For the hotel industry, shopping for new brands and other companies to buy up is always in season.
Already this year, we’ve seen at least one major hotel acquisition announced: Wyndham’s $1.95 billion purchase of La Quinta Inns & Suites.
And if what hotel CEOs said on their recent quarterly earnings presentations at the Americas Lodging Investment Summit (ALIS) in January is any indication, we can expect more deals in 2018.
It’s only February, and 2018 is still relatively young, but already we know of a few companies hoping to fill gaps in their portfolios with some acquisitions.
Looking to Luxury and Locals
InterContinental Hotels Group (IHG), for one, is on the lookout to buy a few luxury brands that will occupy a luxury tier that’s even higher than what the company already has with its InterContinental Hotels brand.
“We are currently looking to acquire one or two small luxury asset-light brands that we would incubate and grow in order to access these significant opportunities,” said IHG CEO Keith Barr, speaking to investors and analysts during the company’s fourth-quarter earnings presentation in February.
AccorHotels, ever the acquirer, is also eyeing the market for more businesses that will allow it to be a true experience platform, and not just a hotel company. During his company’s recent earnings presentation, CEO Sebastien Bazin outlined his vision for transforming AccorHotels into more than just a hotel brand, and justified the group’s investment in various luxury brands.
Bazin said that American companies “were very focused on this segment [luxury] that we had a tendency to forget,” and “that’s why we have to conquer and acquire existing brands.”
He also pointed to the success and power of brands like Apple, Amazon, Alibaba, and Facebook that are “in your minds every day, and they’re in your minds because you use them every day. So, they’re in your homes, in your field of vision, in your minds and many of you are actually dependent on them.” Bazin said the company’s recent acquisitions are part of an effort to develop that level of engagement with consumers, a concept Skift explored in depth in our Travel Megatrends for 2018.
“If I can catch your attention when you’re home, if we can provide you with a service at any time, if I could find you not just a one-time stay or not just restaurant … there are so many ways in which I could increase the number of points of contact,” he said. “And the more frequently I can multiply them, the more contact we have, the more pushing we could do, and the more one day Accor would become top of mind. It’s extremely important to do that — and to do that, you can’t stay within your comfort zone as a hotel group.”
The company is already testing the ways in which it can incorporate many of its recent acquisitions into the services it provides to residents via its AccorLocal app.
‘Completing the Boxes’
The strategy that’s being pursued by IHG and AccorHotels can best be explained by what Best Western CEO David Kong described as “completing the boxes.”
Speaking to Skift at the lodging conference in January, Kong said the hotel industry’s fascination with consolidation and seeking scale is about having every imaginable type of hotel category in the hopes that it makes the brand and its portfolio “that much more compelling.”
Kong said he doesn’t see hotel consolidation slowing down anytime soon, either. “I think the consolidation will continue. It’s like any mature industry, you see that going on all around us. It’s not just the hotel industry. Why is CVS buying a healthcare provider? It’s synergy.”
Synergy and cost efficiencies, he said, are driving the desire to seek scale as well as leverage in dealing with booking sites.
He said cost efficiencies allow hotels to invest more in scale, technology, sales, and marketing: “They can do a lot more a lot faster. That creates a formidable competitive advantage.”
And, Kong said, the leverage gives hotel companies a better bargaining position when negotiating with online travel agencies.
“When you’re like Marriott, you can be your own travel portal,” he said. “You don’t need OTAs. So, when you sit down with them, who has the advantage?”
While Hilton has plenty of scale, the company isn’t ruling out plans for achieving even more of it. But instead of looking to buy up other brands or companies in the pursuit of growth, the company wants to do that organically, and not necessarily through mergers or acquisitions.
“We have been very focused on an organic growth strategy because ultimately, we think it helps us deliver better products that resonate more with customers and delivers better returns for you guys,” Hilton CEO Christopher Nassetta said during the company’s most recent earnings presentation. “And so that has been the approach, and we think that it’s working.”
Hilton’s current size and portfolio breadth, he said, are sufficient enough to give Hilton “the ability to grow both our existing brands, add new brands, and do it in organic way where it’s effectively an infinite yield because there’s really no meaningful cost associated with that growth,” Nassetta added.
However, he did note that if an opportunity too good to pass up emerged, Hilton would consider it.
“We would never say never,” Nassetta said. “That is a dumb thing for any CEO to say. We’ve looked at tons of things over the years. … To date, we have not found things that really met the standard, which is that it’s something that is very strategically important and a good fit strategically and economically advances the ball in terms of creating material value for shareholders.”
He added: “If something ever presents itself that meets the test, then we’d consider.”
Like Hilton’s Nassetta, Wyndham Hotel Group CEO Geoff Ballotti echoed the same sentiments when it comes to how he views potential deals.
“We’re looking absolutely at every deal that presents itself and we’ll continue to do it. But I think what we’re most excited about is our organic growth, particularly in North America,” he said during Wyndham Worldwide’s fourth-quarter 2017 earnings call. “We see great opportunity for both organic and acquisition opportunities as they present themselves.”
The Impact of Scale and Smart Scaling
While it’s certainly advantageous for companies as large as Marriott or Hilton or Wyndham to have as much scale as they do, not everyone else possesses scale to the same degree, and there’s an impact to be felt from it.
In the luxury sector, specifically, the mega mergers undertaken by Marriott and AccorHotels are reshaping the industry by creating some opportunity for smaller players to come in, but also making it more challenging for brands in the middle to compete.
“I think consolidation is helping us because we have a unique product,” Keiser said in an interview at the lodging conference in January, referring to Starwood Capital’s brands such as Baccarrat Hotels and 1 Hotels. “I would say where the consolidation has hurt some other brands is that the more purchasing power that a large organization gets, the less competitive smaller organizations become.”
He said that because Starwood Capital is “one of the largest hotel owners in the world,” the negotiations process for services and goods from third parties is in Starwood’s favor.
“Where we might have been bigger two years ago before we sold a company or two, tomorrow we could go out and buy three other companies and become the biggest hotel company in the world, perhaps,” Keiser said. “You can have that conversation about purchasing power differently than if we were truly a startup hotel company.”
At Choice Hotels, CEO Pat Pacious said his company isn’t being impacted by the consolidation taking place in the industry when we spoke to him at ALIS.
“We have scale, so a lot of people are trying to consolidate to get to scale,” Pacious said. “Scale only matters if you can take advantage of it.”
He noted that it’s important not to seek scale for scale’s sake, either. The question to keep in mind, he said: “If I can bring all these additional hotels on, do I still have a clear strategy? Do I still have a clear definition of where my brand is a good fit for the consumer?”
Pacious said that’s why Choice Hotels made the decision in late 2017 to acquire a brand like WoodSpring Suites. For Choice, WoodSpring’s “ability to franchise in that [extended stay] segment is new” and it serves as “a great business model,” Pacious said.
“We saw the WoodSpring opportunity as a way to fill in that economy extended stay segment that really wasn’t growing for us and give us a real boost,” he said. “We look at consolidation more in terms of what new ideas are out there.”
Pacious said that consolidation, for Choice, isn’t just about getting bigger but also about finding new ways of thinking about how to do business.
“I think some people think about consolidation as just get more rooms,” he said. “We think about it more in [terms of] how do we provide different products for the same consumer over different times and stay and occasions?”
That, Pacious said, is why the WoodSpring acquisition was different from other big mergers: “They’re buying the same segment and putting these hotels on top of each other. Our strategy has been much more differentiated.”
Who’s Buying What Next?
We already know IHG is looking to buy, and AccorHotels is always shopping around. But who else in hospitality is eager to loosen their purse strings?
Our guess: Hyatt. The company is in the midst of selling off a number of its real estate assets and announced a leadership restructuring at the beginning of this year — two moves that would seem to suggest that the company is building up some of its funds to buy other brands and businesses and pursue Hyatt’s strategy for entering into “adjacent spaces” such as wellness and alternative accommodations.
When we spoke to Hyatt’s senior vice president of development for the Americas, David Tarr, and its president for the Americas, Pete Sears, at ALIS, they seemed to hint that more acquisitions into new spaces might be on the way, especially within the company’s soft brand collection.
“When we created the Unbound Collection by Hyatt, the notion was that it would be a platform for experiences,” Tarr said. “So, we can totally can envision a time where maybe tour and travel, cruise lines, train experiences, glamping opportunities [might be a part of it]. There’s a whole host of things that we think could fit very nicely into the Unbound Collection because, again, it’s intended to be more of a travel platform than a brand.”
Starwood Capital’s Keiser also predicted that his CEO, Barry Sternlicht, may be looking to make some purchases going forward.
“The passion that Barry has for both 1 Hotels and Baccarat would make it very unlikely in my mind that we’re the target of an acquisition where he then fades away and the brands become Hilton’s lifestyle hotel brand or Accor’s lifestyle hotel brand, or another one of Marriott’s,” Keiser said. “I think he’ll be the next acquirer, but I think that there will be winners and losers in this, and I think that the balance sheet of Starwood Capital and their acquisitive nature as a private equity company lead you down the path of saying yes, more consolidation is on the way.”
What might Starwood be looking to buy, in addition to the real estate it’s been purchasing of late? Keiser said, “It could be additional brands. It doesn’t just have to be conversions of one company to one of our two brands. It could be a great select service brand that needs scale and distribution power. It could be a hostel company.”
And if Starwood Capital were to launch a third brand after Baccarat and 1 Hotels, what would it be?
“We certainly have conversations about launching a third brand, but perhaps a better way to do that would be to acquire an interesting brand and bring sustainability into its DNA,” Keiser said.
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Photo credit: Hotel executives say they don't see consolidation stopping anytime soon. Pictured is Best Western CEO David Kong. Best Western Hotels & Resorts / Best Western