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March 27, 2013

Airbnb.com Poses Only a Small Threat to Hotel Industry

MichelleGrantAnalyst Insight by Michelle Grant, Travel and Tourism Manager at Euromonitor International

The meteoric rise of Airbnb.com, booking more than 10 million nights since its inception in 2007, should not cause the hotel industry to worry about the vacation rental market. Both business models have co-existed for a significant amount of time without infringing on each other’s growth. It is likely that vacation rentals will appeal mostly to leisure travellers with lucrative business travellers firmly loyal to hotels, thanks to corporate travel policies, loyalty programmes and the standardised experience a hotel offers. To compete for leisure travellers, hotels have advantages over the vacation rentals that they can emphasise to stem losses in the leisure traveller segment.

Vacation rentals step into the limelight

Thanks to Airbnb.com’s success (and the launch of similar websites), there is greater awareness of the vacation rental market, but it has existed for many decades. In fact, Wyndham Worldwide owns one of the oldest vacation rental brands—the British Hoseasons (founded in 1940). According to Euromonitor International, combined self-catering and private accommodation (the two accommodation types that compose the bulk of vacation rentals) accounted for US$77 billion in room revenues in 2011 globally, up 98% from 1999. Total worldwide hotel room revenues was US$429 billion in 2011 and grew 83% over the same time period. Despite being a significantly larger market, the hotel industry turned in a very strong performance against the vacation rental market. However, it does seem that the vacation rental market may be more resilient to global economic downturns as evidenced by growth rates in 2000, 2001, 2009 and 2010, because it’s not as dependent on finicky business travellers as the hotel industry. There may be a bit of a substitution effect with leisure travellers seeking out less expensive accommodation options during times of economic distress—which may be something hotels need to keep an eye on.

% Growth in Global Room Revenues for Vacation Rental and Hotel Industries

% Growth in Global Room Revenues for Vacation Rental and Hotel Industries

Source: Euromonitor International

Note: Vacation Rental Industry includes self-catering apartments and private accommodation

Going forward, Euromonitor International expects that both accommodation types will see similar growth, with hotel room revenues growing by 20% over the next five years, and vacation rental revenues growing by 19%. While the success of Airbnb.com has elevated the profile of the vacation rental market, it is a market that has always existed—its distribution has merely improved with easy to use websites that encourage transparency between guest and owner. As a result, the vacation rental industry isn’t expected to significantly cannibalize hotel industry sales.

Hotels need to keep an eye on leisure travellers

Leisure travellers is where both accommodation types compete heavily. There has been a shift to more family and multi-generational travel. Renting an apartment or villa provides more space at a lower cost than staying at a hotel for these groups. Family members can have their own rooms, so parents can stay up while children are sleeping. Costs are even lower when families use the vacation rental’s kitchen instead of dining out. It is this segment that the hotel industry will need to try a bit harder to win over.

Hotels can respond to this by promoting their extended stay brands to more leisure travellers and emphasising the family friendliness of their properties—providing unique activities such as specific outings for children that aren’t available at vacation rentals. Luxury hotels, in particular, have responded to this shift. For example, the anthenaeum in London has a “kid’s concierge” that will provide child-friendly amenities and activities.

But overall, hotels must leverage their greatest advantage over the vacation rental industry: standardised service. The hotel industry must continue to provide excellent customer service so that leisure travellers are confident that they will enjoy their stay at a hotel instead of running the risk of having a horrible experience with an individual property owner.

Local governments may be an ally

Airbnb.com’s success has been a double-edged sword, drawing the attention of local governments to the vacation rental industry as a whole. In many cities, there are rules preventing residents from renting out rooms for transient purposes. Additionally, the owners of these properties may be subject to sales, occupancy or income taxes, but many are not remitting these taxes to authorities. Furthermore, some residences are in violation of local building codes. As a result, cities, such as New York City and Amsterdam, are cracking down on illegal listings and issuing fines that are in the tens of thousands of dollars. While most cities admit that they do not have the manpower to go after everyone, they are finding the most egregious offenders and will follow up on complaints from neighbours. The risks associated with renting out a property or a room may dampen growth in the vacation rental market, favouring hotels that are in compliance with local ordinances.

For more market research on the travel and tourism industry, join Euromonitor's travel and tourism group on LinkedIn.

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This article is using a pretty misleading statement regarding the hotel industry. Highlighting "vacation rental growth " data with "hotel growth data", then deriving a conclusion that Airbnb is a "small" threat is a highly inaccurate way of reading the numbers. What Airbnb is doing is revolutionary compared to anything anyone has done in the online vacation rental business. They are turning home owners into entrepreneurs. Now that is shifting the entire paradigm in the traditional vacation rental business. Hotels need to be more worried about Airbnb than tradition OTA's . Why? because unlike competing for finite number hotel room nights that can be sold in a city on a given day, Airbnb is adding to the entire demand/supply for available accommodations
Last but not the least, counting on government/neighbors to stall a revolution in online travel is a folly. Companies that are targeting and building customer base with the internet in mind are not going away anytime soon.

Thank you for your comment. I agree that Airbnb.com has revolutionized how travellers access vacation rentals and in the process has brought about greater consumer awareness. My opinion is that both vacation rentals and hotels remain different business models, but do compete for certain types of leisure travellers (families, multigenerational, budget, etc) and to a lesser degree, transient business travellers. You do make a good point that Airbnb.com is expanding lodging supply, which is especially true in large metropolitan areas. This could impact the hotel industry by shifting existing demand to vacation rentals, which would force companies to lower prices to compete. However, the moment this becomes a significant impact and the large metropolitan areas start seeing their hotel tax revenues decline is the moment that you see the local governments step up their enforcement of rental laws. This is already happening in New York City: http://skift.com/2013/01/07/airbnbs-growing-pains-mirrored-in-new-york-city-where-half-its-listings-are-illegal-rentals/?app=noRedirect. A similar situation is happening to the online travel agencies—they are battling city by city, state by state over taxation issues. Here’s the latest example: http://www.staradvertiser.com/news/breaking/20130319_Online_travel_companies_ordered_to_pay_state_70_million_penalties.html?id=199075931. These tax battles haven’t brought the online travel agencies down and I don’t think that the tax and legal issues will force Airbnb.com out of business completely, but they could limit the company’s growth.

I think Airbnb.com poses a much larger threat to existing players, such as HomeAway.com and VRBO. The company has greatly improved the way the existing vacation rental stock is distributed. Yes, there always will be competition between vacation rentals and hotels for some types of leisure travellers, but Airbnb.com may have only increased that marginally. The hotel industry can combat this, as I mentioned in the article, by promoting their extended stay brands, their standardized service, family friendly amenities, etc.

Airbnb will pose a massive threat to the hotel industry when they can solve the key distribution and key insecurity problem - see this blog here for more discussion http://thedigitalkeys.blogspot.com.au/2013/03/digital-keys-what-sharing-economy-needs.html

Your focus on vacation rentals is somewhat myopic and disingenuous to the impact that Airbnb is having. The fact is that Airbnb is being seen, more and more, as a viable alternative to traditional accommodation providers and this is happening across market segments - business and leisure.
Fergal Mc Carthy

A friendly rebuttal to this article- http://www.wordsofvikram.com/airbnb-more-than-a-threat-its-a-disruptor/

Thanks for sending me the link to the rebuttal, Vikram. I’m glad that my article has generated a lot of discussion about Airbnb.com and its potential impact. My opinion still is that Airbnb.com is an improved distribution channel for vacation rentals—an industry that’s always existed and is pretty mature in Europe (now where most of Airbnb.com’s sales are from). It’s gaining space in a fairly fragmented vocational rental market and challenging existing websites such as VBRO.com. As I mentioned, there is potential for Airbnb.com to steal some travelers, especially on the leisure side of things, but I don’t think the hotel industry will feel a big impact.

I doubt that a significant amount of business travel will migrate over to private accommodation types. Managed business travellers have to abide by their corporate travel policies. Maybe hotels will have to fight for some transient business travel, but they still have many perks that I pointed out in the article—standardized service, loyalty programmes, free breakfast, etc that I don’t think will cause a cratering of the hotel market. People have always have had less expensive alternatives to hotels, staying with friends/family, guesthouses, apartments, hostels, etc. It could be that more business travel may be up for grabs as more Americans shift to working for themselves as freelancers, consultants, etc, but on a busy business trip, some may still prefer the standardization of a hotel with free wi-fi, free breakfast, loyalty rewards and friendly desk clerk.

And that’s great that you were able to find a cheaper lodging alternative in Phoenix where the hotels seemed to be virtually sold out during a certain time period and offering only obscene rates. I would imagine that the GM of the hotel understood that there were opportunities for his space since demand for lodging was clearly outstripping supply. It doesn’t sound like Airbnb.com was hurting the hotel industry too badly and probably encouraged others to take the trip even though the hotels were booked up. Looking at data for the hotel industry for the week of the 2013 Superbowl in New Orleans shows that revPAR increased by 76%: http://www.hotelnewsnow.com/Articles.aspx/9909/New-Orleans-posts-strong-ADR-RevPAR-results. It doesn't seem like Airbnb.com had a significant impact on average daily rate growth, but it could be a stronger competitor during mega-events.

As I mentioned earlier, I don’t think the government would ever shut down Airbnb.com wholesale, but it can increase the risks of renting out your place illegally. This would discourage people from renting out their places once they understand that what they are doing is illegal and the local government is enforcing the law to a better degree. The additional cash may not be worth risking getting a significant fine along with the legal hassles. This could dampen supply, especially in the metro areas where I can imagine Airbnb.com is most popular, restraining the company’s growth. Furthermore, if Airbnb.com becomes a true threat to the hotel industry, this means that the local government is likely losing out on a lot of hotel-driven tax revenue. This would likely propel the government to crack down even more to ensure that those renting their places out, if complying with the law to begin with, are remitting the proper taxes and if not, they will fine them (and I wouldn’t be surprised if the federal government pokes its nose into the business practice if it gets enough negative press, much like it did with Facebook about privacy practices). Local and state governments have not been shy about suing the online travel agencies for not remitting taxes on their hotel mark ups and the OTAs weren’t even in clear violation of the law. They will not be shy in shutting down a gray market for lodging to preserve their tax revenues if it becomes too large.

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