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Bed & Breakfasts in Italy: The case of the Emilia-Romagna Region

di Teresa Branzaglia

Alma Mater Studiorum
UniversitĂ  di Bologna
School of Economics Management and Statistics
Campus Rimini
Second Cycle Degree Programme in Tourism Economics and Management
Relatore: Manuela Presutti
Anno Accademico: 2015/2016

3.2.5 - Industrial Analysis

“Villa Teresa” will be part of the B&B industry, characterized by a low concentration and a consequently high degree of competition. The B&B is a subset of the broader tourism industry sector, comprising all of the businesses that offer a composite service whose nucleus, and thus the main and distinctive component, is the overnight stay, meaning stopping off in a defined structure for spending the night (bedandbreakfast.it).

According to the Michael Porter’s competitive strategy, to determine the industry profitability we have to take into consideration five main forces that affect our business:

  1. POTENTIAL ENTRANTS: Threat of new entrants
  2. SUBSTITUTES: Threat of substitutes
  3. SUPPLIERS: Bargaining power of suppliers
  4. BUYERS: Bargaining power of buyers
  5. INDUSTRY COMPETITORS: Rivalry among current competitors

In the specific case of Villa Teresa, as we will deduce from the following analysis, the threats of new entrants and substitutes are not so high, the bargaining power of suppliers is very low, the bargaining power of buyers is medium/low, and the rivalry is not intense (Figure 8).

Figure 8 Porter’s Five Forces for Villa Teresa

B&B in Italy: the case of the Emilia Romagna - Immagine 15

Force 1

Several factors determine the degree of the threat of new entrants to an industry. According to Porter, many of these factors fall into the category of barriers to entry, which are factors or conditions in the competitive environment of an industry that make it difficult for new businesses to begin operating in that market. Examples of entry barriers are: a high production-profitability threshold requirement, significant upfront capital investments, strict government policies, high buyers’ switching costs, well-known brand names, and highly differentiated products. The lower the barriers to entry, the higher the threat.

That being said, the threat of new entrants to the B&B industry, in general, is high. This industry, indeed, is usually characterized by very low initial investments (no need to modify the physical structure of your house), not so famous brand names, and a low production-profitability threshold requirement since in most cases it only represents a second source of income for owners. Besides, consumers’ switching costs are low, in the sense that it does not take a big effort (both financially and psychologically speaking) for buyers to change and choose an alternative kind of accommodation structure.

However, the “Villa Teresa” specific case may represent an exception to what we just explained above; in fact, our Bed & Breakfast would be located in a very isolated area of the Ravenna countryside, where few people might want to go unless the structure is really attractive, which implies the need for a quite big investment for upgrading the business (e.g. a nice swimming pool in the garden).

Force 2

Porter’s threat of substitutes definition is the availability of a product/service that the consumer can buy instead of the industry’s product/service. A substitute product is a product from another industry that offers to the buyer benefits similar to those of the product produced by the firms within the industry. According to Porter’s Five Forces, threat of substitutes shapes the competitive structure of an industry.

As we said before, the switching costs in this type of industry are low, and this usually means that the threat of substitute products is high. Actually, though, the threat of substitutes in our case is pretty low and the main reason for this is the great quality of our service, difficult to reproduce for the same price. Specifically, we offer a villa in the heart of the countryside of Ravenna, located in a crucial position that satisfies people who come for the Adriatic “Riviera”, those who want to visit the mosaic city, those who come for the little characteristic towns with their lovely country fairs, etc. There is already a tennis/volleyball court, a dog enclosure and, before the opening, we will put an inground pool in the garden together with a playground for the kids. In other words, we are going to put on the market an exclusive solution: a luxury product launched at a price per room that is equal to the average price in the industry. Only after gaining some good reviews on TripAdvisor we will think of increasing prices (we noticed that all the structures that do not have reviews on TripAdvisor have a price for a single room inferior to 50 euros).

We cannot consider as potential substitutes the accommodation structures in the city center of Ravenna or Forlì, because the type of tourist interested in staying in the center is not our target (nature lover). We would consider as substitutes all the hotels, farmhouses that offer accommodation, and “Affittacamere” in the area, but the truth is there are only 4 “Affittacamere” (also called Room & Breakfast) in the countryside of Ravenna (Table 8). Across that dozen of hamlets (Durazzano, Borgo Sisa, Coccolia...), indeed, there are about 15 B&Bs (we do not see them as substitutes, but as competitors) and 4 R&Bs that we list below:

Table 8 Room & Breakfast in the area of “Villa Teresa”

B&B in Italy: the case of the Emilia Romagna - Immagine 16

Among the Room & Breakfasts, the only one that might threaten us is “Podere Angela Schiavina” (Figure 9), opened in 2013, which is located 7 km away from us (in Filetto), and has 5 rooms (R&Bs are allowed to have a maximum of 6 rooms). It’s the only one offering 24/7 reception service, car rental service, a barbecue, and a pool. They also accept dogs. Except for the rental car service, we offer all that to our guests, and even more. For example, we do not have fixed time spans for arrival and departure of customers, giving them a flexibility that the R&B does not offer. Also, our garden is way bigger (10.000 square meters) and includes a tennis/volleyball court, a Ping-Pong table, an impossible-to-count number of trees and flowers, and a shuttle service to pick the guests up at the train station/s. Regarding the price, ours is more competitive: we set the price of the double room at €60, they set it at €75.

Figure 9 Distance between Villa Teresa and Podere Angela Schiavina

B&B in Italy: the case of the Emilia Romagna - Immagine 17

* Via Argine Destro Ronco 54 is the address of “Villa Teresa”.

In conclusion, knowing that their product is more expensive than ours and that the quality is a little inferior, we can state that the threat is low. Anyway, a superb Internet presence is vital in order to get the guest to choose your structure over the competitor’s.

Force 3

In Porter’s five forces, supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. In our specific case, this bargaining power is almost equal to zero because we will only need to buy milk, coffee, tea, juices, fresh bread, jams, fruit, cookies, and cereals. The milk and fruit will be bought from a local farmer, and there are 5 within 10 kilometers. The rest can be bought in any supermarket, and there are 3 within five kilometers (2 of them are also open on Sundays). As for the cakes, we will bake them ourselves. There would be no switching cost for us if we will ever need to change supplier for some reason.

Force 4

Porter’s Force of buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. The bargaining power of our customers is medium/low: firstly, because our industry is characterized by an increasing demand, secondly because our potential competitors offer less differentiated products and, often, at higher prices. Moreover, the customers that make up our target are characterized by a low level of price sensitiveness, due to the fact that they look for that personal touch that a hotel/affittacamere would never be able to give.

Force 5

The level of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another, limiting each other’s profit potential. The rivalry among competitors in the B&B industry is not as fierce as the one in the hotel industry. The main reason for this is that each Bed and Breakfast has its own “personality”, its human touch, its owner/s who really gets close to the guests, which usually does not happen in hotels, where one time you get served by an employee, and the next time by a different one. In a B&B, your point of reference will always be the same one. Besides, competition in the precise area where “Villa Teresa” would be is not intense, since we are referring to a hamlet of the municipality (Durazzano) where there are no receptive structures at all.