Opinion: Tune Hotels - Diversification and Business Model Innovation
Tune Hotels, with its red and white facades, bear a striking resemblance to Malaysian low-cost carrier AirAsia. Unsurprisingly, the budget hotel chain is indeed affiliated with the airline through its Group CEO Tony Fernandes. Entry into the hotel industry is a logical option for Fernandes' business diversification, given that flights and hotels are complementary services that go hand in hand. Such a pairing has also been observed in other countries, such as easyHotel being the budget hotel chain of the British low-cost airline easyJet.
This form of diversification is strategic because the hotel chain is able to leverage on the branding of the comparatively well-established airline, which may encourage customer adoption, particularly in its early stages. In recognition of this, AirAsia's BIG loyalty program is integrated into Tune Hotels, allowing customers to earn points on stays and capture their interest. In effect, this helps to build a sense of customer loyalty, and increases the switching cost of flying or staying with other brands. Another benefit is the possibility of product bundling, in which AirAsia flights and Tune Hotel stays can be sold together as a package. In fact, the airline does bundle its flights with a large selection of hotels - beyond Tune Hotels - through AirAsiaGo which sells travel packages made possible through a joint venture with Expedia.
Through the years, Fernandes has ventured beyond the hotel industry into even more areas. Breaking into the telecommunications space is Tune Talk, which is currently the largest mobile virtual network operator in Malaysia. Into the insurance industry is Tune Protect, whereas financial services are offered by Tune Money. It is easy to notice a commonality - these businesses were initially built around the needs of AirAsia's customers, as those why fly would also need hotel rooms, roaming services, travel insurance and foreign currencies.
With the backing of a strong man and his airline, the business model can be replicated across industries, the financial resources for market entry are available, an initial customer base can be acquired, and its credibility starts off above ground zero; these are all natural advantages for the diversified companies to accumulate and thrive.
Back to the topic of Tune Hotels, the chain does convey their value proposition pretty clearly - to provide a great night’s sleep at an outstanding price. The people behind Tune Hotels have probably done their market research and customer analysis, and through the process realised that there are three aspects of achieving the great night's sleep (or in other words, three key customer needs).
First, customers need to arrive and depart from their hotel with ease, which necessitates a good location near major sightseeing areas and business precincts. Second, customers need a good shower before going to bed, which brings to mind heated showers with good water pressure. Third, customers also need a high-quality physical medium for achieving a good sleep, or in simple words, good quality beds and linen. These three aspects - central locations, 5-star beds and power showers - have become the selling points that Tune Hotels publicises to prospective customers.
While this settles the first part of the value proposition, how do they fulfill the second aspect of providing an outstanding price? One way is to adopt a pricing model similar to what low-cost carriers (and to some extent full service airlines) have become experts at doing: product unbundling. This essentially means to divide the product to into separate elements, price each of these elements individually, and offer customers the option of paying for what they need.
So just as low-cost airlines would charge for seat assignments, check-in baggage, meals, change flexibility, and even for printing the boarding pass for you (in the special case of Ryanair), Tune Hotels used to charge separately for towels, air-conditioning, TV usage and WiFi as add-ons. The strategy at that time was to replicate the AirAsia model and compete with a low base price. They even offered "upgraded packages" with all premium amenities included, which in effect was an attempt to re-bundle the unbundled.
The benefit to consumers of such a practice is that they are presented with the opportunity to not pay for what they do not need. This can result in a low base price for the truly no-frills customer who does not have time for TV anyway. The downside is that when all the extras are added, the final bill can be more expensive than what was initially perceived, in the same manner as how the final price for air tickets can double when baggage allowances and credit card surcharges are added. Many years ago, Tune Hotels used to offer room rates starting from Ringgit Malaysia (RM) 9.90 (about US$2.50) per night, while air-conditioning costs an extra RM 12 to RM 15 for a cool room.
Times have changed since then, and they have apparently reconsidered their pricing model, and most amenities are now included in the room rate, except for their Liverpool City Centre hotel in the United Kingdom.
A low price naturally brings a limited profit margin per room, even if costs are kept low. To achieve a sizeable revenue, the options could be to either increase this margin, or to increase the quantity of rooms sold. The latter requires having a high occupancy rate and a large number of rooms per property. Thus, the hotel fits a considerably high number of rooms onto each floor by having "space-efficient" rooms, which is really a nice way of saying that rooms are kept tiny, at least for the basic rooms. It charges a higher room rate for rooms with extra space, which is a practice consistent with most hotels. An interesting offering is the introduction of single bedrooms without windows, which fetches the lowest price of all room types.
Typically, major hotels have building layouts that are rectangle shaped with a corridor through the middle, have a hollow layout with a common space in the middle, or are of some variant like L, T or V shaped layouts. This allows each room to have a window; as an example, the Courtyard by Marriott Seoul Namdaemun has a hollow layout with all rooms along the perimeter and no floor space in the middle. This may be especially important for beach resort properties, in which all rooms may be designed to have at least a partial view of the sea, such as the Westin Desaru Coast Resort.
In contrast, Tune Hotels uses an approximately square building layout to maximise available space, with windowless rooms in the middle to fit as many rooms as possible. While not preferable, it is not a particularly bad experience to stay in a windowless room if all you need to do is to sleep. Besides, in some hotels, a window does not necessarily equate to a view, as all that you may see if the facade of the adjacent building if you are on a low floor.
Tune Hotels currently has 10 properties across Malaysia and one in the United Kingdom. I recently stayed at the Tune Hotel Georgetown Penang located at 100 Jalan Burma, which reminded me of the no-frills sleeping experience. And of course, it was one of those single rooms without any windows located somewhere in the centre of the floor plan. The space-efficient room has a fold-down desk (perhaps inspired by tray tables on aircraft) and clothes hangers at the corner.
Guests staying at regular hotels on previous nights may wish to bring their (branded) miniature toiletries over - unless those have already been eliminated by reason of sustainability - as those provided at Tune Hotels are exceedingly modest. Fortunately, the hairdryer actually beats the typical mid-scale hotel - just lift up and power on, without any need for unbagging, uncoiling wires and plugging into the socket.
The space was tiny, the bathroom was separated by an awkward glass door, and there was of course no room service (not like there would be much space for the plates anyway). But I felt like it was a useful option for a night that I had arrived late at night and just wanted to sleep, while paying a small fraction relative to regular hotels.
From what I see, a positive guest experience - which has traditionally been the priority in the hotel industry - need not be mutually exclusive with being value for money. Tune Hotels have achieved the latter. By now striving to achieve both, Tune Hotels can continue to be a product of business model innovation and be at the forefront of a constant re-imagination.
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| The Tune Hotel Georgetown Penang bears a striking resemblance to AirAsia's livery |
AIRASIA'S DIVERSIFICATION
This form of diversification is strategic because the hotel chain is able to leverage on the branding of the comparatively well-established airline, which may encourage customer adoption, particularly in its early stages. In recognition of this, AirAsia's BIG loyalty program is integrated into Tune Hotels, allowing customers to earn points on stays and capture their interest. In effect, this helps to build a sense of customer loyalty, and increases the switching cost of flying or staying with other brands. Another benefit is the possibility of product bundling, in which AirAsia flights and Tune Hotel stays can be sold together as a package. In fact, the airline does bundle its flights with a large selection of hotels - beyond Tune Hotels - through AirAsiaGo which sells travel packages made possible through a joint venture with Expedia.
 |
| On-board an A330-300 flight on AirAsia X, the long-haul sister company of AirAsia |
Through the years, Fernandes has ventured beyond the hotel industry into even more areas. Breaking into the telecommunications space is Tune Talk, which is currently the largest mobile virtual network operator in Malaysia. Into the insurance industry is Tune Protect, whereas financial services are offered by Tune Money. It is easy to notice a commonality - these businesses were initially built around the needs of AirAsia's customers, as those why fly would also need hotel rooms, roaming services, travel insurance and foreign currencies.
With the backing of a strong man and his airline, the business model can be replicated across industries, the financial resources for market entry are available, an initial customer base can be acquired, and its credibility starts off above ground zero; these are all natural advantages for the diversified companies to accumulate and thrive.
VALUE PROPOSITION
Back to the topic of Tune Hotels, the chain does convey their value proposition pretty clearly - to provide a great night’s sleep at an outstanding price. The people behind Tune Hotels have probably done their market research and customer analysis, and through the process realised that there are three aspects of achieving the great night's sleep (or in other words, three key customer needs).
First, customers need to arrive and depart from their hotel with ease, which necessitates a good location near major sightseeing areas and business precincts. Second, customers need a good shower before going to bed, which brings to mind heated showers with good water pressure. Third, customers also need a high-quality physical medium for achieving a good sleep, or in simple words, good quality beds and linen. These three aspects - central locations, 5-star beds and power showers - have become the selling points that Tune Hotels publicises to prospective customers.
PRODUCT UNBUNDLING
While this settles the first part of the value proposition, how do they fulfill the second aspect of providing an outstanding price? One way is to adopt a pricing model similar to what low-cost carriers (and to some extent full service airlines) have become experts at doing: product unbundling. This essentially means to divide the product to into separate elements, price each of these elements individually, and offer customers the option of paying for what they need.
So just as low-cost airlines would charge for seat assignments, check-in baggage, meals, change flexibility, and even for printing the boarding pass for you (in the special case of Ryanair), Tune Hotels used to charge separately for towels, air-conditioning, TV usage and WiFi as add-ons. The strategy at that time was to replicate the AirAsia model and compete with a low base price. They even offered "upgraded packages" with all premium amenities included, which in effect was an attempt to re-bundle the unbundled.
The benefit to consumers of such a practice is that they are presented with the opportunity to not pay for what they do not need. This can result in a low base price for the truly no-frills customer who does not have time for TV anyway. The downside is that when all the extras are added, the final bill can be more expensive than what was initially perceived, in the same manner as how the final price for air tickets can double when baggage allowances and credit card surcharges are added. Many years ago, Tune Hotels used to offer room rates starting from Ringgit Malaysia (RM) 9.90 (about US$2.50) per night, while air-conditioning costs an extra RM 12 to RM 15 for a cool room.
Times have changed since then, and they have apparently reconsidered their pricing model, and most amenities are now included in the room rate, except for their Liverpool City Centre hotel in the United Kingdom.
SHAPING THINGS DIFFERENTLY
A low price naturally brings a limited profit margin per room, even if costs are kept low. To achieve a sizeable revenue, the options could be to either increase this margin, or to increase the quantity of rooms sold. The latter requires having a high occupancy rate and a large number of rooms per property. Thus, the hotel fits a considerably high number of rooms onto each floor by having "space-efficient" rooms, which is really a nice way of saying that rooms are kept tiny, at least for the basic rooms. It charges a higher room rate for rooms with extra space, which is a practice consistent with most hotels. An interesting offering is the introduction of single bedrooms without windows, which fetches the lowest price of all room types.
Typically, major hotels have building layouts that are rectangle shaped with a corridor through the middle, have a hollow layout with a common space in the middle, or are of some variant like L, T or V shaped layouts. This allows each room to have a window; as an example, the Courtyard by Marriott Seoul Namdaemun has a hollow layout with all rooms along the perimeter and no floor space in the middle. This may be especially important for beach resort properties, in which all rooms may be designed to have at least a partial view of the sea, such as the Westin Desaru Coast Resort.
In contrast, Tune Hotels uses an approximately square building layout to maximise available space, with windowless rooms in the middle to fit as many rooms as possible. While not preferable, it is not a particularly bad experience to stay in a windowless room if all you need to do is to sleep. Besides, in some hotels, a window does not necessarily equate to a view, as all that you may see if the facade of the adjacent building if you are on a low floor.
IN PICTURES
Tune Hotels currently has 10 properties across Malaysia and one in the United Kingdom. I recently stayed at the Tune Hotel Georgetown Penang located at 100 Jalan Burma, which reminded me of the no-frills sleeping experience. And of course, it was one of those single rooms without any windows located somewhere in the centre of the floor plan. The space-efficient room has a fold-down desk (perhaps inspired by tray tables on aircraft) and clothes hangers at the corner.
 |
| Single room without window |
 |
| A fold-up desk on the left and the bathroom door on the right |
Guests staying at regular hotels on previous nights may wish to bring their (branded) miniature toiletries over - unless those have already been eliminated by reason of sustainability - as those provided at Tune Hotels are exceedingly modest. Fortunately, the hairdryer actually beats the typical mid-scale hotel - just lift up and power on, without any need for unbagging, uncoiling wires and plugging into the socket.
 |
| The hairdryer seen in the centre |
 |
| The power shower is comparable to mid scale hotels |
THE FUTURE
AirAsia today flies to over 150 destinations, while its bigger sister AirAsia X connects many farther destinations including China, Japan and Australia. The 70+ A330-900neo's on order are indicative of AirAsia X's future expansion, although as a side note, the airline has asked Airbus to delay delivery of the planes as it makes fleet reductions in February 2020 in light of the COVID-19 coronavirus situation. And while I do not foresee a "Tune Hotels X" any time soon, this enhanced connectivity and penetration can open up doors for potential opportunities.
Still, simply replicating the AirAsia model into Tune Hotels is now a thing of the past, even if it may have succeeded initially. The increasing competition in the hotel scene today has led to a myriad of value for money options at different ends of the spectrum. Hotels can only reach limited heights by competing on price alone, as the industry is, after all, a service industry. The revamped Tune Hotel KLIA-KLIA2 at the Kuala Lumpur International Airport reflects this understanding, with its food and beverage facilities and well-decorated common spaces setting the mark for other properties.
Still, simply replicating the AirAsia model into Tune Hotels is now a thing of the past, even if it may have succeeded initially. The increasing competition in the hotel scene today has led to a myriad of value for money options at different ends of the spectrum. Hotels can only reach limited heights by competing on price alone, as the industry is, after all, a service industry. The revamped Tune Hotel KLIA-KLIA2 at the Kuala Lumpur International Airport reflects this understanding, with its food and beverage facilities and well-decorated common spaces setting the mark for other properties.
From what I see, a positive guest experience - which has traditionally been the priority in the hotel industry - need not be mutually exclusive with being value for money. Tune Hotels have achieved the latter. By now striving to achieve both, Tune Hotels can continue to be a product of business model innovation and be at the forefront of a constant re-imagination.
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