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June 7, 2013

Airbnb.com Redux: Competition from Vacation Rentals

MichelleGrant

Analyst Insight by Michelle Grant, Travel and Tourism Research Manager, Euromonitor International

In February, I wrote a piece entitled “Airbnb.com Poses Only a Small Threat to Hotel Industry”, which has caused a great deal of discussion. I still contend that Airbnb.com (and similar websites such as Onefinestay or even more mainstream vacation rental websites such as HomeAway.com) are, for the most part, simply a better way of distributing existing vacation rental stock, and so the question is more about whether short-term vacation rentals are a threat to the hotel industry. I’d like to explore the issue further in two pieces. In the first part, I will discuss the competition between vacation rentals and hotels for different types of travellers while in the second part, I will examine the legislative issues facing Airbnb.com and vacation rentals.

Airbnb.com - rapid growth but still a small player

As an aside, I’d like to put Airbnb.com’s figures into some context. The company states that it has sold over 10 million room nights since its inception in 2007. The US alone saw more than one billion room nights in 2012 booked at hotels. Airbnb.com had over 300,000 listings in 2012. Smith Travel Research says that the South Atlantic region of the US has four times as many hotel rooms as that. Despite the media attention, the company is a relatively small player in the lodgings market even if you would like to view it as a competitor to the global hotel companies.

Vacation rental still poses only a small threat to the hotel industry…

Renting a house, villa or apartment etc has always been an option for travellers - Euromonitor International has tracked self-catering and private accommodation back to 1999. These two accommodation types (which compose the bulk of vacation rentals) accounted for room revenues of US $77 billion in 2011 globally, up 98% from 1999. Total worldwide hotel room revenues reached US$466 billion in 2011 and grew by 87% over the same period. Despite being a significantly larger market, the hotel industry turned in a very strong performance against the vacation rental market.

However, the vacation rental market performed a bit better than hotels in 2009.  Global value sales only declined by 8% while the hotel industry declined by 12%. Given the recent economic woes, travellers may be keener to rent less expensive lodging options and homeowners, struggling to meet their rent or mortgage payments, may be more willing to rent their spaces.

Another important fact to note is that the vacation rental market is highly fragmented, with many small owners who cannot afford to invest in online websites themselves. The advent of these websites (Airbnb.com, Homeaway.com, Flipkey.com) is helping to shift predominantly offline sales towards the online channel, which may explain the bulk of their growth, rather than being driven by stealing share from hotels. According to Phocuswright, online sales of vacation rentals accounted for 12% of total sales in 2007, but increased to 24% in 2012.

…but hotels still need to be aware of the threat to leisure travellers

This is not to say that the hotel industry can completely ignore this part of the market. Airbnb.com has received a great deal of mainstream press attention as analysts dissect the new “sharing economy”, of which it is an example. This could lead to more leisure travellers shifting towards vacation rentals. According to the MMGY Global/Harrison Group 2012 Portrait of American Travelers, in 2012 some 47% of American leisure travellers were interested in staying in a vacation rental home (46% in a condo) over the next two years, up from 44% and 46%, respectively, in 2010. That is really only a slight increase although it could improve with more promotion from the vacation rental industry and press attention. There are many situations in which a leisure traveller chooses a vacation rental over a hotel, but that choice has always existed.

It could be that some leisure travellers shift to vacation rentals as awareness of this option grows and their travel budgets are restricted. Airbnb.com has also added a new option. Now, anyone can rent a couch or a room or an inflatable mattress out to a guest even with the host at home. This has likely expanded the “room” supply in urban areas, especially those with a shortage of hotels and thus high average daily rates, such as New York City. Adventurous travellers may be keen to save money and stay with an Airbnb.com host instead of at a hotel.

Short-term rentals could also be more popular during times of high lodging demand in a city, such as during large conferences or mega-events, when hotels tend to fill up quickly. Cost-conscious travellers may opt to rent a room from Airbnb.com as opposed to staying at a hostel or not travelling at all. I also pointed out that the growing niche of multi-generational travel may lead to more leakage from hotels to this type of accommodation as it offers more space.

Yes, to a certain extent, hotels compete with vacation rentals and now, thanks to Airbnb.com, primary residences. As I pointed out in my article, hotels also have many assets - branding, standardised service, loyalty programmes and various amenities etc. The vacation rental industry also suffers from concerns about fraud, not-as-advertised properties and unavailability at the time of check-in, with little recourse for stranded travellers. Hotel companies, especially global brands, have a key advantage in these areas. And again, these choices have always existed. It is doubtful that leisure travellers will suddenly turn to vacation rentals in their droves, but hotels will need to keep an eye on how the category is developing and emphasise their own advantages to travellers.

Attributes Affecting Accommodation Choice

Attributes affecting accommodation choice of recent vacation

Source: HomeAway market research, June 2011

Some business travellers may seek alternative lodging

Managed business travellers who follow a corporate travel policy will never opt for this type of accommodation because large companies have corporate travel policies and pre-negotiated rates with hotel companies. Furthermore, companies would be wary of the liability issues if their staff were to stay in private homes. Additionally, hotels offer space for meetings and conventions, something that vacation rentals do not. Location may also play a role, with business travellers may needing hotels near industrial and business parks, airports and suburban locations where vacation rentals may not be offered.

However, in urban locations where hotels are more expensive or sold out, it could be that transient business travellers opt for Airbnb.com or a short-term vacation rental. According to Euromonitor International, six million people were self-employed in 2012. 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 standardisation of a hotel with free Wi-Fi, free breakfast, loyalty rewards and a friendly desk clerk.


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