From left: Nick van Marken, Denis Hennequin and Chris Nassetta talk about issues of the day during Wednesday’s European Hotel Investment Conference.
LONDON—Leaders from two global hotel giants, which represent nearly 7,500 hotels comprising more than one million hotel rooms, said they like the direction the industry is heading and are pleased with their respective companies’ business models.
Chris Nassetta, president and CEO of Hilton Worldwide, said because the supply-and-demand equation is so good, the foreseeable future looks positive.
“The delta between supply growth and demand growth will be greater next year, and that will result in more pricing power, particularly in the U.S.,” Nassetta told the 400 delegates during the opening general session of the 24th European Hotel Investment Conference. “We think ‘13 will be better than ‘12 because the U.S. will show some greater sustained growth.”
“The U.K. in the second half of year will start to show some pickup, and emerging markets and China will continue to grow and surprise people,” he said.
Nassetta expects global revenue per available room to grow between 6% to 7% this year and by the same amount in 2013.
“By any metric, these are pretty good years for the business,” he said.
“The present situation for our properties looks pretty good,” Denis Hennequin, chairman and CEO of Accor said. “The growth outside of Europe is booming. The reality is that once people reach a certain level of income, they want to travel more.”
He said the first destination travelers from most emerging nations are looking to visit is Europe, and low-cost airlines are helping build that traffic.
On the real estate front
Hennequin said the company sold its Motel 6 brand in North America in part because it didn’t match the company’s global portfolio.
“We went to the market in the U.S. on the wrong foot,” he said. “Motel 6 was not suitable for us. There were no synergies we could build around that brand. At some point in time it made sense to reinvest (in other assets). We are better off deploying where we are strong.”
Hennequin said he has no interest in re-entering the U.S. economy segment at any time and “the midscale segment is pretty full.” He said any North American growth for the company will come through its luxury Sofitel brand.
Accor remains on track to become more asset light by selling key real estate holdings.
Hennequin said it’s an effort to “reduce the capital intensity of our properties” but added the company will retain a significant number of hotels while remaining as operator of many others that it sells. Accor divested €1.2 billion ($1.53 billion) in 2011 to 2012 and plans to divest an additional billion between 2012 and 2015, he said.
“The profile of the 2016 Accor will be quite different,” he said, adding that only 20% of the portfolio will be corporate owned and 50% of its revenues will come from Latin America and the Middle East.
Hennequin said proceeds from the sale of assets will be reinvested in the remaining portfolio and for acquisitions. A portion will also go back to shareholders.
Nassetta said Hilton’s real estate holdings account for 38% of the company’s earnings before interest, taxes, depreciation and amortization, and there is no urgency to get them off the ownership books.
“We do own a bunch of big assets,” he said. “We have acquired some assets primarily by buying out (joint-venture) partners.
“Over the very long term, we will clearly pursue asset-light strategy, but for the time being we’re comfortable owning the real estate,” Nassetta added. “We have a number of years of positive fundamentals in front of us; I like owning this real estate.”
He said Hilton’s pipeline of 170,000 rooms is virtually complete following the asset-light model.
“We don’t need to deploy our balance sheet,” he said. “For the type of growth opportunities we see out there, third party is the best way for us to grow.”
Luxury takes the spotlight
The two executives spent significant time talking about the luxury brands in their portfolios.
Nassetta said Hilton’s luxury offerings—the Conrad and Waldorf-Astoria brands—have doubled in size to 45 open and between 20 and 30 in the pipeline since he became the company’s leader five years ago. He said by the end of 2013, the number of open luxury properties will be triple what it was in 2007.
Nassetta said the luxury portfolio is important because it includes the needs of guests and it creates a halo for the company, making it more attractive for whatever exit strategy Blackstone Group decides to utilize when that time comes.
“Where all the luxury construction is going on is Asia/Pacific and the Middle East with a small spattering elsewhere in the world,” he said.
Hennequin said the two fastest growing segments in the world are the luxury and the economy segments.
“Two things we’ve been pushing hard are strengthening economy around Ibis, and we’ve established ourselves as a credible player in the luxury world,” he said.
The company selectively cut its Sofitel brand in half to 120 properties in an effort to cleanse the brand.
“There’s plenty of room to grow the luxury segment for all players,” Hennequin said.
Additionally, the Ibis brand is on the repositioning fast track. Hennequin said a typical brand repositioning takes between five and seven years, and Accor will complete the Ibis repositioning during a three-year window. Seventy percent of the 1,600-plus properties located in more than 50 countries have been updated, he said.
Likewise, Hilton has been on a mission to expand its global footprint, revamping its Hampton Inn, Hilton Garden Inn and Doubletree by Hilton brands to be more flexible for the world stage.
“We retooled those products for Europe and what the customers want,” Nassetta said. “In these markets, customers want a good product and the fact of the matter is throughout Europe there’s a lot of obsolete product, small independent hotels that are not particularly functional in terms of what they offer the customer.”
He added that more customers in Europe want a functional product in a value-oriented setting, which plays into what Hilton’s brands offer.
Hennequin said Asia/Pacific is the company’s fastest growing region—50% of the company’s 110,000 rooms in the pipeline for the next three years is located there.
“China, of course, is a big component of growth for the Asia/Pacific market, but China alone is not the answer to all success,” he said, noting the company’s focus on Australia, Indonesia, Thailand and Vietnam is a big part of its growth plans. “China is still a market where RevPAR is modest and fairly low, but it does create awareness for the brand with Chinese travelers.”
Hennequin said Accor also likes Latin America, where he said the company will have 300 hotels open by 2015.
“In Latin America, supply is still very low, demand is slowly increasing and big events are coming up,” he said. “Of course we’re not building hotels just for events, but the reality is those events change the traffic patterns in those countries.”
He said the company will grow through organic growth as well as acquisitions.