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Consulting Approach

The lodging industry, which has been dealing with standardized products over a long time and grown to a huge scale, is a typical red ocean industry. In a highly competitive red ocean industry, the market share is a common goal for competitors, and economies of scale with a structured value chain is a common strategy for it. However, in the Korean lodging market, the structured value chain does not work properly due to fragmentation of scale of the lodging businesses.
Table of Contents
1. Scale and Productivity
In fact, the size of the lodging market in Korea is not small. In most part of the world, the lodging industry is based on domestic demand, and if compared to the USA, the number of rooms per population is 79% in Japan, 103% in Korea, and 17% in Indonesia. However, the contribution of lodging industry to GDP, Japan is 62%, Korea is 51%, and Indonesia is 6% of the USA. In other words, it can be said that Korea is an oversupplied lodging market, given its demand volume and purchasing power of the demand.
On the other hand, Korean lodging establishments are small in size and tend to be concentrated in selective areas. Again, if benchmarked against the USA, the average number of rooms per establishment is 30% in Japan, 31% in Korea, and 28% in Indonesia. However, the contribution of lodging industry to GDP per room is 75% in Japan, 10% in Korea, and 25% in Indonesia, as compared to the USA. Among equally small lodging establishments in Japan, Korea and Indonesia, the productivity is particularly low in Korea, for the following reasons.
  1. Productivity of a lodging establishment is highly sensitive to supply volume, meaning the competitive environment. Compared to Japan, the consumption of lodging products per population in Korea is 82%, while the supply is 130%. Compared to Indonesia, the consumption of lodging products per population in Korea is 814% , while the supply is 602%.
  2. The impact of supply is amplified if the supply is concentrated in limited areas. This explains the gap in productivity that cannot be explained only by supply and demand dynamics. It is like the situation where you cannot find a lodging establishment for your need out of so many establishments out there.
2. Effect of Economies of Scale
Economies of scale produce and distribute standardized products in large quantities, giving them an edge in the competition for market share, while distributing fixed costs over the larger capacity to reduce the burden.1 For the lodging industry, there is one more advantage: economies of scale allow to respond more effectively to the volatility of the market. The economies of scale related to the lodging industry can be viewed in two dimensions.
  1. Lodging Market: Volatility can be offset at the market level if the market is big enough, meaning that demand is larger than supply, and the makret is divided into multiple submarkets. However, the suppliers do not have any control over the market, other than a choice to be in the market or not. Also, even when available, the choice is applicable only to decisions for new supply.
  2. Lodging Establishment: If the establishment itself is large, it can respond to the market volatility by diversifying demand groups according to the seasonality of the market. However, the capability to respond to the short-term seasonality does not mean it can respond to the long-term cyclicality in the same way. Moreover, it will be further limited by regulations or a liquidity crunch in the capital market.
3. Securing Economies of Scale
The most effective way to secure economies of scale in a market where businesses are fragmented in scale is to actively leverage the many-to-many relationship between owners and operators in the context of value chain. In other words, economies of scale need to be isolated between properties and enterprises.
In this case, the response to the market volatility, which was limited at the establishment level, could become more effective. This is because the risks of a single establishment can be dispersed and aobsorbed twice by two independent portfolios of establishments. However, each portfolio of establishments by property owner and business owner must provide meaningful level of scale and complement each other with different compositions. Otherwise, the economies of scale would not be sustainable.
4. Consulting Process
In providing the consulting services, Lobin aims to help stagnant or insolvent loding businesses overcome problems through economies of scale in accordance with the following procedures.
  1. Market Diagnosis: Diagnose the market trends in the size, competitive dynamics, and volatility patterns by region and type, where the subject establishment belongs, and identify risk factors with priorities.
  2. Positioning Diagnosis: Run a SWOT analysis of the establishment and evaluate its positioning in the competitive market to derive an optimal value chain to response to the identified risk factors.
  3. Workout Strategies: Evaluate portfolios of the owner and the operator, diagnose suitability to the optimal value chain, analyze lodging market volatility with scenarios and establish an optimal strategy.
  4. Workout Execution: After client reporting and consultation of the established strategy, execute the approved strategy through operating structure optimization, financial structure optimization, and comprehensive workout, in order.
    1. Operating Structure Optimization: Implement measures to improve cash flows, including opportunities for revenue increase and expense decreae, as well as replacing the operator or amending the operating contract, etc.
    2. Financial Structure Optimization: Implement measures to improve long-term financial soundness, including rebalancing capital expenditure and working capital reserves, refinancing or asset liquidations.
    3. Comprehensive Workout: If the the optimal value chain is not achievable only through optimizing operating or financial structure, implement comprehensive improvement measures, including reorganizing the portfolio, repositioning or repurposing the asset, etc.
  1. Investopedia Dictionary
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Data Source

  • GDP: GDP, Current $US (World Bank Open Data)
  • Establishments: Compendium of Tourism Statistics (UNWTO), Lodging Business Ledger (MOIS)
  • Rooms: Compendium of Tourism Statistics (UNWTO), Lodging Business Ledger (MOIS)
  • Lodging GDP: Value Added by Industry (BEA), National Accounts (Cabinet Office), GDP of Indonesia (BPS), GDP & GNI by Sector (BOK), Economic Census (KOSIS)
  • Period: 2017-2021

※ In Korea, general & residential accommodations are included while rural & urban minbaks are excluded. Comparable countries are selected based upon availability of lodging GDP statistics for all types of accommodations.

Data Source

  • Population: Population, Total (World Bank Open Data)
  • GDP: GDP, Current $US (World Bank Open Data)
  • Rooms: Compendium of Tourism Statistics (UNWTO), Lodging Business Ledger (MOIS)
  • Lodging GDP: Value Added by Industry (BEA), National Accounts (Cabinet Office), GDP of Indonesia (BPS), GDP & GNI by Sector (BOK), Economic Census (KOSIS)
  • Period: 2017-2021

※ In Korea, general & residential accommodations are included while rural & urban minbaks are excluded. Comparable countries are selected based upon availability of lodging GDP statistics for all types of accommodations.

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Data Source

  • Korea: Lodging Business Ledger (MOIS), Tourist Accommodation Ledger (MCST)
  • USA: Census Database (STR)
  • Period: As at the end of 2021

※ General & residential accommodations other than rural and urban minbaks asre included for Korea. Life cycle was calculated as of December 31, 2021 or actual closure date. If there exists a discrepancy between data sources for an establishment, the discrepancy was settled through an algorithm before use.

Data Source

  • Korea: Lodging Business Ledger (MOIS), Tourist Accommodation Ledger (MCST), Economic Census (KOSIS), Hotel Operating Statistics (KHA), DART (FSS), Trends Report (STR)
  • USA: Compendium of Tourism Statistics (UNWTO), Census Database (STR), Trends Report (STR)
  • Period: 2005-2021

※ General & residential accommodations other than rural and urban minbaks asre included for Korea. Visibility was calculated as the number of establishments for which revenue data is available divided by the total number of establishments. If there exists a discrepancy between data sources for an establishment, the discrepancy was settled through an algorithm before use.

Data Source

  • Guests(Korea): Domestic Traveler Survey (MCST), International Traveler Survey (MCST), Hotel Operating Statistics (KHA)
  • Rooms(Korea): Lodging Business Ledger (MOIS), Tourist Accommodation Ledger (MCST)
  • Guests(USA): Compendium of Tourism Statistics (UNWTO), Trends Report (STR)
  • Rooms(USA): Compendium of Tourism Statistics (UNWTO), Census Database (STR)
  • Period: 2005-2020

※ General & residential accommodations other than rural and urban minbaks asre included for Korea. If there exists a discrepancy between data sources for an establishment, the discrepancy was settled through an algorithm before use.