Why you should care
Because hotel companies are bullish — and that’s good news for travelers.
The world’s biggest hotel companies are in the midst of rapid expansion as an industry boom has lasted far longer than many had predicted, bolstered by record demand from travelers.
From budget to boutique offerings, Hilton, AccorHotels, InterContinental Hotels Group (IHG) and Wyndham are among the companies busily launching new brands or making acquisitions to expand their portfolios.
The bullish mood was summed up by Chris Nassetta, chief executive of Hilton, at the International Hotel Investment Forum in Berlin this month. “We’re at higher occupancy levels as an industry, and a company, than we’ve ever been at in our history,” he said. “The pie is just getting bigger.”
You don’t want to be left behind.
Keith Barr, IHG chief executive
The ascendancy of digital upstarts such as Airbnb had led to dire predictions of home-sharing decimating hotel revenues. Meanwhile, analysts at Morgan Stanley in 2016 forecast a cyclical downturn in 2018 in the U.S., the world’s biggest hotel market.
Yet travel industry analyst STR says that in key markets, such as London, Airbnb takes just 4 percent of total accommodations revenue. Revenue per available room (revpar) — the industry’s preferred sales metric — rose 3.2 percent in the U.S. last year, it says, with at least 3 percent growth predicted for this year.
“We forecast that revpar growth would be nil about a year ago, and we were wrong,” says Robin Rossmann, managing director of STR.
STR says revpar rose in almost every part of the world, with Africa and Europe recording the highest growth. Occupancy levels have stayed at record highs in many markets, while demand is outstripping supply in regions such as the U.S. and Europe, it adds.
Analysts say that a burgeoning middle class, particularly in Asia, is driving growth.
Sébastien Bazin, chief executive of AccorHotels, told delegates in Berlin that contrary to his expectations, there remains a strong desire among many travelers for the assurances in service provided by established hotel companies. “Four years ago, I was dead wrong, because I thought at the time that [hotel] brands would matter less,” he said. “Brands have enormous value, more than I ever believed.”
Not all are convinced. Arne Sorenson is chief executive of Marriott International, which became the world’s largest hotel company after acquiring Starwood Hotels & Resorts in a $13.6 billion deal in 2016 and has more than 6,500 properties and 1.2 million rooms.
He says that his company, which operates the Ritz-Carlton, W Hotels and Sheraton brands, has no plans to launch new brands, though it will open more hotels.
The previous upturn in a notoriously cyclical industry was ended by the 2008 financial crisis, leading large hoteliers to adopt an “asset-light” model, concentrating on hotel management and franchising rather than ownership.
Sorenson says the industry is merely riding a period of global economic growth, and warns that groups that overextend themselves now may be caught out. “As we all know, we’re in a highly unpredictable world,” he says. “Whether you look at politics or … at some of the economic things that are happening, I think it’s right to still be fairly cautious.”
But Marriott’s rivals are busy rolling out new concepts, many targeting millennials, in particular, with younger consumers thought to be least likely to be attracted to more traditional hotels.
Hilton’s Tru is a midmarket brand in which rooms, which cost $80 to $95 per night, are smaller than average; instead, the lobby is far bigger, offering entertainment areas such as bars serving craft beer and equipped with pool tables.
Launched last year, Tru opened nine hotels in the U.S., and Nassetta says the ambition is to have 3,000 to 4,000 globally, adding to the more than 5,200 properties it already has.
Alongside this, adds Nassetta, Hilton is devising a separate “urban, affordable” concept, which he dubs a “hostel on steroids” and says will offer even cheaper, shared accommodations to younger travelers.
French group AccorHotels, Europe’s largest hotelier, which operates 4,300 properties and 600,000 rooms, is attempting a similar move with its Jo&Joe hotels.
These are aimed at cool foreign tourist “tripsters” needing somewhere to stay but also “townsters,” locals living nearby wanting a space to meet friends and socialize or do yoga.
Described as “open houses,” they offer accommodations from private apartments and shared rooms to “out of the ordinary” stays in yurts in some locations.
They look radically different from Accor’s other brands such as Sofitel and Novotel: Rooms are fitted with sleek bunk beds; there are huge, colorful lobbies; and guests are encouraged to cook together in communal kitchens. The company aims to open 50 Jo&Joe venues by 2020.
IHG’s Avid Hotels, also launched in the U.S. last year, is another business offering smaller, cheaper rooms. IHG Chief Executive Keith Barr explains that modern consumers do not want the staples of more established hotels, such as large writing desks. “Customers are spending half their time working in their bed now, sitting with their laptop on their bed in the guest room, because they are not traveling with as many papers and documents as they used to, as everything’s digitized,” he says. “It’s just making smarter use of the overall space.”
STR’s Rossmann adds: “The reason why there aren’t more hotels catering to millennials is not because of a lack of demand, but that it has to be supply-driven at first. You can’t just break down rooms and remodel them. You can only do that with a significant uptick in performance.”
But the expansion is not limited to targeting millennials. Another focus is on building luxury brands that cater to all ages. The industry remains highly fragmented, with the vast majority of hotels being small businesses. Targeting these individual hotels, IHG plans to launch a “conversion” brand, encouraging upscale boutiques to come under a new single umbrella. Wyndham attempted something similar last year with its Trademark Collection, which groups previously independent high-end hotels under one banner.
Acquisition is another form of growth. Over the past two years, the top five operators made $2.4 billion of acquisitions, according to Dealogic, and this looks to be accelerating.
In January, Wyndham acquired La Quinta, a U.S. group that operates about 900 hotels, in a deal worth $1.95 billion. Last week, regulators approved Accor’s $1.2 billion takeover of Mantra Group, an Australian group with more than 100 properties across Australasia.
Barr, who became IHG’s chief in July last year, said the company’s plan to acquire a luxury hotels company is “imminent,” but provided no further details. “I want to keep us well-positioned to be one of the global leaders in the industry that lets us then acquire other brands over time,” he says. “It lets us control our own destiny. You don’t want to be left behind.”
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2018.