What can the hospitality industry learn from Sonder?

By Max Starkov

Sonder, a company managing hotels and short-term rentals, is having an IPO in December 2021 at a valuation of over $1.9 billion.?Sonder describes itself?as “A better place to stay. Inspiring, award-winning design meets modern, mobile-first service. Welcome to the future of hospitality.”

Why is Sonder’s IPO important for the future of the hotel industry?

Currently, for?lending purposes, hotels are considered commercial real estate from both the equity investor and lender perspectives. The other commonly defined sectors of commercial real estate are office, retail, industrial, multifamily and special purpose.?This real estate classification creates the wrong mindset among many hotel owners and operators who operate the properties like real estate businesses.?

True, any hotel operates from and within the physical confines of a real-estate asset, but so do retail stores, colleges, hospitals, manufacturing, etc. Do you consider the retailer Target a real-estate company because it operates out of 2,000 big box stores with multi-million dollar real estate value each? Is Amazon a real estate company, since it leases more than 160 million sq.ft. of warehouses out of which the company conducts its business? Or Tesla with its 8 gigafactory manufacturing plants? Of course not.?

Why does operating hospitality as real estate industry is detrimental? In my view, it shackles the industry to old-fashioned and even obsolete business models and operations, stifles innovations and adoption of technologies, and ensures an outsized role of ownership in day-to-day decision making.?

A hotel operator needs owner’s approval for any capital investment, technology implementation or personnel and marketing expenditure, whether it is a much-needed cloud PMS and AI-powered RMS to better handle demand in this crazy-dynamic marketplace or a must-have CRM system to increase repeat business. How about updating the 5-year old property website and finally moving it to a mobile-first design or investing in omni-channel marketing campaign to boost occupancy??

How about investing in technology to respond to the urgent demands imposed by the pandemic, such as a) contactless guest experience and mobility: mobile check-in and checkout technology, mobile keys, mobile issue resolution applications, virtual concierge, voice assistants, IoT enabled guest rooms, guest messaging applications, touch-less upsell and upgrade applications, etc., and b) cleanliness protocols: UV-C light devices and robots, electrostatic sprayers and housekeeping robots to assure cleanliness protocols and replace the highly ineffective spray-and-swipe techniques? How about much-needed investments in technology to solve the current labor shortages through innovations, automation, mobility, robotization and next gen technology applications??

More often than not, ownership approval does not come. “It’s not in the budget” is the usual answer. Interesting, does Amazon need approval by the owners of the warehouses it operates from to hire additional personnel or introduce automated fulfillment technology, AI and robotics? Of course not!?

The current situation of dominant owners and subservient operators is the reason why hospitality is the most tech-averse and innovation-averse industry today, far behind even traditional sectors like agriculture and construction.

In its current state, hospitality simply cannot adequately service the exceedingly tech-savvy guests and their exceedingly high technology expectations. Gone are the days when hotels offered “a home away from home” with comparable amenities and technologies. Unfortunately, many hotels nowadays offer “a subpar home away from home” experience as far as amenities, technologies and innovations is concerned.

This is why innovative consumer hotel brands like Sonder are worth watching and emulating.?Sonder is definitely into something: turning the hospitality industry from a real-estate industry into a consumer brand industry. By renting hotel buildings from their owners, Sonder de facto removes the disproportionate control ownership has over hotel operations.?

In my view, the future is in the creation of consumer hotel brands similar to Sonder, Selina, etc. that lease a building from ownership and turn it into highly desirable hotel, laser-focused on customer service via world-class technology and innovations. A consumer brand that can make instant decisions to improve guest services, implement next gen technology, change operations and tweak space utilization or invest in marketing. The consumer brand and its unique value proposition becomes the main asset of the hotel, not the building it rents and operates from.?

Just like a celebrity chef that moves his/her Michelin star restaurant from place A to place B and the patrons follow. The actual restaurant premises does have real estate value, but it remains secondary to the overall value of the celebrity restaurant. Similar is the situation with Amazon and the warehouses it leases or Target and the big box stores it operates from.

In other words, the future is in separating hotel ownership from hotel operations. Operators should be leasing the properties from ownership, paying them rent and then managing the hotel as they see fit and as customers and market conditions demand. Not run every day to get approval for practically everything from ownership. Think Sonder, think Selina and...Airbnb.

Back in 2019 Airbnb leased several floors at the venerable Rockefeller Center in Manhattan with the intention of converting the office space into an Airbnb Hotel. There were similar projects in Miami, Florida. The pandemic interfered but I do not doubt even for a second that we will be seeing dozens and dozens of Airbnb hotels using the same formula.

In the future, I can also see the major hotel chains moving in this direction to extract better value for themselves. Right now, a major brand makes 12%-15% of room revenue in the form of royalty fees, reservation, marketing, management and other fees. The rest minus operational expenses goes to hotel ownership. If a major hotel chain uses smartly the Sonder formula and leases the property, they should be able to keep for themselves 2x, 3X or even 4x what they are making now.

There is an increasing incentive for the major hotel chains to adopt - at least for some of their brands - the Sonder formula due to a) technology entering every aspect of hotel operations and b) evident trends toward operating the property at 50% or even 70% below 2019 staffing levels thus alleviating the property's main cost factor.

So what is the future of hospitality? Continue operating as a real-estate industry where day-to-day operations are controlled or disproportionately influenced by ownership or become a consumer brand industry, obsessed with world-class customer service and technology innovation? ?