Trends and Implications in the Travel and Hospitality Industry 2023

Maintaining a thorough scan of the internal and external indicators of market demand, developing contingency plans and triggers, and engineering agility into operations are critical factors for successfully navigating 2023 – says Tim Davis, leading management consultant for the hospitality, travel and leisure sector.

In periods of uncertainty, adopting an agile approach becomes critical to success. Currently, an air of nervous positivity pervades in the industry despite the market remaining as volatile as it is, which is driving an ultra-cautious approach to decision making, which, of course, impacts economic growth.

Despite all the volatility we are seeing, the bottom-line results are continuing to outperform forecasts and a much more short-term approach to business planning cycles has been necessitated as we all navigate on through unchartered waters and conditions.

Whilst everything continues to change at speed, businesses must remain agile, adaptable, and flexible.  To cite Bill Gates, ‘success today requires the agility and drive to constantly rethink, reinvigorate, react, and reinvent’, which encapsulates a lot of the principals of our work.

The current marketplace drivers and resulting outlook

While leisure travel recovers faster than forecast, business travel shows a slower than anticipated return

The biggest and most consistent trend we are seeing across hospitality is that many underestimated the speed of leisure booking recovery, whilst overestimating the speed of business recovery. The net results are a positive outcome, but a tangible demonstration of the challenges around forecasting and business planning.

Still shaking off the post Covid lag

There are several macro-level themes that are influencing where our industry finds itself. Primarily, we are still coming out of a post-Covid crisis era and feeling the lasting impact of that, especially in the hospitality industry. For example, there are still constraints on rehiring staff; in part access to supply is the issue here, but equally businesses are more cautious about increasing costs.

Consumer demand for experiences is back with vengeance

During the pandemic, the pendulum of consumer demand moved more heavily into product buying because of restricted travel. Now, since restrictions have lifted, we have seen the pent-up appetite to travel again, with this desire causing, the pendulum to swing back. Returning to travel, consumers are seeking value more than ever, but also, more experience led purchases, which is a defining indicator for our industry.

Resilience shines through

Although economic conditions are tightening, travel is, as we said above, bucking the trend. The travel industry has outperformed expectations and in doing so, is proving itself to be more resilient than other industry sectors. While people are cutting where they can in other areas to save money, there is a clear trend of wanting to preserve the pleasures in life. Of these, travel and experiences are shining through in consumer spending choices.

Its notable and important to flag, that this has not been the pattern in previous recessions. Typically, travel is one of the hardest hit sectors, but there is no indication of this slowing, and we predict this is set to continue across the coming year.

Less harsh recession is now more likely

Economically, while there are still growing fears over the impact of tightening fiscal conditions – high inflation, rising interest rates, increasing energy costs, all impacting on people’s disposable income – the degree of fear is proving to be more negative than the reality.

Falling inflation rates in the US (now between 6-7 per cent) and in Europe (sitting between 8-9 per cent) demonstrate a much rosier picture than was initially predicted.

Unfortunately, it’s only the UK that is sitting stubbornly over 10%.  Andrew Bailey, the governor of the bank of England, recently talked of several reasons to be more optimistic in the growth forecast. Among the topics discussed were falling energy prices, a lower market curve of interest rates, and an easing unemployment forecast which signalled optimism for a less harsh recession. And the forecasts coming out of the IMF (International Monetary Fund) and the Central Banks, are also all demonstrating an improvement over time. This optimism makes the markets believe that we are going to come to a soft landing rather than falling into a hard crash recession.

Good news from China

Another impactful element, big picture-wise, is the reopening of China. As the world’s biggest exporter, this will have a material impact on stabilising markets by increasing supply and demand into international markets.

However, there are situations, such as the war in Ukraine and the tensions between China and the West, which have an ongoing negative impact. This cloud of ongoing political instability, heightened by not knowing when the war will end or if it will escalate or the prospects of a developing relationship between China and Russia, leave a spectre of uncertainty hanging over the industry, affecting the market.

Exercising overcaution

Both the level of investment and the speed at which companies are increasing costs to support growth will hamper the speed of recovery in the short term. Put simply, businesses are not cost cutting, they are just being vigilant about the speed at which they allow costs to grow. And this is driven by uncertainty.

While last year’s results were strong and current orderbooks might be looking extremely healthy, everyone is still nervous about what the future holds. So rather than rushing back to pre-Covid levels, costs and investments are expanding at a more pedestrian rate so as not to overshoot market demand.

Don’t believe every headline and analysis

Media headlines are actively reporting of a lack of talent to fill the vacancies in a thriving job market, but the other side of the coin is that businesses are simply not rushing to hire people as fast as they otherwise would. Instead, they are actively being more cautious.

There is much discussion about how airports and airlines are understaffed and struggling to find the staff, when in actuality, they are consciously choosing not hire people quickly. In a period of uncertainty, they are exercising caution in an effort to protect profit margins. Businesses are worried that they will over-invest and that costs will become out of control should the demand not recover the way it is expected to.

Meeting changing consumer and market demand

We are living in a time of the biggest changes in consumer and market demand. While diverse types of consumers are looking for new and assorted products and services, we’re also in a world where there are enormous inflections in regional markets around the world.

The reality for airlines, car rental businesses, hotels etc. is that their sources of demand are dramatically changing from one season to the next and when you look forward, that change is still going to happen.

Successfully tackling 2023 in this environment

A shift to agile thinking and action

The need to be agile is two-fold. Firstly, the lack of ability to forecast accurately in the current climate due to the multiple factors impacting recovery, and secondly, because consumer and market demand is very volatile.

There have been a lot of significant changes over the last couple of years. If you consider how seismic the last 24 months has been especially, then it’s not surprising that businesses are having to respond and gear themselves very differently. The predictability of consumer booking patterns is much more short term, whilst purpose and drivers for travel are continuing to evolve and change.

When we refer to agility, we mean that your business antenna needs to be particularly attuned to understanding what changes are happening and when. The need to access accurate, constant, and real-time data is no longer a nice-to-do, it is a business imperative. As critical, however, is a well mapped out, researched, planned, and rehearsed playbook of scenarios to be adjusted and applied to your commercial and marketing actions as the market changes.

For example, this could mean agility in your pricing, where companies are now adjusting pricing by the hour rather than by the day. And reacting not just to historic patterns of demand but also to actual market demand, using real-time data to adjust in the short-term.

Moving to more agile marketing & real-time data

Businesses need to be using technology and market insight to engineer a faster, more agile, more automated response. And this extends to customer targeting and marketing. Annual, long-term plans aren’t sustainable anymore – they are too traditional and outdated in the modern market. Instead, successful businesses are turning to more dynamic, short-term, market-driven campaigns.

Success will come from marketing campaigns that are driven and based upon real-time customer and market information that is personalised to the individual. Marketing spend must be adjusted and reallocated to different markets and consumers according to the current propensity to buy. As such, then investment in marketing is always-on and is constantly evolving based on the buying behaviour of consumers.

Rethink pricing strategies

If you compare the old world with the new. In the ‘old world’, we were continually benchmarking against the YoY data. We looked at historic patterns of demand and pricing and we compared that to what we see today. and if the outlook is better now, we increase prices and vice versa.

Now, in the agile thinking ‘new world’, benchmarking remains a factor, but it has become more real-time and incorporates wider market information that informs businesses on important topics such as velocity of shopping and booking, and major events such as weather, natural disasters, and the announcement or cancellation of major city events etc. and using that to adjust the pricing in real-time.

Products are becoming more personalised too. Whereas they used to be designed and orientated to fit a particular market segment, now, they are becoming unbundled to give customers the choice to buy exactly what they want and to pay for what it is they value.

The common themes in how leaders in the industry are reacting to the current marketplace and business environment are technology, real-time information, and agile processes to make smarter decisions.

So, while companies are adapting at different speeds and in different ways, too many companies are still over-reliant on simply increasing price. And this is due to the level of caution. Constraining the level of supply, keeping its growth deliberately slower and less dynamic than the growth in demand.

Therefore, we have huge inflection points between supply not growing fast enough but demand growing faster than anticipated, which has caused pricing to accelerate with record growth. Consequently, inflation follows, and consumers will need to look elsewhere in the search for value.

Five key things that businesses need to consider for navigating the path forward

1. Adapt the operating model to be more agile – Focus on the way you manage and organise multifunctional resources and expertise to form hybrid teams that focus on the end-to-end journey of change and adaption. Thus, shortening the cycles and decision-making processes to adapt quickly. This is opposed to operating in functional silos where when the market changes only one of the functions makes the right changes and not in harmony with the other functions.
2. Consciously invest more management effort into structured scenario planning and forecasting – Putting in place a sound mechanism for monitoring changes in customers and markets and leveraging that insight to inform and update the different scenarios in which demand can change.
3. Develop a commercial playbook – Look at all the possible and probable scenarios that could occur and have a plan of action for if they do. For example, what if the market recovery is not as fast as we think, or if the opening of China doesn’t drive the demand that we anticipate, or if the situation in Ukraine escalates further or gets resolved? What will we do?
4. Focus investments on digital transformation and improving the customer experience – A longer-term play, a continual focus on digital transformation extending from marketing and distribution to including customer experience and product. It’s about empowering the customer to have the experience that best suits them and better provide from a customer service perspective and building brand trust.
5. Product innovation – Adapt your products and services to meet a greater range of demand types. Rather than revolutionising and creating a completely different product, this is about adapting and evolving your existing product to better meet the changing traveller requirements, such as adapting meetings and events space to accommodate shared working and cater for the increasing number of digital nomads.

Pace Dimensions as developed methodologies and approaches that are proven to help businesses adapt to changing scenarios and to increase the likelihood of success in this new normal. For more information, visit www.pacedimensions.com.