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By Staff -- HOTELS Magazine, 7/1/2006

The hotel giants atop this year’s rankings are enjoying a veritable feast. Hilton Hotels Corp.’s acquisition of Hilton International reunifies one of the world’s best-known brands after 40 years of bipartite operation. Other giants hit the M&A trail to fill in or complement their brand families. Starwood Hotels & Resorts welcomed Le Méridien Hotels & Resorts (with its largely complementary international presence) into its growing brand family. Global Hyatt bought balance for its upscale brands and opened new development options with its acquisitions of Microtel Hotels & Suites, AmeriSuites (re-invented as Hyatt Place) and Summerfield Suites. Cendant Hotels Group, slated to be spun off as the pure hotel play Wyndham Worldwide later this year, diversified its mid-tier and select-service plays with its successful bid for Wyndham Hotels & Resorts, while adding to its core holdings with this year’s acquisition of the Baymont Inn & Suites brand. Choice Hotels International made a big play in a hot market with its deal for Suburban Extended Stay Hotels. 

However, capital private equity and opportunity funds may be the catalyst that builds mega-companies like those that dominate other industires. Blackstone Real Estate Group and its various affiliates bought Wyndham only to sell off the brand and franchise system to Cendant less than a month later. It also sold Summerfield Suites to Hyatt before moving on to buy up LaQuinta Properties and MeriStar Hospitality and launch the LXR Luxury Resorts brand. Starwood Capital, a separate entity from Starwood Hotels & Resorts, also got into the brand business with the launch of the Crillon brand in the aftermath of its purchase of Société du Louvre/Concorde. Colony Capital is reshuffling the upscale rankings with its acquisition of Raffles International and shortly afterward, Fairmont Hotels & Resorts, a deal done with Prince Alwaleed’s Kingdom Holdings—a move that follows up its US$1.27 billion strategic investment in France’s Accor.

Deluxe chains seeking growth may be fighting on new ground. Mandarin Oriental’s Thomas Hendricks sees luxury operators with established presences in gateways moving into cities such as Chicago, Las Vegas, Dallas and Prague. “The biggest challenge will be maximizing the performance of each individual hotel. You do not grow EBITDA just by putting more flags on the map. Sub-par performance dilutes the brand. It also creates a risk that the owner will take back the property if you do not have an ownership interest,” he says.

InterContinental Hotels Group CEO Andrew Cosslett forecasts good times ahead for brands that can establish points of differentiation. “As the ownership base becomes more institutionalized, brands will climb higher into favor. There is a wonderful tail wind blowing us all along. Most of the (investment) capital will be flowing towards brands with larger scale, but there will be a place for smaller players,” he says.

The industry’s leaders foresee these trends shaping the hotel industry for 2006-07 and beyond:

• “Top management and boards of directors will be face increasing accountability. They will be more visible in the public eye; they will have to demonstrate vibrant work in their organizations. General managers will have to move from managing things to focus more on improving the bottom line.” —Arthur Adler, CEO, the Americas, Jones Lang LaSalle Hotels

• “There will be a continuation of asset sales, especially as brands can retain flags on the majority of the assets being sold. There will be more differentiation between asset owners and brand owners.  Brands have to ask themselves what is their core role. Owning and managing real estate is one reason the industry has not reached its full potential. Companies need to be able to focus on building their brands.’’ —Andrew Cosslett, CEO, InterContinental Hotels Group

• “As for the trend toward asset lite, companies like ours will sell more properties. But, we will retain core assets. We do not plan to be real-estate free. Our owners want us to be owners, too.” —Thomas Keltner, president, Hilton Hotels Corp.’s brand performance and development group

• “There has been a significant shift in the ownership of hotel real estate from the more passive/long-term owner-operator model to one in which private equity dominates. This is going to pose challenges for operators. The objectives of these new owners tend to be shorter term in nature and revolve around making real estate value gains. Objectives such as these are not always aligned fully with the longer term brand and management growth objectives. Operators are going to have to be more proactive in working with these owners and recognizing that greater flexibility and rapid change are now the order of the day if they are to be competitive.” —Arthur de Haast, Global CEO, Jones Lang LaSalle Hotels

• “All the trends are pointing toward continued growth in occupancy and RevPAR. Construction costs have held overbuilding in check and gas prices have not dampened RevPAR. Going forward, you will see lesser brands being gobbled up by families of brands. It was proven during the last downturn that hotels wanted to be part of brand families, not out there on their own. You also will see significant organic growth as brands start launching new brands to fill holes in their systems.” —David Pepper, senior vice president, franchise growth and performance, Choice Hotels International

• “Companies cannot take anything for granted. To stay on top, they have to review and update their goals regularly; put strategies in place swiftly to correct their course; not become sentimental about retaining properties which do not fit; hire, train and retain good staff; focus on maximizing revenues, profits and cash; and differentiate the company, brand or hotel from competitors.” —Russell Kett, managing director, HVS International, London

Challenges and Opportunities

What will separate the winners from the losers?

• “The challenges include: maintaining operational standards at a time when it’s hard to find good people; development costs, although mixed use is helping to justify some of the numbers; and amenity creep. Ten or 20 years ago, you could only find a fabulous bed in a luxury hotel. Now you can find it in business hotels. But, the biggest challenge is how to maximize the performance of each individual hotel in the chain. On the opportunity side, given demand, we should see double-digit RevPAR growth for the luxury sector for the next couple or years. Watch for luxury operators to move out of first-tier markets into secondary markets.” —Tom Hendricks, vice president of development, Mandarin Oriental Hotel Group, the Americas.

• “Labor is a key challenge. In China alone, IHG will need to find 17,000 to 18,000 people to staff our hotels within the next three years.” —Andrew Cosslett, InterContinental Hotels Group

• “One of the biggest challenges will be determining the preferences and needs of customers who currently are in their teens. Companies that want to stay ahead of the curve must focus on exceeding customer expectations by providing excellent service. There are opportunities to expand both mid-scale and upscale brands in North America, as well as in Europe, Asia Pacific and Latin America.” —Steven A. Rudnitsky, chairman and CEO, Cendant Hotel Group

• “The key challenges will be escalating operating costs; havoc from natural disasters; growing global uncertainty about safety and security; evolving customer expectations and accelerating change in and merging of technologies. The opportunities center around buoyant economies, a boom in real estate and aviation; improving infrastructure; strengthening ‘brand’ images for countries and initiatives to liberalize foreign investments.” —Rajshree Bakshi, director of sales—special initiatives and marketing information system, Indian Hotels Company

• “The challenges include; how to grow profitability in the United States; rising labor, energy and insurance costs; increasingly fast changes in technology that guests require in the properties; ensuring that owners and franchisees maintain their properties at brand standards given the ever-changing needs of the customers; more competition among brands from mid-market products such as Indigo, Hilton Garden Inn, aloft, etc. (a bit of blurring between full service and mid-priced hotels). The opportunities include: international growth, particularly within Asia (with an emphasis on China and India); taking control of inventory through better web-based reservation systems and expanding brand offerings to cater to all segments of the industry, particularly the emerging 25- to 34-year-old age group.” —Arthur Adler, Jones Lang LaSalle Hotels

• “Customers are more demanding. You have to work hard to give them what they want, or what they think they want. That means training and retraining employees to exceed expectations.” —Thomas Keltner, Hilton Hotels Corp.

• “Brand differentiation is a challenge, especially for the major chains. It’s always a challenge to show how your brands are different from others in the market. It comes down to marketing, a well-thought-out amenities package and customer service delivered to guests at all points in their experience. Companies that grow will be the ones that recognize the franchisee is their primary customer and dedicate themselves to maximizing franchisee return on investment.”—David Pepper, Choice Hotels International

Room to Grow

Few pundits argue about a “big getting bigger” trend. But most also see room for strategic small players.

• “Small companies will be able to compete through affiliations with a global group of independent hotels or small groups of hotels.” —Tom Griffiths, vice president of the Americas, WORLDHOTELS

• “There will always be emerging brands. So long as they have a product that is distinctive and targeted at an appropriate market segment that is either big enough or growing rapidly, they, too, will be successful.” —Arthur de Haast, Jones Lang  LaSalle Hotels

• “As has always been the case, there is room for small players such as Kimpton, Standard, Morgans Hotel Group, smaller scale chains and brands, owner-operators, etc. These companies eventually may be merged into or swallowed up by the bigger companies.” —Arthur Adler, Jones Lang LaSalle Hotels