Hotel CEOs are in heavy social media, public relations mode. But this time it’s less about promoting their brand designs, signature beds or celebrity chefs. For the first time since 2000, it’s about attracting and retaining talent.

Hotel CEOs, who are mostly deal-makers with real estate DNA rather than operators, are going big with social media campaigns centered on recognizing hotel workers and promoting their work cultures.

However, the latest propaganda doesn’t seem to be working because a different type of disruption is at work. Talent is seeing through it and know the corporate posture is decidedly reactive and self-serving. Talent has democratized and is voting against a career in hospitality with their feet. And it’s happening all over the world.

The Talent Disruption — Key Facts

This talent disruption is putting at risk the growth of one of hospitality, the world’s biggest industries that represents over 300 million employees or 10% of Global GDP. For hotel brands and their developers, the timing could not be worse.

Hospitality is forecast to add another 5 million jobs in the next decade to support a record global pipeline of over 10,000 hotel openings, from China, the UK and Germany to the Middle East and China.

Hospitality is the 2nd fastest growing U.S. job market in 2019. Hotels represent 15 million jobs of which 6 million annual job openings from annual turnover.

According to the Deloitte 2019 Travel and Hospitality Industry Outlook, the current hospitality workforce gap has reached unprecedented levels, with the U.S. Bureau of Labor Statistics estimating that there were more than a million job openings within the leisure and hospitality sector in 2018 versus over 350,000 job openings in 2009.

In terms of housekeepers alone, this equates to another 10,000 to 13,500 new employees a year just to clean the rooms. Average annual wage increases in the hotel industry surpassed 4%, compared to a national average wage increase of 2.8% in 2018, according to data from the Bureau of Labor and Statistics.

The situation has been further exacerbated by the Trump administration’s tightening of immigration policies. While immigrants make up about 13% of the total U.S. population, the segment accounts for a highly significant 31% of the hotel industry’s workforce. Furthermore, this talent disruption comes amidst a record hotel pipeline with over 5,647 U.S. hotels opening in the next 3 years.

Countries such as Canada, Australia, Germany, the UK and Japan are facing similar challenges in attracting talent into the hospitality sector, with an estimated combined 1 million jobs unfilled and growing, amidst a wave of hotel openings in the next few years.

Canada and Australia each have over 100,000 unfilled positions in hospitality with job growth in the sector well above 25% in the next 5 years. In Germany, a country on track for its 10th straight year of growth in overnight stays, more than two-thirds of hoteliers identified the scarcity of skilled staff as their biggest problem.

Kate Nicholls, Chief Executive of Hospitality UK, recently said: “what makes Brexit so worrying for hospitality is not skill shortages, not a failure to upskill our workers, but simply a shortage of bodies available.”

Japan is now implementing a plan to allow foreign nationals to apply for a technical internship training program, as part of a new blue-collar work visa program, that allows them to stay employed for a hotel for up to 5 years.

But wait, is this just the result of another economic or real estate cycle and therefore a temporary headwind facing the industry? And why should customers, investors, brands and managers care?

The Hospitality Talent Crisis is a Long-Term Disruption, Not a Short-Term Insurgency

Let’s take a step back. Research proves that the “service profit chain,” which measures the relationship between employee engagement, customer satisfaction and profits, is proven to work in hospitality, airlines, financial services and other service industries. In other words, in hospitality, changes in employee satisfaction and engagement directly impact revenues and the bottom-line, very quickly.

For a variety of reasons over the past decade, in many service industries, the service profit chain is broken. And hotels, which have largely withstood automation and shifts to eCommerce, is perhaps the most broken of them all.

Employee turnover is at record highs, surpassing 50% in full-service hotels in major markets and travel review sites have exposed service problems. Among the major hotel brands, only Marriott has been bold enough to even feature reviews on their own site but does not permit travelers to share real photos.

As a traveler, the talent disruption means fewer staff at hotels, declining service levels from disengaged employees and broken brand promises. It means the traveler will get less value for their money and will be more likely to make fewer trips and do their meetings on zoom.com or rent an Airbnb instead of a hotel suite on their next vacation.

The talent disruption is real. It is not just a cyclical insurgency. The market forces driving this disruption are structural and long-term.

They include the divestment of operations by brands resulting in increased franchising and the growth of 3rd party management companies, the growing power of private equity real estate investors who seek to squeeze out more profits, changing attitudes towards work among 18–30 year old’s and unforeseen geo-political constraints such as anti-immigration sentiments.

Research supports that Millennials, which comprise 75 million or roughly half the workforce in the U.S., seek out employers that have a social purpose, seek more of a work/live balance and far are more likely to change jobs, costing the U.S. economy $30 billion a year. The generational shift in work attitudes is a contributing factor in markets such as the U.S.

Hospitality has become a less attractive employer with higher turnover, relatively low wages and fewer opportunities for career progression. And for many it’s an industry with a glass ceiling. Women and minorities represent most of the workforce but only a minority of property executives and a tiny fraction of corporate executives.

As a result of these underlying drivers, the world’s second largest industry is facing record labor shortages around the globe. 18–30-year-olds are less actively seeking employment or careers in the hospitality industry. They are even giving up health care benefits and a career path to drive an UBER, host an Airbnb and freelance on Upwork.

So, for those industry leaders including hotel owners, operators, and brands who get it and are willing to do more than public relations campaigns, what can be done?

A return to the fundamentals to address compensation, organization and roles and new brand standards for investing in people. In the long run, the way brands are created will have to evolve from real estate driven to people and service driven.

To address the talent crisis, hospitality leaders must spearhead change in the following five areas:

1. Compensation: Pay People What They Are Worth and Align Long Term Interests

2. Organization: Reinvent Property Structures and Empower Employees

3. Product Development: Create Compelling Experiences Not Real Estate Brands

4. Learning: Invest in New Platforms to Grow the Talent Pool

5. Technology: Humanizing Travel With Automation (Bring it On!)

Let’s take a closer look at how the proposed change initiatives can address the root causes of the talent disruption.

1. Pay People What They Are Worth and Align Long Term Interests

The U.S. hotel industry made a record $80 billion of profits in 2018. Private equity and real estate investment trusts own over 80% of U.S. hotels and represent over 50% of hotel acquisitions worth more than $10 billion. Interest rates are at historic lows, enabling investors to refinance and pull out cash and distribute it to investors.

The financial engineers, asset managers, real estate investment trusts and family offices are making record profits. But the wealth is not being shared with the people doing the work in the properties.

In few, if any, hotels do general managers or hotel executives participate in profit sharing. It remains extremely rare for senior management or employees to have equity, options or a promote. This is a stark contrast to service industry leaders in the airlines, gaming or retail business.

In 2019, Delta Airlines paid $1.4 billion of profit sharing, or 14% of their annual compensation to all employees, from stewards to maintenance crew. In fact, despite it being an unprofitable industry, employee profit-sharing has been commonplace in airlines for decades.

Southwest Airlines shared $544 million with its employees through the company’s profit-sharing plan in 2018. The reward equaled to approximately 10.8% of each employee’s eligible compensation. This was Southwest’s 45th consecutive profit-sharing award, starting with the first profit sharing payout in 1974.

From 1995 to 2009, Caesars Entertainment, and its predecessor Harrah’s, implemented a customer service profit chain system that paid front line workers quarterly bonuses that totaled up to $25 million annually. However, after they were acquired by private equity firms, the program was cancelled and sold internally as not negatively impacting customer satisfaction scores.

Last year, Glassdoor named the grocery chain with a cult-like following as one of the best places to work in the US. Trader Joe’s has made the list every year since 2011. Trader Joe’s employees enjoy high salaries, impressive benefits, and frequent opportunities for promotion.

While most Crew Members make $10 to $24 per hour, Captains (store managers) earn more than $100,000 per year. After three months of work, employees receive health insurance (medical, dental, and vision) and a retirement plan in which Trader Joe’s contributes 10% of an employee’s annual salary.

Airlines and retail are very thin margin businesses and casinos lose money on everything but gaming. In contrast, Hotels are a highly profitable real estate business with highly sophisticated investors who have deal savvy.

However, no major hotel private equity firm or owner has implemented a profit sharing or asset specific promote incentive structure at the property level, including its owned and managed properties either in the U.S. or internationally.

While publicly traded hotel companies like Hilton offer restricted shares and stock options to certain Hotel General Managers, real estate owners, including Hilton do not compensate hotel executives for real estate appreciation or profit sharing.

Real estate capital markets are all about creative destruction. But excessive greed is short-sighted and comes back to bite a business every time.

2. Reinvent Property Organization Structures to Empower Employees

Hotel management companies have strict standards and protocols. In major gateway cities the industry is also heavily unionized. For example, 300 hotels or 75% of New York hotels are unionized. This contrasts with only 8% percent of private sectors jobs unionized in the U.S., the lowest level since 1932. In unionized hotels, operators can be restricted by strict work rules that limit flexibility and constrain innovation.

But as the success of Southwest Airlines has proven, unions are not the core impediment to service quality or innovation. Often, the union is a managerial excuse for maintaining the status-quo. Other unionized industries have innovated their labor structures far more than hotels.

According to most operators, a hotel is the ultimate hierarchical bureaucracy with full time employees that cannot participate in the “gig economy.” Hoteliers say it’s not possible to operate a hotel like a technology company, where employees can choose their projects and work as team members that can wear many hats.

In order to beat the talent crisis, this orthodoxy must be overturned, and the mental model must change. There are a lot of ways to experiment with new labor models without throwing the baby out with the bathwater.

Brands such as Peloton and Airbnb (hosts) enable employees to not just build the brand, they become the brand. SoulCycle has taken it a step further and launched a talent agency for their instructors.

Hotel operators can start by enabling front-line employees to respond to customer reviews. Rather than having the General Manager or Guest Relations representative respond to reviews, or outsourcing responses, employees should be empowered to engage directly with consumers.

Ultimately, hotel employers must trust their own people. They can start with allowing their employees to directly engage customers who leave reviews that mention them. Hotels could also enable employees to receive 1:1 reviews from guests who are part of their loyalty program. Evolving the work culture to incorporate customer reviews into the employee career path, compensation and benefits will increase employee engagement, loyalty and customer service. It can also help create a meritocracy where high performers are recognized, promoted and compensated based on 1:1 customer reviews.

3. Create Compelling Experiences Not Brands that are Pure Real Estate Products

Four Seasons hotel founder Isadore Sharp is famous for saying that that he built the brand around service not design differentiation:

“There has always been a consistent thread and it propels us forward today, as we continue to grow globally, and that’s service… This isn’t something that can be accomplished by putting up a plaque or making a speech. It took work over many years–I would say a 15-year period.”

That all sounds good but the problem with Four Seasons under Sharp’s leadership was it set a servant worker standard for luxury hospitality: It took 15 years for a front line employee to become a Hotel General Manager and 25 years for them to ascend to a regional operations role. Four Seasons was what venture capitalist Reid Hoffman would call a Navy battleship. That’s a big reason why Four Seasons, while still a very strong brand, has grown very slowly, rarely turned a profit and survived on its own due to its unique private equity ownership structure. Therefore, Four Seasons is not a good role model or relevant case study for the hospitality industry. Brands like Four Seasons, Peninsula, Mandarin Oriental comprise 1–2% of the industry and are the Maybach and Lamborghini of the industry. The better benchmarks are the middle of the road, chain owned full-service upscale hotel brands such as Hilton, Marriott, Hyatt and Intercontinental whose “big box” hotels employ thousands of workers in heavily unionized markets such as New York, San Francisco and Chicago.

The real estate community, including equity and debt investors are the core customer of hotel and home sharing brands, not the traveler. The problem with this strategy is that while real estate developers seek a product niche at a certain cost per key to build, travelers don’t care. Customers care about the human experience, not the room size, amenities or design. Product consistency is table stakes. It’s gets you shelf space, but it doesn’t generate customer loyalty or repeat business. In other words, customers are loyal to brands that offer unique experiences and that is not what brands are investing in at all.

In order to end the talent disruption, hoteliers must build brands and products that start with the employee and customer experiences first rather than the real estate developers’ shelf-space.

Over the last decade over 80 new hotel and home sharing brands have been launched including a combined 20 new brands by the largest five chains since 2013, including five over the past 18 months. One could assume this indicates that hotel chains and entrepreneurs are innovating on the customer experience, right?

Not really. Baird senior research analyst Michael Bellisario recently told Business Travel News that big hotel chains are becoming less hotel companies and more booking/reservation platforms, making money through franchised brands rather than directly managing hotels.

In other words, hotels and urban development focused home sharing brands such as Sonder and Lyric are micro-segmented real estate products. Their development strategy to address product and shelf space first, architecture and design differentiation second and customer service third or preferably not at all. And their preference is to out-source management, or in the case of the new home sharing brands, bet on automation, as much as possible.

4. Invest in New Learning Platforms to Transition People and Grow the Talent Pool

Service industries, from retail to hospitals, have long poached talent from hospitality. Now that hospitality is thriving and retail is shrinking, can hoteliers fight back?

It’s well known that hospitality is laggard in innovation, particularly in the areas of human resources, learning and development. More fundamentally, they have avoided writing strong brand standards for franchisees and third parties that operate their hotels for the sake of growth. A typical hotel franchising circular contains only minor references to mandatory training and development. Few brands, if any, hire staff for this sole purpose. The evidence is in hotel budgets. As a rule of thumb, full-service hotels have four percent of revenue reserve for furniture, fixtures and equipment. However, while labor is the single largest cost in a full-service hotel, there is no such thing as a talent budget or training reserve. There is simply no accounting standard or benchmark for investing in service or people in full-service hotels.

Training and development remain traditional, course based and outsourced. Despite the explosion of online learning platforms, hospitality learning and development have remained largely traditional and insular. They remain dependent on third party industry platforms, brick and mortar hospitality universities and trade schools that are in short supply.

Most hotel brands like Hilton have an internal university or affiliation with hospitality schools in every major geographic region. For many reasons this is necessary but far from enough.

What is required are new industry/academic partnerships to create online universities or experiential learning platforms. This will grow the talent pool to enable people in career transitions to migrate to hospitality.

For example, over 150,000 Americans lost jobs in retail and many of these people could work in hotels if they were able to learn basic hotel operations, marketing or accounting. A flight simulator for a hotel General Manager could help transition talent from other industries into hospitality and in the process, help address the talent crisis. In order to end the talent disruption, hoteliers must build brands and products that start with the employee and customer experiences first rather than the real estate developers’ shelf-space.

5.Humanizing Travel With Automation Airbnb, home sharing, work/live buildings, hostels and micro-hotels are grabbing the headlines as disruptors. However, they are not disruptors at all. Vacation Rentals By Owner (VRBO) was launched in 1995. In Asia, the Middle East and Europe, apartment hotels have long been an alternative to hotel chains. In fact, most of these “alternative accommodations” are what Harvard Business School Professor Clayton Christensen calls incremental, or sustaining innovations that are launched in response to customer demands and do not alter an industry structure. It’s not surprising that many of these sustaining innovations are already being co-opted by chains such as Accor, Marriott and others.

Something more fundamental is happening that is potentially transformational — a different kind of disruption that is global and far-reaching. Automation is coming to the hospitality industry and its test labs are in kitchens, food delivery and hotel operations.

Alibaba has successfully piloted hotel robots in Hangzhou, China and is expanding the “Flyzoo” platform with new automated properties. Alibaba is seeking to license the technology, not to create a revolutionary brand like the Tesla of hotels. It appears that the platform could also be integrated into the new Chinese “social credit system,” enabling hotels to know whether they are receiving a well-mannered customer who will play the rules or not.

That such an innovation would come from Hangzhou is not surprising to anyone who has managed a hospitality business in China. Training and supervision remain big challenges in Chinese hospitality, which is regarded as one of the least desirable industries from a career standpoint. In 2017, a third-party testing organization Lanmei Test released a report claiming that a number of five-star hotels in Beijing, including the W, the Intercontinental, the Hilton, the JW Marriott, and the Shangri-La, were not changing bed linens completely or cleaning toilet seats and bathtubs after clients had checked out. Studies and government health inspections continue to prove that in addition to low wages, hotel staff in China are often incentivized to do “slapdash work.”

Across the Yellow sea, the experiment with hotel robots has been less positive. After an expensive experiment, More than one Japanese hotel operator fired robot service assistants due to customer complaints and malfunctions.

But assuming Alexa in your room, a social credit system and the robot weaponized housekeeping crew are inevitable in China, could significant or even complete automation be the answer to the hospitality talent crisis in the U.S.?

Some automation is inevitable, especially in the U.S. market, where full–service hotel labor costs average 45% of the income statement versus only 29% in 1980. But domestic travel accounts for over 85% of trip dollars spent in the U.S. So how would the U.S. customer respond to automated full–service hotels? Recently, Deloitte Digital released a white paper called Human Experience (HX) in Hospitality that measured human values of nearly 50 hotel and home share brands across all segments. Deloitte looked at how hospitality companies harness the power of human experience to increase guest loyalty and drive revenue. They found that hotels win only when they deliver a truly elevated human experience. Consider these findings:

1. Customers also expressed a desire to be social with others and to share opinions heard.

2. A key finding to hotel success with luxury customers was their ability to surprise and delight customers with new experiences.

It’s easy to argue that like other highly unionized industries that suffer from labor cost increases that outpace revenues, automation is the answer. But hotels are not a factory. The Deloitte research confirms that if Airbnb and the growth of boutique hotels have proven anything, it’s that travelers around the globe want humanized, local experiences.

Still, automation presents an opportunity for hotels to redesign the customer service journey to correct the gaps in their brand standards. It could enable employees to focus on delivering a more human experience. In the coming years, with the wave of new hotel openings, there is a window of opportunity for industry leaders to invest in people, reinvent operating models and modernize the people side of the hospitality industry. As in the airline industry where Southwest inspired the discount airline revolution, the winners will not be the design or chef-led lifestyle brands. The winners will be the truly people-driven (not technology or real estate driven) brands that succeed in recruiting and retaining a healthy pipeline of talent who are ambassadors, entrepreneurs and contributors to their local communities.