The hotel sector remains fragmented compared to other industries and there are many more M&A opportunities, delegates at the International Hotel Investment Forum in Berlin were told.
The growth of the global operators’ brand portfolios was not welcomed by all of the owners, with the cost of brands compared unfavourably with the costs of using an online travel agent for distribution.
Andreas Scriven, international managing director & managing director, consultancy, Christie & Co, described the market as “15% to 16% concentrated – with the top three operators, we would expect that to shift to 20% to bring it in line with airlines.”
Commenting on the ongoing consolidation, Cody Bradshaw, SVP and head of European hotels, Starwood Capital Group, said: “Brands need to go overhead light as well as asset light. Cost synergies are subsidising many of these deals, but there’s no trickle down in cost savings to owners. My prediction is that Google is going to be a real disruptor in this space. In the next 20 years something has got to give – the brand fees are not that different to the OTA fees.”
Bradshaw echoed earlier comments from Desmond Taljaard, managing director, hotels, London & Regional, who told the conference: “What would a brand have to be able to do to put a brand on a hotel? They need to drive business above and beyond what the hotel could do itself. Take the Atlas Hotel portfolio, we do ponder whether there was any need to brand those, so far we are leaning on the green box rather than the red, but when I’m charged for the brand, loyalty programme, booking.com and I get 12% back at the end of that, I begin to wonder.
“The economics are going to come under lots of scrutiny when the contracts come up for renewal. Every time a brand hires a new brand leader it adds new costs for me, they add bacon at breakfast, green carpet, blue carpet. It’s wonderful for that persons’ CV and I hope they do well, but it adds cost for me. Brands need to keep the cost of value added in balance.
“The OTAs are the fundamental crisis in the hotel sector in the past 20 years. You compare the arithmetic of the OTA and the limited service brand – are we facing a cataclysmic change? People need a lot a lot more weaponry if they are going to win the war.”
Speaking earlier in the day, Richard Solomons, CEO, InterContinental Hotels Group, defended the brands, commenting: “In an industry where intermediaries would like to commoditise brands, it’s important to create brands which stand for something. Consumers are consumers; they get more demanding the more they know about things and that means brands need to be clear.”.
At IHG’s last earnings call, Solomons said that the company was considering a mid-market brand and he told the conference: “As the Holiday Inn brand family reaches saturation there is opportunity. We’ve bought brands in the past – the right brand we’d look at”.
Robert Shepherd, chief development officer, Europe, IHG, told Hotel Analyst that the concerns of the owners had been noted: “The old days of a 25, 30-year management agreement that you couldn’t get out of, they’re gone. The point now is around aligning interests. Unless we align interests, there is no point in a 20-year relationship. By structuring – whether there are performance tests, whether there is a hurdle for incentive management, so you don’t earn meaningfully until you get a certain level of GOP. Our fee structures are a base and an incentive fee, the base is low and competitive. We will talk to owners at the outset and start to make an agreement based on their interests.
“We don’t have to have capital in the game, we don’t have to own it, but we can make sure that our performance is tied to the hotel performance. There may be guarantees fort the first five or six years, at which point the owner will refinance a stabilised asset.”
Coley Brennan, partner, head of Europe, KSL Capital Partners, found positives in the current consolidation. Brennan said: “The increase of M&A doesn’t really make any difference to us. As there’s more consolidation there is a combination of best practice.”
HA Perspective [by Katherine Doggrell]: Solomons told the conference that, when he was at Britvic: “Understanding branding and the FMCG business was always fascinating to me”. Given his comments about avoiding commoditisation in the sector and the need for brands to stand out, one can see how his career has evolved to shift to the other side.
Speculation over the future of IHG was popular around the bar at IHIF this year and comments about potential defensive deals – fancy a look at Rezidor? – were met with wry smiles by IHG executives, aware that something needs to be done.
At the moment the company is in the mid-point between brand and commoditisation. It does not have the extensive portfolio of Marriott International to offer to its owners and the smaller pipeline in comparison to the large operators suggests that a big stable is attractive to those who would put a flag on their bricks.
As Solomons said himself: “It’s not just about having more brands, it’s about having the scale to be a success for your guests and owners.”
Those owners are getting more vocal by the day and looking for those interests to “align” more convincingly. They want to see the operators taking risk. The only risk IHG is currently taking is that of inaction.
Additional comment [by Andrew Sangster]: There was a strangely uncomforted atmosphere around IHIF this year. It was strange because, looking at the business cycle, this ought to be a go-go year for the hotel industry.
So why were investors and operators not as happy as they should be? There is no doubt that politics plays its part: Trump, Brexit and forthcoming elections in France and the Netherlands were all topics of conversation.
But there are also big strategic issues facing the industry, mostly centred around the impact of the internet. Online Travel Agents were more visible than ever at this year’s conference with the CEO of the number two Western player, Expedia, up on stage.
The potentially even bigger issue, however, is the rise and rise of the platforms of which Airbnb is the most ubiquitous. Sébastien Bazin gave a brief talk (see other story) which rehashed themes he has articulated before. He is the most vocal of the global major brand company CEOs on this issue and Accor has been the most active of the majors.
Arne Sorenson had something of an easy time of it during his interview, barely being challenged on the big strategic challenges ahead for Marriott. In particular, while Marriott is now the biggest hotelier it significantly lags the biggest OTA, Priceline, in terms of market capitalisation, and is also significantly behind when it comes to investment in tech and its marketing firepower relative to the OTAs.
All the M&A in the world is not going to turn a hotel company into a tech company and it is gradually dawning on hoteliers that their focus should be on delivering on customer product expectations rather than trying to either emulate or curtail the tech onslaught.
At IHG, the deal with Amadeus as a tech partner looks sensible, as does the emphasis on building brands that offer meaning to customers other than simply which chain scale they sit in. The various book direct campaigns are another matter but at least these are now receiving a lot less attention.
More importantly it appears that the type and nature of the contracts being signed with owners is beginning to see adjustment. It’s still early days but IHG’s Robert Shepherd makes clear he is listening – just don’t expect a seismic shift yet.