• Industry faces digital transformation

Accor is a participant in the digital industry, claimed CEO Sebastien Bazin at November’s European Hotel Investment Conference. And the company was involved in what is going to be a “huge industry transformation”.
Bazin, speaking at the Deloitte organised event held in London, argued that digital will form a much larger part of any discussions around hotel investment in the future: “Running a hotel is all about digital distribution”.

The advantages of a company like Accor is that what it has built is irreplaceable: “You have to buy Accor to get it,” said Bazin. But Bazin was concerned about the next wave of digital transformation which was being driven by companies like Airbnb. He said such companies “were much more of a problem” than the advent of online travel agents, which he described as innovators, or metasearch players (like Kayak and increasingly Tripadvisor) which were aggregators. Mobile technology meant customers had global information in their hand, said Bazin.

“The customer is evolving and changing,” he warned.

“You have to be able to predict the unpredictable. And you need to get people on board who have been through the storm. Deloitte’s Nick van Marken, moderating the panel of two recently appointed hotel CEOs, invited Bazin to reflect on his time since being appointed in August 2013.

On occupation of his CEO seat, Bazin spent three months reviewing the company and found three mainly negative things: a lack of direction; lack of individual recognition; and belief that the company was too France-centric. But these were counterbalanced by a desire among employees not to move and to continue being part of Accor.

The division of Accor into a hotel services part and a hotel investment part was not to do with buying or selling assets, said Bazin. But rather it was a way of giving pride back to the hotel investment side after what had been a “pretty mediocre” performance.

“The transformation will take two to three years and we will spend more money,” said Bazin. Part of the change would involve much more transparency but it was too soon to set rigid benchmarks, he argued as these “have to come from our people”.

The key change was introducing accountability, a word that, said Bazin, had no direct translation in French. Alongside changes with hotel investment and digital, f&b and brands were a focus. This was a driver for the acquisition of Mama Shelter, a chain that derives 60% of revenues from f&b. There had been a culture shock, admitted Bazin, stating that it was hard to hire people with tattoos and piercings and Accor had not worked with outsiders for 25 years. But it gave Accor a lot of pride to be associated with Mama Shelter which had the right design, right service and right clientele.

Fellow panellist Allen Smith, CEO of Four Seasons, said the process he had undertaken since occupying his post sounded similar to Bazin’s. However, Smith said: “A meaningful amount of my first year has been spent understanding how to deal with the board.”

What is not on the agenda are “transformational transactions” and Smith viewed the activity of Four Seasons as very different to what is being done by the global major hotel groups.

“Can we recycle capital and use our balance sheet more aggressively? Yes, but that’s at the margins,” said Smith. A key distinction for Four Seasons was focusing on a “pipeline of talent” rather than a pipeline of product. “Homogenisation of luxury is a risk, we are seeing it in retail. The luxury segment is very crowded and even the midscale segment is creeping into our space with design and technology,” said Smith.

This made it imperative that Four Seasons was clear on what it can deliver and this was driven by the culture of the people within the company. The focus Smith wanted to bring in was for employees to think more like [hotel property] owners with the same care shown to customers shown to owners.

Europe was a region Four Seasons was very focused on right now, said Smith. China too was important, particularly in establishing a brand presence to influence the outbound market. But despite many cities with millions of inhabitants there were still not the business economics to support new hotels for the Four Seasons brand.

Aside from geopolitical hotspots, both CEOs were generally optimistic about future trading prospects. Bazin said that while Paris was resilient, the French provinces were a “disaster”. The Middle East and Africa were both particularly strong regions, however.

Earlier at the conference, van Marken had highlighted that bumpy growth is forecast globally. But the picture looked different from 2007 with only the US having forecasts for 2015 that are in excess of what was achieved eight years earlier.

Europe in particular looked challenging with van Marken describing it as “all ahead slow”. Despite these mixed messages, consumer confidence was approaching pre-crisis levels. Tourist arrivals were rising, set to hit 586 million in Europe in 2014 against 563 million in 2013. And Europe was poised to regain pricing power with rates heading close to the levels achieved in 2007. Geographically, West Europe was strongest with East weakest. Midscale and economy hotels were showing the highest rate and occupancy increases. Europe had, according to STR Global, a 1.4% increase in profitability in 2013 but this sat alongside the 9.1% seen in North America.

The conclusion drawn by van Marken was that the only way was up in Europe given demand ahead on the previous peak by 10% and pipeline remaining stable at 3.2%. Although profitability was 10% of the peak it was in a solid position for recovery and growth.

This meant that there was a potential for what van Marken described as a “banner year” for hotel investment in Europe. During 2014 EUR10bn was spent, a figure last seen in 2004 and only below the peak years of 2005 to 2007. About two-fifths of the cash was invested in the UK and a fifth in France. The biggest investment volume hailed from the US at EUR2.7bn, with Gulf investors at EUR0.8bn, Chinese at EUR0.7bn and Russian at EUR0.6bn. There have been some consistent sources of investment: since 2007, Qatari investors have spent more than EUR7bn in Europe.

The surge in portfolio deals in the UK had helped the process of restructuring provincial UK hotel debt. Of the GBP18bn of debt at the start of the crisis, 75% had been written-down, refinanced or restructured.

The confidence in future deal prospects was driven by three factors: risk appetite at a new high; the amount of capital seeking a home; and a return to easy credit with CFOs saying that credit is now cheaper and more available than at any time since the last boom. The rosy outlook for deals was tempered by economic and political risks including elections, Euro area weakness and the possibility of interest rate rises. On this latter point, however, Roger Bootle, during his economics presentation at the conference, said “I wouldn’t be surprised if rates don’t go up at all. I would be surprised if they were above 1% by the end of next year.” And like van Marken, Bootle suggested that the Eurozone might see more debt as providing an answer to the problems caused by excessive debt.

HA Perspective [by Andrew Sangster]: Deloitte’s Nick van Marken is, as ever, calling the right tune regarding sentiment in the hotel industry. But while the industry as a whole is clearly on the up, markedly so in the US, the picture for individual players is more mixed.

It is an open question as to who will benefit from the current recovery. And there is a potentially big problem ahead in that many of the deals currently being done are being priced at levels that assume the beneficiaries of the upturn will be the same as in previous business cycles. This is complacent, bordering on the dangerous.

There are at least two major new threats in this recovery alongside the usual litany of geopolitical and economic risks. Firstly we are in unprecedented economic circumstances. Property prices have been supported by monetary interventions by governments that are either on a scale never seen before (interest rates) or never tried (quantitative easing).

It is impossible to model the impact given we don’t know when the intervention will end, how it will end or what the effect will be. It is, after Donald Rumsfeld, the biggest known unknown.
Secondly, the next wave of digital disruption looks even more problematic than the first. If, as Sebastien Bazin says, the Online Travel Agents were the innovators, the likes of Airbnb are disruptors because they have another huge threat alongside the OTA superiority in marketing: and that threat is new supply.

Whereas OTAs have to work with existing hotels, sharing economy players like Airbnb are enabling new entrants to the industry. Sure, it is unregulated and usually untaxed, but if existing hotels wait for government intervention to level the playing field, they will most likely be economically crippled by the time it arrives.

When the OTAs first appeared more than a decade ago, some believed that these new routes to market would offer a salvation for independent hotels and small chains. This has not proved the case. Hard numbers to verify this are thin on the ground but Whitbread has shown that in the UK net hotel room supply has remained stagnant even while branded economy chains like Premier Inn grow rapidly.

The real pain from the growth of the sharing economy is not going to be for the global majors with their secured global accounts, effective loyalty schemes and efficient distribution. The threat is coming to independents and small chains. And very probably not so small national chains.

This is not to say the global majors will not be challenged. They are still minnows when compared to the marketing power that the biggest online players can deploy. Consolidation, however difficult to execute, will look increasingly compelling.

And below the level of the global majors the case for change looks even stronger. The brands of these smaller hotel companies are unable to compete technologically, they lack marketing muscle and are being commoditised. It is looking increasingly likely that the digital revolution will finally deliver the much anticipated consolidation in the European hotel sector.

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