Independent Hotel Brands: Standalone Success or Prime Targets for Takeover?

The global hotel giants want to acquire smaller companies that fill geographic or branding holes in their portfolio. Whether the independent brands collectively want to link up with Goliath is a different story.

Hyatt plans to acquire Apple Leisure Group for $2.7 billion, a deal that beefs up the Chicago-based hotel company’s footing in Europe and in the resort market. The acquisition is one of the largest made during the pandemic by a traditional hotel company, and it signals how many hotel executives see the future of mergers and acquisitions: targeted growth rather than buying big.

Independent hotel companies are aware they’re in the crosshairs.

“It’s hard to see another blockbuster transaction. I believe there are diminishing returns to the number of brands one company owns. I mean, it’s almost like enough is enough. I think that wave is kind of over,” Standard International CEO Amar Lalvani said in an interview with Skift. “I can tell you, even from our experience, they do want to acquire one-off brands.”

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It’s easy to think of the hotel world as one ruled by the largest brands. Marriott, Hilton, IHG Hotels & Resorts, Accor, and Hyatt account for nearly 60 percent of the world’s hotel development pipeline, according to Lodging Econometrics. But there are plenty of smaller players that have a devout following of travelers.

Along with Standard International, companies like Montage, Dream Hotel Group, Loews Hotels, and Omni are all U.S.-based entities unaffiliated with one of the global giants. When Hyatt leaders first indicated they were looking at acquiring a brand that could build up their presence in Europe, industry chatter focused on companies like Kempinski, Corinthia, and the SET Collection.

“I believe as they’re considering adding new brands, they’re debating ‘Should we do that through launching our own or buying a brand?’” Lalvani said of the global conglomerates. “So we get approached by big companies. They want cool brands like The Standard, and there’s just not that many left.”

Precise Expansion: Hyatt’s Apple Leisure Group acquisition announcement arrived as the CEOs of companies like Marriott and IHG have all indicated in recent weeks a more geographically targeted approach to expansion. IHG’s new soft brand, the Vignette Collection, is expected to beef up the company’s luxury presence in Europe, the Middle East, and Asia outside China.

Marriott leaders don’t anticipate a repeat performance of their $13 billion Starwood Hotels & Resorts takeover. Instead, it’s all about the smaller brand.

“You’ve got the reality that, depending on what kind of player you’re talking about, the bigger ones would be looking for kind of one-offs that can fill in a hole rather than needing to go and do very large kind of transformational deals,” Leeny Oberg, Marriott’s chief financial officer, told reporters last month.

Marriott already has a history of doing deals like this. AC Hotels was concentrated in Spain when Marriott first partnered with the brand in 2011. Acquiring South Africa-based Protea Hotels in 2014 gave the company a significant presence in sub-Saharan Africa.

“You may see some of these smaller transactions that follow a pattern where we have a small regional player that allowed us to get a footprint in a market where we struggled to grow” Marriott CEO Anthony Capuano later added.

Accor gained a slightly larger presence in North America through acquiring smaller hotel companies like SBE and 21c Museum Hotels. There’s every reason to expect a flurry of more deals like these in the pandemic recovery.

Shareholders want to see growth, even amid the uncertainty of a global health crisis. This can be achieved by wooing owners of existing hotels to take on a brand affiliation or through an acquisition of a smaller company.

“I don’t believe necessarily that you’re a sitting duck, per se,” Evan Weiss, chief operating officer at LW Hospitality Advisors, said of the likelihood of independent brands inevitably getting acquired. “I do think, though, that there is a significant appetite on the part of the major brands to continue to fill their holes in their branding capacity. For those brands, it’s all a volume game. It’s a key count game, and it’s about having a brand to offer every kind of traveler.”

Scale at the Expense of Being Suave: Just because big hotel companies want to acquire smaller brands doesn’t mean they’re going to sell.

Some may like the idea of getting better distribution and loyalty networks by linking up with a Marriott or a Hilton. But others get concerned by the idea bigger hotel companies water down a cooler brand after they take over.

“I think it’s going to get harder and harder for those companies to absorb these types of brands and for the brands to stay true,” Dream Hotel Group CEO Jay Stein told Skift last year before cautioning about Hyatt’s 2018 acquisition of the parent company of Thompson Hotels: “Thompson under Hyatt is going to struggle. That’s where we get the leg up.”

W Hotels was essentially the poster child of the hip, boutique hotel movement before Marriott acquired its parent company Starwood. W’s cool appeal dimmed over the years. A brand refresh was in the works just before the pandemic, but many in the hotel industry argue the biggest hotel companies that led the standardization movement decades ago with brands like Sheraton and Hyatt Regency aren’t a likely source to birth the next hot commodity for hotels.

“Ultimately, there’s a reason the big companies didn’t create most of the coolest brands in the business — because it takes a different DNA to do so [and] a different type of talent than exists within the large organizations,” Lalvani said.

Arguably, Marriott’s coolest brand today — Edition — grew from a partnership with nightlife maven-turned-hotelier Ian Schrager.

“I think the exciting ideas come out from the innovators and the big companies, you know, are really more about execution. Maybe a marriage of those two is a good thing,” Schrager told Skift earlier this summer. “You have to take a look and see whether or not you think that person is going to be able to make sure there’s not too much meat on a ham sandwich when it gets sent down to the dining room.”

Soho House’s Mixed Signals

Rosewood Hotel Group’s private club launch in Hong Kong this summer arrived just as competitor Soho House went public on the New York Stock Exchange. But while Soho House rallies around the idea of cool members and lengthy wait lists, Rosewood is marketing its Carlyle & Co. concept as a club for all (who can still pay the membership dues).

“I grew up in Hong Kong, and a lot of the membership clubs here are very much because of the price point, or it’s very much about your profession or your social status,” Rosewood CEO Sonia Cheng said in an interview with Skift. “You can really feel that this is a different community, and you feel that you can meet people that are outside your normal kind of social circle, and that makes it really interesting.”

Industry analysts told Skift last week more hotel companies are likely to jump into the members-only club market because its a durable revenue stream. Soho House only lost about 10 percent of its membership base during the pandemic while hotels saw occupancy rates plummet to single digits during the worst of the pandemic. Hotel companies may want to look at the whole picture.

Profit Miss: Soho House’s parent company, Membership Collective Group, lost $47 million over the second quarter — an improvement from the $58 million loss seen in the second quarter of 2020 but yet another loss for a company that has never posted a profit.

It isn’t just the hotel industry learning from Soho House. MCG now operates 30 Soho Houses around the world, and the company is taking an increasing capital-light approach in opening clubs thanks to more real estate developers seeing value in what one of the brands does to surrounding property values. That’s similar to how hotels typically partner with developers in building properties and rarely own any of the real estate.

MCG might have invested $10 million or more in the past in order to open a new Soho House, but those costs are now somewhere between $3 million and $6 million, according to the company’s prospectus and road show ahead of going public earlier this summer.

The Hotel Dealmaking Takeaway: Hotels considering getting into this kind of business may want to first look inward — as in, what kind of underutilized space is taking up room in a property, and can it be converted into an exclusive club? It’s less capital intensive than taking out a lease on a new building and can be a test to see how much of a market there is for a new, exclusive brand extension.

“There’s a lot of spare capacity in a hotel. There’s a lot of lobby space that isn’t used at any particular moment of time. The gym rarely has anyone in it,” said Richard Clarke, a managing director covering global leisure and hotels at Bernstein. “I expect we’ll see more hotel groups do something similar to this.”

The Delta Decline

Hotel companies and developers continue to take the long view when it comes to breaking ground on new projects or inking new brand deals. But there are early signs the industry’s recovery from a consumer standpoint stalled in recent weeks, even if hotel CEOs largely ignored the possibility of negative impact on their most recent earnings calls.

China’s hotel market tanked due to an outbreak of new cases of the Delta variant. U.S. occupancy rates averaged just shy of 64 percent last week, according to STR. Revenue per available room, the industry’s key performance metric, was less than 5 percent off 2019 levels. But this was the fourth week of consecutive occupancy declines in the U.S.

The kind of leisure travel propping up the U.S. hotel industry is expected to dissipate after Labor Day, and no clear return on business travel and in-person work is almost certain to drag down performance this fall.

“Demand looks like it is running slightly worse than the typical seasonal decline,” Bill Crow, a Raymond James financial analyst, told Bloomberg.

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