Last year’s hot topic at HICAP Update in Singapore was the need to set up joint ventures in order to facilitate entry to tricky local markets such as China or India, but as Robert Williams admitted while moderating this year’s discussion on behalf of Withersworldwide, this was then followed by the complete absence of any notable joint ventures during the subsequent twelve months. Clearly a hotter topic had to be found this time around, and so attention was duly focused on consolidation. With Chinese insurance company Anbang making a timely US$12.8 billion bid for Starwood and potentially usurping Marriott in the process, mergers and acquisitions certainly provide a talking point.
To set the scene, in the car rental sector, 90% of the business falls to the five largest companies. For the hotel sector, that top five figure is closer to 20%. If you then believe, as Richard stated, that organic growth is no longer sufficient, an argument clearly exists for hospitality groups to seek out acquisition targets, most typically among national or regional chains from the middle ranges of the pecking order. Justin Gross of Withersworldwide confirmed this is the case, noting that “when the biggest have an appetite to get bigger, that tells you something is happening.”
Clarence Tan of IHG was on hand to explain the benefits – economies of scale, management through a single platform, obtaining brands which fill a particular gap, and gaining access to a broader range of potential guests – while citing the success of his group’s Kimpton brand. The efficiencies bring about lower costs for owners, and for those independents obliged to rely on the OTAs to attract custom, access to branded distribution channels which could save up to 20% in commissions. In the case of Kimpton, a boutique chain acquired in 2014, Clarence described the operating situation as “defined by Kimpton, but powered by IHG.” He didn’t mention the handful of Kimpton hotels in the San Francisco area which left the brand after the acquisition. While this was not necessarily a direct consequence of the management change, it remains indicative of the potential for things to go wrong. “Once you get the culture right, it’s very smooth,” said Clarence, while tacitly acknowledging the difficulty in doing so.
Brands clearly have an important role. One owner in the audience explained that brand value lay primarily in the distribution channels rather than brand recognition. Indeed, not a single hotel brand appears in the listing of the top 50 most recognizable brands worldwide. This may be a consequence of market fragmentation, but the leading hospitality groups are not overtly identified with the brands they own; it is rather as if one could drive a Camry or a Corolla without ever being made aware that both are Toyotas.
One conference delegate took the opportunity to expand on this point. “Aren’t there just too many brands already?” he asked. “I’m in the industry and I have no idea what they all represent, so heaven help the consumer. We see depletion of brand value, so we just invent a new brand, and no-one knows what it’s supposed to mean. Some of them are just these weird new words – so forget about customer loyalty, I’ll just stay with anyone.”
In Asia-Pacific, Clarence remained confident that industry consolidation would continue, especially as the region offers some of the highest growth potential in the world. The region also has a balance of mature and emerging markets and is thus ideal for balancing risk. Eric Levy of Tourism Solutions added that he was seeing more Master Development Agreements, with the caveat that he “wasn’t seeing more that actually worked.”
A final word of caution came from Robert, who confided that he believed more owners would be challenging their management contracts in the coming months, so litigation would be one area which would see a strong upturn in activity. As a lawyer, he carefully suppressed any outward signs of satisfaction at the thought, but the notion is a clear reminder that there are many stakeholders at all levels who are affected by consolidation, many of whom are not in a position to decide their own fate.