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[#PAFh19] "Our growth has never been below 10% in all the countries where we operate"

What are the ambitions for B&B Hôtels? Interview with Fabrice Collet, CEO, B&B Hotels and Scarlett Omar-Broca, Executive Director at Goldman Sachs Merchant Banking Division.

Fabrice Collet (FC): There have been changes at B&B, we changed shareholder about 6 months ago, before that we changed three years earlier. The cycle continues, this is the 5th shareholder in 12 years. While there are some things that move, others don't. It is the power of the business model: what we are trying to build, the trust we are given and the prospects.

Scarlett Omar-Broca (Scarlett O-B): 

What led Goldman Sachs to make this major investment? We have been following B&B Hotels, both the company and the management, for nearly 3 and a half years. It gave us the opportunity to make a deal. The most important parameter for us is the management team and its impressive ability to deliver strong growth every year. Whether it is Georges Sampeur for many years or, more recently, Fabrice Collet and his whole team.

The first macro reason underlying the investment thesis is the evolution of the penetration of chains in the budget hotel sector in Europe. European countries, and in particular Germany, which is a huge market for budget hotels (12% editor's note), are extremely behind in terms of penetration of chains in this segment. Compared to the 70% penetration rate in the USA, Germany has a very long way to go. France is in an intermediate situation but there are still many prospects. B&B Hotels has managed to capture this trend by opening hotels every year in European countries, thus moving from being a French company to being a European leader in the sector. This growth of more than 15% per year has been attractive for us. We consider that B&B today is at a turning point marked by growth acceleration as well as a market that underpins growth for the next 15 years.

The second macro element that makes an extremely interesting combination of risk/return is resilience. While growing by 15 to 20% per year, B&B is positioned in a segment that is very little affected by crises. It is the quality of the B&B product that allows travellers, especially business travellers, to trade down in times of crisis while maintaining a quality of service and product that it can find in more expensive hotels. Thus in 2009, the budget industry remained flat while B&B grew by +4%. Regarding the growth of B&B's EBIDTA in 2008 and 2009, we are over 10%. All this is also possible thanks to strong growth meaning new property openings. Another point in this regard, which is relevant to the quality of the teams, is that we studied the ramp-up curves of about a hundred hotels opened in previous years and there is incredible consistency in the performance of these hotels. This bodes well for growth over the next 2 years with hotels either under construction or recently opened.

FC: All this is good because it is the beginning of a story for B&B Hotels. We are now in a segment that has two qualities. The first is that it is growing rapidly with a huge need for chain hotels. The second is that it is extremely resilient, it goes through cycles (this was the case for the latter). We make a product that is for everyone. There are two ways to distinguish yourself in the hotel business. Either by doing very specific, very innovative things that attract attention, or by doing what we do, which is something that may be a little less singular but meets all needs. We are dealing with customers who might say, I need to spend a night quickly and simply, I will arrive late and leave early. I don't need it to be the experience or adventure of my life, but I need it to go well, with no compromise on design, on the comfort of the room, on bedding, air conditioning, sound insulation, breakfast, reception, WiFi, bathroom. If in addition to all these elements, I am greeted by a big smile, which is usually true at the B&B brand, then I am satisfied. If it doesn't cost a lot of money, then so much the better. What we do is not revolutionary, but doing it well every day is a hell of a fight. The charm of this broad approach to the sector is that it covers the needs of a large number of people and therefore has a great future.

When we look at the growth curve of our supply, we can draw several observations. Our growth has never been below 10% in all the countries where we operate. We have accelerated our growth at times, sometimes through Village Hotel acquisitions, but also in Spain, Germany... Our growth is also driven by the opening of new countries. We are now in 15 countries. We have gone from one property in 1990 to 38,000 rooms at the beginning of 2019, we reach around 45,000 at the end of the year.

When you look at our market shares in France, Germany, Italy and Spain, we are making progress. In France, despite Accor's historic presence, we are the only player to make progress in this segment, with an 8 to 10% increase in market share between 2012 and now. In Germany on a more open market, we now have 18% of the market, 7 years ago we had 10% and we will soon be leaders. In Italy we have 40% of the market, in Spain we are at nearly 14% with a pipeline that will allow us to become number 1 in about two years.

All these elements, however positive they may be, are not enough. We must be the first solution at the top of our customers' minds. When we are looking for a bedside table, first reflex is IKEA, etc.... We must also install our brand in our segment and to do so we must be a leader. I think we are on our way to doing it in Germany. Elsewhere it will take time because we need to build these brands. To build these brands, it is necessary to open more and more hotels and at an faster pace at that. All this requires energy, ambition and finally shareholders who validate this strategy and give us the means to implement it. I think that's what we found with Goldman Sachs.

I am convinced that in 10 years' time, we will see that there are a handful of companies, 3 to 5, that have succeeded in creating global budget hotel brands that will be recognized by consumers. Either we manage to be in this handful, or our contribution will go to one of these leaders. Of course, we would like to continue our independent and joyful autonomous journey as long as possible.

An important ambition, a wager on the behalf of Goldman Sachs underlying the sector, what equity story can you reveal about this deal?

Scarlett O-B:  Our basic case, which is already comfortable, is the status quo with 15 to 16% growth per year. We then have a more ambitious case, namely to go further, outside the existing countries in Europe, and particularly in Asia. Bring in Asian customers through our contacts in China, but is there a place for B&B to play in that region? There may also be acceleration by acquisition, including potentially transformative acquisitions. There is also a whole digital strategy, we are convinced that there is a lot to do to follow our customers, know where to find them, attract them directly to our brand without necessarily going through the OTAs.

FC: We have begun to change our business model a little for some time. At one time, we were focused on a development mode, namely growth through subsidiaries with hotels operated by agent managers and properties leased to Covivio (with which we are still developing in Poland and hope to do in Hungary). In recent years we have taken a major step towards franchising. This makes it possible to provide a high quality service, it also makes it possible to answer our customers' real question more quickly. They are not only asking us to make beautiful hotels with all the qualities I have described, they are asking us in the first place to make these beautiful hotels in the places where they need to sleep. Franchising is a great way to develop, we opened about fifteen of them this year in France and we will accelerate.

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