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Analysis

The global hotel landscape: is winter coming?

After a period of organic growth, more or less active depending the markets chosen and the means put into it, the hotel landscape is being re-designed on a large scale through mergers & acquisitions aiming at imposing the size as a major asset towards investors and developers, greedy distributors and consumers asking for more diversity in supply and generous rewards for their loyalty, even non binding. The growth of hotel supply among the large brands has taken impetus, but with two notable differences compared to previous years, prior to the subprime crisis: the massive disruption of the sharing economy and the disturbing presence of Chinese groups in a game usually dominated by Anglosaxons.

A glimpse at the annual ranking of hotel groups worldwide makes it clear that something has changed in the respective strategies of the leaders. The “Gang of Four” that has been in the lead for years now has one obsession: succeed in crossing the magic threshold of one million branded rooms.  From one year to the next, changes in the Top 10 result from a frenetic race to increase the number of rooms. In 2016, the landscape became much more chaotic with the announcement of mergers of American groups, Chinese groups and the leading European group. The merger announced last November between Marriott International and Starwood Hotels will lead to the constitution of a new global leader, the first group to cross the threshold of one million rooms for thirty or so brands across all ranges. Up until the last minute, however, the plan was nearly thwarted by a new player, the Chinese insurance group Anbang that put Marriott’s managers into cold sweats and forced them to reach a little deeper into their pockets in order to finalize the operation.

AccorHotels, meanwhile, is engaged to Fairmont Raffles Hotels International, and continues to question Jin Jiang Hotels group’s reason for insisting on entering its capital as it already owns Accor’s leading European competitor.

Publicly traded hotel groups must face the pressure of financial markets that enormously valorize the new players on the digital hotel economy, such as Priceline (booking.com), Expedia, TripAdvisor, and AirBnB. The race for operating revenues is unfair since they do not evolve within the same economic model, but this does not prevent them from improving their profitability and especially reducing distribution costs while investing in their own tools and imposing the size and strength of their brands when negotiating with online distributors.
After the collapse following the financial crisis of 2009, hotel groups progressively improved their gross margin (see graphic above), with the biggest entering a strong acceleration phase in 2013. The context is favorable to takeovers, particularly for groups that are well positioned on the American continent which is a step ahead of other areas around the world. Hotel cycles are moving again with a vision that is mostly optimistic regarding growth in demand worldwide and a boost in supply growth, encouraged by financial markets that appreciated the value of publicly traded groups, even if room rates and gross margins have not yet regained pre-economic crisis levels. It must be remembered that at the time the sector took advantage of an obvious shortage in hotel supply, which fed real estate speculation on assets and drove average daily rates up.

Another phenomenon got a serious boost in recent years: Chinese authorities, and private and public actors have all realized the importance of tourism as an economic player. The Prime Minister’s plan of action is clear: the future of the country will result from a rebalance of industrial and rural activities for the benefit of service activities, the first rung of which is occupied by Tourism.

With a local market of several hundred million guests and a flow of international travelers that practically doubles each year, Chinese groups have understood that they could rapidly become world leaders. We could believe that they are still small in terms of available capacity and even more so in terms of market capitalization, but acceleration is such that the respective ratios could evolve quickly as the episode in which Anbang rivaled with Marriott International demonstrated.



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