šØ Introducing the Hotel Tech Stack
Overlooked #150
Hi, itāsĀ AlexandreĀ fromĀ Eurazeo. Iām investing in seed & series A European vertical solutions (vSol) which are industry specific solutions aiming to become industry OS and combining dynamics from SaaS, marketplaces and fintechs. Overlooked is a weekly newsletter about venture capital and vSol.
In the next 4 issues, Iāll share a deep-dive in the hotel tech stack. In this 1st post, Iāll explain how hotels have adopted technology and what are the major venture trends in the industry. In the next posts, Iāll dig into a public vSol for hotels called SiteMinder which helps hotels distribute their inventory online. Iāll also cover a private vSol for hotels called Mews that provides a modern Property Management system (PMS), the system of records for hotels. Iāll end the deep-dive with a side by side comparison between SiteMinder and Mews. I have 2 goals with this deep-dive: (i) introduce the key characteristic of a specific vertical market and (ii) draw lessons from this vertical that can be applied to other verticals for vSol builders and investors.
I divided this first post into three sections:
A quick history of the hotel tech stack
How did covid impact the industry and its stack?
Noteworthy venture trends
Section nĀ°1 - A Quick History of the Hotel Tech Stack
a. Introducing the Hotel Tech Stack
The Property Management System (PMS) sits at the core of the hotel tech stack. Itās the backbone to manage the operations of an hotel including key modules such as front-desk (check-in, check-out, reservation, payments), housekeeping (scheduling, task assignment, maid management), back-office (invoicing, accounting ledger) and guest management (profiling, history, contact).
Itās almost a must-have for hotels. For instance, in the UK, 85% of hotels have a PMS and in the US, 80% of hotels have a PMS. Itās also the software on which hotels allocate the biggest share of their IT budget (26% vs. 16% for the ERP, 12% for the CRS or 12% for the CRM).
Most of the time, hotels combine the PMS with other tools (e.g. a CRM, a Revenue Management System, a Central Reservation System, a Channel Manager). This can result in a fragmented tech stack in which hotels use 10-20 different tools that are not properly interconnected. The most common other software purchased by hotels are:
Customer Relationship Management (CRM) systems: a unique system of records for guests across time and properties. Hotels can better engage with customers before, during and after the stay in order to maximise revenue generation and to improve guest satisfaction.
Central Reservation Systems (CRS): tool to help hotels manage reservations across different properties with specific features like group bookings as well as live inventory and rates.
Revenue Management System (RMS): enables hotels to maximise revenue generation by adapting room prices real-time based on market data, historical booking and customer segment targeted.
Channel Managers: allows hotels to sell their inventory in real-time and at the same time on different booking sites including online travel agents (e.g. Booking or Expedia), metasearch engines (e.g. Google), global distribution systems (e.g. Sabre or Amadeus) and direct booking (e.g. your own website).
b. Incumbent PMS players
The main incumbent in the PMS market is Oracle with its Opera Hospitality Suite which is targeting mostly large hotels and multi-properties hotel chains. Oracle acquired Opera in 2014 for $5.3 billion. Opera has a 6% market share when you look at the number of hotels and a 16% market share when you look at the number of rooms. Opera was founded in 1987 in Germany under the name Fidelio. It was initially built to serve opera houses giving the name to the solution before pivoting into the hotel industry which was more promising. In 1992, Fidelio stroke a massive deal with Hilton to become the defacto PMS of all its hotels. Fidelio was fully acquired by Micros in 1995 before being acquired by Oracle nine years later.
The other large incumbents in the PMS market include Protel (founded in Germany in 1994 and backed by private equity funds Eurazeo and Advent) as well as solutions acquired/developed by the two main Global Distribution Systems (GDS): Amadeus (which acquired Optims in 2004 and Itesso in 2015) and Sabre (which acquired SynXis in 2018 which is a CRS with PMS capabilities).
Like many software categories, the PMS market is currently transitioning from on-premise to cloud-based solutions. Incumbents have most of their customer base on on-premise solutions. They have released cloud-based products but theyāre struggling to transition their customer base to the cloud. For instance, in 2020, Oracle had transitioned only 100 of its 38K properties to the cloud.
When theyāre not using incumbents, top hotels chains have built their own PMS in-house. For instance, Hilton has a PMS called OnQ which is used by most of its properties. Same for Choice Hotels which has an in-house solution called ChoiceAdvantage. Many in-house solutions are starting to become obsolete and these chains are increasingly looking at third party solutions to replace their historical PMS.
Besides hotel chains, there is an increasing need of independent hotels and alternative accommodations (B&Bs, hostels, etc.) to digitise their operations. This long tail will tend to pick all-in-one solutions including a PMS when larger hotels and chains will have a more best of breed approach.
The combination of (i) incumbents struggling to move to the cloud, (ii) in-house systems becoming obsolete and (iii) the long-tail digitising its operations has opened the door for many newcomers in the PMS category.
c. The Hotel Tech Stack Besides the PMS
Besides the PMS, there are three solutions that are becoming more prevalent in the hotel tech stack:
CRMs: PMS are room-centric solutions and not guest-centric solutions. As a result, hotels struggle to engage with their guests before, during and after the stay in a personalised manner. Itās even more complicated when youāre an hotel chain because most of the time youāre not able to track a guest who is staying at different properties. CRMs solutions like Revinate have emerged to go after this opportunity.
Middlewares: we mentioned that the hotel tech stack can be fragmented with multiple systems being used without being well integrated. It has created an opportunity for middleware solutions to become the Plaid of the hotel industry, reading and writing information across all the different hotel tech solutions.
Channel Managers: with the rise of Online Travel Agencies (OTAs) like Booking and Expedia, it has become a challenge for hotels to manage their online distribution on third party websites. OTAs is a significant business driver for hotels as theyāre forecasted to generate 51% of their bookings in 2023. As a result, channel managers have appeared to help hotels distribute their inventory and their rates in real time across multiple channels. Top channel managers include SiteMinder and D-Edge.
Section nĀ°2 - How did covid impact the industry?
The travel industry was one of the most impacted industries during covid. Many hotels and restaurants had to shut-down. Leisure and business travel were both impacted with almost no activity for several months. As a result, in 2020, global travel bookings decreased by more than 60% compared to 2019 and it will take 5 years for the travel industry to fully recover to its pre-pandemic level.
Covid also changed customersā expectations around hospitality. Customers want travel to be more flexible. Customers are staying longer combining leisure and work when they used to have shorter and work only stays. Customers want not only an hotel room but a rich experience with ancillaries (restaurants, workspace, entertainment). Customers are expecting hotels to upgrade their digital journey with options like in-room QR-code or self check-in.
Section nĀ°3 - Noteworthy Venture Trends
1. Building the All-In-One SaaS for Independent Hotels
As previously discussed, the hotel tech stack is fragmented with hotels using up to 20 different point solutions to cover their needs. It can work for large hotels and hotels chains which are willing to have a best of breed approach but it does not make sense for independent hotels and alternative accommodations.
It creates an opportunity for all-in-one solutions going after the long tail in the hospitality market which will bundle in a unique suite the main components of the hotel tech stack (PMS, website builder, channel manager, RMS).
Starting with the PMS before expanding into other products seems to be the most obvious play (cf. Cloudbeds and Amenitiz) but there may be an opportunity to start with another product brick that is easier to sell than a PMS before adding a PMS later on to the product offering (cf. Smartpricing starting with a Revenue Management System).
2. Going after Oracle Opera Slowly but Surely
Oracle Opera is the dominant PMS in the hotel industry especially in the mid-market and enterprise segments (i.e. hotel chains). But Opera was started in 1987 and the solution has barely evolved in the past decade.
Itās an old-school product (on-premise, closed-system, hard-to-use, costly) that is ripe for disruption. Opera has recently released a cloud version of its PMS but itās struggling to transition its customer base to the cloud.
It creates an opportunity to disrupt Oracle Opera. Itās a decade-long product roadmap to have feature parity with Opera and it takes time to sign large hotel chains because changing a PMS is an open heart surgery. Nonetheless, if you take the long term view, itās obvious that a modern PMS will emerge (cloud based, open ecosystem, easy to use). Mews, that we will cover in an upcoming edition of the newsletter, seems to be the best contender to challenge Opera.
3. Disrupting the PMS as Central System of Records
Many hoteliers are starting to say that itās an aberration to use the PMS as central system of records. Indeed, PMS is a room-centric tool and hoteliers, like any other business, want to be customer centric. It would make much more sense to have a CRM as a system of records.
In the mid-term, CRM are going to be even more important (i) to sell ancillaries to hotel customers (e.g. activities, a room with a better view, a package for remote workers), (ii) to personalise the guest experience and (iii) to properly run the B2B part of the business. There is a strong momentum for CRM adoption in the hotel industry because CRM can help hoteliers restoring their profitability post covid.
This play also makes sense because (i) hotel chains struggle to have a unified customer data layer pulling and pushing information from the PMS of their different chains and (ii) it helps hotel chains become more digital without upgrading the PMS which is an operation that could kill the business. Revinate seems to be the go to CRM in the hotel industry for B2C customers. Another interesting company is Thynk which is building CRM for hotel chains to manage the B2B side of their business, aggregating customer data from all the PMS and POS used by the different properties.
4. Full Stack Modern Hotel Chains
New hotel chains such as Olo, Sonder and Selina are emerging, riding travel consumer trends (e.g. Selina for digital nomads, Sonder for remote workers) and leveraging technology to have better unit economics compared with incumbents.
The general thesis behind these full stack models is that you cannot fully disrupt the hotel industry without operating hotels or accommodations by yourself. By controlling the full value chain, youāre able to digitise the industry to another level. Itās a thesis that Iāve seen across several verticals (e.g. Carvana for reused cars, Opendoor in real estate and One Medical in healthcare).
With the rise of interest rates and capital drying up for tech companies, these models have been severely punished by public and private investors and the hospitality industry is not an exception when you look at Sonder and Selinaās stock prices.
Thanks to Julia for the feedback! š¦ Thanks for reading! See you next week for another issue! š
I think a good strategy for vSol firms to identify new markets is to just see which industries are most dependent on Oracle and then go ahead and build something better.