2002 HOTELS' 325

By Mary Scoviak, Contributing Editor -- HOTELS Magazine, 7/1/2002

The status quo of the upper echelons of the HOTELS’ 325 ranking seems ironic after one of the most tumultuous years of the last decade. But it demonstrates clearly how much more sophisticated hotel companies have become. Better financial structures, strict discipline at the negotiating table and unexpected levels of operational flexibility left the giants virtually unassailable, even in the aftermath of the tragedy of September 11 and the wake of an economic downturn.

The overall gains of less than 150,000 rooms by the Corporate 300’s Top 10 are a sign of last year’s troubled times. Cendant’s Hospitality Division’s “Ramada Revitalization” program eliminated a significant number of properties from the brand, a factor largely responsible for Cendant’s 1,317-room decline from 2000 to 2001. Best Western International contracted by 5,510 rooms in 2001, just in time to prepare for a growth push to add 300 properties this year.

The deals that were completed were simply strategic. Most followed the template of Six Continents Hotels & Resorts’ long awaited buy up of Compass’ Posthouse portfolio, which offered critical mass in the UK mid-tier. Hilton rose from 14th to 12th by freeing up investment funds through its trendsetting sales/leaseback deals and continued organic growth. Marriott International capitalized on a deal pipeline that delivered nearly 35,000 rooms to its portfolio last year, while Accor benefited from expansion in Central Europe, Asia and North America. Sol Meliá edged up one spot as it realized the pay-off for previous deals to extend its domestic presence and open new markets such as Paris.

Spain’s NH Hoteles was one of the few big gainers in this year’s rankings, rocketing up from 82 to 39 thanks to a series of distribution-building acquisitions. Although NH subsequently sold off Golden Tulip Worldwide in a management buyout, its recent acquisition of Astron should galvanize its position.

For many companies, it was the deals that did not happen that made news. MeriStar Hospitality saw two deals shelved, the first with American Skiing and, in the crisis environment of 9/11, a merger with FelCor Lodging Trust. Six Continents still is sitting on a massive war chest, leaving the industry to debate the pros and cons of returning cash to shareholders versus putting the capital to work in an acquisition. The fate of Wyndham International remains undecided as prospective suitors come and go. Starwood Hotels & Resorts’ Ciga portfolio retains its “for sale” sign, but no take-all buyer has emerged.

It is unlikely anything will catalyze another wave of consolidations moving into the early months of 2003. “The available field for multi-unit acquisition is small. And there is not much incentive,” says Jay Witzel, executive vice president Carlson Hotels Worldwide and president and COO Radisson Hotels & Resorts. “Most big-company acquisitions have not been accretive. Deals are easy on paper, but hard to execute day to day. With that in analysts’ minds, public companies will be under incredible scrutiny when it comes to acquisitions.”

Corporate 300

Organic growth, regional deals drive expansion for the world’s biggest chains.

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Top 300 by Number of Hotels
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If September 11 had never happened, it is doubtful the top ranks of the Corporate 300 would have looked much different than they did at the close of 2001. Without accretive deals to be done, even cash-rich companies chose to concentrate on niche plays and organic growth to achieve their targets. That trend is likely to keep these rankings fairly stable in the near term. Tom Keltner, Hilton Hotels Corp.’s executive vice president and president, brand performance and franchise development group, echoes the industry’s thinking with his prediction of a slow deal pace for at least four to six months. “Buyers want to buy off today’s cash flow, while sellers want to sell off 2000’s cash flow. There will be a few deals, generally. Sellers can wait because they know it is going to get better,” he says.

All eyes will be on Six Continents in the near term. Company officials have reserved comment on the ongoing speculation as to whether Six Continents will return cash to shareholders or deploy parts of massive war chest into significant acquisitions. What they will say is that the world’s second largest chain has no plans to change its strategy. The job at hand is managing the nearly 70,000 rooms in its development pipeline and using the US$860 million earmarked for development this year for a blended program of renovation, new-build activity and acquisition of other landmarks such as the Regent Hong Kong.

“We have set ourselves the period of the downturn to evaluate the use of funds,” says Dee Cayhill, vice president and head of media relations. “We have been driving hard on a rapid route of organic development, but at the same time we have been reviewing larger consolidation opportunities. Any deal would have to meet not only distribution criteria but financial criteria.”

Most industry experts say that finding deals to meet these parameters will not be easy in the short term. The days of buying brands to meet analysts’ expectations are over, especially since most of the major brands no longer have gaps to fill.

Expansion Targets

Steve Holmes, chairman and CEO of Cendant’s Hospitality Division, says 2002 will be fairly flat for Cendant, while 2003 should return this giant to an annual growth track of 20,000 to 30,000 additional rooms. However, “flat” is not even in the vocabulary of giants such as Marriott International and Accor. Armed with a full cadre of brands, J.W. Marriott Jr., chairman and CEO of Marriott International, forecasts the addition of 25,000 to 30,000 rooms worldwide in both 2002 and 2003, with roughly 25% of that growth coming from outside North America. Conversions will be part of that growth strategy, especially in areas with a slow economy. Marriott’s call on the market is that the supply environment “has not looked this good in years.” The hold on supply growth bodes particularly well at a time when demand is expected to return on the heels of economic recovery.

With fewer deals coming to market, international forces such as Accor will have to continue to shop the world to fuel their deal pace. In addition to opportunistic moves such as the recent acquisitions of Century International Hotels and Zenith to secure a bigger hold on the Asian market, Accor is moving in other directions similar to its competitors. For example, Accor has a joint venture with China’s Jin Jiang group to establish a hotel sales and distribution network; regional deals with Poland’s Orbis and Germany’s Rema; and more flexible investment options that match the financing profile to the potential of the deal. This strategy will bring more than 220 Accor brand hotels on line this year, including 16 in the Arabian Peninsula.

Still digesting its Tryp acquisition, Sol Meliá is looking at single assets deals to fill gaps in cities such as Berlin and Zurich and getting the 65 hotels in its pipeline open, says Luis del Olmo, executive vice president, marketing and sales. Gateways will be hotbeds of competition for international chains.

Expanded product offerings position companies such as Le Méridien to shop for boutique opportunities for its Art + Tech brands as well as traditional luxury hotel deals and its new push to bring luxury to gateway airport locations. CEO Juergen Bartels has set a goal of adding two hotels a month.

Mid-Tier Spread

The budget and mid-market segments will account for much of this year’s expansion among chains around the world. It tops Accor’s growth plans with 55 Ibis, 45 Etaps, nine Formule 1, 25 Motel 6 and seven Red Roof Inns set to open before year’s end. It also dominates the targets for Mexico’s Grupo Posadas, which plans to add 30 net hotels this year, the majority of which will be mid-tier Fiesta Inns.

More affordable to finance, mid-tier and limited service also dominate the growth plans of companies such as Hilton Hotels Corp. “It is going to be hard to find anyone willing to put up US$50 million to US$80 million for new construction,” Keltner says. The most appealing deals will be those that can be financed by local or regional institutions who know the markets and the brands. Faster paced growth for limited-service Hilton Garden Inns, Hampton Inns and Homewood Suites should fuel Hilton Hotels Corp. toward its goal of opening 130 to 160 hotels this year.

Consortia 25

Efficiencies of scale and volume growth keep the leaders firmly on top.

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In 2001, the big news concerning the Consortia 25 was not revolutionary changes in the rankings, but evolutionary changes in the companies themselves. Most used the last six months of the year to accelerate the rollout of business-rebuilding marketing programs and support services that fine tune yield with more sophisticated management of distribution channels. The issues facing the leading consortia now deal as much with optimizing rate delivery as driving sales through the GDS and the Internet.

Looking For Growth

Looking beyond service issues, the Consortia 25 has put growth back on the agenda for the next 12 months. “We can expect to see more consolidation activity late in 2002 and 2003. Deals could be on two levels: giants acquiring each other, and consolidators looking to fill geographic, product or business niches,” says Mark Wells, Utell’s president and CEO.

Shawn Heaton, new president at Lexington Services, Irving, Texas, agrees that consolidation will continue but “only if new providers deal with real cost and revenue models, and the economy continues on its current trend.”

Companies may have to look hard to find deals that fit these parameters, cautions Marshall Calder, Leading Hotels of the World’s senior vice president, brand management. “A lot of deals have been done already. There are not too many players to consolidate,” he says. More likely in the near term will be synergistic deals, such as the combination of Lexington with World Choice Travel, ABC Travel and other MyTravel companies, and joint ventures, such as Leading Hotels’ quality assurance, group sales, financial and marketing services.

One avenue that could shake up the upper echelons of the Consortia 25 is the specter of vertical integration by hotel companies following the Cendant/Galileo template. Another is niche-driven organic growth. The success of Leading Small Hotels may spawn a Leading spa brand and a resort brand in the near future. “Growth has never been a problem. In fact, in the six months after September 11, we had more applications than in any six months in our history,” Calder says. “But, we do see annual growth declining from the 10% of the last two years. New concepts that lessen confusion, like Leading Small Hotels, present greater opportunities.”

Where the Consortia 25 will concentrate growth depends on their portfolio needs. Watch for Utell to grow distribution in Canada, Mexico, Central America, expanding South American economies such as Brazil’s and strategic locations in Asia Pacific. SRS-Worldhotels is mounting a major growth push this year, not only to build on a strong base in Europe but also to expand its presence in North America, Latin America and Asia. Europe will be the prime target for groups such as Lexington Services, which recently established a European corporate division to eliminate dependence on representative groups.

Expanding Service Menu

The increasing viability—some would say financial necessity—of outsourcing capital-intensive aspects of reservations technology are pressuring marketing and reservation services to compete for membership/clients with expanded services that deliver overall performance enhancement. Initiatives such as New York City-based Leading Hotels of the World’s joint ventures to provide quality assurance, group sales assistance, financial services and marketing services are taking their place alongside traditional marketing/reservation skills as key selling points. “We do everything except manage the hotel,” says Calder, summing up a trend that is redefining what members expect from companies that once simply booked room nights and delivered marketing assistance.

Marketing and reservation services also are cultivating a partnership role in the management arena. “One has to concentrate on increasing a hotel’s RevPAR at the optimum cost rather than just encouraging channel switching without increasing or even maintaining a hotel’s revenues,” says Michael Ball, SRS-Worldhotels’ recently appointed CEO.

Matching the expectations of suppliers and buyers “in the most productive and cost effective manner” is fueling developments in rate process automation. Linking travel buyers to rates solicited directly from member properties increases transparency for buyers, while new net rate offers give hoteliers channels for selling “last minute” or distressed inventory at the best achievable rate.

Programs such as these are aimed at countering the market share gains being made by low-cost providers and intermediaries who base their business almost solely on pricing. “Low-end providers have gained some market share, but it has been much slower than their investors had expected,” says Heaton of Lexington Services. “There are questions about future enhancements for these companies due to lack of funding rather than lack of investment capital.” Ball also questions the staying power of providers “who create a business built on price manipulations.It will be interesting to see how these companies that cropped up virtually overnight fare in the longer term,” he says.

Still, the need to address incursions from no-frills providers is pushing leading consortia to further differentiate themselves with upgrades such as Lexington Services’ enhancement of its SPIRIT© hotel reservation system with detailed Web-based property information, revenue and marketing management services, advanced reporting capabilities and direct interfaces. “All services will have to explore the available distribution channels to help members achieve maximum revenue. Interfaces, like our interface with SABRE, allow their properties more flexibility and enhancements in rate processing as well as product display,” Heaton adds.

Eliminating Confusion

Managing distribution channels, whether in terms of product display or differentiation, will be a major issue for the consortia. Services are already helping members partner with proven Internet sites to capture e-mail address information, cost effectively target direct marketing to e-mail customers and improve proprietary Web sites. “The potential of the Internet is excellent, but it is an enormous audience. Communication and pricing logic processes remain great challenges,” Heaton says.

Intensified branding efforts should streamline this communication process. Whether they simply segment a massive portfolio such as Utell’s into easily understandable “selections” from luxury and airport hotels to apartments, classify hotels by category, as does SRS-Worldhotels, or incorporate the service’s name as a brand, as does Leading Hotels of the World, the Consortia 25 are answering travel buyers’ demands for an easy-to-navigate product line.

This is a valuable tool for selling in the professional medium of the GDS, but even more important for growing Internet business generated by travel planners as well as individuals who want to control their travel plans directly. Managing the potential of the Internet is a priority at a time when year-over-year sales increases are typically 150% to 200%. Whether one shares Ball’s view that the Internet is an enabler or Calder’s view that it “has a big impact on where business is going,” it is clear that consortia see Internet skills as a primary sales tool. “The Internet gives us an opportunity to have more dialogue with our customers, and we have to use that opportunity to tap e-commerce’s potential,” Calder says.