Geographic expansion and diversification is hardly a new concept in growing a business. According to Jones Lang LaSalle Hotels, the pace in which branded hotel companies are pursuing assets in new locations will reach a new focus and intensity in 2012.
While Brazil, Russia, India and China (otherwise known as the BRIC nations) remain a key focus of international growth, several other high growth markets are offering an ever-expanding customer base and the opportunity for branded international expansion to more aggressively move beyond the BRICs. Countries that offer rapid economic expansion and growth, decades of pent-up demand and a large deficit of hotels are just waiting to be tapped. Indonesia, Malaysia, Nigeria, Turkey and Vietnam are just a few of the nations that are showing well-developed commercial real estate, strengthening domestic corporate base, stable financial markets that now provide a foundation for growth and leisure and corporate travel. Notwithstanding its well-publicized security challenges, Mexico’s economic outlook, strategic location and relatively sophisticated business environment, have caused Goldman Sachs to classify it alongside the others as an attractive high growth market.
“Hotels in the United States and Western Europe are heavily weighted towards global brands, with nearly 70 percent of all properties bearing globally recognized names. The situation in much of the rest of the world is almost the inverse in the aggregate,” said Clay Dickinson, Executive Vice President for Jones Lang LaSalle Hotels and leader of the firm’s Strategic Advisory and Asset Management division in Latin America. “The need to be in markets in which their customers are increasingly traveling, limited competition from local hotel brands and the potential to capitalize on the rapidly growing middle class incentivizes international companies to continue expanding abroad, ideally until the size of their presence abroad more closely reflects that in their home markets.”
Global growth in emerging markets will be facilitated by the availability of capital and a tolerance for risk. Mature markets remain an opportune location for investments; however, there is limited opportunity for growth.
“The demand for hotel development in mature markets, like the United States, is expected to be about two percent in 2012, limiting growth for many major brands,” said Jalil Mekouar, Americas COO and Managing Director of Strategic Advisory & Asset management for Jones Lang LaSalle Hotels. “We expect that hotel brands will continue to deploy international expansion into their growth strategy to ensure continued momentum bringing investment opportunities to previously unconventional markets.”
While the future of high growth markets outside the United States looks appealing, successful expansion and integration in these countries can be difficult. “Most global brands have come to prefer an ‘asset light’ model based primarily on growth via management contracts or franchising, which is often incompatible with the demands of high growth markets – both from a practical and investor requirements standpoint,” said Mekouar. “In many of these countries there is still an expectation that the brands will invest in new hotel projects. Moreover, there tends to be a limited number of independent management companies capable of meeting the standards required to grow brands via franchising.”
In order to be successful, brands generally must work with local partners, and in particularly attractive markets which offer key gateway cities, economies of scale or both, those local partners can often bargain from a position of strength when it comes to dictating the terms. Increasingly, they are demanding that the brands ‘invest’ in expanding into the country – be that in the assets to be developed, in key money for management contracts, or in building out a more robust support infrastructure to support the value of their brands. “Brands have generally paced the adoption of this viewpoint, but increasingly are selectively making such investments,” added Dickinson.