As mega mergers go ahead in the hotel sector, what does this all mean for brands?
Over 1,600 years since Sun Tzu wrote his classic treatise on the art of war, tactics are alive and well. This is especially true of today’s travel industry. As you read this, battles for market share are raging among industry giants and upstarts alike. And one tactic in particular has found favour as a means for gaining competitive advantage: mergers. Airlines are swallowing up airlines; online travel agencies absorbing online travel agencies; and car-rental companies wolfing up car-rental companies.
Nowhere is the merger trend more visible than in the hotel industry, which has seen a flurry of acquisitions activity since the start of 2015. First, the San Francisco-based Kimpton Hotels and Restaurants was acquired by InterContinental Hotels Group for USD430 million. Then FRHI Hotels and Resorts was bought for USD2.9 billion by France’s AccorHotels. And most recently we have Marriott International’s USD12.2 billion takeover of Starwood Hotels & Resorts Worldwide, a deal creating the world’s largest hotel management company.
Many are asking what all this consolidation means for consumers. “I have read a lot about the recent acquisitions and there are many references to scale, cost-savings, competitiveness etc., but what’s in it for the patron?” wondered Bill Heinecke, the head of Minor Group, recently. His concerns seem to centre not so much on whether titans uniting will translate into higher prices for consumers as whether it will enhance the guest experience. “I can imagine that the loyalty programme offering will be more all-encompassing,” he told TTG Asia, “but will the actual experience in each and every property across the globe be enhanced because of these titans coming together? I truly doubt it.”
He added, “What one gains in scale one loses in agility and the ability to take care of the most important element of the business – the guest.” He’s also not convinced that mega brands are in the interest of hotel owners. “There is certainly an argument for economies of scale, but owners will become very small fish in a very big pond,” he said. “In addition, they will compete with hotels/brands within the company.”
To gather industry insights on the issue, QUO recently spoke to Peter Henley, president and CEO of ONYX Hospitality Group; Nikhom Jens, senior development planning manager at Jumeirah Hotels & Resorts; Michael Levie, chief operations officer at citizenM; and Jesper Palmqvist, area director Asia Pacific for STR Global.
Are we at the start of a merger and acquisitions feeding frenzy?
Peter Henley: M&As have been around in the hospitality industry for a long time. The situation today, however, is different. Firstly, deals are being discussed or concluded on a scale previously not seen. Secondly, companies of all sizes are seeking the potential financial benefits of a broader customer reach and reduced costs.
Nikhom Jens: Over the past years the hospitality industry has gone through a high growth period in many markets while the world’s economy is slowing down. To remain competitive, other global chains that focus on scale and geographical coverage will need to step up. Quick fixes are undoubtedly acquisitions of smaller chains or mergers to complement their existing portfolio. Capital outflow from Asia, particularly China, is another driving force for M&A activities, such as a Chinese firm’s takeover of Club Med.
Michael Levie: With the Internet revolution, online travel agents appeared and are better than hotels at capturing individual business, e-commerce and online marketing. Meanwhile, corporate contracts are losing ground as price transparency obstructs hotels to react fully to the market. Also channel management, where your reservations are coming from, has gained importance due to the costs associated. This is all putting stress on the frequent-stay programmes of hotels. Loyalty is bought, and volume in these programmes is the last stronghold of chains. Chains have become asset light, barely managed and reduced to brands. Consolidation is the only way forward in their eyes, yet won’t solve the underlying problem. Online travel agencies (OTAs) with their own corporate loyalty schemes will capture ground.
Jesper Palmqvist: M&A activity certainly picked up in the last 12 to 18 months in our industry, and even though recent activity involving Starwood Hotels & Resorts is of an unusually larger scale, we’ve seen many reasonably big deals happening in the past as well. From a personal opinion it would seem likely that this activity would continue, especially in China, where competition is more intense than before, both across travel technology and hotel companies. There seems to be a sentiment there that size does matter at the moment. But in other countries around the world there is less of a frenzy, partially in some cases due to them coming out of a larger consolidation phase and now finding their feet again in terms of market dynamics.
Where is the balance between cannibalising guest segments and gaining the ability to put multiple properties under separate brands into a single market?
Peter Henley: If brands are clearly differentiated and have a clear understanding of a market, a company can effectively operate various properties across different brands in the same market. For the larger companies, there is undoubtedly some overlap between brands and it is their responsibility to show owners that they can drive revenue and bottom-line growth despite this. There is no single solution – it is something that each hotel company considering a merger must address.
Nikhom Jens: Personally, in emerging markets where demand is growing while supply is limited, it is possible to see benefits from having more brands in a merged portfolio. Basically, you gain a larger market share and increase consumer awareness of your group quickly. In mature markets, the pie is pretty much the same size. It is hard to drive new businesses into these properties and you will see the owners realising this impact soon.
Michael Levie: All major chains have too many brands that already overlap grossly. On top of that, take into consideration the various physical states of properties and an old/bad five-star brand in a chain can be way worse than a new three-star brand of the same chain. In addition, location remains the key factor for competing.
Jesper Palmqvist: One of the challenging aspects of any post-M&A scenario is aligning and embedding brand cultures. If you acquire a brand that, both at the corporate office and property level, contains values and a vision that are quite different from that of the new owner, it can sometimes be difficult to adapt and have that operate optimally. There’s never a one-size-fits-all approach in terms of what to do with a new set of brands and management contracts; it so much depends on overall size, what brands you have, the geographic spread and much more.
What should a freshly merged company do to preserve the uniqueness of its newly acquired brands?
Peter Henley: Hopefully any company considering a merger has done their homework as to how the newly acquired brand will fit into the merged company. If the end goal was to generate the inherent value of a particular brand then every effort must be made to preserve the uniqueness of the brand. If, however, the end goal was different – maybe the acquisition of assets or to expand their marketing reach – the outcome of the merger might be different.
Nikhom Jens: I believe there should be a comprehensive study on how brands in the same tier/price point can coexist. Perhaps they cater towards different types of consumers (corporate vs. leisure, traditional vs. lifestyle) or they are strong in different markets.
Michael Levie: The only real differentiator will be ‘brand experience’. I don’t believe any of the major brands differentiate themselves at all, so they can put any brand name and logo on any building and it truly won’t make a difference.
Jesper Palmqvist: I’d say first and foremost that it depends on the management company; if they want to preserve the uniqueness in the first place, there needs to be flexibility and a culture of adaptation of internal process across operations, marketing and other departments. Some bigger groups have shown over time that they are well equipped to do so, whereas others may have found it more challenging keeping that unique aspect of a new brand.
How do mergers of large hotel companies affect the branding of the hotel company itself, in terms of both B2B and B2C?
Peter Henley: The merging of larger companies such as Marriott and Starwood will bring together two very powerful loyalty programmes and their respective databases. From a strategic perspective, the new company could seek to drive more business through direct B2C channels.
Nikhom Jens: Basically, scale will augment the importance of brands within the hotel company. There will also be more negotiating power with suppliers, service providers and owners. At the same time, global consumers will be more aware of the hotel company. This is what Accor has done over the past years to penetrate Australia, India and China. However, this doesn’t mean that mergers will always be successful. Mergers of two regional boutique firms may not have the same impact.
Michael Levie: Corporate contracts are on the decline; this will remain the case with or without mergers. Brand frequent-stay programmes will be under pressure as a result of diminishing corporate deals. OTAs will continue to be a solid solution and gain ground, including focus to win over the corporate companies. My conclusion is that with or without mergers, the chains have a huge problem.