It’s no secret that the global hotel industry is currently in a state of flux. As online travel agencies (OTAs) such as Expedia and other industry disruptors such as Airbnb continue to shift the industry landscape in ways we could not forsee, traditional hotel companies are increasingly moving to consolidate in an effort to remain competitive.
In the past year or so alone, significant mergers and acquisitions made headlines. Last April, for instance, Bethesda, Md.-based Marriott International, Inc. acquired Toronto-based Delta Hotels and Resorts. The $170-million transaction helped Marriott beef up its Canadian portfolio by adding 37 properties and nearly 10,000 rooms in more than 30 cities across the country. The transaction also increased Marriott’s distribution in Canada to more than 120 hotels and 27,000 rooms.
Then, in late December 2015, Paris-based AccorHotels announced its intention to purchase FRHI Hotels & Resorts, the parent company of three iconic hotel brands — Fairmont, Raffles and Swissôtel — in an effort to create a worldwide luxury hotel giant. It signed the agreement with the Qatar Investment Authority, Kingdom Holding Company of Saudi Arabia and Oxford Properties, an Ontario Municipal Employees Retirement System (OMERS) company, last December in a deal worth approximately $2.9 billion U.S. in cash and shares. The deal will add 155 hotels and resorts (40 are currently under development) and more than 56,000 rooms worldwide to Accor’s portfolio, which operates Ibis, Sofitel and Novotel, among others.
Perhaps the biggest acquisition news in recent months is Marriott’s deal to acquire Stamford, Conn.-based Starwood Hotels & Resorts Worldwide. The story began in late 2015 when Marriott offered to acquire Starwood for $12.2 billion. Things took a dramatic turn in March, as the previously agreed-upon deal was overturned by China’s Anbang Insurance’s offer of $13.2 billion, or $78 per share in cash. Starwood accepted Anbang’s offer, but Marriott struck back just days later with a higher offer, valuing Starwood at $77.94 per Starwood share or $13.3 billion. When Anbang suddendly withdrew its bid, Starwood accepted Marriott’s sweetened deal, creating the world’s largest hotel company with more than 1.1 million rooms in 5,500 hotels worldwide and more than 30 brands.
Dramatic M&A activity aside, the real question is whether consolidation is financially benefical for the hotel industry. For the most part, the answer is yes, according to industry insiders. “As the companies get larger, they’ll generate substantial economies of scale when it comes to purchase agreements with suppliers, as well as more of a balance of power in dealing with the larger OTAs like the Expedias of the world, which are trying to eat into their distribution margins,” says Edward Khediguian, Montreal-based SVP of Franchise Finance at GE Capital Canada. “The brands almost have to get bigger.”
Bill Stone, EVP at CBRE Hotels Canada in Toronto, agrees. “You have the disruptors out there, like the Airbnbs … and just having a larger base to draw on helps you, to some degree to compete against them.” From this perspective, the ability to combine loyalty programs may be one of the most practical benefits of conconsolidation. “I think loyalty programs will be more important,” says Khediguian. “So the big brands, as they consolidate, will go ‘best in class’ in terms of what’s the best loyalty program among all the brands that they’ve consolidated, and then drive better quality, incentive-driven loyalties that are CRM (customer relationship management) based, such as knowing your customers’ travel patterns, interests and feedback. That will be one of the key pillars of what will make consolidation relevant.”
Douglas Quinby, VP of Research at the U.S.-based tourism, travel and hospitality research firm Phocuswright, concurs. “The aggregate entity of a Marriott and Starwood, or the Accors and Fairmonts, has the ability to offer that much more inventory to loyalty program members. And that’s especially important as hotel companies try to compete with online travel agencies in particular,” he says. “The reason why consumers go to OTAs is they’ve got everything under one umbrella. You can see everything, you can compare everything and you can see all the prices and options.” But, by forming a mega-conglomerate offering a wide breadth of brand variety in varying categories that will also reward clients for being loyal, he says, you can offer something that will give the OTAs a run for their money.
As Quinby explains, travellers no longer fit into a singular profile — the exact same person will often choose different categories of accommodation depending on their current need. For instance, someone may choose a mid-scale brand when travelling on business, an economy brand when travelling with their family on vacation, and they may splurge on a high-end luxury brand for an anniversary celebration weekend with their spouse. “So, the more inventory, the more options, the more rates, the more prices that [a hotel company] can offer to travellers already within its hold and loyalty program, who it can market to directly, the better its marketplace advantage,” he says.
Loyalty programs aside, another benefit of consolidation includes the traditional upside which would occur with an acquisition in any industry: cost savings due to operational efficiencies. This, of course, is likely to drive profits and have a positive impact for shareholders. “If you acquire a company and there are operating efficiencies — because you don’t have to duplicate certain functions — there are going to be savings,” says CBRE’s Stone. “So, I think there are definitely going to be some benefits there, particularly for the company doing the acquiring.”
Interestingly, Khediguian speculates on another potentially unexpected side effect of consolidation — individual hotel owners who simply decide to forego brands altogether. As the brand-holding franchisors get larger through consolidation, “they’ll be able to dictate terms a little bit more heavily,” he says. “But if that’s pushed too far, then [property] owners may go the other way and move away from branded franchised product.” With the proliferation of OTAs and the increased power of online reviews (“People are actually listening to online reviews now,” says Khediguian), the power of a known and trusted brand may no longer go as far as it used to. So a hotelier who builds up stellar online reviews may actually be able to compete just as well as an independent if they decide they don’t like the terms of the franchisor. As Khediguian notes, consolidation will likely “give the disaggregators a run for their money, but the disaggregators won’t go away.”
One thing experts seem to agree on is that there will be more mergers, acquisitions and overall consolidation in the hotel industry in the coming months. “It is going to happen,” says Stone. “It is all about consolidation right now, especially at the brand level. We do anticipate others in the next 12 to 24 months.” Quinby adds that he expects some of the smaller brands out there are certain to be feeling the pressure to merge, and he wouldn’t be surprised if there are talks going on among brands like Hyatt, Hilton, Choice or Wyndham right now. “I can’t imagine that all of these folks aren’t talking to each other and looking at potential transactions,” he says. “It’s going to be very difficult for them to compete with the economies of scale of a Marriott/Starwood tie-up.”
By: Carol Neshevich
Volume 28, Number 3