Market Structure and Determinants of Demand for Hospitality in Australia

This article explores the market structure and determinants of demand for hospitality in Australia, including income, price, and hotel market performance. It also discusses recent trends in the hospitality sector, such as catering to millennials.

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Contents
Introduction......................................................................................................................................1
Background Information..................................................................................................................2
Market Structure..............................................................................................................................3
Determinants of Demand for Hospitality........................................................................................5
Income..........................................................................................................................................5
Price..........................................................................................................................................5
Hotel Market Performance..............................................................................................................7
Market Leaders............................................................................................................................7
Determinants of Supply...................................................................................................................7
The Number of Sellers.................................................................................................................7
Government Regulation...........................................................................................................7
Recent Event in the Hospitality Sector............................................................................................8
Catering For the Millennial..........................................................................................................8
Conclusion.....................................................................................................................................10

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Introduction
Majority of the hospitality properties are small and unbranded businesses in Australia and
specifically in the lower star grades. Almost half of all rooms are however congested in a much
smaller number of huge high rated and branded hotels in a few major cities. The last
development in Australia was the Sydney Olympics which added thousands of rooms in the
Sydney market alone and mostly this affected the five star segments. Room occupancies were
declining due to the emergence of the Asian crisis.
Background Information
Hospitality sector in Australia is facing increased competition. There is rise in the quality
of food, craft beer and unique customer experience that have created various arms of race in the
sector. The arms race is generally the turbo charged by the competition from the small bars. This
news is great to the consumers but they are tough on the operators (Barron & Arcodia, 2015, p.
56). Due to the increase in the standards required, competition have risen and spread to other
areas and has been accompanied by the enhancement in the revenue and social media in venue
technology (King ., McKercher , & Waryszak, 2016, p. 45). Clients like to socialize, drink and
eat, be entertained and do the latter in a safe manner. Depending on the location of the
customers, mix and focus is thus redirected to meet the requirements of that locality. There has
been a move to change the engagement with the customers mostly due to the increasing
empowerment offered to the customers.

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Social media has given information to customers concerning menus and venues than
before and increased forums to express the quality of the services that they get from different
operators. In a case whereby a client has had a bad experience at some given place, they then
share the information with a big audience just by the touch of a button. For instance, alcohol in
Australia is at its lowest consumption in 55 years according to the research done by the IBIS
world. The latter has inserted more pressure on the growth in revenue specifically for those
operators who have not embraced the alteration in the consumer behavior (Andersson, Carlsen,
& Getz, 2014, p. 46). Australians are consuming more alcohol in their homes than in the licensed
places. The liquor retailers are said to have been gaining an increased share of total alcohol that
is present than those in pubs, bars and also clubs.
In the recent past, the operators have been looking forward to increasing their game to
offer their food in a more efficient manner and also improve on quality. The latter has been
triggered by various factors but the primary cause of this is the arm race (Perdue , Immermans, &
Uysal, 2015, p. 36). The quality of food and beverage has been the foundation of a good offering
in conjunction with the venue of presentation. The specialist competitors in most cases provide
superior offering by majoring on the products that suit their demographic clients’ base with an
aim of creating a competitive advantage. Everything else that these competitors do aids the core
competency and is helpful in the differentiation of competitors (Pegg, Patterson , & Gariddo,
2015, p. 67). The trend towards premium beverages is a clear indication that the clients are
keener on what they are purchasing. Per capita beer consumption in Australia in the last five
years went down by 7.5%. In most cases; clients are still spending the same amount in that they
switch to a premium product.

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Market Structure
Monopolistically competitive firms are able to influence the market prices of their
products by altering the kind of commodities that they offer. Monopolistic firms have their
products which are not perfect substitutes. Holiday inns in Australia are perfect examples. The
consumers in this case have preferences and the sellers are able to differentiate their products
from those of their competitors. The goods and services that they offer are heterogeneous in the
short run. A monopolistically heterogeneous hotel is capable of exploiting its brand with an aim
of maximizing the profits (Carlsen & Getz , 2017, p. 34). The rate of returns in such cases are
greater than the rate that is required to compensate debt and equity holders for certain risks that
investors might get when they invest in the hotels. Hospitality industry has a monopolistic
competition that has many sellers, differentiated products and easy barriers to entry in the long
run (Wong , Dean, & White, 2015, p. 46).
The characteristics of this structure are almost the same as the one in a prefect
competition except for the fact that the products are heterogeneous and that the monopolistic
structure does not involve a great deal of price competition. The latter therefore gives the hotels a
certain degree of market influence. The firm can raise market prices without losing all customers
owing to the customer loyalty of their brands (Carlsen & Getz , 2017, p. 45). The products in a
monopolistically competitive market are not all that different but in trying to be monopolistic,
they advertise products to make their goods differentiated from the other commodities.
Monopoly is short-lived and for any firm to be in the competitive model they have to convince
customers that they have no effects on the other hotels. The long run barriers in this market are
relatively easy in that there are no significant barriers to entry.

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The hospitality industry has special characteristics that differentiate it from the
manufacturing sector (Barron W. , 2016, p. 34). These features play a vital role especially in the
pricing sector. Unlike the production industries that can expand production upon increase in
demand, the hotel industry has fixed rooms in the short run and hence supply in the short run is
capped. The second characteristics are that the hotel stays are perishable in that the stays cannot
be inventoried for future utilization in case the stay has expired (Cheng & Brown, 2018, p. 56).
Tangible goods on the other hand can be stored for future date. Hotels also require a substantial
capital for them to be operational. The hotel industries also require complex methods of
production and therefore have an impact on the financial well-being of firms. The execution of
products supply in hospitality leads to creation of urgency in the execution of various functions
of management which impact on the pricing decisions. To understand pricing mechanism, hotels
need to understand costs and subsidies.
Determinants of Demand for Hospitality
Income
Income plays a vital role as far as travelling is concerned. One needs to commit some cash
to transport so as to get to the desired destination and of course pay for hospitality services. In
this case, we use the discretionary expenditure as a determinant of demand for hospitality and
tourism. We use the real disposable or personal income because this is a subjective matter. We
can also apply the GDP concept (Worland & Wilson, 2018, p. 24). With increased income, there
will be increased demand for tourism but this will be at a decreasing rate since the consumer
saturation point will become more apparent. The saturation is reached because tourism is

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considered to be a luxury good which has a depreciating luxurious state since the consumers will
at some point reach a saturation level in travelling and therefore tourism becomes less attractive.
Price
Prices are difficult to choose due to the wide variety of commodities that the tourists are
mostly likely going to pay why they are on vacation. The amount that is spent on travelling
counts as part of the cost of living at the place where hospitality will be availed. Price indices for
the consumers are very substitutable to the tourists at the destinations since they follow tourism
prices so closely (Richardson, 2014, p. 25). With increased prices, the demand for the products in
the hospitality sector will generally go down. When the prices are low, then the demand for the
products in the hospitality sector will be highly demanded. If there are substitutes in the sector,
the price of a given commodity will be dependent on the price of other related commodities. If
the price of a given commodity is relatively higher than that of the substitutes, then the
consumers will shift their consumption to the alternative substitute and lower the demand for this
commodity.
Rates Of Exchange
Exchange rates can introduce hospitality into demand models in terms of the exchange rate
adjusted CPI ratio. When making decisions to tour places, the tourists are aware of the exchange
rate variations than the changes in the relative prices. In most cases, tourists visit Australia
during summer and everything that they consume is financed by their annual budget (Carlsen &
Getz , 2017, p. 34). Relative prices and exchange rates affect the consumption behavior of
tourists and are therefore taken as determining factors when making decisions whether to make a
trip. Since the exchange rates are published on daily basis, tourists have more knowledge on the
exchange rates than they have on the relative prices in the countries that they want to visit. The

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exchange rates vary over time and therefore they affect the number of tourists who visit
Australia. The fluctuation in the exchange rates affects the decision of the tourists in various
ways which are either favorable or not. Generally, an increase in the exchange rate due to the
host countries devaluation of its currency will lead a decline in the tourists demand.
Hotel Market Performance
Market Leaders
Hotels across the country have been performing well in Australia. The trend rooms in the
country have showed a small gain the ADR and RevPAR adding to a maximum of 68.5%, a
figure that represents 6,900 commercial accommodation properties from Hobart. The rates of
occupancy in Sydney and Melbourne are 20% greater than the national score and this shows the
different trading conditions in the trading conditions in the regional areas (Carlsen & Getz ,
2017, p. 45). Melbourne, Sydney and Hobart have been leading in the market in the recent past
while Perth saw a 4.6% decrease. Darwin’s future prospects are expected to grow to 8.8% in the
capital city.
Determinants of Supply
The Number of Sellers
When there is an increased number of sellers who are providing accommodation mostly
in the hotel sectors, therefore the supply increases and this will lead to a decrease in the prices
(Barron W. , 2016, p. 47). A decrease in prices will yield low profits for the hotel providers but
will be advantageous to the tourists. Decreased cost of accommodation will make the tourists
come in large number and hence increased revenue to the government is noted.

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Government Regulation
The Australian government can put strict measures for people who accommodate the
tourists during their stay. It can put long legal procedures for people to obtain licenses with an
aim of discouraging over flooding in the industry (Barron W. , 2016, p. 87). This causes the
supply of products for tourists limited and then prices are kept high.
Elasticity
The tourism and hospitality sector in Australia has grown tremendously in the recent
past and has generally contributed to the growth in the GDP in Australia. The products in the
sector are elastic. With the growing impact of competition from USA and South Africa, there are
several factors that need to be considered in a competitive edge (Carlsen & Getz , 2017, p. 78).
The prices and quantities demanded are the primary guidelines to setting prices of the
commodities in this sector. A decrease in the demand for commodities in Australia will mean
that the industries hiked their prices and hence, the consumer would shift to substitutes in USA
or South Africa. The change in prices would have severe impacts on the products from Australia
hence the products are aid to be highly elastic.
Recent Event in the Hospitality Sector
Catering For the Millennial
The millennial are the people aged between 18 to 34 years. The millennial are expected
to represent about 50 % of all travellers in Australia by the year 2022. Hospitality and tourism
firms therefore need to define their strategies based on the demographic groups. The hotels
should strive to please them in the check-ins and also with reasonable prices (Cheng & Brown,

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2018, p. 47). This will increase the tourists demand for the hospitality products. Majority of the
guests are also self-sufficient and therefore need to use apps to make orders.at conference
meetings, the travellers need to have high quality tech equipment’s and a staff that is easily
approachable and supporting staff (Carlsen & Getz , 2017, p. 23). Guests today are also taking
care of their health.to respond to this; hotels are being fitted with well-equipped pools and spas.
The travellers mostly expect to find innovative wellness alternatives. They also expect to be
provided with healthy food options, developing trends which include lighting that energizes,
purification of air, in room exercises and shower water that is vitamin-infused .there are also eco-
friendly practices that are aimed at having renewable sources of energy and improving on the
availability of water. There has been installation of solar panels in many hotels and also updating
systems so that air conditioners and lights are automatically switched off after the guests leave
their rooms. The above impacts have increased the relative prices for the hospitality products
(King ., McKercher , & Waryszak, 2016, p. 34). The increase in quality of services has also lead
to an increased demand for the same. With the increased demand, the supply in the short run
went down as shown in the figure below.

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(King ., McKercher , & Waryszak, 2016, p.
45).
Conclusion
Hospitality in Australia plays an important role in the contribution to the growth of
GDP. The market structure of hospitality industry is one that employs the characteristics of a
monopolistic competition. The firms involved in this case have almost the same kind of products.
There are several factors that determine the demand and supply for the commodities from
hospitality.it is advisable for the firms in this industry to ensure that they cope up with the
current trends so that they receive more tourists and hence get increased returns.

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