Mediterranean resort with hotel in bay (5)
I believe the answer is:
niche
'bay' is the definition.
(thesaurus)
'mediterranean resort with hotel' is the wordplay.
'mediterranean resort' becomes 'nice' (French city on the Mediterranean).
'with' means one lot of letters goes inside another.
'hotel' becomes 'h' (phonetic alphabet).
'nice' placed around 'h' is 'NICHE'.
'in' acts as a link.
(Other definitions for niche that I've seen before include "Specialized market" , "Cosy spot" , "Nook, cranny" , "Shallow recess in a wall" , "Particularly suitable position" .)