel industry was a confounding place to be for investors in 2015. Companies in the sector were breaking records left and right, posting all-time highs for occupancy rates and revenue per available room — and yet the Baird/STR Hotel Stock Index, comprised of 41 hotel stocks, fell over 20%.
Part of the decline was due to slowing revenue after a long cycle of growth, but investors were also coming to terms with the sudden appearance of Airbnb and what its explosive growth would mean for the established giants in the space. Could Airbnb do to hotels what Uber did to taxis?
Leisure travelers appreciate the Airbnb business mostly because they assume it to be cheaper than a conventional full-service hotel. Price is by far the dominant factor here: The notion is that you’re just paying for a room and unbundling the amenities — or in other words, not getting gouged like a tourist.
In reality, however, much of the Airbnb inventory is relatively upscale with amenities that compete head-to-head with your typical hotel experience. As a result, it turns out that the average Airbnb room is already 30% more expensive than average hotel inventory in the biggest U.S. markets.
Most conventional hotels aren’t comparable to Marriott International Inc’s (MAR) resort rooms or Airbnb’s more highfalutin rentals — roadside mom and pop motels and low-frill mass-market chains like Holiday Inn of InterContinental Hotels Group PLC (ADR) (IHG) or Motel 6 of La Quinta Holdings Inc (LQ) are where the center of the market still lies. And that means that unless you’re dead-set on staying in a “quirky” neighborhood or experiencing the local residential experience, you’re probably getting a better deal with a chain hotel.
So these regular chains aren’t racing Airbnb to the bottom to compete on pricing because their prices are already there. The company isn’t really disrupting the other, more luxurious side of the hotel spectrum either because business travelers are not gravitating toward Airbnb lodging.
People try it out because it’s fun and different, but often the rooms tend to be inconveniently located (longer rides to meetings), the amenity mix isn’t quite right (is there a printer?), and most of all, the culture doesn’t work for larger or more professional groups. No one wants to wake up to their executive assistant’s towels on the floor.
This is important because Airbnb aspires to compete for that executive account. It’s a market that pays more and tends to be lower maintenance — but it’s a hard sell. Meanwhile, business hotels thrive because they keep a lock on the most lucrative market.
Despite Its Potential, Airbnb Isn’t a Big Threat
Airbnb is growing fast but it’s not transforming its market the way Uber did. From a consumer point of view, the only big change is that now there are incrementally more options to choose from in a particular town. But you’re never locked into the Airbnb universe, and even hotels are encroaching on the ever-important millennial territory with hip and trendy boutiques like Hyatt Hotels Corporation’s (H) Andaz chain.
Airbnb clocked 80 million room nights last year, while conventional hotels came out to 1.7 billion room nights, or 96% overall market share. Every point of share Airbnb gains looks really good from its point of view, but for conventional hotels, the market is still growing fast enough that their own share shrinkage is minimal.
With share prices still depressed but future outlook optimistic, now might not be a bad time to consider investing in those standard hotel stocks, whether that’s Hyatt, Intercontinental Hotels, Wyndham Worldwide Corporation‘s (WYN) hotels or La Quinta.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
