Big Hotel Brand Interest in All-Inclusive Resorts May Be Overheated

For several years now, the big hotel brands have been adding all-inclusive resorts, stealing market share from independent and regional brands. Several factors will sustain this trend, said a new, well-written report from JLL Hotels & Hospitality Group, a brokerage and research firm.

• For example: In the past decade, the big brands gained ten percentage points of share in Mexico and the Dominican Republic alone, JLL said.
• A decade ago, 70 percent of resort properties were owned by independent and regional brands, such as Sandals, Iberostar, and Riu. Now only 60 percent are.
• Big brands are chasing big money. All-inclusive resorts produced about $7.9 billion in revenue in the first half of the pre-pandemic year of 2019 — a 20 percent sales jump over five years, said STR, which has monitored data on about 1,500 resorts.

Adding all-inclusive inventory is an understandable play for some big hotel brands.

But hoteliers’ broader exuberance about the all-inclusive segment’s potential for fat profits might be overheated — perhaps as overheated as some of the guests by the infinity pool.

The trend isn’t new. Big brands have been adding all-inclusives for years. But deal interest has been heating up. Recent deals include:

• Hyatt closed a $2.7 billion acquisition of Apple Leisure Group in November.
• In 2019, Marriott announced an $800 million multi-pronged push into all-inclusive. Part of that involves the world’s largest hotelier creating an “All Inclusive by Marriott” umbrella, with all-inclusive hotels beginning to open in 2024 under brands such as Ritz-Carlton and W. About 49 percent of its recent hotel signings and conversions in Latin America have been all-inclusives.
• Accor said this year it will quadruple Rixos Hotels to 100 by 2027

Two factors are driving big hotel brand interest. One is the growing demand for all-inclusives, especially premium ones. The other is the potential for scale efficiencies.

Some all-inclusives have made strides in repositioning themselves as a more deluxe service than the mid-market, mediocre reputation of the past.

• In the Dominican Republic, all-inclusive luxury resorts increased their market share by 16 percentage points between 1990 and 2022, JLL said.
• In Mexico, only 17 percent of all-inclusive properties were “luxury” in 1990. But luxury now represents one-third.
• So-called premium, or “upper upscale,” resorts have also grown.

Big hotel brands believe they can use their efficiencies of scale — especially in marketing and distribution — to make the all-inclusive model more cost-efficient and, thus, profitable.

• The big brands like Marriott and Hilton have enormous loyalty programs, which can be tapped as sources of direct marketing and direct distribution for all-inclusives.
• “Since the all-inclusive segment relies so heavily on reducing operating expenses, the ability to leverage these loyalty programs has been a significant impetus in the expansion of traditional European plan brands into the space,” said JLL’s report.
• For example, last week, Marriott said it planned to make available as a booking redemption in its loyalty program Royalton Splash Riviera Cancun, a 1,049-room all-inclusive resort and waterpark. The resort is set to open later this year and be managed by an arm of Sunwing.
• Companies like Hyatt are also finding attractive regional players that have created vertically integrated distribution-and-product systems, such as Apple Leisure Group. They can help streamline operations while keeping the marketing machinery, including travel agents familiar with the product.

Destinations are seeking the development of all-inclusives, said an IDB Invest report. Plus, some airlines are adding routes. Both factors could increase inventory.

• In Mexico, La Paz, Mazatlán, and Puerto Escondido are seeking resorts, Hotel News Now reported.
• Airlines have been adding flights to many markets. For example, Colombia has authorized 32 new international routes, including “the first-ever route from the United States directly to its island of San Andres, which starts from Miami,” said JLL’s report.

Reasons for Caution About All-Inclusives

Yet, despite all of the factors above, there are reasons for big hotel brands to tread cautiously. When interest in something is exuberant — as hotel interest in all-inclusives has been lately — that can be a warning sign of inflated prices relative to long-term return-on-investment.

Mergers of companies with different business models tend to stumble, on average.

• Consider the case of Apple Leisure Group (ALG). It lucked into finding a solid strategic buyer in Hyatt. Unmet pent-up demand for leisure travel helped ALG boost Hyatt’s results in the first quarter.
• But! One of the challenges at ALG has been its unwieldy business lines and scattered offices The structure has been costly.
• Hyatt’s headquarters in Chicago will likely have to deal with ALG’s operations in Cancún and Miami indefinitely. Streamlining operations may be time-consuming.
• The merger’s premise involved revenue synergies. Hyatt’s large distribution network promised to more efficiently sell the resorts. But if the revenue synergies are weaker than expected, Hyatt will have to ensure that cost savings are higher.

It matters how a merger is executed between a hotel company and an all-inclusive player.

• A large challenge for traditional hotel companies is that all-inclusive is sold differently. All-inclusive packaged revenue includes food and beverage, so it has higher fixed costs to deliver. The non-package revenue — such as spas and dinners on the beach — produces high margins. So upselling is critical. But many big hotel brands aren’t as good at upselling as they ought to be.
• For the all-inclusive model to work, direct sales are key to minimizing distribution costs. Also critical is having a great personalization game through marketing technology to upsell heavily.

Asset-heavy operators might have an advantage over big brands in differentiating that appeal to premium customers.

• Club Med teamed up with Cirque du Soleil to launch a circus-themed playground.
• Karisma Hotels did a brand extension with Nickelodeon, the children’s TV network.
• The above products might demand premium prices in a market filled with look-alike offerings.
• Yet these kinds of potentially high-margin products may be harder for big hotel brands to create.
• The real margin opportunity may be in the asset-heavy control of operations — the opposite tack from what the big hotel brands are taking.
• For example, Sandals has “hard brands,” which may win share more easily for premium traveler wallets than the “soft brands” that Marriott, Hilton, and Hyatt are developing.
• Sandals recently said it owns enough land to double its size.
• It’s not the only traditional operator ready and capable of putting up a fight for the highest margin guests.

All-inclusives grew between 1990 and 2022, thanks partly to the rise of budget carriers worldwide. But that tailwind may lose its force.

• Sluggish growth in low-cost flights because of rising jet fuel costs in an age of climate change could burn optimistic investors in the international market for all-inclusives.
• Climate change may also boost operational costs for all-inclusives in the tropics much faster than business plans account for. Minor inflation, such as rising costs for pesticide control, air conditioning, or de-salination, could add up more quickly than expected.

Countering technology underinvestment may suck out some of the profit big hotel groups hope to discover.

• A good technology game, especially in marketing and in reducing operational costs, is key. But many players have outdated tech and tech that’s not immediately compatible with the systems used at big hotel brands.
• A case in point: TUI Group is a big player in the fly-and-flop market. TUI finds that directly controlling the assets can be ideal for gaining operating leverage through tech investment.
• True, TUI is massively indebted overall.
• But the group’s recent ramp-up of its tech game suggests it may have a better grasp than the hotel giants of what technological investment will be needed to unlock value in all-inclusives.

Adding demand cheaply is a proven model for merger success.

• Fosun International, a Chinese conglomerate, took majority control of Club Med in 2015. Club Med went from losses in 2014 to profits in 2016 and resumed expansion. The conglomerate spun it out, as part of Fosun Tourism Group, in 2018.
• The turnaround’s success may have owed more to the funneling of Chinese visitors that lacked comparable alternatives into Club Med properties than achieving scale efficiencies. Cheaply adding new demand to an all-inclusive product can boost margins. But taking costs out of an all-inclusive model can be harder.

The all-inclusive model keeps travelers spending inside the resort’s gates. While cruise ships can do this easily, resort owners may have a harder time.

• Shifting cultural preferences in a new generation may push some higher-end travelers to seek at least a sense of engagement with local communities, as my colleague Lily Girma suggested in a recent article. Does any recent Airbnb ad evoke the closed walls and large buffet bar of a resort? No.

All-inclusive will certainly be a tempting opportunity for hoteliers. Expect more acquisitions.

• Playa Hotels & Resorts, which went public after a blank-check merger with TPG’s Pace Corporation in 2017, might be priced attractively because of market dynamics and its consistent profits. Playa’s close partner Hyatt may be in a shopping mood in the next couple of years.

But hoteliers have to carefully place their bets, watching out for the perils of entering a truly different business model. Decades of steady growth in the past don’t necessarily promise fat profits for decades to come.

CORRECTION: This article originally said that Playa Hotels & Resorts oversaw an all-inclusive resort brand with Panama Jack. But while it managed, owned, and operated those two properties, those properties are now Wyndham Alltra.