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Analyses

Power lines of the next world

Adrien Lanotte, Senior Analyst MKG Consulting, deciphers the new trends underlying the development of the hospitality sector for the attendees of the Hospitality Operator Forum.

Financial review

First observation, the hospitality players are back. From a financial valuation point of view, by the beginning of 2022, hospitality players had regained or even exceeded their pre-crisis global value levels.

This applies to hotels and even more so to digital travel players. OTAs and intermediation platforms have gained in power in recent years.

A remarkable new line of force in recent months is that hoteliers have collectively regained a higher valuation than these digital players. The world's top 12 hotel operators are worth just over $200 billion, above the digital players. Note that these digital players are individually stronger and fewer in number.

Digital companies have been on a downward trend in recent months and weeks. What are their prospects? These players have emerged through strong business models. They are therefore present and will remain. However, if we look more globally at the financial valuation universe of technology assets, we can start to see signals similar to those of the technology asset bubble of the early 2000s. If we look at companies that have never made a penny but are worth billions of dollars today, it makes sense to question the sustainability of these models.

Conversely, we are seeing a resurgence in hospitality companies. From the point of view of investors and operators, it is interesting to note that all the players in the market are now much more attentive to the importance of their domestic market. These are of course the markets that have shown the greatest resilience.

One of the great illustrations of this trend is the American Choice Hotels, which acquired the American portfolio of Radisson Hotel Group from the world's number 2, the Chinese Jin Jiang. It is thus significantly strengthening its position in its domestic market with an investment of around $10,000 per room for the purchase of 67,000 rooms.

Geopolitical issues

The American players had not let the Chinese Jin Jiang take 100% control of the portfolio of Radisson Hotel Group properties on their soil. This return of the "old world" also means that geopolitics is once again coming into play.

Are we in a world that is opening up, as in recent years, or are we closing up? To find answers to this question, we can first look at what exists. If we analyse the distribution of the world's leading hotels by continent, we can see quite clearly that domestic markets predominate.

By focusing on the continents that have contributed to the growth of the stock of these groups between 2021 and 2022, we can see different dynamics of net growth in supply. The first observation is that for many players the growth dynamics are shifting. At Wyndham Hotels & Resorts, half of the room inventory development, which is key to the value of a franchisor, is taking place in China. The American leaders are strengthening their development in Europe and the rest of the world.

On the strategic side of the development of the supply, the number one destination today is China, its logic being to bring out its own champions. On this continent, there are regions with more or less strong dynamics. The first is Shanghai, with the number 2 in the world Jin Jiang, as well as Huazhu and Greentree, three groups which are in the global top 15. Beijing is also in this dynamic with BTG and other growing players like Tripmod. Guangdong is also a significant territory with Dossen, present in the world's top 10, and Funyard, which has formed a partnership with the French number 1 for developments in China.

In the United States, the development dynamic remains the same, namely the development of franchising. The fleet of the top 5 in the world in the US has developed by 5.5% on the franchise between 2021 and 2022.

At the same time, there is the dynamic of the owners to be taken into account in the USA. These players have a very large surface area. This has led to the emergence of a new player in the world's top 20, Sonesta. These large property owners who previously entrusted their properties to the brands of large hotel groups are now taking the step of forming their own group with their own brand. They are also building their own management platform and offering services on behalf of third parties.

In this context, hotel groups have a brand development logic. However, growth in room volume is now coming less from the large international brands. Rather, it is developing either through brands oriented towards domestic markets or through diversification brands. We are witnessing the rise of what has been baptised lifestyle or boutique brands.

Focus on demand

In May 2022, the European market returned to a growth dynamic compared to the pre-Covid period, including for destinations that had been slow to recover due to their corporate and international customer mix.

If we look further into the analysis, we can see that although the market is recovering, consumption patterns are now different.

The peaks in occupancy will correspond to very particular moments such as the Easter holidays or the Ascension weekend in connection with the Champions League final in Paris, the rugby final in Marseille and the Cannes Film Festival awards, which are driving forces for the recovery.

If we break down the week/weekend overnight stays, we can see that on weekend days, the recovery started earlier and stronger. On weekdays, the recovery took longer to materialise, and we are now on more favourable levels on weekdays without yet reaching pre-crisis performances. In France, over the first 23 weeks of the year, the midscale prices of weekends have been on a par with those of weekdays (compared with a €10 difference in favour of the week before the crisis). There are even cases where the midscale prices are higher on weekends than on weekdays. This is a break that has been introduced by this Covid sequence.

The evolution of consumer behaviour

Booking behaviour has changed significantly. If we break down booking behaviour over the longer or shorter term, we can see that after a virtual disappearance of advance bookings, these have returned, indicating a renewal of confidence on the part of consumers.

The dynamics are different for each range. The budget segment is much more used to last minute bookings, so this segment has proved much more resilient during the crisis. The upmarket and luxury segments are regaining visibility in terms of occupancy, which is pulling up the capacity of hoteliers to raise prices. As of week 20 of 2022, the mechanism we outlined in 2021 has been set in motion, with the upscale and luxury hotel industry pulling up prices.

What about MICE?

Many players in the sector had anticipated a very late recovery in major events. With hindsight, we can see that things have evolved differently when we look at the figures. If we compare the 2022 and pre-crisis data on hotel performance during major events such as Vivatech in Paris, for example, we can see increases in RevPAR, midscale prices and attendance. This is totally consistent with the idea that we will travel less but better. It is therefore more likely to be the high points of the year that will trigger certain trips.

Revenge travel

This need to travel to compensate for months of frustration creates catch-up effects that are visible in hotel performance. For example, flights within Europe or between North America and Europe have returned to high levels compared to 2019. The only areas that are not yet in recovery mode are the Asian markets.

The destinations that have taken the lead in the recovery are different from those previous. All coastal and port cities as well as those with shipyards are emerging as growth drivers of the recovery.

The upturn in activity is being driven by new sub-markets such as the coastline. This outperformance of certain markets has a direct impact on the strategy of players in the sector, with Atream, for example, setting up an SCPI ( Civil Property Investment Company) dedicated to coastal tourism.

Certain facilities are also drivers of value creation, such as those linked to the welcoming of bicycles or services around well-being.

All these trends, which are taking hold - and only the future can tell us if they will last - require players in the sector to think deeply about the way products are designed.

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