PODCAST: How hotels are delivering better digital experiences

James Cook: The hotel industry has long been somewhat constrained by a straitjacket of sorts when it comes to adopting new technology. There are a number of reasons for this: fragmented ownership, complex management structures, and just plain risk-averse thinking. However, a new wave of tech disruptors has emerged, and today we're diving into this hotel tech revolution.

Roman Pedan: There are many structural elements in the industry that put it into that straitjacket. Hotel brands are really good at what they do, but they've also been around for a long time. And when you're around for a long time, you build up debt in a conceptual way, not in a financial way.

James Cook: That is Roman Pedan, the founder and CEO of KASA, and that is KASA spelled with a K. KASA is bringing fresh ideas to the hospitality world with new technology. And today we've also got Zach Demuth here with us. He is our head of hospitality research at JLL. Together, they're going to give us the inside scoop on tech transformation in the hotel industry.

This is Trends and Insights: The Future of Commercial Real Estate. My name is James Cook, and I am a researcher for JLL.

James Cook: Zach, can you explain, because this is a general audience, how the hospitality industry works? How you've got one company that owns the real estate, another that's an operator. Just give a little explainer on that.

Zach Demuth: The hotel industry suffers from extreme fragmentation. So if you take the average - I'm just going to pick Hilton for the sake of argument, but the same could be said for Hyatt or IHG - just pick your run-of-the-mill Hilton in any city in America. The real estate itself is owned by one entity. Then the actual employees, so the management of the day-to-day operation, what the guest sees, 70 percent of the time in the U.S. is by a third party.

And then you have the flag, right? Hilton. So the guest thinks they're staying at a Hilton. Hilton, and again, this could be said for any of the others, is simply a franchise company. They're simply the distribution, but arguably the most important piece of the puzzle because that's how the guest books. That's what drives distribution.

If you don't have a name on your hotel, broadly speaking, it's very challenging to compete. But the brands offer that consistent distribution. They also offer to the guests at least some level of standardization. The challenge is they're not actually operating the hotel. And so I think, again, you have this sort of misalignment where the guest checks into a Hilton, whatever, they're expecting Hilton-based service. They're actually getting service by a third party that is supposed to maintain the standards of Hilton.

So in the average hotel in the U.S., there are three very different stakeholders. They have very different priorities. And I think when you look at the technology space, that sort of indicates why there isn't much change and why there is so much fragmentation across the entire spectrum.

James Cook: Roman, so there's this fragmented space that Zach has described, and then along comes KASA, and I've seen it described as a hospitality operating system. So you're going to have to explain that and explain how you're using technology to change this quote-unquote "archaic system."

Roman Pedan: Yeah, so going into building KASA, we noticed that the margins for a lot of properties were not working. Pain has just gotten to such an acute level. But labor costs especially have increased without a reprieve in terms of innovation. What KASA has done is we've gone to the hotel P&L and we looked at every line. We asked, how can we do this better? Why does it work the way it does? And what can we do better? To every line, we applied one of three things: we either automated that line item, centralized it, or eliminated it.

Most of our guests self-check-in and as a result, we've eliminated much of the front office at the properties we operate. The experience of the guests, frankly, is better. They don't wait in line to check in just to give their ID and their credit card. They go straight to their room. And the staffing model is much leaner for the property. We automate a lot of accounting and centralize a lot of the revenue management as well.

We drive across our portfolio a 60 percent margin on GOP, so everything before insurance and taxes, and the average limited-service hotel in the United States is around a 35% GOP margin. We drive better review scores than the average. We also improve RevPAR indices relative to the average.

James Cook: Yeah, it's not like KASA is fully automated, right? There are still humans involved. Tell me about that. What's the stuff that has to be human-focused?

Roman Pedan: Our general philosophy is to automate the mundane and ensure there's more time for humans to deliver hospitality. And frankly, if you ask guests, they don't care about technology as an end in itself. They're excited about the outcomes it drives. And so our belief is technology should drive superior outcomes and then blend into the background as much as possible so that the hospitality experience itself can be the product, not the technology.

The part that the humans drive are the special touches to the stay, the feeling that the guest gets when they arrive. And they have a note from us that welcomes them, remembers they stayed with us before, puts something special in the room that's evocative of a conversation we had with them from a previous stay. So the creativity, the hospitality, that's where all of our attention as hoteliers should be.

The parts we are eliminating as much as possible are the mundane. So it's the night audit, it's the non-hospitality-oriented check-in experience that just feels like a DMV experience more than anything.

James Cook: Yeah, I love it. I travel a lot for work and I probably have a million travel stories, but just off the top of my head, sometimes you're like, "Oh, I forgot to get a receipt for my expense report." And you're calling some guy in an office in New York who transfers you to somebody else. And then, "Oh, hey, shouldn't this just be in an app on my phone?"

Anyway, I want to talk a little bit more big picture, Zach, about technology. What would you say are the game-changers coming to the industry around technology? Is it this behind-the-scenes automation that we talked about?

Zach Demuth: I definitely want to pick up on something Roman said, and this is a quote that I've used often. It's not mine, but the CEO of Virtuoso Travel, who runs the largest luxury travel kind of consortium globally, always says that technology should be used to automate the predictable such that we can humanize the exceptional.

It's about back-of-house optimization. Roman mentioned margins. We all know the industry has a really hard time attracting and then retaining labor. Clearly, you can't work remotely in a hotel, right? You can't be a housekeeper remotely, that doesn't work, but there's no reason why we can't use technology to optimize back of house. To schedule labor more efficiently, effectively, and better for the employee, to optimize food costs.

There's so much waste in hotels around food, whether it's banquets or actual restaurants, again, bad for the environment and bad for your P&L. Talk about one of my big pet peeves. I also travel a lot. You walk into a hotel room and it's 50 degrees in there. And you have to wonder, how long has this been vacant? Best case scenario, it's been vacant for a couple of hours. Worst case, for a couple of weeks. Why is there not more? And if this technology exists, why aren't hotels using that when you have guests checking in and out? It's good for the environment and good for your bottom line.

Roman Pedan: I couldn't agree more. What we've seen is there are a few markets where the way things work no longer works. So the status quo no longer works in San Francisco. The margins that Zach quoted are nowhere near that; they're running barely break-even operations because revenue has gotten hit so much and costs have gotten out of hand.

That's the same case in L.A., especially in downtown L.A., and you can say Portland and Seattle and several other markets in the United States where the existing approach just doesn't work. And we're driving much higher margins. We're driving a 60 percent margin in San Francisco, which many say, claim, think is preposterously high. But the reason is we focused all of our attention on that back of house. How do we automate, eliminate, centralize in order to deliver a better experience to the guests and more efficiency to the owner?

James Cook: Zach, from your point of view, is there a generational change coming where you've got older generational groups that really need that high-touch experience, but this next wave that's coming is fine with, let's say, a little bit more of an impersonal experience, at least in certain aspects of the hospitality world?

Zach Demuth: I think particularly when you look at the millennial generation, more and more, we see a preference for choosing a hotel based on location such that the hotel is like your landmark, but it's not your entire experience. You're using the hotel as a jumping-off point for experiencing whatever that destination has to offer. Right, the whole idea of the experience economy.

And so I think more and more consumers want more technology. They want to enable something that allows them to be closer to their lifestyle. So I think consumers, more and more of the hotel industry or the lodging industry is dominated by younger generations who have this in their own homes and so want this as they travel.

I also think again, the hotel industry's model outside of maybe the very upper echelons really can't afford not to adopt technology. The last two years, there were some crazy high revenue growth numbers, and that was not real. That was just driven by quick changes in consumer behavior. The reality is our industry grows, best case scenario, three or four percent each year in top-line revenue. Like expenses, to Roman's point, are growing materially faster, labor costs, and then everything we can't control.

So the industry really can't afford not to adopt something that will materially positively impact its bottom line.

James Cook: We've talked about technology in general as something that's going to be doing more automation behind the scenes, maybe in some cases it's customer-facing when it streamlines things. And I'll ask both of you this one: Is there technology though that the guests do get excited about? Is there anything that they're like, "Hey, we want this in our room or in our hotel"?

Roman Pedan: From my perspective, they get excited about less friction, more value, and better quality. So that's a feeling, but it's also a price tag on the room. By reducing the cost structure of our operation, we're able to deliver better margin to the owner, but also a lower price compared to what others can offer in the market, given their cost structure.

The top three things that guests look for when they travel are the price, the location relative to where they're visiting, and their perceived quality. Have they heard good things about the property? Have they experienced it in the past? Are the reviews really good?

We can affect the things they care about most, certainly on price, but on quality, what I'm excited about over time is for the democratization of what's right now more of a luxury experience in terms of the way that we personalize the experience for the guests.

In an operation that is focused on delivering good value and good margin, we can't do all of that, but we can automate quite a bit of the data collection. We can look at the past experiences of a guest with us, every conversation they've had with us, summarize their preferences, and do the small touches that really make it feel like what is true - that we care about the stay and also make the stay feel more specific to you. And those are things that resonate when you're traveling, and you really feel like you're at home on the road. That feels very different than when it's a very foreign experience, not familiar at all.

That's one of the things that I think guests really care about. And it's more subtle than, "Hey, I want it to be hyper-personalized." It's more the feeling you get when you step into the room and you know that the brand or operator behind the property has your preferences in mind.

Zach Demuth: Yeah, I would agree with that. My background prior to joining JLL, I spent a lot of time with Ritz Carlton, which is a luxury brand under Marriott. To Roman's point, and we called it at the time, the Ritz Carlton mystique, and literally people's jobs were to go into guest rooms and figure out, what kind of drink did the person have? Where did they put their pillow? Obviously in the restaurant, what did they order? And everything was taken handwritten and then theoretically was supposed to be put into a computer and then shared. At the time there were 90 Ritz Carltons across the country, across the world, and now there are many more.

There's no reason why that sort of data aggregation can't be done by technology, automated by technology, and used really in any sort of hotel environment. Now, clearly in the luxury space, there are more touchpoints, so you're going to have more data, but again, there's no reason why you can't use it in any spectrum.

So to me, there are huge personalization opportunities, and I think in the hotel space, yes, price, generally speaking, at least in the majority of the industry is what consumers care about most. There's also a huge value component, and the reality is if hotels only compete on price, it becomes a race to the bottom, and so everybody loses.

And so there's a huge intangible aspect, right? Service, as we all call it, whether it's good to me is bad to you and vice versa. But if you can create personalization, we know that is good to everybody.

You have a huge amount of data. You have multiple properties. There's no reason why that can't be shared freely. Again, the more you collect on an individual or the type of individual, right? You can bucket consumers in different ways. And I think if you can deliver that personalization, we called it at Ritz Carlton, it's delivering on both the expressed and, most importantly, the unexpressed wishes of guests.

And so I think again, technology can do that in a way, or at least can give you the tools to do that in a way that humans just candidly don't have the ability, and frankly, they should be the ones delivering on it. And I think there's a huge guest opportunity.

Roman Pedan: A hundred percent agreed. I think my point on price and cost structures, you should have the best cost structure. So if you need to, you have that as a lever, but then you should not need to use it as a lever because the experience is so compelling and so personalized that you would drive premiums to the market. And the data that we collect, because every interaction with the guest is digital - even when you call us, the call is transcribed. We summarize the preferences from the call. Most interactions with us are by text, and we obviously are able to use AI to summarize those.

I think that the art is how to deliver on it in a way that conveys a sense of comfort and care rather than is overbearing or, in the worst case, frankly, creepy in how you deliver on it. But with that art, you can really create a special connection with a brand that is otherwise extremely expensive to do, obviously à la Ritz, and I'm on or impossible to do for others without the technology.

Generally across the sector, I agree with Zach that a lot of data is untapped, and some of the data is around what is working at the properties and what is not working at the properties. We are blessed with incredible feedback from our customers, from our guests. That feedback comes in the form of calls, text messages, how they use the room through the photos that we take of the rooms during housekeeping. It comes in the form of reviews that guests voluntarily leave to tell us how we did.

And so it is an amazing opportunity to use that data to seek the root cause of what is working and what is not working, but it's an enormous undertaking if you're doing it by hand. What we do is we essentially input all of the data into a system that outputs for us here are the issues, both on an overall portfolio level and on a specific property level. That are delivering the most delight. Here are the issues that are causing the most problems, and we identify the ones that we can solve the least expensively and do those first, and obviously just try to ensure that we're constantly leveling up the experience and using the information that in most situations in the hotel world is there but it's not - it's treasure that's unplundered. It's not used. And we're instead actually using that data.

And so I think that's a massive opportunity.

James Cook: Okay. Follow-up question, Roman, what's an example of a change that you made based on the data that you analyzed?

Roman Pedan: Early check-in is a really important part of the experience, and we looked and we saw we were denying a lot of early check-in requests. And part of it was because we're lighter on labor. So we wanted to be extra sure when