CitizenM: The digitalized hotel supply chain

A 210-room hotel required in New York? No problem, we can ship that to you: Digitalization of the real estate and lodging supply chain in the form of modular construction is allowing companies such as CitizenM to react more quickly to changes in global demand with hotel delivery inspired by the "just-in-time" philosophy.

CitizenM is a Dutch hotel company with thirteen properties across three continents. A majority of the company’s hotels are in European capital cities and the brand targets the affordable luxury segment[1]. In January 2017, the World Trade Organization indicated that 2016 marked the seventh consecutive year of sustained global tourism growth following the 2009 global economic and financial crisis, resulting in 300 million more international tourists traveling in 2016 as compared to the pre-crisis record in 2008.[2] Growing international tourism due to economic growth since the financial crisis matched with scarce hotel supply in parts of the world such as Europe[3] has led to increased revenue metrics for hotels and an encouraging rate outlook for new entrants.[4] These dynamics mean that hotel developers and operators such as CitizenM must increasingly solve for a quick go-to-market strategy in an industry that is typically characterized by construction delays and limited availability of high-potential development sites. To address this challenge, CitizenM leverages the digitalization of its supply chain via modular construction to create competitive advantages for its operation.

Digitalization of the supply chain should be of concern to the management of the CitizenM group because of the ability of digitalization to (1) reduce the go-to-market time of the group’s product offering; (2) mitigate uncertainty around quality and product performance; and (3) provide greater clarity on costs. Specifically, digitalization of the supply chain refers to off-site modular construction or “smart construction” that employs data-driven sequence of operations, robotic manufacturing, and advanced logistics. This digitization allows for more “integrated planning and execution, logistics visibility, and efficient spare parts management” in a real estate context.[5] Moreover, a 2016 report on smart construction by KPMG found that offsite modular construction led to less on-site inspections and maintenance, shorter development borrowing periods, and earlier revenue streams.[6] This fact is particularly key for a company such as CitizenM because it enhances its ability to match supply with demand. For CitizenM, similar outcomes proved to be true in its project in the Lower East Side neighborhood of Manhattan: “modular construction enable[d] the company to accelerate the construction completion by two to five months and significantly reduce ancillary costs related to construction, such as truck delivery of raw materials.”[7] A compression of the construction cycle in any real estate project has meaningful impacts on the overall project return and financing costs.

To address this opportunity, CitizenM has designed a business model that leverages advances in off-site construction to launch innovative hotels in desirable global cities. Applying lean manufacturing principles to the hospitality business, CitizenM is able to deliver its product with less waste and maintain low costs of production[8] through a process called ‘Industrial Flexible Demountable.’ Moreover, the hotel rooms are pre-made in an off-site factory that ensures that the end product is of a comparable quality to a luxury yacht or private jet.[9] The company’s first hotel was constructed in twelve months and serves the Schiphol airport in the Netherlands. The construction method also allows for timely customization and rapid integration of value-add technologies such as in-room electronic moodpads that enable guests to control the entire room’s experience.

Going forward, CitizenM can continue to leverage digital advancements in construction to grow its footprint in additional markets and expand to different segments across the hospitality value chain. As modular construction becomes more ubiquitous in both the residential housing and hospitality sector, key participants will need to ensure the lowest cost of production to remain competitive. In the short term, this can take the form of driving scale in the markets it enters and targeting geographies where production can be optimized to serve multiple opportunity sets with one production hub. Currently, the company’s main production facility is in Poland[10], which begs the question: can one facility efficiently serve global expansion? Will the brand be able to differentiate itself going forward on a product that prides itself in uniformity?

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[1] https://www.citizenm.com/global/company

[2] “Sustained growth in international tourism despire challenges.” World Tourism Organization UNWTO. 17 January 2017. http://www2.unwto.org/press-release/2017-01-17/sustained-growth-international-tourism-despite-challenges

[3] Mayer, Nicholas & Trunkfield, David. “Staying power: European cities hotel forecast for 2016 and 2017.” PWC. https://www.pwc.com/gx/en/hospitality-leisure/pdf/european-cities-hotel-forecast-2016-2017.pdf

[4] Mayer, Nicholas & Trunkfield, David. “Standing out from the crowd: European cities hotel forecast for 2017 and 2018.” PWC. https://www.pwc.com/gx/en/hospitality-leisure/assets/european-hotels-forecast-report-2017-2018-web.pdf

[5] Schrauf, Stefan & Berttram, Philipp. “Industry 4.0: How digitization makes the supply chain more efficient, agile, and customer-focused.” PWC. 2016.

[6] Southern, Joshua. “Smart Construction: how offsite manufacturing can transform our industry.” KPMG. 2016. https://assets.kpmg.com/content/dam/kpmg/pdf/2016/04/SmartConstructionReport.pdf

[7] Rosenberg, Zoe. “CitizenM’s modular hotel on the Lower East Side is now under construction.” Curbed NY. 2017.  https://ny.curbed.com/2017/1/9/14213154/citizenm-lower-east-side-hotel-nyc

[8] Cheshire, Tom. “Hotels that arrive prebuilt: how CitizenM manufactures its buildings.” Wired Magazine. 2012. http://www.wired.co.uk/article/hotels-that-arrive-prebuilt.

[9] Krzykowksi, Matylda. “CitizenM by Concrete.” Dezeen. November 7, 2008. https://www.dezeen.com/2008/11/07/citizenm-by-concrete/

[10] Morris, Keiko. “New York hotel Arrives in Pieces from Poland, Some Assembly Required.” The Wall Street Journal. 08 January 2017.

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2 thoughts on “CitizenM: The digitalized hotel supply chain

  1. This is a very interesting look at real estate development, an industry that has somehow avoided broad-based disruption. Based on what i gathered from your article, CitizenM owns and operates hotels, but it is not a developer or general contractor. It was fortunate, then, to find
    another company that actually carries out this modular construction. The profitability impact to CitizenM is clear: lower construction costs and faster time-to-market mean a stronger bottom line. However, I do wonder whether digitalization is improving the economics for the construction company building these modular properties. Are they able to command a price premium that captures some of CitizenM’s savings?

  2. To be able to answer your first posed question, it would be great to see what the prefabricated hotel modules look like: are they ‘flatpacked’ and assembled onsite, or fully constructed and simply placed in position at the location? Either way, having only one facility to produce the modules may be limiting their speed of growth.

    Firstly, there is the potential issue you raise of geography. I wonder if the efficiencies in speed of construction would be lost to the cost of transporting prefabricated hotels around the world / Europe from Poland? It could be more efficient to have another factory serving another market than create in Eastern Europe and ship there.

    Secondly, if CitizenM have truly ambitious growth plans, the rate at which hotels can be built could be limited by the throughput rate of the factory / production of the modules. This is unlikely to be a serious issue at this stage as one would assume scaling the workforce may be a more likely bottleneck, however it could be of concern. If the current utilisation is close to 100%, then there could be an argument for another factory. Of course the flipside of this is that were there more factories, would the company be able to keep up with the pace of hotel modules being produced or would the factories be under utilised?

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