Table of Contents
1. Ambiguous Terms in Lodging Industry
- Lodging Business: In the ‘Conribution to GDP’ statistics, the lodging business refers to the ‘industry’. However, in the ‘Facilities and Equipment Standards for Public Health Businesses’ in the “Enforcement Regulations of the Public Health Control Act”, the lodging business means the ‘business place’.
- Lodging Property: In the ‘Paroperty Types by Use’ in the “Enforcement Decree of the Building Act”, lodging property means a ‘use of a building’ designated through a building permit and a building ledger. However, in the statistics of the ‘Domestic Travelers Survey’, the lodging property is referring to the ‘business place’ regardless of the ‘use of a building’ designated by the law.
2. Upper Concepts in Lodging Industry
- Place: It is a concept that encompasses location and facilities, meaning the physical components of a lodging product. Location refers to the land from a supplier’s point of view, and its value varies depending on accessibility, views, and surrounding attractions from a consumer’s point of view. Facilities mean buildings from a supplier’s point of view, and their value varies depending on size, composition, comfort, etc. from a consumer’s point of view.
- Service: Narrowly, it means the assistance provided to consumers in using the location and facilities like home, which includes essential help in maintaining their daily routines, such as eating, cleaning rooms, washing, and transportation. Broadly, it includes opportunities for things that are hard to experience at home, such as banquets. From a consumer’s point of view, the value varies depending on the range of services provided.
- Time: The transaction of a lodging product is carried out on a daily basis with a specific timing. One place can produce different products if the timing of consumption is different, and a lodging property with 100 rooms normally produces 36,500 guestroom products in a year. Usually, the period when demand is concentrated is called ‘high season’ while it is called ‘low season’ when demand is lowest.
- Price: It means the value of the product that the consumer and the supplier agree on a transaction. In general, the laws of supply and demand apply, and the price goes up in high season, as competition among consumers increases, while it goes down in low season, as competition among suppliers increases.
- Owner: It is responsible for securing and maintaining the ‘place’, which accounts for the largest portion of the assets in producing lodging products, and the owner takes the greatest risk because it invests the largest amount of capital. The key objective is to maximize capital gains through asset value appreciation, and for this purpose, the main motivation is to connect the lodging market, capital market and property market.
- Operator: It is responsible for producing and distributing ‘service’ among the components of the lodging product, as well as efficient management of working capital in response to the volatility of the lodging market. The key objective is to maximize cash flows through revenue increase and expense reduction, and the biggest motivation is to secure and improve the competitiveness of the lodging product.
- Financier: Although it is not actively involved in the lodging business itself, it provides the capital required to the owner for securing the property and to the operator for working capital. The key objective is to maintain solvency of the owner and operator, and to this end, it continuously monitors the owner and operator’s creditworthiness, as well as the stability of asset value and cash flows.
- Advisor: It collectively refers to entities that provide various business services to achieve the goals of owners, operators and financiers, and includes experts in various fields such as accounting, appraisal, consulting, travel, advertising, payment and credit rating. The key objective is to discover and realize growth opportunities, and to this end, it continues to monitor trends in the competitive environment.
3. Lower Concepts in Lodging Industry
The dictionary definition of the market is ‘an abstract area where goods and services are traded’.3 Therefore, the lodging market refers to an abstract area where lodging products are traded between suppliers and consumers. Abstract areas collectively refer to physically partitioned and virtual areas, meaning that the place of transaction between multiple suppliers and consumers cannot be specified.
One of the unique characteristics of the lodging market is that supply is inelastic, while demand is elastic. Due to this asymmetry, the volatility of prices and cash flows is noticeable in the lodging market.
- Seasonality: It means that there is a short-term fluctuation in prices and cash flows between high season and low season in a year. In general, it shows different characteristics depending on the location, but seasonality does not appear much in urban areas catering mostly to business demand, although demand tends to be a little more concentrated in autumn. On the other hand, seasonality is dramatic in non-urban areas catering to leisure demand, and demand tends to be highly concentrated in summer and winter, the holiday seasons.
- Cyclicality: It means a repetitive pattern of highs and lows in prices and cash flows in the long term. This is attributable to the imbalance between supply, which takes about 2-3 years from product planning to supply, and consumption happening on a daily basis. Unlike seasonality, it has a significant ripple effect affecting asset value and liquidity. The surest way to respond is to keep a certain level of liquidity on a fixed basis.
The dictionary definition of industry is ‘a collection of suppliers that produce a particular product’.4 Therefore, the lodging industry refers to the whole set of suppliers that produce lodging products. It is also a subset of the lodging market because it does not include demand, which is the subject of consumption. However, the scope of the lodging industry may also vary because the range of lodging products may be differently by regulation.
The lodging industry, which has existed since BC, is demonstrating standardized characteristics across the world. In general, the following features are common.
- Capital Intensive: Since the place, which is a tangible asset, forms the basis of the product, large-scale investments must be made in the early stages, and the fixed cost of maintenance is large. Therefore, the lodging industry is characterized by being sensitive to trends in the capital market, such as fluctuations in interest rates.
- Labor Intensive: Unlike ordinary real estate businesses, the service must be produced repeatedly every day because it is rented on a daily basis. And such process is highly labor dependent. Therefore, the lodging industry is characterized as being sensitive to trends in the labor market, such as fluctuations in labor costs.
- Red Ocean: In the lodging industry, which has expanded over a long period of time, the competition is fierce as numerous suppliers produce and distribute standardized products in large quantities. In the case of the red ocean industry, suppliers commonly compete for market share, and economies of scale provide an advantage.
The dictionary definition of a business is ‘the act of selling or buying a specific good or service’ or ‘an individual or corporation that conducts such an act’.5 In Korea, the former is commonly accepted. Therefore, the meaning of lodging business in Korea can be said to be the act of suppliers producing lodging products and supplying them to the lodging market.
The lodging business also works as a criterion for dividing the lodging industry into subsets. In order to run a lodging business, the business must be registered in advance, with a business type selected from the “10th Edition of Korean Standard Industrial Classification”. Specifically, the type of lodging business should be selected from the detailed category of the “10th Korean Standard Industrial Classification”, which will be recorded as a ‘business type’ on the business registration document.
The “10th Korean Standard Industrial Classification” classifies the lodging business into the general and residential lodging business, and the other lodging business. The general and residential lodging business is further divided into hotel, condominium, yeogwan, minbak, and other general and residential lodging business.
Meanwhile, the “Enforcement Decree of the Tourism Promotion Act” subdivides the hotel again into tourist hotel, floating hotel, traditional hotel, family hotel, hostel, small hotel and medical hotel. In addition, the “Public Health Control Act” integrated ‘yeogwan’ and ‘yeoinsuk’ from the “Public Health Act” into the general lodging business, and separated the residential lodging business from it.
The lodging enterprise refers to the entity that finally delivers the lodging products to the lodging market. It is an element that constitutes the whole set of the lodging industry, and belongs to one of the subsets in the lodging industry, standing at the front of the lodging business. In addition, it refers to an operator in the context of the structured value chain.
Lodging exterprises refer to the entity that produces services, the final stage in producing lodging products, and are not required to possess the place, which is the largest asset. Therefore, the exterprise type can be subdivided depending on how it sources the place.
- Owner Operator: The owner of the place directly registers as the lodging enterprise, playing the role of an operator, with tangible assets accounting for the largest portion in its financial statement and non-current liabilities are typically larger than its paid-in capital. However, since the amount of depreciation costs in the income statement is large, liquidity can be secured through accumulation of surpluses, which will be used as a source for renovation in the future.
- Leased Operator: An operator who does not own a place but rents another owner’s place to run a lodging business, and it is relatively light-weight in total assets because the size of non-current assets, including tangible assets, is not as significant in its financial statement. Instead, the proportion of current assets, as compared to total assets, relatively large, and depending on market conditions, it can be excessive compared to the size of total assets.
- Third-Party Operator: It is a common model of global hotel brands to produce and sell services, entrusted with the role of operators from the legal entity of the lodging business. The operating contract secures control over the place, while not sharing the financial risks borne by the legal entity of the lodging business. Instead, it focuses on maximizing cash flows and its commission tied to the cash flows.
Lodging properties are used in a broad sense to collectively refer to places that form the basis of lodging products, but there is a narrower definition in Korea. A loding property, one of the uses of buildings under the “Building Act”, refers to a type of building dedicated to lodging business. In other words, a lodging property in a narrow sense cannot be used for purposes other than lodging business.
However, the lodging business does not necessarily have to be run only in lodging properties. Among the types of lodging businesses, minbak, dormitory and gosiwon can use buildings other than lodging properties. Minbaks are subdivided into the urban minbak pursuant to the “Tourism Promotion Act” and the rural minbak pursuant to the “Agricultural and Fishing Villages Improvement Act”, both of which are allowed for residents to operate lodging businesses in the ‘housing’ where they live. In addition, in terms of the use of buildings, dormitories are classified as ‘multi-family housing’, and gosiwon below a certain size is classified as ‘neighborhood living properties’, so they are not lodging properties in a narrow sense.
Among the definitions in a broad and narrow senses, the narrow sense seems a little more useful for the lodging market in Korea. Above all, it can contain and provide more specific information. For example, if the use of the building is a lodging property, it also carries the information about the land as well. Just like the use of buildings, there are restrictions on use of land, which are called ‘land use areas’. Land use area restricts certain land from being used other than for designated use, and lodging properties can be built on lands designated for ‘commercial’ use, while not allowed on lands designated for ‘residential’ use.
Regardless of the definition, the lodging property typically consists of three parts.
- Room: Rooms are a sleeping area as the key part of the lodging property. There are cases where a lodging property does not have other facilities, but no case without rooms. In addition, the quality of rooms is also the factor that has the greatest influence on pricing of lodging products.
- Other: A space where optional services are provided other than sleeping is called other facilities. For example, food and beverage outlets, lounges, banquet halls, swimming pools and casinos fall under this. Depending on the type of lodging properties, the requirements for other facilities may be specified in the relevant laws and regulations.
- Common: Public facilities do not generate direct revenue, but the lodging property does not qualify as an independent product without it. The lobby is a representative example. In addition, parking lots, staff spaces, mechanical rooms, electric rooms, and linen rooms are examples of common facilities in a lodging property.
The lodging establishment refers to the minimum unit of infrastructure that can produce and distribute lodging products independently on a daily basis, and is a combination of a lodging enterprise and a lodging property. In fact, the definitions and uses of a lodging enterprise and a lodging property do not exactly match the units of production and distribution of lodging products. This is because lodging enterprises and lodging properties are not always under one-on-one relationship.
After all, a separate concept is needed for the independent production and distribution unit to analyze lodging market data effectively, and Lobin uses the lodging establishment for it. There may be disagreements because it is not a term defined in the law, but it is used generally according to the following criteria.
- If locations are different, each is considered a separate establishment. For example, the Shilla Hotel Seoul and the Shilla Hotel Jeju, operated by a single lodging enterprise called Hotel Shilla, constitute both different lodging properties and different lodging establishments. This is because each is sold as a separate product targeting different set of demand.
- If business types are different, each is considered a separate establishment. For example, ‘Novotel Seoul Yongsan’ and ‘Novotel Suites Seoul Yongsan’ located in a single building are separate establishments, although they are in a lodging property operated by a single enterprise. Novotel Seoul Yongsan, a tourist hotel, uses from 5th to 24th floors and is sold for general transient demand. On the other hand, Novotel Suite Seoul Yongsan, a family hotel, uses from 25th to 40th floors and is sold mainly for an extended-stay demand.
- If sold with different names, each is considered a separate establishment. For example, ‘Grand Walkerhill’ and ‘Vista Walkerhill’ are operated by a single enterprise under an identical business type of tourist hotel. However, the separate room towers are considered separate establishments because they are sold as different products with different names.
- If lodging enterprises are different, each is considered a separate establishment. For example, the Sea Cloud Hotel and the Sun Cloud Hotel, located in a single lodging property, are different establishments, although their business types are the same as residential lodging. This is because different enterprises operate each part as a separate product.
- A number of properties operated by the same enterprise on the same location with the same business type are considered a single establishment. For example, the ‘Flower Village’ of ‘Muju Deogyusan Resort’ is a complex consisting of seven towers: Dandelion, Forsythia, Sun Flower, Camomile, Cosmos, Lily and Azalea. All of them are operated by a single enterprise under the same business type, as a single product.
- When the ownership of each room is different, the whole is considered a single establishment. In the case of condominiums or condo hotels that can be deeded by unit, each unit is an independent lodging property from a legal point of view with separate a building ledger and a property deed. However, if each unit is not sold as an independent product while a single enterprise operates the whole as a single product, it is considered a single establishment. In addition, if two buildings on adjacent sites with different owners are sold by a single enterprise as a single product, they are also considered a single establishment.