Tourism and Hospitality Industry, Research Paper Example

In the contemporary globalized and interrelated world, various industries across the borders and evolve according to the laws of supply and demand. Consequently, often, in order to sell a product, producers follow demand to different markets and craft their goods and services to the requirements of this or that market demand. On the other hand in order to remain successful in a foreign market the configuration of demand and its elasticity become the crucial points in company’s success. The aim of this paper is to explore the industry of tourism and hospitality, particularly the hotel segment of it, elasticity specifics of demand within the Chinese market, and to predict the development of the market in the next 2-4 years. Moreover, the case of Marriott International performance in the Chinese hotel market is analyzed.

Overview

The industry of tourism together with hospitality is one of the most profitable industries in the global economy. The development of this industry is largely conditioned by the boosting of global economy and internationalization of the business. In this regard, depending on the conceptual approach the sector of tourism can be divided into hospitality and transportation segments. Consequently, hospitality comprises such elements as food provision, entertainment and of course accommodation (Hassanien et al. 78). In terms of this paper, the primary emphasis is placed on the aspect of hospitality, in particular hotels and resorts business.

The strong trends in the development of tourist industry, particularly hospitality segment is essential for boosting the economic growth of various countries. Its primary importance is that it can easily create new jobs in the service sector of the economy. Moreover, tourism contributes to the stimulation of investments and generation of export. The overall contribution of this sector to the world economy in 2012 was estimated at 5 percent or around $760 billion in terms of investments and $1.2 trillion in export (Konovalova and Vidishcheva 84). The development of this industry also has a tremendous impact on the infrastructure that stimulates the development of other industries involved in infrastructure development.

A particular feature of the industry is that due to its diversification, although it is dependent on the global trends of growth, it remains vibrant irrespective of slight changes in income performance of populations of various countries (Hassanien et al. 79). In this regard, because tourism and the hospitality business can be divided between business and recreation travellers and the availability of different budgetary options the industry favors strong demand irrespective of the certain national or international economic downturns. For instance, during the global economic crisis, although the amount of travelling decreased slightly, the primary effect was felt by budgetary hotels but not by middle-scale and luxurious brands. This was explained by relatively the same level of business travelling which was inevitable irrespective of economic trends (Tribe 98).

Having an overall look on the industry, in order to the details analysis, it is essential to measure it to the target market and product. The target geographical market is China and the target product is hotels. In this regard, the primary trend in the Chinese hotel industry is the diversification of hotels infrastructure across the entire scale from budgetary to luxurious brands (Konovalova and Vidishcheva 85). However, for the international global companies, the primary targets are middle-scale and luxurious brands due to their profitability and relatively stable demand (Tribe 102). This trend of infrastructure boosting and adding new hotels brands across the country is conditioned by the status of the developing economy with a tremendous potential, meaning that besides international business and recreational tourism, the internal demand for the accommodation has a great potential in China due to its high tempo of population growth (Hassanien et al. 84). Consequently, one of the reports on the industry development outlines the following:

“Recent statistics of global travel trends project that the number of outbound Mainland Chinese tourists will double from an estimated 100 million in 2013 to 200 million by 2010…The survey reported room nights available totalling 81,733 nights in 2012, rising to 83,039 in 2013. Forecasts for 2014 suggest an increase of 1,762 rooms in 2013. In terms of room nights sold, the 2014 forecast totalled 51,844 rooms, a 2.2 percent increase on last year”  (JLL 3-4).

Demand elasticity

Demand elasticity for tourism and hospitality depends on various factors such as population, substitute price, business or recreation attractiveness of a certain area. The most commonly used to characterize hospitality demand is the elasticity of own and substitute price. On the other hand, other factors that need to be considered include travelling costs and the price of the hotel in the target destination (Hassanien et al. 65). Taking into consideration that hospitality demand depends largely both on national and international components, and the majority of travellers are middle-income and recreation-oriented rather than luxurious and business-oriented, the demand will be negative or inelastic, meaning that “an increase in tourism prices in a destination would lead to a decrease in the demand for this destination” (Li 11).

While the average price elasticity for tourism and hospitality on the international scale varies from -0.6 to -2, in the case of Chinese market, the estimates vary significantly depending on the area. In terms of price elasticity, various areas have a different measure: for the inbound tourists Hong Kong has the index of -1.025, while Mainland China -4.132. This means that the increase of price for hospitality by 1 percent will result in the reduction of demand by 10.25 percent, while in the Mainland China by 41.32 percent. This is conditioned by the business and luxurious orientation of hospitality in Hong Kong in contrast to the Mainland China, where travelling is primarily internal and thus more price-sensitive (Li 42).  A particular feature of the hospitality business in China is that the orientation of demand changes with time particularly in terms of the external factor of tourism. In this regard, Gang Li argues according to time-varying parameter model (TVP) the structure of demand can change significantly:

“For example, based on this model Song and Wong (2003) found that the income elasticity of demand for tourism in Hong Kong decreased over time as far as the UK and USA were concerned. The implication is that travelling to Hong Kong has become less and less luxurious for British and American tourists” (Li 11).

On the other hand, depending on the nature of tourism, its origin and destination, the demand can be both elastic and inelastic. In this regard, the best example is business-oriented travelling. Business travellers are less sensitive to the change in costs. This is conditioned by the fact that business trips have very a little alternative in contrast to leisure travellers. Since businessmen often travel for a short-term trip to conduct meetings in specific are within a certain timeframe, they often are connected to a certain area at certain time, and they can choose only a few options that suit their schedule. Thus, they are less flexible in postponing or cancelling their traveling arrangements like leisure travellers that are more sensitive to the change of market prices of travelling (Tribe 59).

Regarding the example of positive cross price elasticity of demand is the case of substitutes within the target market segment. In this regard, taking the middle-scale segment of the hotel market in Hong Kong, there is a high competition and diverse substitutions for the provision of the same type of services for relatively similar price. Consequently, two similarly market targeted brands will be substitutes and the price increase for one will increase the demand for another (Hassanien et al. 74). Regarding the overall characterization of Chinese tourist and hospitality industry, it can be argued:

“Substitute price elasticity of demand for tourism is generally expected to be positive: increases in price for one destination should drive tourists away to another destination and vice versa. Average cross-price elasticity of demand is 0.4. This means that trips to different destinations are substitutes but competitors’ prices have little effect overall” (Konovalova and Vidishcheva 86).

On the other hand, the example of the negative price elasticity for demand is when two products are complements to one another. In this regard, the correlation between two complements in the Chinese hospitality business would be conditioned by the internal or international nature of travellers and the purpose of their destination. For instance, in the case of the business travellers within the internal segment who often need to travel both to Beijing and Shanghai during the same business trip, the cross-price elasticity demand for these two destinations and staying in the hotels of these two cities will be negative, because they are complements to one another and are often sold in a single package to various internal businesses (Tribe 85).

Regarding the income elasticity means that the increase in higher values in the countries from which tourists come from results in the stimulation of demand for tourism and hospitality services in the country of the income increase. The income elasticity for inbound Hong Kong is 1.948, while for the Mainland China 3.387, while the numbers the domestic tourism for the Mainland China is 0.733 (Li 42). This data can be interpreted in the following manner. First of all, international traveling demand for China together with intra-district travelling is considered to be a luxurious product, meaning that the income elasticity is above one. On the other hand, the domestic travelling to the Mainland China is a product of necessity which is demonstrated by the index being below one. The analysis of Hong Kong demonstrates that it is one of the most desired destinations and the estimation around two means that if the income in the native countries of travellers increases by 10 percent, the likelihood of their visit to Hong Kong increases by 20 percent accordingly (Li 43). Thus, the income elasticity of demand can be characterized as a normal good.

In terms of the market structure to characterize the Chinese hospitality market, it is best characterized as being monopolistically competitive, which corresponds to the usual structure of the hospitality industry. In this regard, the necessity of heavy investment into infrastructure and the vast scale of the Chinese hotels market make the market less advantageous for the small business and their consequent capacity of freely competing with the international corporations and local mega firms present at this market. Although depending on the target segment of the market, competition can differ, still mega-companies often diversify their target audience by combining various market segments within different brands under the same ownership. For instance, Accor owns a middle-scale brand of Mercure targeted at recreational and business travellers, and also Ibis budget hotels aimed at single-service performance (Tribe 62). Consequently, small businesses are incapable of competing with Accor even in terms of the budget segment of the market. Moreover, the ownership structure of the industry is as follows:

“In regards to the ownership structure of the hotels, 49.2 % of properties surveyed were state-owned, 39.4% privately owned and 11.4% were held under other ownership structures, such as joint ventures and foreign-owned enterprises ” (JLL 3).

Regarding the performance of the industry, since the Chinese economy was the one to demonstrate economic growth during the global crisis, irrespective of certain decline in tempo, the target industry remained relatively stable with a slight decline in leisure tourism. However, business and luxurious tourism remained relatively unchanged. On the other hand, comparing 2012 and 2013 estimates the Revenue per Available Room (RevPAR) has decreased by 2.4 percent in contrast to 2012. It is argued to be conditioned by the decline in inbound tourism due to the slowing down of the economic environment: “Overall occupancy of surveyed hotels decreased from 63.0% in 2012 to 60.0% in 2013. Due to a fall in occupancy and ADR, RevPAR decreased 7.0% to RMB 240 in 2013” (JLL 4).

Irrespective of the recent slowdown of Chinese economic development, the overall trend in the global and Chinese hospitality market is that travelling will boost due to the strengthening of the global economy and diversification of travelling reasons. In this regard, while overall travelling decreased slightly, it is largely due to the budgetary and leisure segment vulnerable to the income elasticity of demand. On the other hand, the segment of business and luxurious travelling and hospitality remained relatively stable with a tendency to growth. In this regard, in the timeframe of 2012-2015, mid-scale hotel segment demonstrated 12.5 percent growth, while luxurious segment 11 percent.

Moreover, the market prediction based on population growth and development of infrastructure in the country suggests that income from the industry in 2020e is expected to be $100.9 billion: 24.8 billion for high-end segment, 56.8 billion for mid-scale and 19.3 for budget hotels (JLL 17). These predictions are based on the economic potential of the country and strengthening of its role in the global economy and consequent business stimulation of traveling (Hassanien et al. 57).

Marriott International

The chosen company for the target market is Marriott International. This company operates on the global scale and is famous for its culture-oriented approach to the business conduct. The company paid attention to the Chinese hotels market since 1999 and made it one of the primary interests nowadays. In 2012, company’s international properties RevPAR increased by “5 % to $111.45, occupancy for these properties increased by 1.9 percentage to 71.2 percentage, and average daily rates increased by 2.2 percentage to $156.47” (Marriott International 33). In this regard, the comparable company’s revenue increased in Chinese, Thai and Indonesian markets. Comparing this data with the overall description of the market situation in 2012-2013, it becomes evident that while the industry performance slowed down slightly, the company’s performance in that market improved and revenues increased. Although there are various factors, that contribute to company’s successful performance in the target market, one of them is the diversification of targeted market segments. Targeting different segments gives a company an opportunity to compensate in the case one segment reforms worse than the other:

“Price discrimination can be found in tourism industry because of different demand and its elasticity. For example, hotel chain Marriott consists of different brands for different consumers, such as luxurious Bulgari Hotel & Resort, the Ritz-Carlton; the Marriott Hotels & Resort (five stars hotels for business, individual and group travellers), Courtyard (four stars hotel for business travellers) and so on”(Konovalova and Vidishcheva 85).

In this regard, Marriott International diversified its hotels, according to the predicted growth directions of mid-scale and luxurious brands. It became a key player in the Chinese hotel market with 67 hotels functioning and 80 at various stages of development as of 2014 (Marriott International 4). Since the company targets more stable segments of the market, it can be argued that its price elasticity can be positive. In this regard, the behavior can be predicted in terms of the Veblen effect meaning that more expensive products attract more customers. In the case of the business environment, the factor of prestige and demonstration of one’s success can be key factors in choosing a more expensive and luxurious hotel brand over more affordable (Tribe 97).

Another factor to consider is the corporate contracts, where various international corporations sign contracts with global hotel networks for the convenience purposes (Hassanien et al. 66). In terms of luxurious segment, the offer of more exclusive good and services characteristic of Marriott International brand in contrast to any other close rival make it the final destination of the luxurious client that are devoted to other preferences.

Regarding the positive cross price elasticity of demand it would correspond to the overall trend within the industry and the example shown above regarding the Hong Kong area, where there are a lot of substitutions for the same target segment of the market. However, in terms of the negative cross-price elasticity, the overall example given for the industry in general also corresponds to the case of Marriott International. In other words, two destinations are characterized as complementary and cannot be competing with one another. Regarding the income elasticity of the demand for the segments targeted by Marriott International, they are less likely to depend on the overall income in the countries of tourists’ origin, mainly because business and top-level rich people act like individuals whose income does not correlate directly with the overall trends of national economies (Tribe 103). For instance, the Ukrainian economy is far from being stable or well-structured. Consequently, the income elasticity of demand will demonstrate the very low possibility of business and luxurious travelling to the hotels of Marriott International in China. On the other hand, the number of oligarchs and millionaires in the country is quite high, which suggest that demand for luxurious hotels is very high as well (Hassanien et al. 69).

Overall, from all mentioned above it can  be concluded that irrespective of the overall trends in the elasticity of demand for the tourist and hospitality industry in China, some estimates and consequent performance of Marriott International was different. The difference in estimates is because, unlike the industry itself, the company targeted only certain segments of the market that demonstrated to be more profitable than the others. In this regard, while the entire industry has segments that more vulnerable to price and income elasticity of demand, the company targeted business and luxurious segments that could be characterized by positive price elasticity. In any case, just as each industry has its geographical specifics of elasticity of demand so does each segment within that market.

In terms of the future analysis of the elasticity of demand, this experience demonstrated that the accuracy of the data and the consequent outcome largely depend on the ability to narrow the target filed to the most quantifiable minimum. In the case of this analysis, the researched industry was limited to a specific country with diverse segments of the hospitality industry. Although the findings give an overall idea of the main trends in the industry and the performance of the Marriott International, trends within different areas of China except for Hong Kong can have their own factors influencing the elasticity of demand.

Works Cited

Hassanien, A., Dale C. and Clarke A. Hospitality Business Development. Burlington, MA: Butterworth-Heinemann. 2010. Print.

Jones Lang LaSalle (JLL). China Hotel Market Overview 2014. Web. 22 June 2015. < http://www.joneslanglasalle.com.cn/china/en-gb/Research/2014-china-hotel-market-overview-en.pdf>.

Konovalova, A. and Vidishcheva, E. “Elasticity of Demand in Tourism and Hospitality” European Journal of Economic Studies, 4.2 (2013): 84-89. Print.

Li, G. “Tourism Demand Modelling and Forecasting: A Review of Literature related to Greater China” The Journal of China Tourism Research, 5 (2009): 2-40. Print.

Marriott International. 2013 Annual Report. 2014. Web. 22 June 2015. <http://investor.shareholder.com/MAR/marriottAR13/_media/files/Marriott_2013AR.pdf >.

Tribe, J. The Economics of Recreation, Leisure and Tourism. Waltham, MA: Butterworth-Heinemann . 2011. Print.