Hospitality Risk

7 Critical Risks Facing the Hospitality Industry

Rapidly changing customer demands and a boom in guest-facing connected technologies are among the factors changing the risk landscape for hospitality companies.
By: | August 2, 2018 • 6 min read

Generational marketing gurus say that millennials have ushered in the “experience economy,” where live experiences are valued more than material goods — excellent news for the travel and hospitality industries.

Advertisement




But thanks to this technology, millennials also have different expectations about how they should be engaged during those experiences, and other generations have caught on.

The hospitality industry has its work cut out for it keeping up with customer demands and changing technologies.

1) The Sharing Economy

Recent years have seen a spike in sites like Airbnb, Homestay, HomeAway and HouseTrip. Airbnb, with about 150 million users, is the most significant threat. According to a report by Morgan Stanley, hotel cannibalization from Airbnb was around 51 percent in 2017 and is expected to increase to 54 percent in 2018.

More troubling for the industry’s future is Airbnb’s popularity with college students and millennials. This group places heavy value on experiential travel, and the sharing economy may represent for them an experience more unique than a traditional hotel.

2) Continuously Changing Consumer Demands

Technology has dramatically changed the nature of customer expectations and raised the bar in terms of the type of experience and engagement customers consider the norm. This is a particular challenge in hospitality, where reputation and customer satisfaction is vital.

Consumers — particularly millennials — have grown accustomed to customized and streamlined shopping experiences, whether it be a free gift on their birthday or same-day delivery for online

purchases. Clean, well-designed guest suites are no longer enough. In fact, several hotel brands have taken the step of branching out to boutique hotels that specifically cater to the millennial ethos.

“Every major hotelier that has a viable brand you’ve known for 30 years typically has in their portfolio now a more limited service or more millennial-driven type of brand they’re building to attract a certain segment of the marketplace,” said Michael Drayer, CEO of the Global Entertainment Practice with Aon Risk Solutions.

For the rest of the industry, keeping up will require an investment in strategies that will help them learn more about their customers and design services around them. In addition, more social-media savvy is necessary for companies to start thinking about how to offer a travel experience that will motivate guests to eagerly share on social media.

Perhaps because of the changing nature of customer demands, maintaining customer satisfaction has become more difficult in recent years. Social media dramatically exacerbates the risks, in an environment where a single social media gripe by a traveler, no matter how mundane, can spread like wildfire and even be picked up by local news outlets.

Customers demand multiple channels of engagement with service and operations personnel, in order to better connect with customers before negative perceptions have time to set in — and spread.

3) Shortage of Experienced Personnel

According to the Bureau of Labor, the leisure and hospitality sector employed more than 15,000 people in 2016, and that number is projected to jump to almost 17,000 by 2026. As the industry continues to grow, staff will have more options, both in and outside the industry, and the poaching of experienced personnel will become a competitive sport.

Travel and hospitality companies must identify and address wage and worker satisfaction issues to keep their people happy and motivated to provide the level of service customers expect.

Finding the right people may be difficult especially for small hospitality providers. High-end luxurious accommodation providers recruit trained professionals at a high cost, which is an impossible feat for low budget hotels.

Creative companies must focus on referral-based hires and adopt retention programs that help boost employee morale and productivity, like mobile apps for scheduling and benefits, and attractive incentive programs.

Another key factor impacting worker satisfaction is tips, said Drayer, a practice that has been impacted by changing habits and technology.

“The hospitality industry has always [included tips] as an important part of compensation for its customer-facing individuals. But we’re moving more and more to a cashless society. How do they handle that? Do they support or even provide the infrastructure to utilize cashless apps and such as VenMo?”

4) Consumer Perception of Risk

Terrorist attacks, biological outbreaks and incidents of political or social violence can not only significantly impact specific locations but can also have a more widespread chilling impact on leisure travel behavior across a region or even globally.

What’s challenging for the hospitality industry is that related losses are impossible to predict and difficult to insure against, particularly for companies that suffer business interruption losses without any property damage. Loss of attraction coverage and certain newer parametric products are a step in the right direction, but potentially significant exposures remain.

5) Uncertainty in International Travel

According to the U.S. Travel Association, over 75 million international travelers visited the U.S. in 2016, and that number was expected to hit over 83 million by 2020. But recent drops in non-resident arrivals are being attributed by some to President Donald Trump’s travel ban and immigration crackdowns.

That means hospitality companies are facing a period of uncertainty, while still needing to ensure they provide as unique an experience for foreign travelers as for domestic guests. Staff must be aware of cultural differences and the particular expectations any international visitors might have.

6) Guest-Focused Technology

In addition to offering tablet-based kiosks and mobile check-in, hospitality companies are finding ways to incorporate technology that improves operations and enhances guests’ experiences. Hilton’s “Connected Room” and Marriott’s “Internet of Things” room are scheduled to roll out by the end of 2018, offering tech amenities such as digital keys and the ability to use a smartphone to control room temperature, lighting, TV and more. Guests will even be able to swap out wall art with family photos for a more personal stay.

Of course, with this surge of connected technology comes new levels of risk. Vulnerabilities in connected devices raise the risk of attackers unlocking digitally keyed doors to steal guests’ valuables or finding a path into hotel systems.

It seems like not a week goes by without a hospitality client facing a ransomware attempt, with attempts to compromise reservation systems or operations systems, said Drayer.

“The efficacy of the technology to open and close doors and to utilize the different systems that are web-enabled is an extremely risky proposition these days.”

7) New Regulations

After several years of discussion and debate, the Cal/OSHA Standards Board recently approved a standard on “Hotel Housekeeping Musculoskeletal Injury Prevention.” The final regulation became effective July 1, 2018.

Advertisement




The new regulations are comprehensive, and potentially arduous for some employers. Employers are required to conduct regular worksite evaluations to identify and address specific risks. They must include an effective means of involving housekeepers and their union representative in designing and conducting the worksite evaluation.

Employers must establish procedures for investigating musculoskeletal injuries to housekeepers and correcting such hazards identified. A formal training program is also required and must be refreshed regularly. All documents related to the new standard must be kept as well.

For California hospitality businesses, this development could be a game-changer and require extensive modification to current practices. For those outside California, this development is still worth monitoring; not only does it establish standards to consider adopting independently, but it could also be a sign of things to come in other jurisdictions.

“Regulation typically starts in California and moves east,” said Drayer. “So even though this is only currently affecting our clients in California, it’s going to be coming soon to a theater near you.” &

 

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

A Recall Nightmare: Food Product Contamination Kills Three Unborn Children

A failure to purchase product contamination insurance results in a crushing blow, not just in dollars but in lives.
By: | October 15, 2018 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: THE HEAT IS ON

Reilly Sheehan, the Bethlehem, Pa., plant manager for Shamrock Foods, looks up in annoyance when he hears a tap on his office window.

Reilly has nothing against him, but seeing the face of his assistant plant operator Peter Soto right then is just a case of bad timing.

Sheehan, whose company manufactures ice cream treats for convenience stores and ice cream trucks, just got through digesting an email from his CFO, pushing for more cost cutting, when Soto knocked.

Sheehan gestures impatiently, and Soto steps in with a degree of caution.

“What?” Sheehan says.

“I’m not sure how much of an issue this will be, but I just got some safety reports back and we got a positive swipe for Listeria in one of the Market Streetside refrigeration units.”

Partner

Partner

Sheehan gestures again, and Soto shuts the office door.

“How much of a positive?” Sheehan says more quietly.

Soto shrugs.

“I mean it’s not a big hit and that’s the only place we saw it, so, hard to know what to make of it.”

Sheehan looks out to the production floor, more as a way to focus his thoughts than for any other reason.

Sheehan is jammed. It’s April, the time of year when Shamrock begins to ramp up production for the summer season. Shamrock, which operates three plants in the Middle Atlantic, is holding its own at around $240 million in annual sales.

But the pressure is building on Sheehan. In previous cost-cutting measures, Shamrock cut risk management and safety staff.

Now there is this email from the CFO and a possible safety issue. Not much time to think; too much going on.

Sheehan takes just another moment to deliberate: It’s not a heavy hit, and Shamrock hasn’t had a product recall in more than 15 years.

“Okay, thanks for letting me know,” Sheehan says to Soto.

“Do another swipe next week and tell me what you pick up. I bet you twenty bucks there’s nothing in the product. That swipe was nowhere near the production line.”

Soto departs, closing the office door gingerly.

Then Sheehan lingers over his keyboard. He waits. So much pressure; what to do?

“Very well then,” he says to himself, and gets to work crafting an email.

His subject line to the chief risk officer and the company vice president: “Possible safety issue: Positive test for Listeria in one of the refrigeration units.”

That night, Sheehan can’t sleep. Part of Shamrock’s cost-cutting meant that Sheehan has responsibility for environmental, health and safety in addition to his operations responsibilities.

Every possible thing that could bring harmful bacteria into the plant runs through his mind.

Trucks carrying raw eggs, milk and sugar into the plant. The hoses used to shoot the main ingredients into Shamrock’s metal storage vats. On and on it goes…

In his mind’s eye, Sheehan can picture the inside of a refrigeration unit. Ice cream is chilled, never really frozen. He can almost feel the dank chill. Salmonella and Listeria love that kind of environment.

Sheehan tosses and turns. Then another thought occurs to him. He recalls a conversation, just one question at a meeting really, when one of the departed risk management staff brought up the issue of contaminated product insurance.

Sheehan’s memory is hazy, stress shortened, but he can’t remember it being mentioned again. He pushes his memory again, but nothing.

“I don’t need this,” he says to himself through clenched teeth. He punches up his pillow in an effort to find a path to sleep.

PART TWO: STRICKEN FAMILIES

“Toot toot, tuuuuurrrrreeeeeeeeettt!”

The whistles of the three lifeguards at the Bradford Community Pool in Allentown, Pa., go off in unison, two staccato notes, then a dip in pitch, then ratcheting back up together.

For Cheryl Brick, 34, the mother of two and six-months pregnant with a third, that signal for the kids to clear the pool for the adult swim is just part of a typical summer day. Right on cue, her son Henry, 8, and his sister Siobhan, 5, come running back to where she’s set up the family pool camp.

Henry, wet and shivering and reaching for a towel, eyes that big bag.

“Mom, can I?”

And Cheryl knows exactly where he’s going.

“Yes. But this time, can you please bring your mother a mint-chip ice cream bar along with whatever you get for you and Siobhan?”

Henry grabs the money, drops his towel and tears off; Siobhan drops hers just as quickly, not wanting to be left behind.

Advertisement




“Wait for me!” Siobhan yells as Henry sprints for the ice cream truck parked just outside of the pool entrance.

It’s the dead of night, 3 am, two weeks later when Cheryl, slumbering deeply beside her husband Danny, is pulled from her rest by the sound of Siobhan crying in their bedroom doorway.

“Mom, dad!” says Henry, who is standing, pale and stricken, in the hallway behind Siobhan.

“What?” says Danny, sitting up in bed, but Cheryl’s pregnancy sharpened sense of smell knows the answer.

Siobhan, wailing and shivering, has soiled her pajamas, the victim of a severe case of diarrhea.

“I just barfed is what,” says Henry, who has to turn and run right back to the bathroom.

Cheryl steps out of bed to help Siobhan, but the room spins as she does so.

“Oh God,” she says, feeling the impact of her own attack of nausea.

A quick, grim cleanup and the entire family is off to a walk-up urgent care center.

A bolt of fear runs through Cheryl as the nurse gives her the horrible news.

“Listeriosis,” says the nurse. Sickening for children and adults but potentially fatal for the weak, especially the unborn.

And very sadly, Cheryl loses her third child. Two other mothers in the Middle Atlantic suffer the same fate and dozens more are sickened.

Product recall notices from state regulators and the FDA go out immediately.

Ice cream bars and sandwiches disappear from store coolers and vending machines on corporate campuses. The tinkly sound of “Pop Goes the Weasel” emanating from mobile ice cream vendor trucks falls silent.

Notices of intent to sue hit every link in the supply chain, from dairy cooperatives in New York State to the corporate offices of grocery store chains in Atlanta, Philadelphia and Baltimore.

The three major contract manufacturers that make ice cream bars distributed in the eight states where residents were sickened are shut down, pending a further investigation.

FDA inspectors eventually tie the outbreak to Shamrock.

Evidence exists that a good faith effort was underway internally to determine if any of Shamrock’s products were contaminated. Shamrock had still not produced a positive hit on any of its products when the summer tragedy struck. They just weren’t looking in the right place.

PART THREE: AN INSURANCE TANGLE

Banking on rock-solid relationships with its carrier and brokers, Shamrock, through its attorneys, is able to salvage indemnification on its general liability policy that affords it $20 million to defray the business losses of its retail customers.

Advertisement




But that one comment from a risk manager that went unheeded many months ago comes back to haunt the company.

All three of Shamrock’s plants were shuttered from August 2017 until March 2018, until the source of the contamination could be run down and the federal and state inspectors were assured the company put into place the necessary protocols to avoid a repeat of the disaster that killed 3 unborn children and sickened dozens more.

Shamrock carried no contaminated product coverage, which is known as product recall coverage outside of the food business. The production shutdown of all three of its plants cost Shamrock $120 million. As a result of the shutdown, Shamrock also lost customers.

The $20 million payout from Shamrock’s general liability policy is welcome and was well-earned by a good history with its carrier and brokers. Without the backstop of contaminated products insurance, though, Shamrock blew a hole in its bottom line that forces the company to change, perhaps forever, the way it does business.

Management has a gun to its head. Two of Shamrock’s plants, including Bethlehem, are permanently shuttered, as the company shrinks in an effort to stave off bankruptcy.

Reilly Sheehan is among those terminated. In the end, he was the wrong person in the wrong place at the wrong time.

Burdened by the guilt, rational or not, over the fatalities and the horrendous damage to Shamrock’s business. Reilly Sheehan is a broken man. Leaning on the compassion of a cousin, he takes a job as a maintenance worker at the Bethlehem sewage treatment plant.

“Maybe I can keep this place clean,” he mutters to himself one night, as he swabs a sewage overflow with a mop in the early morning hours of a dark, cold February.

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are their recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

Shamrock Food’s story is not an isolated incident. Contaminations happen, and when they do they can cause a domino effect of loss and disruption for vendors and suppliers. Without Product Recall Insurance, Shamrock sustained large monetary losses, lost customers and ultimately two of their facilities. While the company’s liability coverage helped with the business losses of their retail customers, the lack of Product Recall and Contamination Insurance left them exposed to a litany of risks.

Risk Managers in the Food & Beverage industry should consider Product Recall Insurance because it can protect your company from:

  • Accidental contamination
  • Malicious product tampering
  • Government recall
  • Product extortion
  • Adverse publicity
  • Intentionally impaired ingredients
  • Product refusal
  • First and third party recall costs

Ultimately, choosing the right partner is key. Finding an insurer who offers comprehensive coverage and claims support will be of the utmost importance should disaster strike. Not only is cover needed to provide balance sheet protection for lost revenues, extra expense, cleaning, disposal, storage and replacing the contaminated products, but coverage should go even further in providing the following additional services:

  • Pre-incident risk mitigation advocacy
  • Incident investigation
  • Brand rehabilitation
  • Third party advisory services

A strong contamination insurance program can fill gaps between other P&C lines, but more importantly it can provide needed risk management resources when companies need them most: during a crisis.



Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]