Vertical integration resurfaces in resorts
In the hotel industry, constant pressure exists from shareholders. Return capital. Sell off non-core assets. Unlock cash for faster expansion initiatives.
Consequently, for the past several years, many global hotel companies—from Marriott International to InterContinental Hotels Group and Mexico-based hotel group Grupo Posadas—have adopted an asset-light growth strategy to generate revenue. Focusing on third-party management and franchising rather than real estate ownership, these companies have spent less money on fixed-asset investments.
For example, Marriott International owns six out of 3,700-plus hotels; IHG owns nine out of 4,600-plus in their systems.
But is a paradigm shift afoot?
The asset-heavy business strategy, one of vertical integration, recently has resurfaced with many global travel companies. They are forming their own hotel ownership and management divisions. The goals are multifold: complement their ancillary travel business, generate a presence in key locations, increase control over products and services, and create additional revenue streams.
As these intrepid travel companies further pursue vertical integration, what key implications should industry stakeholders anticipate? This asset-heavy model signifies companies entering into businesses that:
extend beyond their core expertise;
prove capital intensive; and
create investment concerns and potential conflicts of interest.
Extending beyond core expertise
Global travel and tour companies today wear many hats: tour operator, travel agency, airline owner, ground transportation provider, land-based activity architect—and now hotel owner and manager.
To complement their ancillary businesses, these companies are moving away from their core distribution expertise and investing in hotel real estate. This is happening particularly in Mexican and Caribbean all-inclusive resort markets, where wholesalers (tour operators) and retailers (travel agencies) are largely responsible for generating hotel demand.
By becoming a one-stop shop, these vertically integrated travel companies employ both business-to-business and business-to consumer strategies to maximize gains from additional revenue streams. Yet, as vertical integration influences where distributors allocate demand, this system creates potential conflicts of interest for other hotels.
This new distribution paradigm has been particularly successful for repositioning Mexican and Caribbean resorts where the traditional third-party distribution model (via third-party licenses and franchises) has not performed as well as packaged travel (via wholesale contracts and, increasingly, online travel agencies). However, dynamic pricing and yield management (versus more static packaged pricing) has been somewhat hindered.
Some examples of Mexican resorts that have been converted to the all-inclusive business model to benefit from vertical integration and other market factors include: the conversion of the Fiesta Americana Condesa to an all-inclusive, resort; the former Mandarin Oriental Riviera Maya to a BlueBay Resort; the former InterContinental Paraiso de la Bonita to a Zoetry Paraiso de la Bonita; the former Le Meridien Cancun to a Sandos; the former Hilton Cancun to an Iberostar; and the Marquis Los Cabos to a Secrets Resorts & Spas, among others.
As a result, some of the large global hotel companies, such as Hilton Worldwide, also have begun to roll out brand products to compete in the all-inclusive marketplace, such as the recently opened Hilton Puerto Vallarta Resort in Mexico. Others will likely follow.
The success and growing acceptance of the all-inclusive business model in Latin America is largely due to the benefits of vertical integration, which provide for enhanced product development. Vertically integrated travel companies have used their ancillary business platforms to conduct thorough market research and listen to guests about their travel needs and vacation experiences, ultimately developing differentiated hotel products, services and brands to capitalize on these opportunities.
For example, Blue Diamond Hotels & Resorts, part of Sunwing Travel, created multiple hotel brands that appeal to different market segments, such as their Royalton luxury brand, Memories family brand and Grand Lido adults-only brand. Thus, these travel companies pursuing the asset-heavy business strategy may be extending beyond their core areas of expertise, but, in many cases, they seem to be also adding value to their existing business with these ancillary hotel products.
Capital intensive businesses
The asset-heavy strategy, besides requiring companies to step outside their core areas of expertise, also requires significant capital. High barriers to entry exist to grow in key markets and coveted locations.
Thus, over the past few years, several global travel companies have deployed their own capital to enter key all-inclusive resort destinations like Mexico (mainly Riviera Maya), Jamaica and the Dominican Republic. Hotel groups such as Ocean Hotels & Resorts, part of Canada-based tour operator Transat A.T., and U.S.-based Apple Leisure Groups’ AMResorts have focused their core expansion and capital investment efforts in these key markets.
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Canada-based travel company Sunwing Travel recently announced a $250-million investment in early 2013 to develop a 1,250 room Royalton Resort in the Mexican Riviera Maya, while travel company Spain-based Grupo Piñero’s also announced a $250-million investment in mid-2012 for seven new resorts under its Bahía Príncip brand in the Dominican Republic and Mexico. These hotel groups have also planned expansion initiatives for new destinations in the Caribbean, Central America and Latin America.
As vertically integrated travel companies grow in the Latin American hotel sector, several investment concerns arise, including seasonality issues and a potentially weaker relationship between tour operators/distributors and their hotel partners.
For example, investors of hotels that are in the same market as these vertically integrated travel companies have expressed concerns that these companies may first allocate hotel demand to their owned asset(s) instead of other competitive hotels.
Some other investment concerns for vertically integrated firms include:
overexposure to key yet limited markets;
high levels of competition for customers’ discretionary leisure spending;
limited geographic and business diversity compared to other global leisure companies; and
resort destinations’ susceptibility to rising operating costs, such as energy, food and water, all which impact operating margins in a highly cost-centric business model.
Therefore, a focused yet narrow strategy places much dependence on few stakeholders and external forces, which can greatly impact business outcomes.
Nevertheless, mitigating factors that bode well for these vertically integrated, asset-heavy businesses include:
government support and investment incentives;
long-term management contracts in resort management businesses;
increasing industry-wide popularity of the all-inclusive vacation market; and
access to strong commercial alliances and representation in strategic source markets.
Vertically integrated travel companies seem to be benefiting with their all-inclusive resorts in key Mexican and Caribbean destinations. But will this asset-heavy paradigm ultimately be employed by other global hotel companies, as they ask themselves, to own or not to own? Perhaps this will always be a question in the Latin American resort market.
Jonathan Kracer is Managing Principal of Sion Capital LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions, with offices in Miami and Mexico City. Mr. Kracer is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. Mr. Kracer’s columns primarily cover hotel asset-related subjects, with a particular emphasis on cross-border topics related to the U.S. and Latin America. He can be reached via email at firstname.lastname@example.org. More information about Sion Capital LLC can be found at www.sioncapitalco.com.
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