This second article in the Sector Futures series on the hotels and catering sector looks at the trends and drivers affecting the sector, presents a framework to link them together and assesses their impact. The article also reviews some scenario work relating to the sector before concluding with an examination of the implications on the sector of the drivers and scenarios. Examples of the implications include better working conditions, consolidation and more consumer protection.

Following the overview of the sector and initial look at trends and drivers in the first article of this series, this article now examines these trends and drivers in more detail and reviews existing foresight research on the hotels and catering sector.

Trends and drivers of change

The first article identified and introduced several trends and drivers that are shaping the sector. In a STEEP (social, technological, economic, environmental and political) breakdown, the key social drivers were identified as ageing populations and changing lifestyles and tastes. Information technologies, along with new production and kitchen technologies, were identified as the key technological drivers. Economic drivers included globalisation and low-cost travel, which in part raise issues about skill levels, migration and competition. Regarding environmental drivers, the main issues were identified as the direct impact of climate change on the sector as part of the tourist industry and the political desire to improve energy and resource efficiency across the economy. The key political drivers are likely to be legislation to improve consumer and worker rights, along with the quality and labelling of food. Beyond that, the sector, as part of the tourist industry, remains sensitive to the impact of international relations on consumer behaviour. The links and interactions between these forces are shown in the schematic diagram below.

Trend and driver linkage

Figure 1: Trend and driver linkage

STEEP analysis

The following table summarises the STEEP factors affecting, or expected to affect, the industry along with their possible impacts.

Assessment of the trends and drivers

Sociological drivers

Sociological changes, such as changes in lifestyles, are driven by and affect consumers, and directly affect businesses. The temporal impact varies, but some changes, such as the increased use of the Internet for shopping, have had a profound impact on the industry. Such drivers require businesses to adapt in order to survive, for example, by reviewing their relationship with the customer and their marketing strategy. An ageing population will affect the composition of the workforce (as outlined in the first article) and may help improve working conditions; it is also likely to lead to a change in the composition of consumer demand. In addition, growing interest from consumers in the production and health aspects of food is increasing pressure on caterers to supply better-quality food, produced in socially responsible ways, and with information on its origins. Reluctance by the industry to act on these issues is leading to increased governmental involvement. Changes to the supply chain in response to these trends are likely to be long-lasting.

Technological drivers

Technology has been a primary driving force of change among consumers and in the sector, thereby helping to globalise it. While it creates opportunities, technology is also a major threat to small enterprises in the sector. Because of their small size, it is much harder for them to generate economies of scale and recover the cost of investment in new technologies. However, if they do not invest in new technologies, they are likely to lose out to those who have. The increasing use of technology has led to a need to retrain existing staff. Some industry bodies have argued that technology poses a threat to employment by reducing staff hours (as seen in the fall in full-time employment) and thus will exert downward pressure on wages. The initial boom in the use of information technologies appears to be slowing, and while its use will continue to increase, it is likely to be at a more gradual pace.

Economic drivers

Globalisation has affected all parties. It has pushed governments to cooperate and integrate more, and in doing so has made the world more accessible to all parties. Economically, it has reduced restrictions on the movement of capital, labour and resources. For the consumer, it has opened up new parts of the world, thus the hotels and restaurants most dependent on tourism face stiffer competition for their services, but they may also benefit from tourist visits from newly accessible regions. For companies, it opens up a larger market and offers the possibility of greater economies of scale that benefit larger chain groups and encourage consolidation. Recent trends show that many companies in the sector have chosen to expand by means of mergers or acquisitions as they become more aware of the need to pool resources in order to compete effectively in an expanding market.

The rise in low-cost air travel has above all benefited consumers, offering them more choice, flexibility and pricing options. While establishments are receiving increased numbers of visitors, it is not clear that the increase in visitor spending has been commensurate with the increase in numbers. Many tourists have become far more cost conscious, leading to a growing demand for budget, no-frills hotels. The EU market for low-cost travel still has some way to go before it reaches maturity, so the effects have probably not yet reached a plateau. However, with governments looking increasingly set to levy environmental taxes on air travel and with oil prices rising and staying high, ticket prices can be expected to rise also. The impact of this on consumer demand is uncertain, as it is not yet clear how sensitive consumers are to the pricing of budget air travel.

Environmental drivers

In general, environmental drivers are likely to have a less immediate impact on the sector than the other drivers discussed. The most direct impact is likely to be felt by establishments that form part of the tourist industry in areas affected by climate change (coastal and ski resorts) and areas of environmental interest. However, the timeframe for such effects is likely to be further in the future than for other drivers. Although freak changes or storms may wreak havoc, the resultant damage they cause is often temporary, but the permanent damage, as from rising sea levels, is taking place as a slow, gradual process. Nevertheless, the net impact on businesses in affected areas can be expected to be negative as the features that made them attractive in the first place are eroded. While some may be able to adapt to the new environment, their success is likely to depend on how consumers react. In other respects the impact of environmental changes is likely to be felt through policies to reduce emissions, to improve the use of all resources, especially energy resources, and to reduce pollution by improving waste management. Although much of the focus has been on power generation plants, all companies are under pressure to be more energy efficient and such pressures are likely to increase in the medium term. Furthermore, the timeframe for these drivers may be longer than for others, as environmental concerns are often low on the political agenda, and it is not easy to reach political consensus on environment-energy policies when these are believed to curb growth. Any costs created by environmental policy can be expected to affect enterprises in the first place, and it will be up to them how to deal with this. The obvious choice is to pass it on to customers, but regardless of whether this is done or not, any additional costs are likely to favour larger enterprises that enjoy greater economies of scale and have more flexibility in absorbing costs.

Political drivers

New legislation, such as smoking bans, changes to licensing laws and new regulations governing food safety, is partly a response to changes in people’s tastes and lifestyles. However, new laws can bring great costs to businesses. The smoking ban, for example, has improved conditions for workers and customers, but at the same time there is evidence that it has reduced turnover and that this has translated into job losses. Over the medium term, firms are likely to face increased demands from consumers for more informative marking and higher-quality standards for food. How governments will respond to such pressure from consumers is unclear. In the UK, for example, the quality of catered school meals became a hot topic in 2005 after the poor quality of such meals was highlighted by a high-profile chef on TV. One company supplying such meals (Compass) has suffered as a result, and the UK government is taking action to improve the quality of school meals. On the other hand, among the proposed EU laws recently scrapped by the EC president, José Barroso, there was one on food labelling. Nevertheless, governments may still be willing to take initiatives independently of EU legislation in order to satisfy their electorates.

The enlargement of the EU has positively impacted on the hotels and catering sector because the new Member States provide a new source of demand. However, migration from the new to the old Member States in pursuit of higher wages and a better standard of living is turning out to be lower than had been expected before accession. Moreover, because economic growth in the new Member States is expected to accelerate now that they are in the EU, rising wage levels and improved standards of living will probably make migration to EU15 countries less attractive.

New policies are helping to expand the scope of social dialogue within the hotels and catering sector. Social dialogue is becoming a major part of good governance because it allows all stakeholders to be part of policymaking within the firm and industry. On the other hand, union membership in this sector is comparatively low, making it difficult for workers to agree on objectives and to present a united front.

Scenarios for the hotels and catering sector

In contrast to STEEP analysis, scenario work allows us to look beyond the familiar environment. It helps the industry to prepare for the consequences of unexpected events by asking the following questions:

• What if (X) happens?
• What would be the effects on the industry if (X) were to happen?
• What are the best ways of counteracting adverse effects?

The search for scenario work on hotels and restaurants failed to discover work related solely to hotels and restaurants. It was only as part of the tourist industry that hotels and catering received attention, and so the scenario analysis here is based primarily on foresight work related to tourism. Although hotels and restaurants are part of and rely on the tourist industry, their market is not confined just to tourists. Furthermore, the published scenario work was reactive, in that it was based on dramatic events in their immediate aftermath. It did not analyse the possible effects of hypothetical events or look at observable and more prosaic trends.

In recent years, there have been several unexpected events that have affected the hotels and catering industry, such as the 9/11 terrorist attacks, the outbreak of SARS, the foot and mouth epidemic in the UK and the bombings in Madrid and London. Such shocks have a low probability of occurrence, but their impact is high. Recently, however, such shocks have become more frequent and hence people are more inclined to believe that they will happen again. It is extremely difficult to predict these shocks, but good policies at all levels (European, national or firm) or any foresight work must not ignore their possible reoccurrence. Petersen (1997) refers to these shocks as ‘wild cards’. He suggests that some shocks are imaginable, and if agents are well prepared, they could be turned into manageable events:

There is a general assumption that there is nothing to do about these huge surprises. However, not all wild cards are unimaginable and by identifying wild card events that may possibly occur in the future on a proactive rather than reactive matter, these can sometimes be converted into anticipated manageable events. The chance alone of averting a future catastrophe or at least preparing strategies to handle it may be reason enough to examine wild card possibilities. If not dealt with wild cards can trigger a chain of events much worse than the initial happening. A major natural disaster can for instance cause a global epidemic, which may lead to nations closing their borders in turn leading to a collapse of the airline industry and so forth. (1997, pp. 43-47)

Post-9/11 scenarios

One topic that scenario work could not ignore was the impact of 9/11 on the travel and tourism industry. Two major scenarios were published shortly after the attack on New York. The World Travel and Tourism Council (WTTC) estimated at that time that there were 207 million people employed worldwide in the travel and tourism economy. Its ‘best guess’ was that the attacks would lead to 8.8 million job losses worldwide, of which 1.2 million would be in the EU.

Within six weeks of 11 September 2001, the International Labour Organisation (ILO) published the report The social impact on the hotel and tourism sector of events subsequent to 11 September 2001 ( 136kb), which outlined two possible scenarios:

The best-case scenario

Assumptions:

• 9/11 is a one-off;
• there are no other attacks in the United States (US);
• there are no other attacks in other parts of the world.

Travel to Europe, which before the attack was showing recovery from recession, would not be badly affected. Europeans would continue to travel within the continent, while travel to the Middle East was unlikely to revive in the short term. The European tourism industry would benefit as a substitute destination choice. However, US tourists, who account for a significant part of the demand in the industry, would not return to Europe for some time. The reduction in US tourists, who are recognised as big spenders, would affect upmarket restaurants and hotels the most.

The worst-case scenario

Assumptions:

• there are other major terrorist attacks in the US;
• there are outbreaks of terrorism in other countries;
• the ongoing war in Afghanistan spreads to other regions.

In this scenario, the tourist demand from Asia and North America would plummet. Within Europe, the travel pattern would also change depending on the scale and location of any attacks. Domestic travel would probably benefit, with demand shifting from the location of an attack to an alternative location. In the extreme position, personal or business holidays would come to a halt.

In the ILO’s best-case scenario, the WTTC predictions were pessimistic. In the ILO’s worst-case scenario, the consequences are far worse than the WTTC’s predictions.

Iraq war scenarios

When the US and the UK decided to invade Iraq in 2003, WTTC looked at the possible outcomes of the Iraq war and their consequences for the US tourist industry in its 2003 research on the United States - Travel and tourism, a world of opportunity ( 526kb, pp.18-21). The WTTC’s scenario was informed by the experience of the 1991 Gulf war, the effects of which, according to the WTTC, were to limit economic growth through three main channels: higher oil prices, shattered consumer and business confidence and lower equity prices.

The base scenario: diplomatic solution or victory after a short, contained war

In the base case, the war is assumed to be short, contained and successful, and to remove global uncertainty. The effects on oil prices, confidence and equity prices are assumed to be very similar to what they would have been had there been a diplomatic solution to the crisis. In the short term, economic growth is assumed to be higher due to increased government spending. The difference in the effects on travel and tourism between no war and a speedy, contained war is therefore predicted to be small. However, the threat of war was assumed to undermine confidence and to reduce international travel, and this would affect the travel and tourism industry more than the rest of the economy.

Assumptions:

• quick, decisive victory or diplomatic solution;
• no use of weapons of mass destruction (WMD) against US troops, Israel or region;
• no reduction in OPEC oil production and exports;
• no challenges to Arab governments in region;
• new Iraqi government installed and in control;
• no damage to oil-producing capacity in Iraq or elsewhere.

The war scenario: victory with regional disruption

Under this scenario, a longer-lasting war results in persistently higher oil prices, with a deeper and longer fall in confidence and equity markets. The effects on the travel and tourism industry are expected to be more severe.

Assumptions:

• Iraq attacks oil facilities in region, with limited damage but political and economic knock-on effects;
• Iraq attacks Israel and US troops but not with WMD effective enough to trigger a major response or to have highly lethal effects;
• unexpected protracted Iraqi military resistance;
• limited Israeli intervention in war; rising political unrest in region;
• low-level civil tensions and clashes in Iraq after military conflict is over;
• some terrorist attacks on US interests.

These pressures were predicted to lead to a slowing of between 1% and 2% in GDP growth in the US and UK. The effects on the travel and tourism industry are more severe under the war scenario. In the US, under this scenario, in 2003 the travel and tourism industry would experience:

• 0.9% fall in industry demand;
• 3.7% fall in industry GDP;
• 8.9% fall in exports;
• loss of 449,100 jobs.

Climate change scenarios

Although the global climate has been changing for some time, there is uncertainty about its future path and patterns as well as the consequences. Research commissioned by the World Tourism Organisation (WTO) suggests two possible scenarios on global climate change, relating specifically to the tourist industry in Hungary, The responses of Lake Balaton to global cliamte change ( 299kb, Rátz, 2003).

Climate zone shift scenario

Assumptions:

• The temperate climate zone covering Hungary shifts northward and is replaced by a warmer climate.

This would be expected to lead to a longer summer season with much higher temperatures. This could have benefits for the tourist industry, assuming the temperatures are not too high and droughts are infrequent. In contrast, winter sports tourism is likely to disappear under such a scenario.

Ice caps melt scenario

Assumptions:

• Ice caps melt due to global warming.

Under this scenario, the Gulf Stream cools down and changes the climate in Europe. The Hungarian climate becomes colder and wetter. This would have a mainly negative impact on the tourism industry, as the summer season becomes shorter and wetter. However, it could lead to the further development of winter sports tourism.

Scenario summary

Some scenario work relevant to the hotels and catering industry tends to focus on dramatic events. In some cases, the work is done after the shocks have occurred, with a best-case scenario assuming that these shocks are unique and the worst-case scenario assuming that they are not. In hindsight, it is easy to say that it is a pity such analysis was not conducted before the events occurred and that there were no plans to deal with the consequences of such events. Regarding the climate change scenario, it should be emphasised that it related to Hungary only. Furthermore, the study’s primary focus was not the effect of climate change on the hotels and catering sector; instead, it formed part of a wider discussion on the overall impact of climate change on the region. Since the concern here is the European hotels and catering sector, the major drawback of the Iraq war scenario is its focus on the US tourist industry.

Moreover, to date there appears to have been little work done on exploring the future of the industry through scenario planning in the light of the various current influences identified in the first two articles of this series. It may be more useful to project these current trends and drivers and identify possible outcomes and responses.

Possible scenarios to consider are:

• What if the current weakness of the EU economy persists for much longer than expected?
• What if there is a collapse in the world financial market?
• What if there are more outbreaks of deadly viruses?
• What are the implications of developing countries becoming developed over the next 10 years?
• What would happen if the Internet ceased to exist, e.g. because of political censorship?
• What if the current skills gaps remain in 10 or 15 years’ time?
• What will the role of information technologies be in the industry in the future, and how will this affect labour demand?
• What are the implications if the European Union breaks up?
• What are the implications of a Europe-wide zero immigration policy?
• What are the implications for labour supply if there are no government pensions?

Implications

As younger workers increasingly become more qualified, they are less likely to consider the hotels and catering industry, with its poorer working conditions, as a career option. This and the ageing of the population are likely to persuade businesses to employ older workers. Because of their circumstances, older workers are often less mobile and have other commitments. Consequently, they are likely to be more demanding about working conditions, to be more favourable to union membership and to become more involved in social dialogue.

Changing lifestyles and more demanding consumers are likely to promote the development of more specialised enterprises and broaden competition among hotels and restaurants. The more specialised nature of services should allow firms to charge a premium. These niche markets are likely to attract multinationals as other parts of the hotels and catering industry become commoditised and less profitable. Commoditisation exerts downward pressure on premiums and profits. In order to survive and make a profit, firms offering commoditised services can be expected to cut costs and homogenise the service/experience on offer.

On the supply side, the increasing use of technology will continue to help establishments better manage their resources and reduce spare capacity. A better knowledge of future demands has implications for staff, in that establishments are likely to seek more flexible working patterns to match demands. This in turn has implications for lifestyle and for where the savings go. On the demand side, the Internet, wireless computing and 3G mobile telephony all make it easier for consumers to obtain information, compare prices and value for money and shop around. This trend and the increasing use of the Internet as a marketing device by businesses will lead to more intense competition and make it harder to close a sale. Firms are increasingly likely to respond by seeking staff with skills in information and communication technologies (ICT), including marketing, sales and web design.

Any increase in outsourcing in the catering industry further separates the consumer from food producers, making it harder to check the origin of food. This implies a possible widening of the information gap and is likely to increase pressure on catering companies to provide information about the food they serve. Businesses can be expected to resist this because of the cost implications, so governments may intervene. The use of technology in the kitchen can be expected to raise productivity and lower labour demand. This again has implications for where the savings go. Increased productivity should see wages rise, but lower reliance on chefs’ food preparation skills would have the opposite effect.

In the context of globalisation, EU enlargement offers a larger labour pool and facilitates migration. It is unclear to what extent this will help to fill the skills gap, as the tourist industry in most new Member States is small in comparison to that in France or the UK, for example. However, as long as relative wage differentials between regions are large enough, workers in poorer regions can be expected to move to richer regions for work. This can be expected to lower employment costs in the hotels and catering industry in richer regions. Furthermore, this is likely to attract the most skilled from the poorer regions, thus hindering the development of the industry there. At the same time, in enlarging the EU hotel and catering market and making it more accessible, globalisation has created an opportunity for companies to exploit substantial economies of scale. To what extent this could approach the scale seen in the US, for example, is unclear given the much wider cultural and language differences that exist in the EU. Nevertheless, it is still likely to lead to the increased presence of larger multinational hotel and catering chains, which is likely to fuel the demand for migrant labour in order to reduce employment costs. Customers may suffer if this leads to a homogenisation of service on offer, but brand names and reputations should ensure a higher-quality product. In order to maintain this, companies can be expected to recruit the best-skilled staff and improve working conditions in order to retain them.

The skills gap in the industry adversely affects the quality of service in the industry and damages the industry’s reputation among travellers. This lessens establishments’ pricing power and makes it harder to attract customers. This implies handsome rewards for companies that fill the gap (with good practice putting firms on a virtuous cycle) and premium wages for those with the necessary skills. The existence of the gap suggests that firms are unwilling to undertake training themselves and that working conditions need to be improved in order to attract and retain skilled staff. Establishments therefore have to take a more proactive and united approach.

Although low-cost airlines have increased the frequency of trips made by travellers, they often stay for a shorter duration and tend to be more cost-conscious. Furthermore, as profit-maximising companies independent of political or national influence, low-cost carriers will not hesitate to scrap unprofitable services. This has implications for policy as well as the hotels and catering industry’s marketing strategy at a local level. In some regions, the rapid growth in the tourism and leisure industry is likely to work against raising levels of education or skills, while its effect on wages will depend on the industrial structure of the locality.

Legislation to improve the working environment, e.g. smoking bans in bars and restaurants and working time regulations, has negative implications for firms’ margins and labour demand. In response, firms are likely to push for productivity gains and seek more cost-effective labour and a greater application of technology.

Political concern over consumer health and the content of food is increasing pressure on catering firms to reduce sugar and salt levels, for example, in prepared food. If catering firms respond to such concerns, this could create new demands for new tastes in food. If health problems such as diabetes and obesity become greater public health issues, then the prospect of health-related taxes on food must surely draw closer. Growing concern among consumers about the origin of their food and the production methods involved is largely a social trend, but it, too, is generating political pressure for more information and increased food labelling. This raises the prospect of legislation forcing the industry to inform consumers. The disclosure of more information and the demand for food produced in more socially responsible ways is likely to promote good practice in the food supply chain, and may lead to a shift away from low-end food establishments.

In the wake of the 9/11 attacks, the EU hotels and catering sector saw turnover growth slow dramatically. US visitor numbers to the EU are only now returning to the pre-9/11 levels. International relations remain fractured because of the US-led ‘war on terror’ and the Iraq war. The continuation of political and military hostilities and the continued involvement of EU nations mean that some EU Member States remain targets for terrorism, as seen in the Madrid and London bombings. US tourist confidence is therefore likely to remain fragile. High-profile marketing campaigns may be needed in the US to bolster confidence. That US visitor levels are recovering suggests terrorism has not inflicted long-lasting damage on the industry. Such damage could be caused, however, if one location were to suffer multiple attacks within a space of two or three years. While the industry is likely to be able to recover from this on an EU level, the impact on the affected region is likely to last longer. Heavy discounting in response, as employed in London in recent years, whether successful or not, would probably lead to lower levels of employment and investment, and a deterioration in working conditions. Such a downward spiral would take years to reverse.

Conclusion

This concludes the review of the key trends and drivers affecting the sector, and of scenario work relating to the sector. The reader should have a better idea of what issues are driving the sector and of the paucity of scenario work relating to the sector. Having looked at the trends and scenarios and their implications, the third and last article in this series, Hotels and catering - policies, issues and the future, carries the discussion forward to look at major policy issues and challenges facing the sector. Consideration is given to their timeframe and the agents and regions affected.

References

Allegro, S.M., HOTREC/EFFAT study on medium term trends in the hospitality sector and their impact on enterprises and labour market, The Hague, European Federation of Food, Agriculture and Tourism Trade Union (EFFAT), 2001, available at http://www.effat.org/8/8_1/Files%20EN/HOTREC/D%20HOTREC%202%20Study%20medium%20terms%20trends%20EN.pdf ( 270kb).

International Labour Organisation (ILO), The social impact on the hotel and tourism sector of events subsequent to 11 September 2001, Geneva, 2001, available at http://www.ilo.org/public/english/dialogue/sector/techmeet/imhct01/imhctbp.pdf ( 138kb).

Nordin, S., ‘Tourism of tomorrow: travel trends and forces of change’, Östersund, European Tourism Research Institute (ETour), 2005, available at http://www.etour.se/download/18.58f7691048241fd54800062/Tourism%20of%20tomorrow.pdf ( 1.4Mb).

Petersen, J.L., ‘The wild cards in our future: preparing for the improbable’, The Futurist, July-August 1997.

Rátz, T., The responses of Lake Balaton to global climate change, Madrid, World Tourism Organization (WTO), 2003, available at http://www.world-tourism.org/sustainable/climate/pres/tamara-ratz.pdf ( 299kb).

The European e-Business Market Watch, ICT & e-business in the tourism sector, Sector Report No. 13, Brussels, European Commission, October 2002, available at http://www.ebusiness-watch.org/resources/tourism/SR13_Tourism.pdf ( 2.88Mb).

World Travel and Tourism Council (WTTC), ‘European Union: travel and tourism, sowing the seed of growth’, London, 2005, available at http://www.wttc.org/2005tsa/pdf/European%20Union.pdf ( 2.1Mb).

World Travel and Tourism Council (WTTC), ‘United States: travel and tourism, a world of opportunity’, London, 2003, available at http://www.tbr.org/about/pubs/unitedstates.pdf ( 526kb).