Hilton’s midscale brand to launch in 12 months
29 APRIL 2015 2:34 PM
Previously thought to be an economy-segment play, Hilton’s new lower-tiered brand actually will sit in the midscale space, said CEO Chris Nassetta.
McLEAN, Virginia—Despite having 11 brands under its umbrella, Hilton Worldwide Holdings is still notably absent in the lower-priced chain scales.
Having launched the upper-upscale Curio—A Collection by Hilton and upscale Canopy by Hilton brands in 2014, executives are now busy working on the newest member of the Hilton flag family: an entry-level brand that likely will play in the midscale space, President and CEO Chris Nassetta revealed Wednesday during an earnings call with analysts.
“We’re hard at work. Sometime in the next 12 months you’re going to see us do something in that category, and we think that could be a mass-scale brand, particularly in the U.S. … This could be amongst the largest brand by hotel count that we have,” he said.
That timetable is faster than the two- to three-year window laid out by Jim Holthouser, Hilton’s executive VP of global brands, in January.
Nassetta during the call also made clear the new entrant will serve the midscale segment as opposed to economy as first thought.
That means it will fill the void left by Hampton Inn, which began in that segment but has since risen up the food chain and now sits as an upper-midscale behemoth that now counts more than 2,000 hotels to its name.
“That would replace what space Hampton, with all of its amazing success, has exited as it’s moved up,” Nassetta said. “We could stand to have a slightly lower-price-point brand in the midscale segment that would allow us to capture customers earlier” to ensure they’ll stay with Hilton throughout their traveling lifetimes.
By serving that niche, Hilton effectively fills the last gap among its offerings. Nassetta made that point clear when asked by analysts if Hilton has any interest in acquiring Starwood Hotels & Resorts Worldwide, which announced an exploration of strategic alternatives Wednesday morning.
“I do not think we have a strategic gap that we cannot deal with ourselves,” Nassetta said.
There are advantages to creating brands in house, Nassetta added. Realizing a better return on investment is chief among them. Whereas an acquisition could cost hundreds of millions of dollars, building one from scratch might take only a few millions, he said.
“It’s mostly, honestly our time. … Given the size of our system and infrastructure that we have on a global basis and relationship we have with owners, it really is for the size of our operation relatively de minimis,” Nassetta said of the investment. “It’s the millions of dollars, not tens of millions, which I view as immaterial for us.
“And the returns are exceptionally high because we invest very little and build great platforms,” he added.
Hilton reported total revenues of $2.6 billion during the first quarter.
A competitive climate
Nassetta was asked whether an uptick in construction activity in the midscale space was any cause for concern.
There were 12.1% more midscale rooms under construction in the U.S. as of 31 March than the prior year, according to pipeline data from STR, parent company of Hotel News Now.
“The reason you’re seeing more of the development getting down there is the economic model works there. … People are able to drive better results, higher margins and as a result can raise the capital to do it. I don’t think it’s a problematic setup,” Nassetta said.
An analyst also asked him about competition across all chain-scale segments as more and more brands enter the fray. In the 4-star, soft-brand space, for instance, Curio will face competition from Starwood’s Tribute Portfolio, which was announced 16 April.
“It’s a competitive world, but I’d say we are faring very well if you look at what’s going on with Curio (which has five open and 11 in the pipeline) with 11,000 rooms already teed up and ready to go,” Nassetta said.
“We don’t have really stiff competition on the specific deals we’re working on. We do not see any pattern of having to buy the business in the form of key money or other things,” he added.
Hilton’s scale and track record bring with it certain advantages in the market, Nassetta said.
“We have the highest average market share of any of the players with our system producing an average market share of 115%,” he said. “What owners are trying to do is make the decision to put their money with whoever they think is going to drive the highest economic result.”
The new midscale brand already has a leg up, Nassetta added.
“We have tons and tons of interest with our existing franchise ownership community,” he said.