Discuss how the events mentioned in the preamble would affect the revenue of different hotel markets in Singapore.
Rising global incomes has contributed to the increase in tourists in Singapore. However, the rising foreign worker levy has resulted in a rise in operating costs for hotels in the country. At the same time, advent of hospitality companies such as Airbnb which focuses on short-term lodging has made it easier for travellers to rent private accommodation from locals.
Discuss how the events mentioned in the preamble would affect the revenue of different hotel markets in Singapore. [25]
Introduction
Define:
1. High class, luxury hotels (4*, 5*) such as Capella, Mandarin Oriental, Shangri-la
2. Budget & boutique hotels such as Naumi hotel, Hotel 81
PED is the measure of responsiveness in the quantity demanded for a commodity because of a change in the price of the same commodity, ceteris paribus. YED is the measure of responsiveness in the quantity demanded of a good to the change in the income of the people demanding the good, ceteris paribus.
Impact of growing affluence in emerging markets
On high-class luxury hotels
1. High-class luxury hotels are likely to have YED>1 since they are luxury goods.
2. Rise in incomes of tourists would likely see a more than proportionate increase in demand for such luxury hotels.
3. Occupancy rates should rise -> Rise in Total Revenue (Significant).
On budget and boutique hotels such as Naumi hotel, Hotel 81
1. Boutique hotels are likely to be less income elastic compared to luxury hotels as they are less luxurious (have fewer services and amenities).
2. Demand would rise less than proportionately (that is if, YED<1), occupancy rates would likely rise but to a lesser extent compared to luxury hotels -> Rise in Total Revenue (Less Significant)
3. Budget hotels such as Hotel 81 may or may not be seen to be a form of inferior good by tourists – in the case whereby tourists view it as an inferior good, a negative YED value would mean a fall in Dd since incomes rose.
4. Occupancy rate for budget hotels may fall -> Fall in Total Revenue
Impact of higher foreign worker levy
Higher FWL -> Higher labour costs -> Higher cost of production -> Fall in Supply -> Prices increase
On high-class luxury hotels
1. Demand is likely to be price elastic for high-class luxury hotels (large % of income, not a necessity).
2. A rise in prices-> More than proportionate fall in Quantity Demanded -> Fall in Total Revenue
3. However, it may be possible that hotels with large profit margins may choose to absorb the increase in cost of production (to maintain price competitiveness) and choose not to charge higher prices (squeezed profit margins but total revenue stays the same).
On boutique hotels
1. These firms are likely to have the same impact as luxury hotels (Demand is price elastic).
2. However, firms are unlikely to be able to absorb increase in COP due to smaller profit margins.
On budget hotels
1. Demand is likely to be more price inelastic for budget hotels as their prices are a smaller proportion of a person’s income.
2. The increase in prices -> Less than proportionate fall in Quantity Demanded -> Total Revenue will rise
Impact of rise in Airbnb
On all 3 hotels
1. Airbnb is a substitute to hotels and is generally seen as a more affordable alternative.
2. Due to the increased popularity of Airbnb as a substitute, the Demand for hotels would likely fall.
3. However, the impact of the fall in Demand would likely affect different types of hotels differently.
Boutique and Budget Hotels
Being close substitutes due to similar amenities and pricing constitutes that these firms are more significantly affected
Luxury Hotel
Attracting a different crowd, mainly business travellers and higher income earners, constitutes a less significant impact on these firms
Analyse combined impacts of the above events
High-class luxury hotel
1. Rising affluence èHigher Demand -> Higher Total Revenue
2. Higher Cost of Production -> Higher prices but Demand price elastic -> Lower Total Revenue (but possibility of absorbing – possible to ignore this factor)
3. Airbnb -> Substitute-> Fall in Demand èLower Total Revenue (but limited impact)
Likelihood -> Higher Total Revenue
Boutique hotels
1. Rising affluence -> Higher Demand -> Higher Total Revenue
2. Higher Cost of Production -> Higher prices but Demand price elastic -> Lower Total Revenue
3. Airbnb èSubstitute -> Fall in demand èLower Total Revenue
Likelihood -> Lower Total Revenue
Budget hotels
1. Rising affluence èLower Demand èLower Total Revenue
2. Higher Cost of Production èHigher prices but Demand price inelastic èHigher Total Revenue
3. Airbnb èSubstitute èFall in Demand èLower Total Revenue
LikelihoodèLower Total Revenue
Conclusion
While Airbnb has been gaining popularity as stated in the preamble, private accommodation is still seen to be a less viable choice as compared to luxury hotels given that the latter provides much more convenience given its locations and availability of in-house services. We would however expect that Airbnb would have affected revenues of the hotels industry in generally, specifically more so for budget & boutique hotels.
(RWA) However, given that the context of Singapore’s legislation which currently prohibits the renting out of apartments for short term stays not exceeding 3 months – we would expect the impact of Airbnb to be very limited at least in the context of the Singapore market.
Comments
Students must note that the question specifically wanted a discussion of different hotel markets – the hotel market, in general, is not acceptable in such a case and there must be a splitting of the different firms in the hotel market. Comparisons can be made from then on before a synthesis can be made.