It is check-in time for hotel companies in search of an upgrade.
Marriott International’s $12.2 billion approach for Starwood Hotels & Resorts only signals the beginning of a fresh round of deal-making in the sector.
Still to come: a $3 billion deal for FRHI Hotels & Resorts, the owners of Fairmont, Raffles and Swissotel, a £1.5 billion deal for the UK budget chain TraveLodge, a €1 billion deal for the French group B&B Hotels and a £595 million deal for Atlas, a portfolio of 48 UK hotels.
Then there is the prospect of other bidders trying to usurp Marriott in the race for Starwood. The deal does not complete until the middle of next year and Hilton and InterContinental Hotels Group may be interested in Starwood themselves.
Since hotel companies sold off their assets and became hotel managers, rather than owners, the benefits of consolidation are compelling: it is the fastest route to growth, scale helps when dealing with big online travel agents, and costs can be trimmed.
Mergers and acquisitions fall into a regular cycle and consolidation is being driven by the fragmented market. Arne Sorenson, the chief executive of Marriott, explained why he had returned for Starwood despite not being interested initially. “We were watching a lot of the online travel agencies consolidate and platforms like Google doing more in the travel sphere,” he said.
“These things caused us to conclude that having 1m rooms and more resources would allow us to compete better.
“We compete in an industry that is highly dispersed. No one really has significant market share. Even after this deal, we will not have significant market share. Marriott has 10 per cent of the US market, for example, and Starwood has 3-4 per cent. But being bigger we can have more dollars to spend effectively on technology, marketing, loyalty and so on.”
This has been the biggest year for hotel deals since Blackstone bought Hilton Worldwide for $26 billion in 2007. The M&A cycle in the hotel sector comes around every eight or so years, and lasts for two to three.
From 1995 to 1997, ITT spun off Sheraton, Caesars World and Madison Square Garden into a separate company, Granada bought Forte for $8.1 billion, CUC bought HFS, the owners of Ramada and Super 8, for $14.7 billion and Starwood then bought ITT for $13.9bn.
From 2005 to 2007, Hilton spun out its hotels business, Cendant spun out its Wyndham hotel business, property group Lightstone paid $8 billion for Extended Stay, the mid-range hotel company, Apollo paid $27 billion for Harrah’s hotel and casino group and Blackstone bought Hilton for $26 billion.
The cycle is determined by the industry’s swings in occupancy and room rates. This year, revenue per average room, the industry’s yardstick, rose to 13 per cent above where it was in the previous peak in the US cycle, just before the financial crisis, leading some commentators to comment that the current US cycle may be approaching its peak.
It is difficult these days to recognise a hotel room. With the arrival of Airbnb and other sharing websites, any spare bedroom can potentially be a hotel room, and then there are campsites, hostels and micro bed-and-breakfasts.
But even if the sharing economy is stripped out — leaving 17.5 million hotel rooms worldwide — the industry is still very fragmented, and remains dominated by small individual businesses. The top 10 hotel companies only have one-third of the rooms on the market, with no one having more than 4.7 per cent of rooms globally. Only the airline and packaged food sectors are more fragmented, according to analysts at Morgan Stanley.
In Europe, the lack of a dominant market leader is even more apparent: the top five European operators account for only 14 per cent of rooms. In the US, they have 48 per cent of the total.
In the past, when hotel companies owned their assets, it was difficult and extremely expensive to win scale. Hotel rooms are also a fairly similar product, with location being the most important factor. Today, brands are easier and cheaper to roll out and it is easier to have a consistent product across different countries.
The world’s three-largest hotel groups have not been very successful at building global businesses. Hilton, Marriott and InterContinental Hotels have 83 per cent, 81 per cent and 65 per cent respectively of their rooms in the Americas.
But different regions have their own economic cycles and diversification is a useful hedge for hotel companies. In 2007 and 2008, the Middle East was booming. In 2010 and 2011, Asia outperformed the rest of the market. Last year, it was the US that shone.
Some analysts have suggested that US operators buy up either European or Asian rivals, but such deals are difficult to pull off. By buying Starwood, Marriott is getting access to a company with a strong Asia presence, even as it expands its own Asian arm organically. In recent months, Marriott has opened a new hotel in mainland China every fortnight.
For the Chinese company Jin Jiang Plateno, there is a need and desire to move beyond the mainland and acquire foreign assets. Starwood and Accor have arguably the most balanced and diversified portfolios.
Hotel companies, now that they have become merely collections of brands rather than the owners of hotels, face an existential crisis from online travel agents.
Customers often prefer to shop around on comparison websites rather than going directly to their preferred hotel company’s site. That gives the online travel agents more clout when setting the commissions they charge for their service.
To fight back, many hotel companies are now turning themselves, in part, into online travel agents. Marriott, Hilton and Starwood have all opened up their website bookings to independent hotels. Consolidation brings with it more marketing budget to advertise hotel brands and launch national campaigns.
Hotels are also prioritising their loyalty programmes. Not only do the schemes provide important insights into consumer behaviour, but customers who are part of the Starwood programme, for example, spend 20 per cent more per room and spend more while they are staying at a hotel.
Consolidation helps build bigger loyalty programmes which then in turn attract more members and offer a greater range of benefits. InterContinental has the largest rewards scheme, with 84 million members, with Marriott having 49 million and Starwood 20 million. By comparison, Delta Air Lines and American Airlines both have between 90 million and 100 million members.
— Financial Times
