Hilton is the kind of hotel company that's adamant about sticking to its guns. It says the future outlook looks fairly solid — unless, of course, fears of a looming recession come true.
Hilton CEO Christopher Nassetta is the type of chief executive who doesn’t waver from his views that easily.
In a third quarter earnings call with investor analysts on Wednesday, Nassetta was asked a number of times whether he’s reconsidered his cautious position regarding mergers and acquisitions.
“The short answer is no,” Nassetta said. “For the 11 years I’ve been here, the filters have literally remained the same. That something really works well strategically in terms of brands and our brand portfolio versus what we can do in our own, and does it — can we do it in a way that’s really accretive to value?”
Nassetta added, “We’ll look at almost everything” but he said that everything to date that Hilton has reviewed “has not made sense.”
Hilton, unlike its peers, has pursued an organic growth strategy where others have been much more acquisitive in an industry undergoing increasing consolidation. Just this month, Hyatt Hotels announced its intent to buy Two Roads Hospitality for $480 million. In 2016, Hilton’s rival Marriott bought Starwood Hotels & Resorts for $13.3 billion, thereby creating the world’s largest hotel company.
Earlier this month, a news report listed Hilton among a list of suitors pursuing the troubled luxury hospitality company, Belmond. While analysts’ questions hinted at the possibility of Hilton acquiring some or all of Belmond, the company was never mentioned by name.
However, Nassetta’s comments seemed to suggest Hilton was not necessarily an eager acquirer for Belmond, or other luxury hospitality brands or assets.
Answering a question related to Hilton’s luxury strategy and the potential for acquisition in that space, Nassetta said: “The things that you could make available don’t really funnel to our filtration system. They either have their own problems as a brand, or the economics of it would be such that you will destroy a lot of value in it. So, well, we looked at lots of things. Obviously, not a lot of that made sense.”
In short, Hilton’s strategy for the future remains unchanged: The company plans to continue to focus on organic growth and developing its own proprietary brands, as well as promoting more direct relationships with its consumers, and maintaining its business in the corporate travel and group segments.
On Being a Brand Builder
In the past few years, Hilton has unleashed a number of new brands. And just yesterday, the company debuted its 16th brand, Motto by Hilton, a hostel-inspired urban microhotel brand. It’s one of five new brand concepts that company announced it would add to its portfolio back in December 2016.
On the way, Nassetta noted, is work on a new luxury lifestyle brand. “We will eventually do luxury lifestyle,” he said. “We have chosen not to do it because of other opportunities and we can only do so much at one time. But ultimately, we’ll have a luxury lifestyle brand as well.”
As Hilton builds its own brands, rather than acquire existing ones, Nassetta assured analysts that it was important to the company to confer with its existing hotel owners for feedback in the development of the new brands.
Another sector where Hilton might consider the possibility of developing a new brand could be in the all-inclusive space, although it’s not that likely in the near future, Nassetta said. In September, Hilton announced its partnership with an all-inclusive resort specialist, Playa Hotels & Resorts, that would help the company grow its all-inclusive portfolio under its existing Hilton brand name.
“Currently, we’re doing it sort of as an extension of our corporate [brand] at the moment, Hilton,” he said. “We will look at whether, as we get into it, if we think there’s enough opportunities to sort of create effectively its own presence, create an independent or an extension of Hilton with a real brand name to it as opposed to just being part of the Hilton system. But it’s premature for us to judge that.”
On Being a Proponent of Direct Booking
In addition to being known as a hotel brand builder, Hilton has also garnered a reputation for promoting direct booking to consumers, and Nassetta noted the company’s most recent ad campaign, “Expect Better, Expect Hilton” as playing in an important role in Hilton’s drive to push more direct bookings.
“Our web direct platform remains our fastest-growing booking channel, a trend we expect to further accelerate with the rollout of ‘Expect Better, Expect Hilton,’ our largest portfolio marketing campaign to date launched at the end of the third quarter,” Nassetta said in his prepared remarks.
He also said, “In the third quarter, we added 3.7 million new Hilton Honors members, up more than 16 percent year-over-year. Our roughly 82 million Honors members now account for nearly 60 percent of system-wide occupancy.”
That ad campaign, Hilton Chief Marketing Officer Kellyn Smith Kenny told Skift in September, was meant to change the conversation about direct booking to be more about the importance of maintaining a loyalty relationship with Hilton.
Nassetta said, judging by third quarter numbers, which don’t yet take the new campaign into account, Hilton saw growth in its direct channel share and that bookings from online travel agencies were “flat.”
“So, the trends are what we want to see,” he said, quick to stress that Hilton still wants to work with the online travel agencies such as Booking and Expedia. “We just want to work with them in the right times in the right ways at the right price, and we want more and more to have a direct relationship as much as we can. And that’s what we’re seeing happen in our channel mix.”
On Maintaining Strength in Corporate Travel and Meetings
Hilton, like Marriott and InterContinental Hotels Group, made plenty of waves in the meetings and events industry earlier this year when all three announced they would cut commissions paid to third-party planners.
However, those commission cuts don’t appear to have negatively impacted Hilton’s meetings and events business going forward, which Hilton chief financial officer Kevin Jacobs noted was “solid” in the third quarter, as was Hilton’s corporate transient business.
Looking ahead, Nassetta said, “Group position for next year remains up in the mid- to high-single digits with nearly 70 percent of group business on the books, and early corporate rate negotiations show healthy year-over-year increases.
He also said that conversations with Hilton’s corporate travel accounts, which account for approximately 10 percent of Hilton’s business, also demonstrate an optimism looking ahead to 2019.
“Broadly, people say they’re going to travel more for business and for meetings and they know they’re going to pay more and they’re willing to pay more,” he said. “And they’re willing to pay more of the increasing rate as compared to what they have said a year ago,” referring to Hilton’s corporate travel rate negotiations, which rose approximately 1 to 2 percent.
He continued, “So again, I don’t want to be a Pollyanna, but I think all of that’s positive, and I think all of those judgments are based on the fact that people think that the global economy, the U.S. economy in the case of the U.S.-centric companies, are just going to hang in there and keep chugging along, which is obviously what is built into the assumptions of our guidance.”
The Third Quarter by the Numbers
“Chugging along” is an apt way to describe Hilton’s progress in the third quarter as well, with Hilton beating estimates on its profits, but falling a bit short on revenue. Net income rose 2.5 percent to $164 million in the third quarter.
Hilton’s adjusted earnings per share of 77 cents beat analysts’ consensus expectations by a few cents. Revenue grew 7.7 percent to $2.25 billion; however, analysts had estimated third quarter revenue to be closer to $2.4 billion.
Global revenue per available room (RevPAR), a popular metric used to measure strength in the hospitality industry, grew modestly in the third quarter to 2 percent. RevPAR in the U.S. rose only 1 percent in the third quarter compared to the same period last year, likely impacted by weather-related issues and calendar shifts in holidays.
Still, Hilton issued a fairly confident outlook for the rest of the year, as well as 2019. For all of 2018, Hilton expects system-wide RevPAR to grow between 3 to 3.5 percent, and for 2019, it anticipates RevPAR growth of 2 to 4 percent.
Hilton shares were trading slightly down after its third quarter earnings were announced, at approximately $65.45 a share as of 12:30 p.m. Eastern.
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Photo credit: Hilton remains committed to building its own brands, like the newly launched Motto by Hilton, rather than acquiring others. Hilton