Waiting For The Turnaround
Latin America’s hoteliers shift to domestic and regional targets is raising occupancy, but rate remains the issue moving into 2003.
By Mary Scoviak, Features Editor -- HOTELS Magazine, 10/1/2002
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Any realistic hope of recovery is at least 12 months away for Latin America’s hoteliers. Barring some quick and unexpected turnaround in the United States, recession will continue to take its toll over the next year, especially in terms of rate. Challenges stemming from currency devaluation, political uncertainty, high operating costs and, in some markets, oversupply are likely to make 2003 a year many Latin American operators will want to forget.
What good news there is should come from economy and mid-tier hotels in the secondary cities of Mexico, Brazil and, to a lesser extent, Central America. Steadier domestic and regional mid-spend business travel—paired with developing mid-tier leisure tourism—is creating pent-up demand for standardized, quality hotel product in destinations beyond the gateways. France’s Accor, Brazil’s Atlantica Hotels International, Spain’s Sol Meliá, Mexico’s Grupo Posadas, El Salvador’s Grupo Real and a small group of U.S.-based franchisors are among the 2- and 3-star pioneers that proved the potential of branded, mid-priced hotel networks in Latin America. Last year proved how insulated some secondary markets were, with occupancies sometimes double that of their gateway competitors.
How large and how vulnerable the middle class is changes from country to country. However, Brazil and Mexico have rewarded start-up 1- to 3-star hotels with turnaround times frequently starting at six months. Moving into 2003, these properties should be well positioned to hold or increase market share. The decisions of some global companies to locate in secondary cities guarantee a regular flow of weekday travel. So, while São Paulo’s 5-star hoteliers are bracing for an extended rate war, Atlantica’s Choice Hotel International branded mid-tier Comfort Inn and economy Sleep Inn properties in Brazil’s secondary markets expect occupancies to hold in the mid-60s or above with rates at, or in some cases above, this year’s US$35-US$45 average.
Chieko Aoki, president of luxury São Paulo-based Blue Tree Hotels, agrees that low-priced and economy hotels “will continue to be very successful” but predicts “at least” a 10% decline in rate and occupancy in all segments next year, with the steepest declines in over-supplied markets. “Price-sensitive guests will continue to choose the lowest room rates,” she says. And, they will continue to travel. In her view, the devaluation of Brazil’s real will have its upside. Devaluation makes Brazil more affordable for international travelers and more cost-effective for locals whose travel budgets will buy less abroad. This should improve performance for Brazil’s large crop of new or newly renovated resorts in 2003. Brazil’s more aggressive business hotels could “normalize” in the second half, Aoki forecasts.
Pent-Up Mid-Tier Demand
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Making major gains will be difficult in a country with 25,000 rooms under development. Guilherme Cesari, associate, HVS International, São Paulo, says the current pipeline will grow Brazil’s chain-controlled room supply 40% by 2006. Nearly 8% of that total will be controlled by Accor, which has more than 10,000 rooms under construction. “This will guarantee Accor leadership far into the decade,” Cesari says. Sol Meliá, which already has 12,071 rooms and nearly 50 hotels in its Americas division, has dynamic growth plans for all segments. Nearly 20 mid-range Meliá Confort and Sol Inns are opening this year and next along with boutique hotels, a few luxury business/conference hotels and resorts.
In general, Brazil has been richer ground for local and European hotel companies, which control 47% and 39% of the chain-operated category, respectively. American companies account for only 14%. “Still, large chains will dominate Brazil in a short time,” Cesari adds. In the market for the long term, they are betting on Brazil’s strong internal tourism market and its positioning as one of the world’s four largest emerging economies—along with China, Russia and India—to fill rooms and, eventually, sustain rate.
Blue Tree, with 1,639 rooms under development, hopes to tap the business/leisure potential of Northeast Brazil. Local government investment in airports and road infrastructures are stimulating both private investment and tourist demand. Already established as a leisure destination, the area is maturing as a business center as companies attracted by tax incentives and lower labor costs sidestep the Southeast.
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Paul Sistare, Atlantica’s president and CEO, has 35 deals with 5,000 rooms in the pipeline in Brazil. Most will be branded with Choice Hotels International’s Comfort Inn and Sleep Inn flags. The Radisson brand will be reserved for city centers where Atlantica is positioning it to out-compete older, more expensive luxury properties. Sistare has identified potential not only for these mid-spend concepts in secondary cities with populations that often exceed 100,000, but also for a “third generation,” down-sized Sleep Inn prototype that can be built in tertiary markets for US$25,000, including land costs.
Hilton Hotels Corp., Beverly Hills, California, which oversees brand development in Mexico under a special agreement with Hilton International, reports a 30%-40% increase in development inquiries over last year, largely driven by interest in mid-tier Hampton Inn and limited-service Embassy Suites. “A lot of interest is coming from the real estate side,” says Nelson Diaz, Hilton’s vice president in charge of franchising. Real estate still is viewed as a safe harbor, especially when connected with a strong brand. “The franchising model is well accepted in Mexico. And, the Mexican market is extremely stable. Still, you have to do a tremendous amount of due diligence to make sure you are working with someone who looks solid and is,” he adds. Diaz sees further expansion potential as many of the 10-year licensing agreements offered by other brands begin to expire and smaller, regional brands, weakened by the last 12 months, “want to be plugged into a worldwide network.”
Gastón Azcárraga, chairman and CEO of Mexico City-based Grupo Posadas, says close to 90% of the 30 hotels planned to open each year will be in the core, mid-priced Fiesta Inn brand. The main targets are in Mexico, but further development is planned for its mid-tier Caesar Business brand in Brazil. Cendant Corp., Parsippany, New Jersey, also sees “untapped opportunities” for budget, economy and mid-priced hotels in Latin America’s emerging markets.
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In Latin American development, stability is the key word. “The political and economic situations in most countries, with the exceptions of Mexico and Chile, are seriously affecting the outlook for short-term development,” says Guillermo Rocha, the Mexican-based Howard Johnson master franchisor for Latin America and the Caribbean. “Financing is another stumbling block. It is not easily available. When it is, the local interest rates make it impossible to undertake projects.”
Mexico has another potent draw beyond its increased stability: A middle class of nearly 60 million. Although that middle class has tended to grow and contract with Mexico’s economy, Azcárraga, like industry analysts, now sees enough fundamental strength in the domestic economy to support, if not expand, a middle class with enough discretionary income to travel. Economic maturation has brought the benefits of bigger markets, 4% inflation and 5% interest rates, but it also has increased the sophistication of deal making. “One of the biggest surprises for international companies is that development in Mexico is complicated and that land is not cheap,” Azcárraga says.
In Central America, Fernando Poma, president of Grupo Real, Santo Domingo, predicts regional trade agreements will generate new demand in the economy and mid-tier. With six Inter-Continentals open in Central America and the United States, and another under construction in the Dominican Republic, Grupo Real is testing this demand by shifting its development focus to mid-priced Comfort Inn products. Though most will be freestanding, in Panama Grupo Real is reworking the mall/hotel concept that proved successful for its 5-star properties to create a 3-star mall with a mid-priced hotel component.
Linked to construction powerhouse, Grupo Roble, Grupo Real specializes in new-build properties. The drop in interest rates from 18% to 7.5% combined with the Grupo Real/Grupo Roble construction synergies makes it cheaper to build than buy. That may not be true for competitors. Local lenders continue to be wary of hotels and companies lack of knowledge of Central American markets. Grupo Real is taking advantage of its track record not only to get a jump on competitors in the mid-market, but also to explore creation of a no-frills super-economy concept it would operate under its own brand.
Christian Charre, vice president, Jones Lang LaSalle Hotels, Miami, confirms the strength of second-tier cities. “In countries such as Brazil and Mexico, business travelers used to stay with friends or family because there was no suitable hotel product. Until recently, there was nothing for the domestic market and that created a lot of under-served demand,” Charre says.
Room For Resorts
Charre also likes the prospects for the resort market in key Latin American destinations. Though rate may trail, he forecasts that occupancies will be up as travelers with devalued currency choose to stay closer to home. Brazil’s Costa da Sauipe reported an upswing in occupancy in late December 2001, a time when most urban hotels were feeling the crunch of Argentina’s financial woes and the North American recession.
Resort development in Latin America is a matter of finding the right niche. SuperClubs Resorts is broadening its family-oriented Breezes brand with the addition of two resorts being reflagged in the Dominican Republic and further expansion in Brazil. “The Bahia region is ripe for discovery by Americans, and Varig’s new airlift will help us put this and other projects planned for Brazil on the U.S. traveler’s map,” says the Hon. John J. Issa, executive chairman, SuperClubs Resorts, Kingston, Jamaica. “As with family travel anywhere, affordability is key.”
Given SuperClubs’ strong performance in markets such as Curaçao and Brazil’s Costa do Sauipe, the company will continue to target areas with natural resources that differentiate the resort and expand the menu of activities. “Latin America is an emerging destination, enjoying the benefit of novelty. But it is also unfamiliar territory—and forbidding to some. You need to balance the exotic with the familiar to make it work,” Issa says.
The resort sector also has room for further upscale development. While Dallas-based Rosewood Hotels & Resorts is “actively looking” at Mexico City, the luxury operator plans to announce a project in the Tulum area of Yucatán before the end of the year. “Ninety-percent of the opportunities are in the new-build arena,” says Tom Hendrick, Rosewood’s vice president, development. “Since lenders have become more conservative, developers are doing more mixed developments as a means to finance hotels.” Five-star projects such as Rosewood’s Punta Mita can still get done provided they have residential components to generate early returns.
Hendrick contends luxury products are opportunistic plays in Mexico. “As markets mature, you get larger growth in the luxury segments. In Mexico, this has been largely untapped,” he says, pointing to the success of the Rosewood-managed Las Ventanas al Paraiso on the Baja, which “enjoys the highest rate and occupancy in Mexico.”
Luxury products such as Rosewood’s resorts and the Pueblo Bonito properties on the Pacific side of Cabo San Lucas are bringing new markets to Mexico, according to Alfredo Rosas, corporate sales and marketing director for the Los Cabos Tourism Board. He predicts a 5-8% increase in rate and occupancy for Mexico’s resorts. “Golf, spa and eco-tourism are new markets for Mexican destinations,” Rosas says. “There are also new geographic destinations. A key factor in their performance involves partnership with the airlines. Unfortunately, they are not structured to respond to the hotel industry’s immediate needs, which could prevent faster growth.” Pueblo Bonito is among the luxury operators that have found sites in established markets, including a 200-room luxury hotel that opened in September, a mixed-used golf resort with residential units and hotels and another property in Puerto Vallarta.
Nick Ward, vice president, international development, Marriott International, sees room for several Marriott brands in popular destinations such as Los Cabos. Although some conversion opportunities may emerge for brands such as Renaissance, Ward contends that lack of comparable product makes acquisition an unlikely vehicle for growing 5-star Ritz-Carlton and mid-priced Courtyard by Marriott. Courtyard could be a solid growth vehicle both in Mexico and the Caribbean. Airport development may surface as another important trend for mid-tier properties in more stable Latin American nations.
Contrarian Plays
Below these consensus opportunities are options with higher risk/reward ratios. A major one is Argentina. While Sistare maintains Argentina “will go down before it goes up.” Paul White, Orient-Express Hotels’ vice president of operations and development for Latin America, “expects to see increasing interest in Argentina generally, but particularly in the south. The south of Chile is also a hot market.” White says that while Argentina’s financial situation has stalled hotel development, financial pressures on other hotels are creating acquisition opportunities. Orient-Express also has acquired a fourth hotel in Peru—another market that has drawn little international chain interest. “We have not yet upgraded it to true Orient-Express standards but expect to do so as demand re-emerges for this part of southern Peru,” White says. “Economic stability is the real key rather than simply potential.”
Charre agrees that Argentina does have opportunities to acquire properties at a fraction of their value. “But most Canadian and U.S. companies do not have the appetite for these deals,” he says. “Watch for the Spanish companies to be the most aggressive.”
The Caribbean, including Cuba, invites differing opinions. A rush of supply that slowed only toward the end of the 1990s leaves little room for expansive development, except in the Dominican Republic. Heavy competition, exacerbated by high operating costs, have most experts agreeing with Hyatt Hotels & Resort’s divisional vice president, Victor Lopez, who says, “It is going to be a rough road ahead.”
Thomas O’Neill, managing director, HCI Consulting, International, Miami, points to “a silver lining for repositioning opportunities and limited-service development.” He says currency instability, economic uncertainty and security issues have re-routed investment interest from Latin America to the Caribbean. Mixed-use projects with a substantial residential component are viable options for the Caribbean. Interval ownership also has good prospects, especially in the secure surroundings of established resort areas. The challenge will be the window for returns, which may be as many as two to five years away.
Puerto Rico is planning major tourism initiatives to fill the 2,425 new rooms (an 18% increase) coming on line by the end of next year and to at least start building a market for the 42 hotel projects under consideration. The rest of the Caribbean will be watching to see how far the Puerto Rico Tourism Co.’s Committee for Air Access gets in solving the nettlesome problem of matching airlift to demand throughout the region.
As for Cuba, the question of lifting the U.S. embargo continues to be one of “when.” Charre points to a recent U.S. poll that showed 80% of the respondents saw no reason to avoid doing business in Cuba. “Major Fortune 500 companies are putting on the pressure. They see European companies making a killing,” he says. The same applies to U.S. hoteliers who are sidelined while European chains such as Sol Meliá make their mark. “Yes Cuba is suffering a bit, but it is drawing off demand from the other islands because of its size and the diversity of its attractions,” he adds. The government’s short-term direction may become more easily discernible after Florida’s next gubernatorial election.
Other trends to watch include exotic, eco-tourism developments in Mexico, southern Brazil and Belize. Panama also is moving into the spotlight as a hub for Central American business and a showcase for the Miss Universe pageant —an event that draws more than a billion international viewers.
Brazil’s Companies To Watch
Whatever happens with the real and the election, Brazil remains the hub of the Southern Cone. Among the companies jockeying for position are:
Accor. The budget Ibis brand and economy Formule 1 will be the primary growth drivers for this French group in Brazil. Secondary cities look to be the major targets now that Accor has a presence in most major cities. Much of its growth to date has come through the condo-hotel structure, Brazil’s most popular vehicle for new property development. Strengths include its reservation system, while challenges include the refurbishment of old properties in oversupplied markets where owners may not be interested in making new investments.
Atlantica Hotels International. This Brazil-based company is a nice surprise. Launched by veteran Greg Ryan and nurtured by Paul Sistare, it is the country’s first independent, multi-branded hotel management company and has grown to be the second largest hotel company in Brazil. Strengths include its youth and the number of deals it has done. Challenges include delivering profitability to a fast-growing list of owners.
Blue Tree Hotels. The best condo-hotels in Brazil are managed by Chieko Aoki and her staff. Strengths include fantastic properties, good locations and sound management. The challenge is to convince owners that Blue Tree has the same capability to deliver as did Caesar Park when Aoki was at the helm.
Sol Meliá. Close to 99% of its properties are condo-hotels. Strengths include good properties, while challenges include heavy competition in oversupplied markets. It is time for Sol Meliá to show off its management skills.
Six Continents Hotels. The UK-based giant is moving into the condo-hotel market, but more carefully after seeing the ups and downs experienced by competitors. 6C has a strong franchising infrastructure but is challenged by the ability to create a Brazilian reservation system with the same power it has worldwide.
SuperClubs. This is a major surprise. Performing better than competitors in the resort market, it is developing two SuperClubs branded resorts and will manage urban properties with the Sonesta brand. It has strong momentum with four Sonestas opening in 2002 and 2003 and a track record in terms of performance. Challenges include posting urban hotel resort performance that matches the excellent results of its resorts.
Pestana Hotels. This Portuguese group caught the market unaware with its decision to invest in or acquire five hotels in the recent years. Strengths include its innovative style. The next move looks to be creation of a real estate investment trust structure for its hotel in Rio de Janeiro. The challenge: growth.
NH Hoteles. This Spanish company continues to build a strong presence in Brazil. It is well capitalized, but will face the challenge of finding the right deals.
Task Ahead For GMs
Capturing market will be the mandate for general
managers throughout Latin America in 2003. How to
get it, and how to maximize yield are generating
creative thinking throughout the region.
Francisco Zinser, CEO NH Hoteles Mexico: “Mexico is doing better that other Latin American countries, but we do not see this translating into RevPAR, rate or occupancy. Our largest market, the United States, is facing deep economic difficulties. Generating incremental revenue gets tougher every day. Though we will always be highly dependent on the U.S. market, we have made efforts to grow our market in Europe and some points in Asia. The Mexican government is analyzing several projects of interest to hoteliers—a tax refund policy with certain limitations and casinos."
Howard Friedman, president, The Americas, Hilton Group: “Rate growth and air lift are the two big issues facing hoteliers in the Caribbean. Volume has been achieved through discounting. Now the business needs to regain pricing confidence. We will see more concentration in specific niches such as honeymooners, divers, weddings, family vacations and golf packages, as well as more all-inclusive offers.”
Paul White, vice president, operations and development, Latin America, Orient-Express: “In the leisure markets, guests in Peru (especially those from the U.S.) are staying for shorter periods and want to pack in more experiences. In the corporate market, in Rio de Janeiro we see fewer guests from merchant and investment banks, but more from oil and pharmaceutical companies.”
Paul Sistare, president and CEO, Atlantica Hotels International: “Labor is not as easily controlled in Brazil. There is no part time; everyone works 44 hours a week. That creates a challenge for general managers. There is also uncertainty about the presidential election in October. Just as in the United States, there are different scenarios depending upon who wins.”
Chieko Aoki, president, Blue Tree Hotels: “Seasonality continues to be a challenge for resort operators. We hope initiatives to book business meetings and conventions will attack this problem. We have defined an action plan that includes greater efficiencies on the corporate and property levels; increased sales and reservation activities; centralized and corporate-controlled purchasing; and more detailed evaluation of our financial results. We have become more flexible in negotiating our management contracts, but keeping the principles of each party’s responsibilities clearly defined.”
Emanuel Schrebmaier, vice president, sales and marketing, The Americas, Sol Meliá: “We are no longer doing a one-year business plan; it is more like a 90- to 120-day outlook. The challenge for next year will be in finding areas where we can do better—not only in terms of cost savings but in terms of revenue generation and yield management. We have different plans for different markets: building FIT business in Panama; growing meeting, incentive, convention and exhibition business in parts of Mexico; and bringing more Spanish business to Argentina. We are also looking at value for money offers. Selling an all-inclusive resort now means more than offering a meal plan.”
Victor Lopez, divisional vice president, Hyatt Hotels & Resorts: “Cost controls are a major issue in the Caribbean. The cost of labor is greater; almost all food has to be flown in and then there are the taxes. Still, we see this as the cost of doing business. Our focus will be on adding value not lowering rates. Over the next year, sales will center on incorporating components that cost the hotel little but are meaningful to key markets—such as having children stay free, eat free and participate in various activities at no extra cost. We will also target new markets, such as the U.S. West Coast and more of the Southwest. We have opened a London office to do nothing but sell the Caribbean, which has already generated a phenomenal response.”
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