HOTELS' 325
InterContinental Hotels Group steps back into the corporate chains’ top spot, thanks to assertive franchise growth and Cendant’s aggressive housecleaning.
By Mary Scoviak, Contributing Editor -- Hotels, 6/30/2004 11:00:00 PM
InterContinental Hotels Group’s leap-frog over Cendant Corp. to the top spot in HOTELS’ 2004 Giants ranking is more about strategy and timing than numbers. There is no comparison between the growth tracks of the demerged and reorganized IHG and Cendant, which is just completing a systemwide housecleaning. What is important about IHG’s gains, and those of eight of the other Top 10 companies, is that they signal a new way of playing markets constantly in flux.
Think Small, Strategic
Big deals are off the radar, unless you are Starwood Hotels & Resorts, which at press time was still assessing the potential of Le Méridien Hotels & Resorts. Most chains are not willing to trade a heavy debt burden for numerical growth at a time when a single event can drop occupancy to 10% overnight. “Big corporate acquisitions will remain on the back burner. The return on investment just is not there given the price levels,” says Peter Cashman, Choice Hotels Europe’s London-based COO. The Giants’ growth engines more likely will be fueled by small, strategic acquisitions, such as IHG’s bargain US$15 million buy of the Candlewood Suites brand and Carlson Hotels Worldwide’s completion of the Park Inn purchase.
Organic growth is also on the agenda. Keen to maintain momentum that added 22,015 rooms last year, chains such as Accor will blend direct investments with partnerships, according to the requirements of the region and the brand. Benjamin Cohen, executive vice chairman of Accor’s management board, sees more partnership deals for upscale and midscale brands in areas “where the business context is sensitive,” such as Latin America, Africa, the Middle East and Asia Pacific. Bucking the trend of non-capital intensive growth, Cohen favors direct investment in Europe, “especially for economy brands that represent 60% of our expansion.”
Watch for more franchising, too. Hilton International launched a franchise division to look for expansion in Europe and IHG made it clear franchising would be a priority tool for global growth—a quick way to grow the numbers without eroding capital earmarked for investment in must-have destinations or opportunistic deals.
New Flags
Niche plays are still hot. New brands such as IHG’s Hotel Indigo, Marriott International’s Bulgari, Sol Meliá’s Hard Rock Hotel and Choice Hotels International’s planned “lower/upper scale” product are being launched to expand portfolios and reach. “The future of the industry will be all about families of brands, with guests developing relationships within the brand families to meet their different travel needs,” says Richard North, IHG’s CEO. “We will see guests migrating to bigger companies that offer brands at different price points with other scale benefits, from loyalty programs and ease of booking to a wide choice of destinations and consistent quality standards.” Does that mean further declines for smaller brands? “We expect so,” North says.
The results of 2003’s ranking are proving him right. Last year was good to the big, established brands. The Top 10 powered ahead. But, the bottom tier of the 25 largest corporate chains showed the stresses of three tough years. Only TUI Group, Extended Stay America and La Quinta Corp. managed to grow their rooms portfolios. Le Méridien Hotels & Resorts’ aggressive development teams nearly managed to keep the numbers at par; Sol Meliá and Club Méditerranée both shouldered fairly major declines; and Interstate Hotels & Resorts realigned its portfolio during its first full year of operations after the 2002 merger with MeriStar Hotels & Resorts.
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Still, the Top 25 had all the usual names. It is well below these bastions that the real vulnerability is being felt. Weaker brands looking for salvation and successful niche or regional players looking to cash-in on their success could be this year’s targets. “I would not be surprised to see large chains gobble up the small ones,” says David Goldberg, Choice Hotels International’s vice president, corporate and brand strategy and treasurer. “Smart, small companies will be acquired. The rest will just continue to lose money and rooms.”
Contraction is not always reactive. It has become a strategy for the downturn. Cendant Hotel Group’s decision to drop more than 265 substandard hotels was its corporate take on renovating during the downturn. Pared down to a core of quality hotels, Cendant is targeting 175 U.S cities and aggressive international growth. “Expansion abroad is a strategic imperative,” says Steven A. Rudnitsky, Cendant Hotel Group’s chairman and CEO. “Yes, we expect demand improvement for U.S. hotels this year. But international expansion will expand our customer base, broaden awareness of our brands and leverage our resources.” Cendant’s master licensing deals with China’s Frontier Group Pte and Ireland’s Premier Hotel Management are the first steps in this new direction. The success of Carlson’s master licensing agreement with Rezidor SAS Hospitality has many companies taking a second look at a business model that has been on the shelf after years of mixed results.
Growth Gap For Consortia
Strength at the top is a theme for the consortia as well as the corporate brands. Pegasus Solution’s acquisition of Unirez late last year and VIP International’s juggernaut-like growth dwarf the efforts of the other consortia. Only six other marketing and reservation services in the Top 25 consortia managed anything close to substantive growth. But the interruption should be temporary.
Consortia such as Design Hotels are pinning future growth on an expanded service menu, from a la carte pricing to a bold plan for direct investment. “To grow, you have to find your place. Contemporary hotels are more likely to choose us,” says Claus Sendlinger, CEO, Design Hotels. “If they’re traditional, they might want to go with Small Leading Hotels of the World or Small Luxury Hotels.” As for start-ups, the situation will be tougher, Sendlinger says. “It is hard to build a service now unless you have a lot of money. This is not a high margin business, and it is hard to raise money.”
The definition of what consortia means is getting broader. This list combines technology providers such as Unirez to soft brands such as SRS-WORLDHOTELS to marketing and representation service provides such as VIP International and Pegasus Solution’s Utell. Is there room for all? “For now, on a global basis, yes there is room for all of us to grow,” says Rick Shaum, VIP’s senior vice president of sales and marketing. “There are hotels in many regions that have not even started to maximize electronic distribution. Something will have to give as the proliferation of companies exceeds the number of new hotels coming online. But that will take several years to play out.”
Roland Tanner, vice president, product management, Pegasus Solutions, says controlled growth may not be a bad thing. “You will see consortia getting smarter about the hotels that join. The same will apply to consolidation. With Unirez and Utell, Pegasus now can offer different services at different price points. There is also a place for the smaller players who are strong in a certain niche or region. The ones who survive will be those that drive demand and out compete the brands and the big representation companies,” Tanner adds.
Fragmentation in the European market and even in parts of Asia Pacific should increase the survival rate for some regional brands.
The success of the consortia is finally reawakening an interest in independent hotels. Companies such as Destination Hotels & Resorts that are growing their portfolios strategically see a choice for owners in the branding versus non-branding decision. “It may be necessary to franchise a hotel that is a commodity. But, if the property is unique, it can marketed as its own brand,” says Charles Peck, COO of Destination Hotels & Resorts, which hopes to double its portfolio within five years.
About The Ranking
Data for HOTELS’ 325 is gathered through a questionnaire sent to hotel company contacts, who are asked to report the number of hotels and guestrooms as of December 31, 2003. Companies that do not respond are subject to an estimate through the use of public information, local consultancies and corporate Web sites.
In some cases, rooms and hotels are counted more than once because HOTELS chooses to separately report data from owners, managers and franchisors on the same list. For example, Carlson Hospitality Worldwide’s data includes properties managed or franchised by its joint-venture partner, Rezidor SAS Hospitality, which has its own listing in the ranking.
HOTELS would like to shed light on some notable changes in the ranking, including the addition of the Candlewood branded hotels to the InterContinental Hotels Group listing. Data for fledgling CNL Hospitality Corp. includes the recently acquired KSL Resort properties, a deal which was announced early in 2004. AFM Hospitality Corp. was very busy in 2003 and their listing reflects the acquisition of Trigild Services, but not Boutique Hotels & Resorts consortia, which AFM now runs as a separate company. The ranking also reflects Hankyu Group’s acquisition of Dai-Ichi Hotels and Interstate Hotels & Resorts acquisition of Flagstone Hospitality Management.
Among companies changing names this year are Caesars Entertainment, formerly Park Place Entertainment; Suburban Franchise Systems, formerly InTown Suites; The Falor Companies, formerly Allied Hospitality; and Homestead Studio Suite Hotels, formerly BRE/Homestead Village LLC.
View the rankings:
HOTELS' Corporate 300 Ranking | HOTELS' Consortia 25
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