Hotel brands face having to start spending, in order to maintain their relevance in the marketplace. That was one of the predictions that Richard Clarke, senior analyst of hotels and leisure at AB Bernstein, gave delegates at the Hotel Distribution Event.
“You don’t need the brand to tell you the hotel’s any good, anymore,” he noted, and as a result “brand premiums have come down.” Yet the brands keep on growing – providing a comfort blanket that today is mostly appreciated by owners and bank lenders. “The brand is less relevant to the consumer – it’s relevant to the owner.”
“The absolutely number one factor is distribution,” said Clarke, noting that just on distribution, you can save money being a branded hotel.
OTAs “have, in the past, provided incremental occupancy. What’s changed, is the market has consolidated – it’s effectively a duopoly.” He wondered how Booking and Expedia would look to draw out their brands into the hotel space more directly in future. Many aggregators, he noted, move to content production, citing the example of Netflix moving from movie streaming to producing its own series.
Casting an eye at other consumer-oriented, franchise businesses such as McDonald’s, Clarke suggested there was also likely to be pressure for more capital commitment to support franchisees: a modest reversal from absolute asset-light. “We’re not seeing a lot of it at the franchise level yet.” His other comparison point was on valuations: “Hotel companies look cheap, compared to other franchise companies.”
Looking ahead, he warned newcomers such as China’s Alibaba could enter the hotel space. They have created a single property in China , ostensibly to showcase their technologies.
Clarke noted that the last upturn has seen a disconnect appear between rising occupancy, and room rates. Some of that might be accounted for by the arrival of Airbnb, he said, but not all. But the flip side of lagging room rate rises, was that the sector now seems able to maintain rates better, resisting a price war during a downturn, as was seen recently in France.
He also said some hotel brand shares are cheap, notably Accor, which has been punished by investors for its forays into tech company acquisitions.
In a panel discussion, owners and investors declared the brands to deliver value – so long as their various levers were pulled judiciously.
Nick Chadwick, senior vice president at Starwood Capital, said of a brand: “We see it as a means of leveraging competitive advantage.”
Despite ESSEC professor Peter O’Connor arguing that there’s no such thing as loyalty, and that most scheme members are simply signups who once wanted free hotel wifi, as an owner Chadwick declared himself a fan of loyalty programmes. “We have a Residence Inn in Kensington, and the amount of redemptions we get is phenomenal.” And Bernstein’s Clarke said during a recent visit to the Indigo in Cardiff he found staff keen on loyalty point guests. “They feel like they’re getting a free night, so they spend lots on other things such as the mini bar.” While at their worst, loyalty guest rebates give owners barely enough to cover their overheads, during busier times the return can be substantially better.
Chadwick acknowledged that simply setting up a loyalty scheme can be a major headache. “When we owned Principal, we looked at setting up our own scheme – it was very costly.” So costly, it never happened.
For the brands, Clarke said there were some clear returns. “It’s all about the data,” plus it keeps customers away from OTAs and Google searches. He noted that recent innovations had seen the brands taking steps to make it easier to earn and burn points, such as IHG’s tie-up with Mr&Mrs Smith. “It’s all about finding something attractive to spend the points on.” Accor, too, is about to relaunch its loyalty scheme, offering the chance to spend points on a variety of non-room experiences.
But the use of a brand remains a decision often taken property by property. Jacob Rasin, director of business development at Pandox, said most of his group’s airport hotels were branded. But a recent experiment with an unbranded city centre hotel in Brussels, where Booking.com is the sole distribution platform, has worked out well, he said: “Going down to net revpar, the result is the same. And the ramp-up was very quick, less than three months.”
Chadwick added that the big choice of brands today was beneficial, putting the pressure on the big hotel groups to innovate: “As an owner, it’s great. We also think about our exit, there is a security blanket for an institutional buyer of a franchised brand.” But, having been part of the team that created the Ace hotel in Shoreditch, he is well aware that the smart development of a well marketed brand can also deliver a big brand premium. There, the buzz delivered lots of direct business: “Our distribution costs were so low.”
He also worries about mid-market brands. “We see the barbell effect in hotels, the middle is being hollowed out.” Starwood’s recent acquisition of Yotel was at one end of that barbell: “We like the compact, limited service sector.”
But what of the disruptors? Clarke noted that Airbnb “is probably one of the only aspirational brands in the budget space – I think they’ve done a good job with the brand.” Chadwick said he had tested Airbnb as a distribution platform, and is now seeing a maturity in that space. Looking ahead, Clarke said Oyo would be an interesting challenger: “They are happy to spend money to grow, which the brands hate doing.” He had recently sat down with IHG, who he said will start worrying about Oyo when they lose their first hotel to the Indian upstart.
Perspective (by Chris Bown): At Hotel Analyst, we love fighting talk, but this year’s HDE seemed to imply the burying of many hatchets, as peace breaks out between hoteliers and OTAs. The owners, enlightened by research about the real cost of marketing rooms, seem to appreciate that OTAs do a good job, for which they earn a decent crust. As ever, it’s about not overpaying for, or overusing, their skills.
But there remains the challenge of making sure rooms are sold for the max, on the right channel mix. Still the big guns wrestle with legacy systems, while all manner of software promises elements of what owners and operators need, but not the killer app. As HDE took place, UK startup Impala received further funding towards its aim of building an API-driven umbrella to link all the differing systems together. We wish them well.
As ever, Google stands in the middle, happily taking commissions from everyone who wants to reach the customer, brands and OTAs. Will they launch their own direct sales channels? Not as long as they can make more from charging those competing channels to deliver up eyeballs. And the brands, desperate to keep those eyeballs off Google, are feverishly working to create ever more enticing loyalty programmes. The battle continues; the hatchets are in shallow graves.