Stephen P. Joyce, CEO, Patrick Pacious, COO, Mark Pearce, Senior VP International, Carl Oldsberg, VP International Operations, and Tess Mattisson -freshly appointed Director of European Marketing-discussed the key trends and opportunities for their group and the hotel industry. Here are their insights on M&A and the rise of new players, lodging supply and demand trends, vacation rentals and the keys to a successful marketing and digital strategy.
Carl Oldsberg: “M&A was long overdue, it’s not a surprise. For the consumer it might not be the optimal situation, but for the industry I find it actually quite good as we are all facing the challenge of distribution partners. If you asked us about our competitors five years ago it would have been a hotel company; it you ask today we would pick an OTA. With consolidation the hotel industry will get bigger muscles; it will be a totally different story in negotiations for Marriott & Starwood as a standalone vs. Expedia and that is good for the industry. It levels the playing field.”
Stephen P. Joyce: “I said that I preferred an acquisition of Starwood by Marriott rather than the Chinese because I think we benefit when companies are well run and I think Marriott will do just that. It will take them to a new position regarding OTAs. I also think there’s going to be more consolidation. You need to have scale because the distribution environment is very unfriendly and having an ubiquitous inventory is important for consumers. You might see another move among the big players… but most of us are buyers and not sellers so I don’t know who is going to give in first –but it’s not going to be us! There will also be a consolidation of the smaller chains, for survival. AccorHotels made a pretty significant acquisition and they are in a technology acquisition mode, which we find very interesting and we are watching that very carefully. At Choice, we like all our brands, but obviously continue to look at other opportunities as they arise. We would like to continue building our portfolio; for example we would like a full-service brand. We haven’t found the right deal yet, the reason being we have high standards in terms of return as our businesses are already profitable and investors expect high ROI from us. It would be great if we could find the right transaction, but simply focusing on our core business can deliver great results to our shareholders as well.”
Patrick Pacious: “There’s a tipping point in reaching critical size. We have that scale and we have significant growth in front of us. So as a standalone company we are among the best in the class. Regarding start-ups and technology businesses, we are looking at them. If there is a business we want to get into and there is already somebody doing it, it may make sense for us to partner with them, acquire them or let them continue to be a software company on their own. I think the biggest challenge faced by anybody buying these businesses is integrating their cultures, and the most important thing in a startup is culture. So if you have a big hotel company mindset with a capital allocation model and a talent acquisition model on top of it, you can smother the innovation. And once you acquire them, their owners get cashed out, whereas they are the ones bringing the original impetus. So we look at opportunities from time to time, but we haven’t got there yet, although we have worked with a lot of outside companies, for example to launch Vacation Rentals by Choice Hotels.”
Choice Hotels Convention in Las Vegas
What are the strategic objectives of Vacation Rentals by Choice Hotels? And why did you launch it in the US only, when going global usually boosts the scalability of such services?
Steve Joyce: “There’s been a marked shift in the way consumers book their vacations. If you go back just five years, only 10% of the American public considered alternatives to traditional lodging. Now it’s about 35-40%, and it continues to expand at a rapid rate. The credit goes to some of the online players who have been in this market; but I think the difference between what they bring and what we now offer is that we have professionals handling check-in and checkout, problems occurring during the stay, offering 24h availability… This is critical because if you talk to people who have stayed in rental products, some of them say: “it was awesome, the owner brought me around town, he/she was really nice, great place…”; there’s a middle group that says: “nice enough, and it was a good price”, and about 30-40% say: “the place was scary, I didn’t feel safe, the host was a creep.” We felt we had the capability to deliver added value to both guests and owners. Indeed, vacation rentals are a very fragmented industry with no real technology program helping owners run their business. We provide that technology to them, or they can buy our program that will drive people to their lodging units –or both.”
Pat Pacious: “We looked at the US market first because that’s primarily where our customers are. At the end of the day, the vacation rentals opportunity was to create a greater travel aggregator on choicehotels.com; that’s what we were looking for with Vacation Rentals by Choice Hotels. Owners are seeking business delivery and guests: we have them. It’s just a different product segment. Another thing to consider is that whenever you cross town borders the regulatory environment changes. Others have tried to roll out vacation management companies on different markets; it doesn’t work because the rules applicable to vacation rentals are defined at a town level. So we wanted to work with people who had already figured them out. Actually, the complexity of that business doesn’t scale.”
How do you feel about the rise of Chinese hotel groups? And about the leverage they can get by expanding as conglomerates?
Steve Joyce: “This country, the United States, has been through the conglomerate phase and neither investors nor the people that worked there liked it very much, the reason being that it is inefficient. So the Chinese have certainly assembled a lot of capital, and they are buying a lot of things. Can they run them well, given all the businesses lines they are in? Maybe they are different from people in this country, but in the US we collectively decided that was not a good way for a company to be run. The Chinese are strong purchasers, but it remains to be seen how effective they are at running hotels. Actually, we have not seen them be effective competitors anywhere. And I personally believe that you want to focus on what you are good at, and not do everything, because it would dilute your efforts and results. At Choice Hotels we are one of the purest investments you can make; I don’t want to meddle with other businesses.”
Pat Pacious: “If you look at what has been happening in our industry, everyone has been shedding their timeshare business, their owned assets, to create focus. If shareholders want to buy hotel real estate, they can do it through a REIT. If they want timeshare, these have stocks. However, when you put things together, it is hard for an investor to figure out a value. So the reason why you see that kind of focus is that it is good for shareholders, as well as customers, franchisees and guests.”
Sleep Inn exterior prototype
You mentioned there is a strong RevPAR momentum in the US, yet growth in some major hospitality markets has been slowing down and financial analysts are wondering whether the current cycle will last. Europe has been facing challenges of its own. What is your view on the industry’s business perspectives?
Steve Joyce: “You hear a lot of talk about the cycle and I agree, the cycle has peaked, but there is no reason to believe the cycle will immediately go into decline. Indeed, on our segments there has not been that much new supply -unlike in some other cycles-because until recently there wasn’t much financing available. Now that’s just coming, but supply creation is still way below historic levels. That’s why we are pretty bullish through 2018. If employment, the economy and consumer confidence hold up, there is no reason why we shouldn’t be doing good business up to that horizon. After that, we’ll see. At Choice Hotels, we are projecting year-on-year growth will be superior to 4% in 2016, which is slightly lower than the 6-7% we delivered recently, but a great year by most standards nonetheless.”
Carl Oldsberg: “In Europe, regarding the terrorist attacks that everybody has in mind at the moment, it is sad to say but we are getting used to these tragic events, meaning the impact gets smaller and the recovery faster, which is good for the industry, although it is a sad development in general terms.”
What are your current targets for supply development, on the domestic and international markets? Is there no risk your international expansion may backfire if it gets criticized by shareholders as it was at Starwood?
Pat Pacious: “With the peak of the market right now, financing is very widely available for new construction projects and for conversions. Throughout the revitalization process of the Comfort brands, in the last five years we’ve taken 600 properties out of our system. We’ve made a list of these markets in North America, sorted them by RevPAR and now we are getting back to our multi-unit developers with that list, together with financing available for them in many cases.”
Mark Pearce: “Internationally, we are actively looking at opportunities in the UK and virtually all of the markets. Choice Hotels is leveraging its balance sheet to get the right kind of deals and we’re really seeing its impact resulting in people willing to do partnerships with us. In the last two years, we set up an office in Amsterdam -I actually relocated there- and from there we built the international growth team. Now there is strong momentum.
With the Star Inn deal, within 3 weeks we added 16 hotels and two new countries to our portfolio. In Germany, we are now working with a development partner for new-built Comfort units. Friedrichshafen is up and running, we have a second one under construction at the Frankfurt airport, and two more already in the pipeline with them. For Ascend Collection, we recently added Ecuador, two in the UK and one in Nice. We recently signed a deal for 25 hotels in Saudi Arabia and the UAE. In Turkey, we started 18 months ago and now we have three hotels, with 1 more in the pipeline, and we just signed 6 Ascend Collection units that will be new-build. So we’re really seeing a lot of opportunities to leverage.”
Choice Hotels Convention
Steve Joyce: “We also visited Cuba and are in talks with officials and developers; hopefully we will get some deals in the months to come. We are going to help the development of Cuban tourism through education: we are working to give Cubans access to Choice U, which will hopefully help them train the 50-75,000 hospitality workers they will need for the 20- year expansion phase that is about to happen in Cuba.”
Carl Oldsberg: “Our shareholders and hotel owners have set international growth as one of our main objectives for the company as a whole. It is starting to pay off. I don’t think there is a risk for us in expanding on international markets because in the US we have about a 10% market share while elsewhere it’s far from that, so we have tremendous growth opportunity. There are still many markets we have yet to enter; Spain is one of the countries where we are currently searching actively. Overall, our non-US pipeline has never been stronger.”
Sleep Inn guest room prototype
What kind of marketing and digital initiatives do you plan to implement?
Pat Pacious: “We need to win in the loyalty world and in the mobile world. The good news is, they’re converging. Consumers still want the best price, the best product, best location: the same was true 30 years ago. The difference is, today they are bombarded with information. Different pricing, different ways to shop, product descriptions, packages… The companies that will be the winners are those that can stop the noise, give instant rewards, and ensure them they’re paying the lowest price. The member-only rate is an example of this, that’s why we have launched it as a part of our loyalty program. What is really happening in the mobile space is you are moving from a transaction to an experience focus. We want people in the property to interact with hotel staff, the neighborhood, and to get food, all through that app. Mobile apps got a big boost, then sort of ran away, now apps are making a comeback as a way to interact with customers. Once guests interact, you get the information about what is of interest to them and can personalize experience. Additional services may come from us or from the neighborhood we are in, but ultimately it will be all about providing a tailored experience to the millennial traveler.”
Carl Oldsberg: “Regarding social media, the hotel industry has been using them the wrong way, saying “look at how good we are”, boasting about what they do -this is of no value to the consumer. You need to think about when you can bring value, provide what they need. And in that process we can market you, but that shouldn’t be the main focus. In the past marketing was all about ads, billboards and screaming how good you are; now it is about listening and engaging consumers at the right time through their preferred touchpoints.”
Tess Mattisson: “If you actually look at what people express, you can bring them something that is meaningful, provide content that will help them in their decision-making journey. For example, if we see people looking for aspirational content, let’s not give them an ad but a piece of content that adds value right where they are in their mindset. You have to think about the native approach of each platform. Why were they built? How do people actually behave on that platform? What are the native functions? If you do this, you will get much more from these tools. Think about how you use them as a person: you look at what your friends did, what they shared, rather than all those ads that appear. Then as a marketer you may sit down at your office and release ads or contents about your brand. That’s forgetting what you did minutes before: scrolling down without looking at those same ads because they were not relevant to you. The fact is you have people on the other side, so it’s all about meeting their needs, not yours as a brand. In the digital universe, everyone needs to find their sweet spot. We need to be a little brave, and be disruptive sometimes. The beauty of all this is that you can instantly measure the impact of your initiatives. And my job is to make sure we get the most cash value to the franchisees from our marketing investments.”
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