For large hotel companies, size matters
02 DECEMBER 2015 7:04 AM
In this consolidation chapter of the cycle, size, growth and being first matter, according to sources.
GLOBAL REPORT—Size matters in the hotel industry.
That’s the sentiment that ended the 16 November conference call announcing Marriott International’s intent to acquire Starwood Hotels & Resorts Worldwide.
“We’re now the world’s largest hotel operator in every chain scale that matters … the best-in-class company. … Today, size matters,” Starwood’s interim CEO Adam Aron said on that call.
And sources interviewed for this story agreed with Aron’s statement.
“The larger something is the greater its power when it comes to negotiating deals. Staffing is consolidated and rationalized, purchasing power is enhanced and agreements with customers can be more all-encompassing,” said Mark Martinovic, CEO of Hotel Partners Africa, a hospitality advisory firm specializing in Africa.
Adam Maclennan, director and head of United Kingdom and Ireland at PKF hotelexperts, agreed.
“Size does matter for the big hotel groups,” he said. “They are under enormous pressure to show their shareholders a positive growth story, persuade franchisees and owners that they can deliver guests at price premiums and have sufficient coverage to be relevant and appeal to guests in as many segments of as many markets as possible.”
The potential wedding between two of the world’s largest hotel conglomerates will have ramifications to other hotel entities, Maclennan added.
“This move should catapult the new company to the top of the league table in most of the metrics used to define system size. The other big groups will need to react,” he said.
Angela Roper, director of the International Centre for Hotel & Resort Management at the London School of Hospitality & Tourism, part of the University of West London, agreed the move would have huge implications for the industry.
“They have created huge swim lanes, but if you add up all the hotel rooms in the world, they will still have only 7% or so, although more in the United States, the most important market there is,” Roper said.
Hotel Partners Africa’s Martinovic said cost savings could be passed on to owners, giving them competitive advantages in certain circumstances that other management companies might not be able to offer, despite initial synergies being most likely seen at the corporate end.
Maclennan said Marriott’s pending acquisition of Starwood would arm the new company with a better hand when negotiating with online travel agencies.
“I would expect them to increase the proportion of bookings through their own distribution channels with increased loyalty membership and system size,” Maclennan said. “This will appeal to owners who often question the value of the brand when they have to pay large commissions to the OTAs on top of franchise or management fees.”
Roper also mentioned the ability such size would have in the battle with OTAs and metasearch companies.
Christopher Agnew, managing director of MKM Partners, agreed that the merged companies’ newfound size gives it a sudden edge.
“I think scale matters,” Agnew said. “And I think a lot of the talk about this deal is about loyalty and the kind of technology they want to deploy around that.”
Agnew said a larger, merged company will have more power to focus on technology, which in turn can lead to cutting-edge advantages for growing its distribution and loyalty programs.
Crispian Tarrant, CEO of BDRC Group, said the Marriott/Starwood deal sets Marriott up as a power player on a global scale in a way that only Hilton Worldwide Holdings was able to achieve in the past.
According to BDRC’s brand rankings, the planned merger gives Marriott International control of two of the top five ranked brands (Marriott and Sheraton) in Latin America, Asia/Pacific and the Middle East, along with two of the top 10 brands in the U.S. and western Europe.
Concerns in mergerland
Martinovic mentioned two concerns about the Marriott/Starwood deal, including customer perception and brand consolidation.
“There is a movement away from ‘big is beautiful’ from the customers’ perspective, and if a company is deemed too big, it can sometimes hurt business,” Martinovic said. “However, in this case, it is unlikely the brands will be combined, so just because Sheraton is owned by the same people as Protea (following the proposed merger), that will not impact hotel guests’ perceptions. I have no doubt, though, that this will affect deals with tour operators, online travel agencies and other industry professionals, but to what extent remains to be seen.
“Morality and capitalism are not synonymous, and with the consolidation of corporate, central reservations, marketing and regional offices, unfortunately the first savings will be at the cost of certain employees,” Martinovic added.
“We might also see one or two brands merged or perhaps sold by the time senior management, strategists and management consultants have completed their work,” PKF hotelexperts’ Maclennan said. “It will be a big challenge to keep 30-plus brands relevant and sufficiently differentiated both to the guest and to the investment community.”
- Read more: “Marriott/Starwood owners optimistic about deal”
Too much size
The notion that a giant with 27 hotel brands, 1,071,096 keys and 5,456 hotels might have too much influence in the market is another issue, according to sources, who fall short of calling the planned merger a monopoly.
“It’s more of an oligopoly than a monopoly,” Maclennan said. “The new mega-company could potentially influence pricing in certain brand-heavy markets. They will also have more power to negotiate with suppliers. I would expect a strong focus on strengthening their distribution channels and efforts to influence consumer behavior with the additional marketing muscle,” Maclennan said, adding there are still plenty of competitors, disruptors and emerging brands, especially outside North America.
“This is certainly a significant event in the evolving globalization of the hotel industry,” Maclennan added.
The potential merger has particular ramifications in Africa, Martinovic said.
“Starwood and Marriott have both traditionally applied an asset-light model to development (in Africa),” he said. “Prior to (the) merger of Marriott and Protea Hotels & Resorts, it was common that when looking for a management company, we would approach Protea, Marriott and Starwood, amongst others, as potential options, and they would need to bid competitively against each other.
“The question will now be how much competition will remain amongst these three hospitality companies for such roles, given their common ownership? How much room for negotiation of management contracts will remain for new owners and developers, and how will this affect the travel industry?” Martinovic said.
HNN’s Sean McCracken contributed to this report.