The Global Hotel Industry: Big, Beautiful and Branded?

Warwick Clifton, Research Director, presents a summary of hotel group activity from The Global Hotel Group and Brand Analyses, which analyses over 2,100 hotel groups representing over 60,000 hotels in over 180 countries globally.

. March 11, 2013

This research article considers the relative impact of the hotel groups versus independents within a global context and analyses the extent to which the hotel groups have penetrated various hotel markets with regard to their relative market share.

The article outlines some initial thoughts that have emerged in the first year of an exciting and comprehensive global research project, The Global Hotel Group and Brand Analyses. We, along with most other industry commentators of the 1990's, predicted the end of the road for independent hotel operators as they suffered at the hands of the growth hungry hotel groups. While the nature of the hotel industries globally cannot be considered as a homogenous mass, with different regions and countries being at differing stages of industry maturity and therefore having distinctly different industry structures. The general consensus was that the more mature markets of North America and the UK would lead the route to domination by the hotel groups at the expense of the independents.

Indeed, if global hotel supply as provided by the hotel groups in 1992 is compared with the provision in 2012, a picture is painted of the global hotel industry that is increasingly concentrated. See Table 1.

Table 1: The Global Players - 1992

Compare this 'top twenty' with that in Table 2: The Global Players - 2012. Whilst many of the 'names' have changed the entities of the majority generally remain in existence despite ownership of them having changed hands and the groups themselves having consolidated through M&A activity

Table 2: The Global Players - 2012

There is some degree of 'double counting' in this table, as the majority of these two companies' portfolios are already listed as branded units of other groups also listed in this table. As managed units in the case of Interstate, and a mix of managed units and those they are responsible for on a master franchisor basis in Rezidor's case (Carlson brands).
As this article was being written, Carlyle Group led a consortium of investors to buy the 7 Days Group and take it private.

The two tables when analyzed, demonstrate dramatic consolidation and concentration of hotel supply globally. These 'top 20' groups represented an increase of circa 31,000 hotels (300%) over the 20 year period.

The top 6 groups represent approximately 46% group hotel supply globally

The big are getting bigger. Indeed, these top 20 represent over 66% of total group hotel supply globally. This is emphasized by the top 6 groups representing approximately 51% group hotel supply globally, a situation which compounds the paradox that is global hotel supply. At one extreme, the more developed markets of North America are epitomized by 'hard' branding and extreme levels of market concentration. The other extreme is illustrated by the emerging, less developed markets where brand and group affiliation is in the minority. Where it does exist, it is generally through domestic affiliations or upper-tier hotels being affiliated to 'International' groups in primary 'key' locations, with the majority of hotels being 'independent' in the truest sense of the word. The European situation is somewhere in the middle. Although once again, it should not be seen as a homogenous mass, with each country having distinct market traits, features and patterns. Indeed, the industry 'prophets' of the early to mid Nineties beckoned the onslaught of a branded and highly concentrated hotel supply revolution in the UK and France, but to date, this has not materialized to the extent anticipated.

The Changing Nature of the Groups

Over the decades the groups have changed in character and structure as well as in name. There are less 'diversified conglomerates' in the rankings. As the global economies have changed considerably and the industry has matured, resulting in the changing appeal of the industry to investors. The industry has without doubt become more specialized and professional, with 'Hotel Divisions' within larger corporate entities being separated and often 'floated' as standalone entities ( E.g. the separation of Rezidor from its airline parent SAS).

As the 'independent' hoteliers have been put under increasing pressure to adapt or die, many have sought the benefits of becoming franchisees of established brands to facilitate them achieving 'group' related benefits (brand perception, advertising etc) via the relatively low cost of franchise fees. This demand for 'membership' from hoards of independent hoteliers has resulted in the increasing domination of Franchisors in terms of numbers and their influence on hotel supply activities. These Franchisors, whilst seeking global penetration have encouraged and essentially created the emergence of 'true' master franchisors.

In parallel, it is primarily these same franchisors that have been fundamental in increasing the number of standardized 'budget' offerings through franchise activity. These have been the main reason for the lowering of the average hotel size over the last two decades. They have appealed to both consumers and investors as a 'value' segment of the industry, which has experienced amazing growth through its standardized, low cost development model facilitating it to expand rapidly in tertiary locations, which historically had been the domain of the 'independents'.

The maturity of the industry and its specialization and separation from its 1980's persona as a real estate investment vehicle has resulted in an increased separation of Bricks/Brain. Many of the major groups now operate primarily as Franchise Model businesses (Carlson), as Management Contractors and Lessees of hotels rather than the traditional model of 'Owner Operators'. Only the future will tell if this trend to 'Asset Light' is 'Asset Right'. Despite this trend, there remains an element of 'Owner Operator' in the majority of the groups with most selecting a multi-strategy approach to the hotel business. This is highlighted by the fact that there is only one pure management company in 2012's top 20 (Interstate do actually own a handful of hotels but they are essentially a management contracting company).

The entrance of three Chinese groups into the top 20, shows how the Chinese industry is developing. All three groups' portfolios are essentially domestic in nature with a focus on the budget and economy sectors. However, their enormous growth and continued potential growth both domestically and internationally make them of great interest.

Table 3: Key Global Supply Features 2012 (Total group affiliated stock)

As previously discussed, despite referring to a 'Global Industry', the industry varies drastically from country to country, and equally from continent to continent. See Table 4.

Table 4: Supply by Continent - 2012

Table 4 demonstrates the dominance of North America in representing group hotel supply, with circa 52% of supply occurring in this continent. Therefore it's importance in terms of hotel supply features and it's indigenous players are over-represented when 'averaging' out the figures on a global basis.

However, the Americans are not having it all their own way, the Increasing importance of Europe is evident having developed from circa 10,000 group hotels in 1994. Europe as a host has become a major battle ground in global developments in the last two decades, resulting in an increase in its group hotel supply by 30% in this period.

These continental developments of the 'old' and 'new' worlds, however, could potentially be surpassed by the dramatic 'entrance' of Asia as both a major host and player. Despite numerous fluctuations in fortune over the period, the countries of central and eastern Asia in conjunction with the Middle East, have developed at a pace with enormous growth in not only the hotel groups normal 'hunting grounds' of business/hub destinations but also in resort destinations.

The differing changes across the continents can be highlighted by a cursory glance at the principal host countries. See Table 5.

Table 5: Top Host Countries

The dominance of USA is evident with circa 50% of group hotel supply. The top 5 host countries represent 66.4% group hotel supply, with China joining the 'traditional' developed domains of North America and Western Europe. China is the real news story as indigenous groups look to rapidly develop their chain networks internally which has resulted in the budget and economy sectors being dominated by indigenous brands despite the best efforts of the 'globals'. The 'globals' have however been relatively successful in the mid to up markets, where their management expertise and attractiveness to international travelers has been pro-actively leveraged to attain management contracts.

Middle East still 'in planning' despite furor

The other major emergence in terms of exposure and excitement has been the Middle East countries, predominantly the United Arab Emirates. However, despite phenomenal levels of investment, it remains relatively small on the global stage as a host, but is becoming increasingly important as the country of origin of hotel groups, both as operators and owners.

Drilling down further, the relative importance of individual host cities and towns are analyzed in Table 6.

Table 6: Top Host Cities/Towns

China hits the headlines once again due to its enormous number of indigenous budget and economy sector rooms in the key cities of Beijing and Shanghai. Once again the relative importance of the USA as hotel hosts is emphasized with half of the top 20 locations being in the USA. Globally the top host cities are 'hubs' with the possible exception of Las Vegas, which despite having relatively few group hotels, is in third position due to the immense average size of its hotels. Florida's Orlando is a shock number four, but this in part is due to the Disney Resort hotels contribution to the total room stock. The European hubs play an important role in the top 20, with all the key economies, with the exception of Italy, having an entry.

The importance of 'tourist destinations' is highlighted by Orlando and Dubai, but London, Paris, New York, Barcelona, Las Vegas and Bangkok also benefit from their dual roles as both business and Tourist destinations.

Global Market Penetration

We analyzed the extent to which the global hotel industry had been penetrated by the hotel groups in terms of the proportion of total room stock that was affiliated to the hotel groups.

For the purpose of this paper it was necessary to use secondary sources to gain comparable data on total hotel room stock (independent unaffiliated and group affiliated) for each country. However, it was not possible to source reliable, comparable data for every country in the world for which The Global Hotel Group & Brand Analyses cover, but it was identified that 120 countries (this included all the key hotel markets globally) had suitable data for comparison with the Hotel Group data derived from the aforementioned The Global Hotel Group & Brand Analyses. The proportion of total hotel room stock that was group affiliated was then measured in percentage terms and the countries were categorized. The global average level of market penetration by Hotel Groups (based on Number Bedrooms) was 37.8%.

Table 7 shows the number of countries in each market penetration banding. This shows that only 17.5% had group penetration levels of over 50%, and 53% had group penetration levels of less than 25%.

Table 7: Headline Penetration Figures

Table 8 shows a sample of the countries which were in each market penetration banding.

Table 8: Key Countries

Key Findings to date

This paper has presented evidence of increased levels of market concentration. The big are getting bigger, generally at the expense of the independents and the smaller indigenous and regional groups. This concentration has generally occurred due to M & A activity and diverse development activity which has 'swallowed up' many independents via franchising. Growth activity within the groups has generally been positive whilst the picture for the independents globally, has been negative. This growth has generally been facilitated through 'Hard' branding in line with franchising growth which has been favored by financial markets.

However, much of the growth that is shouted from the rooftops by any of the hotel groups is actually a composite of 'Brand churn' increasingly prevalent in developed hotel markets, meaning that even though the hotel and room stock affiliated to individual groups/brands change increasingly regularly, the actual growth in total hotel group hotel and room stock is much more conservative.

Co-operation between hotel groups via franchising has resulted in more 3rd party use of brands and this is a trend that is set to continue as increasingly complex structures of operating hotels are used. This will potentially result in numerous hotel groups working together and sharing the risks and returns through separate real estate ownership, branding, management, master franchising and asset management.

In terms of the hotels themselves, it is anticipated that there will continue to be Sub-segmenting/niching of sectors. As markets mature, and groups seek to differentiate themselves it is likely that new 'Category Killers' will emerge and that features and functions of completely different segments will be overlaid to create new composite sectors. Such developments in recent years have included the extended stay and Boutique/lifestyle sectors which are now offered at a variety of market levels and in differing locational types which are fundamentally distant from where the sectors originated from.

So, is this the end of the road for the independents? Can they compete with the resources, both physical and intellectual, that the groups possess? The answer is 'No' to both questions.

For the foreseeable future, there will be markets which the independents can compete within head to head with the group hotels and there are some markets in which the independents can out-play the groups (evidenced by how many of the groups are trying to create softer brands for certain markets).

What does the future hold?

Generally, the future looks relatively rosy despite economic uncertainty. We anticipate continued growth of the branded 'Budget' concepts, this is evidenced by the fact that this is one of the predominant hotel forms in the 'pipeline'. It is finding new opportunities through property conversions in urban locations in developed markets as well as penetrating at relatively early stages of market lifecycles in less developed economies (witness China and India).

There has been enormous growth in the 4/5* resort market, in both urban and resort locations and this trend is set continue albeit at a slower pace

Also, as discussed earlier, category killer brands and combinations will continue to emerge just to confuse matters further for both industry commentators and consumers alike. The pipeline will continue to focus on the market extremes with the budget, luxury resort and boutique/lifestyle sectors likely to see the fastest growth in the short-term.

Despite these opportunities, the groups will need to continue to fight, both with each other and the independents for both investment and consumers. Despite having experienced major growth in the last two decades, these findings show that market concentration levels are still relatively low compared to other 'retail' industries, with no single group having a significant market share.

However, the groups are not going to have it all their own way. Hotel Consortia continue to make some inroads and a newly invigorated and 'harder' Best Western is an example which offers the independents some degree of protection and weaponry against the onslaught of the groups. There is also evidence of an increased public appetite for 'individual and experience' hotels and this may result in 'hard branded' hotels being less attractive. This is already addressed by numerous groups who have recently launched 'collections' of independent hotels as ancillary offerings to their 'branded' portfolios.

Despite this the groups will certainly see major growth in the years to come. Key features are likely to be: - Growth of the BRIC markets. Not only as hosts, but as players (e.g. HNA and Jin Jiang) and perhaps most importantly, as consumers domestically and internationally as the burgeoning indigenous middle classes continue to expend their wealth. - Continued inflation of the Middle East 'Bubble' - Further concentration

Data taken from The Global Hotel Group & Brand Analyses, a joint venture between Global Hotel Research Limited & Center for Hospitality & Retailing, Leeds Metropolitan University. For more information on this report please contact Warwick Clifton below...

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Warwick Clifton is a research analyst who works within both the academic and commercial spheres. His specialized fields of interest revolve around strategic developments in the global hotel industry. He has co-produced major research projects in conjunction with global consultancy firms such as Deloitte & Touche and PriceWaterhouseCoopers. He is frequently called upon to comment upon and explain strategic developments as well as advise players in the industry upon strategic development options. Mr. Clifton continues to develop and deliver academic research tools that have use in the commercial world. The most recent of these developments has been his firm's seminal production and publication of 'The Global Hotel Group and Brand Analyses'. Mr. Clifton's full-time employment within academia was as a Principal Lecturer at Leeds Metropolitan University (UK) and as a Lecturer at The University of Huddersfield (UK). Mr. Clifton has published widely in the academic press focusing on strategic hospitality developments and is also the author of numerous industry reports. Mr. Clifton can be contacted at 00 44 (0)750 161 1543 or [email protected]