Consumers crave experience · 2019-03-04 · Consumers crave experience The intelligence source for the hotel investment community Volume 14 - Issue 1 Spring Experiences were increasingly

Consumers crave experience

The intelligence source for the hotel investment community

Volume 14 - Issue 1 Spring www.hotelanalyst.co.uk

Experiences were increasingly being demanded by guests and were seen as key to creating lasting loyalty, heard delegates at the conference held in the Jumeirah Carlton Tower in London.

Cédric Gobilliard, SVP, lifestyle division, AccorHotels, said: “The lifestyle hotel is all about F&B&E - food, beverage and experience. When you create a lifestyle hotel, it is a social club, a community with shared values - it’s not fake at all. Forget about being a hotelier, focus on F&B&E and focus on creating a hotspot.”

Commenting on the group’s Jo&Joe brand, Gobilliard, said: “Jo&Joe is a mix between huge F&B product - 50% - and a mix between travellers and locals. We don't need to invest in marketing, it will be social media which spreads word of mouth.” The brand was created in part as a response to Airbnb, with Gobilliard commenting: “Airbnb has had a positive impact on AccorHotels. We realised that it was a new experience and gave people new expectations. They think global, but act local. They are digital, but they want to be social. They are selfish, but want to share everything.”

Commenting on the role of loyalty programmes in the brand, he added: “My community doesn't

need the loyalty programme to be engaged. It's important for AccorHotels, but it's not so important for the community.”

Ben Livingstone, CEO, Graystone Action Sports, the adventure sports group, said that he felt that loyalty programmes were outmoded. He said: “As long as people feel something evolving they'll always come back, but loyalty cards are on their way out.”

The panel pointed to the difficulty of creating authentic experiences. Tom Chalmers, design director, Saco, said: “We call it meaningful experience, past the classic wine tasting or bus tour. We're trying to imbue emotions, to do something a bit deeper. You have to partner with true believers, you can't do this yourselves. We create an eco-system of experience.”

Livingstone responded: “Our product is not a warehouse full of birch ramps but that's not our product, it's about giving people the experience and be taught and be better. You get something to take away, a skill.”

Alternative hospitality assets were seen as being in a strong position to offer loyalty-inducing experiences, in particular in the co-living and

co-working sectors. Gerard Greene, CEO & founder, Our Society said: “When we look at hotels they are very transient spaces and they have spaces where they might bring in F&B. Residential often has lots of amenities but someone at the door to stop you getting in. But co-living looks for more curating and can offer more. There is a massive opportunity to draw investors and people from the hotel industry because there's a lot to bring to...

Inside05

Brands flex to meet demands

10 Deutsche Hospitality adds Zleep

18 Data, data everywhere

25 Ctrip launches hotel brand

28 UK hotels and Brexit

Continued on page 3

hotelanalyst

Food, beverage and experience were the essentials for any lifestyle hotel, attendees at the Hotel Alternatives Event 2019, hosted by Hotel Analyst, were told.

Left-right: Ian Sloan, VP customer success, Avvio, Tom Chalmers, design director, Saco, Ben Livingstone, CEO, Graystone Action Sports, Robert Ryan, chief real estate officer, Tech Space,

Cédric Gobilliard, SVP lifestyle division, AccorHotels

There is GBP3bn of hotel property on the market in the UK at present with half of this amount on offer or close to selling, according Paul Collins, CBRE’s head of hotel investment properties UK & Ireland.The portfolios understood to be in play, according to gossip at various industry functions, include Grange, with Queensgate tipped as the buyer, and the Tchenguiz Hiltons with Vivion Capital anticipated to conclude a deal.

The Tchenguiz portfolio of 10 Hiltons was put into administration by its lenders last year with the biggest asset, the Kensington Hilton, selling for a reported GBP260m to Cola Holdings in the autumn.

Also, rumoured to be looking to exit are groups like Macdonald Hotels. And big single asset deals are expected too with the likes of Park Hotels retrenching back to the US.

Last year, deal volumes were the second best in the past decade, only bested by the banner year of 2015. Across Europe, hotel investment volumes were up nearly 5% when overall real estate investment was stagnant.

There are good reasons for hotels to be enjoying a good spell. Some other sectors, notably retail, are suffering from secular decline. In contrast, travel and tourism has great prospects.

Despite Brexit, the UK hotel industry has “pretty positive fundamentals” according to CBRE’s David Bailey. He does, however, forecast revpar growth to be in the range 1% to 2% for the UK.

The short-term may prove considerably tougher. As I wrote in Hotel Analyst’s last issue, we are clearly in the midst of a turn in the economy across Europe with much talk of an industrial recession.

Couple this with the uncertainty around Brexit and its consequent dampening of economies, principally in the UK but elsewhere in Europe too, then the near-term outlook is challenging.

This all highlights something of a conundrum in the hotel transaction market right now. Pricing is continuing to be punchy with yields tightening despite shaky economic forecasts, significant pipeline and profitability dropping.

Jonathan Langston, chairman of HotStats, says the past decade had seen profit conversion drop from 40% to the mid-20s. This has not been reflected in transaction prices.

There are a number of reasons driving the strength of asset prices: the weight of money needing to be deployed; the falling yields in other asset classes; and the ongoing cheapness of debt.

To this latter point, CBRE’s Paul Collins spoke about the popularity of ground leases. The biggest UK portfolio deal of last year, the 14 hotels in Principal Hayley that traded for GBP858m, had a ground lease which had helped drive value.

Ground leases are appealing to investors seeking long income structures. Collins mentioned that UK local authorities were one of the key purchasers.

Now it is tempting to have the ironic thought along the lines of: “new-fangled financial engineering being sold to public sector bodies, what can possibly go wrong?”

There is justifiable anxiety. But properly structured, debt instruments like ground leases can make sense. The worry is that a toppy market will lead to the creation of unsustainable arrangements.

Collins gave a worked example of a ground lease structure that showed a value uplift of almost 24%. Put in a few racier assumptions and this can be much higher.

Aggressive buyers and lenders keen to grab market share may well test such structures to the limits. Will this time be different?

Contents News Review 4-26Investors hunt alternatives - Brands flex- Accor unleashes potential - Aprirose launches operating platform - Deutsche adds Zleep - Fuller's pursues hotels - Whitbread cautious - Marriott's combined strength - Thomas Cook overheats - IHG buys Six Senses - Marriott's Bonvoyage - Expedia eyes consumers - Co-living jv for India - Huazhu's midscale push - Ctrip launches brand - Brookfield looks to Leela

Insight 18, 28-30Data, data everywhere - UK hotels and Brexit

The Insider 32Okerstrom wriggles out - Robots have their chips

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All enquiriest +44 (0)20 8870 6388Editorial director Andrew Sangstere [email protected] (HA Perspective and print newsletter) Katherine Doggrelle [email protected] (HA Daily and social media) Chris Bowne [email protected] Editor Dr Peter O’Connore [email protected] Sarah Sangstere [email protected] Christine Thouroudee [email protected]

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Hotel transaction volumes defy gravity

Commentary by

Andrew Sangster

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01

...the party in the alternatives sector]. The integrity and authenticity of a brand is what will ultimately drive the long-term success of the brand.”

Greene warned that experience in residential rather than hospitality could put some co-living developments at risk. He said: “Developers are so used to building and selling. There are very low, or no sinking funds. No thoughts on corridors, back of house and then what happens is that people are piling in on the basis of P&L accounts without a capex budget. So what happens in three years' time to their rental rates when there is more competition? The residential market had one-year rolling contracts, so there is an education to be had from the hotel sector in the form of management contracts. The residential industry has got a long way to go to understand the value of the brand. There's no room for leases because of the yields.”

Adela Cristea, senior director, head of business development, UK & Ireland, Radisson Hotel Group, said that the company was moving into co-working as a result of owner demand. She said: “Public spaces are the first impression when you come to a hotel and the last when you leave which makes them so important. We think that Radisson Red would suit co-working. We have entertainment spaces in the lobby, pool tables,

foosball tables. People want to work in the lobby, rather than at a big table.

“Being flexible and creative and thinking out of the box is key to success. We at Radisson are being very flexible. We are happy to lease out space if the owner wants different F&B or lease out space in the lobby for co-working space. It's owner driven. We think brands are here to stay but we need to adapt and cater for what the owners want.”

HA Perspective [by Katherine Doggrell]: What the owner wants, of course, is more cash for gold cars and helicopters and while they may very well want co-working spaces, they are likely to want them in the belief that they will bring in more cash. Other hotel companies are also looking to monetise the trend for people coming into their lobbies and drinking lattes ever so slowly while they use the free wifi and one way is to call it co-working.

Much of the debate around experience was how to do it well, in a manner the guest won’t find contrived and won’t cost too much. As Chalmers noted, the right partner goes a long way. If you want to have yoga in your hotel, all you need is the space and an amenable yoga teacher, who guests can pay. The AccorLocal programme looks

at making the most of amenities and services which, by and large, the hotel already has.

Greene quoted Starwood Capital founder BarrySternlicht, who said that customer service was about 'how to not fail your customer'. It's about getting the basics right.

Additional comment [by Andrew Sangster]: There were two key highlights for me in this, our fifth Hotel Alternatives Event. The first was the range of hospitality professionals popping up in all sorts of diverse real estate verticals and in other experience economy businesses.

Examples of the hospitality professionals include Gerard Greene, the former CEO of Yotel, who is now creating a co-living concept Our Society; Robert Ryan, a former development manager at Travelodge is now chief real estate officer at office specialist Techspace; and Ben Livingstone, a former hospitality consultant is now CEO of Graystone Action Sports, a next generation sports facility in Manchester.

The second highlight was understanding just how rapidly the experience economy is reshaping the real estate landscape. Hospitality and hospitality- like services are now the key to the future in everything from offices to retail to residential. All the big trends such as co-living and co-working have at their core a hospitality element. The panel session on this topic featured office provider Knotel (the hospitality connection is clearly in the name), a serviced apartment provider who is now developing a co-working nursery concept called Cuckooz Nest, the previously mentioned Our Society and Radisson Hospitality, a global hotel brand player who is spotting the activity in some of these sectors and is getting increasingly involved.

I used to talk about how silos were being broken down and boundaries blurred. I increasingly think it is now more relevant to talk about how the hospitality virus is infecting nearly all real estate (industrial has so far proved resistant). There is a break out of hospitality fever across the property sector.

Left-right: Thomas Emanuel, director, STR, Yin Yeung, director, CBRE, Marie Hickey, director, Savills

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An increased enthusiasm for the sector from both investors and lenders meant that platforms were expanding, as alternatives moved closer to the mainstream.

Bob Silk, relationship director, Barclays Bank, said that the bank was happy to consider alternative assets, including caravan parks, which he described as having “good asset backing, good income streams and are stable across the cycle”. Silk said that, as with any lending under consideration, “you need revenue trajectory, you need to know the competitor position. The trouble with data is at there can be so much available that you can go blind trying to take it apart. We lend on Ebitda - we don't think about loan-to-value, it's illusory”.

Shona Pushpaharan, head of hotels and real estate finance, Clydesdale, commented: “Some of the alternatives, like student accommodation, are seen as real estate, not hospitality, so you have to take more of an LTV view. Then with developing, with student accommodation and aparthotels, the buildings are very similar, so if you're comfortable with one then you're comfortable developing the rest. It's location, brand, who's operating. We're looking for people who can build.”

The lenders all agreed on having some equity involvement before they would commit. Mark Quigley, managing director, UK, real estate finance, Beaufort Capital Management UK, said: “They need enough equity, we need to see the whites of their eyes, we need to see the cash. If there's no cash equity that would cause us concern. In terms of location, the reality is that we need to be far more discerning about micro-location. You need to delve into the weeds to make sure it's the right place. If it’s student accommodation it needs to be so close to the university that the students can roll out of bed and into the lecture theatre.”

The bankers were cautious about alternative forms of lending, in particular ground rents. Martin Smyth, executive director, Coutts, said: “We are seeing a lot of competition from alternative lenders. We are comfortable with mezzanine finance and equity coming in, we see a few ground rent structures we aren't comfortable with, as borrowers are cutting their equity down to zero. One plus one doesn't equal two when you split the ground rent and the leasehold interest. Borrowers are using the ground rent in lieu of equity. We're not convinced if we sell these assets

when they are distressed there will be a market.”Silk added: “I've been doing this a really long

time and I'd like to stick to my knitting and if you're a borrower and you want to borrow up to 90% from a variety of sources, you may not own your asset for very long as values go up and down. If you want to borrow a lot, being careful what you wish for. The equity in your house doesn't pay your mortgage, the pound in your pocket does.”

For the investors, opportunity to build on existing portfolios was key. Laura Brinkmann, VP, real estate, Brookfield Asset Management, said: “Brookfield are eager to invest where there is the potential to operate, adding value, as opposed to fully-stabilised branded real estate where you have no input into asset management or operation.”

Erik Jacobs, partner, HORECA Investment Partners, pointed to how Generator was able to build up a portfolio at a time when real estate suitable for conversion to hostels was relatively cheap. He said: “We continue to look at platforms in Europe. The price sensitive of the hostel market is strong, it's hard to increase prices. To seek a city centre site which works as a hostel, where the cost of real estate is now higher, doesn't always work.”

Hostels were one of a number of products feted at the event, with serviced apartments hailed by a number of speakers because of their similarity to the hotel sector and their increased popularity amongst corporate travellers. Ed Fitch, partner, Cushman & Wakefield, said: “Serviced apartments help volatility in a way that hotels don't. People tend to treat apartments better than hotel rooms and they have a fraction of staffing requirements than normal hotel rooms. Corporate travellers are using serviced apartments more and more. Brand recognition has become a factor, they are policy compliant and the traveller really likes the product.

“Serviced apartments are delivering the experience that people want, blurring the lines between business and leisure. Airbnb is a channel to sell your product, and has normalised the product. Serviced apartments tend to be in strong city centre locations with strong underlying value...

Investors hunt for alternatives Alternative hospitality products could offer higher returns, although lack of available stock remained an issue for those wanting to invest, heard attendees at Hotel Analyst’s Hotel Alternatives Event.

Left-right: Andrew Sangster, editorial director, Hotel Analyst, Ollie Saunders, lead director – Alternatives, JLL, Ed Fitch, partner, Cushman & Wakefield, Yin Yeung, director, CBRE


hotelanalyst

Patrick Fitzgibbon, SVP for development in EMEA at Hilton, revealed that the group’s new Motto brand was the result of considerable deliberation: “We’ve been talking about this for three years’. The first opening in central London was under construction, but around a year from opening, and the brand brings elements of hostel flexibility to its hotel offering.

Motto will be compact, with 14 sq m modular rooms, but those rooms will feature flexible furniture layouts, and Hilton’s designers have rethought the interconnecting door, to enable rooms to be combined for groups and families. “We’ve looked at linking whole corridors of rooms,” said Fitzgibbon. He declared the concept was designed to appeal to two audiences - “the investor, and the customer”. Being able to adapt rooms to suit families or groups of friends travelling

together was, he said, a big opportunity: “Something hotels have not done well for years, is accommodating groups quickly and simply.”

The concept was reckoned to work in adaptive reuse of buildings, and Fitzgibbon said up to 25% of rooms in any Motto scheme could be without windows.

The Motto format was based on offering compact space in great city centre locations. Despite the high cost of such sites, Fitzgibbon was confident hotel investors would find the format attractive. “If you can put these in the right place, you can yield right.” He said a Motto could be built for around GBP80,000 per key - “it’s pretty comparable with a Hampton” - and expected the majority of sites to be franchised or owner operated.

At Whitbread, the Premier Inn team had opted to take a shot at the sub-budget sector, with their

new Zip concept. Mark Anderson, managing director property and international at Whitbread, said Zip would target a sector reckoned to be worth GBP0.75bn a year in the UK, “and at the moment about two thirds of the sector is independent”. With a price point starting from GBP19, it could also pick up those who might otherwise stay with a friend or take a taxi home from the city.

The compact rooms would have two beds, which can be moved together if needed, and there will be a basic food option alongside delivered in options. Anderson said Zip was trading location for value, with its locations deliberately out of the city centre, to reduce land input costs. The first would be a conversion of a Premier Inn on a site outside the centre of Cardiff, with a second site in Southampton. For now, the idea was to build Zip as a UK brand, but Anderson said it could follow Premier Inn into Germany: “in high price markets like Berlin, Munich I could see that”.

Operational cost issues were also pushing the brands towards joint sites, often combining a hotel brand with an extended stay brand. Asli Kutlucan, senior partner for development and acquisition at Cycas Hospitality, declared herself a fan, loving the efficiencies that a pairing creates. (...)

... - the branding of the market helps and they are liked by the institutional investors. A barrier to investment has been a lack of supply, but that is starting to come through.”

Looking performance, Thomas Emanuel, director, STR said that serviced apartments had seen 81.8% occupancy in 2018 in the UK, against 77.9% for hotels, with rate GBP36 higher. He said: “Of course you're going to pay more for a three-room apartment and serviced apartments are still predominantly upscale and city-centre based.” Emanuel forecast an 11% growth in supply in the UK for 2019 in serviced apartments, against 3% for hotels, falling in 2020.

HA Perspective [by Katherine Doggrell]: Dealing with the complexities of hotels has left many investors fully primed to invest in the alternatives market, a situation which does not, as yet, seem to have the traditional hotels grumbling too much - perhaps because the global hotel brands were too busy getting into the alternative sectors themselves.

For the lenders, as long as they could see the route to revenue, they weren’t too phased by handing over a bit cash, even for developers, as long as they were committed to having skin in the game. And with mature markets in Europe no longer offering the returns from hotels which

some investors were seeking, creeping over into hostels, serviced apartments and self-storage units was becoming very un-alternative indeed.

But for all the ‘oh they’re just like hotel rooms’, they were not without their issues. With many of the alternative brands still in their proving stage, investors had to use their nous rather than banking on flags. Demographic changes and Brexit were also likely to make waves, not least in the student sector. And, with delegates being told that Millennials were moving away from ownership and into experiences, how were they going to fill all those self-storage units? At least the ageing population offered solace for those looking at care homes.

04

Big hotel brands were reacting to changing consumer demands, to shifting operational needs and to the challenge of social marketing. Delegates at the HotelAlternatives Event heard how groups including Hilton,Accor and Whitbread were all responding to theevolving marketplace.

Brands flex to meet market demands

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...In London, StayCity has recently agreed a deal on a site it will share with Premier Inn, while in Paris, a tri-branded site is currently being negotiated. “We’re seeing this more and more,” said Christabelle Morgan-Desouches, head of development for Accor’s Adagio aparthotel brand: “Half of my projects in Europe are double branded.”

Hotel developers were also eyeing up high streets, where traditional retail was suffering from as consumers move online; one UK shopping centre was recently put up for auction with a GBP1 starting price. “The decline of retail is opening up some interesting opportunities for some hybrid development,” said Kutlucan. And both Whitbread and Hilton see opportunities to take their new brands into high streets. “I think the above ground floor space offers a great opportunity,” said Fitzgibbon. “If others such as student accommodation providers come in, we can make the high street more vibrant.”

Alongside changing product demands, consumers were also changing the way they sought out new adventures and places to stay.

Cédric Gobilliard, senior vice president of Accor’s lifestyle division, said his new properties now rely on social marketing and word of mouth spread via social media, to grow bookings: one new South American property has already gathered more than 40% occupancy at opening, without the use of any traditional promotion.

HA Perspective [by Chris Bown]: Consumer tastes and behaviours are changing, and as more and more increasingly sad-looking British high streets are demonstrating, a failure to adapt leads to a number of unhappy outcomes. For investors, the value destruction is alarming. So it is ironic that retail, once a stalwart mainstream property investment, may yet see the alternatives coming to repopulate and rescue town centres, with student living and hotel brands bringing back the buzz to urban landscapes.

It is easy to become blasé about new brands, but with Motto and Zip, two major hospitality groups have spotted opportunities in the market, and are going for them. The contrast between

asset-light branding, and investment-led returns, was laid bare by the differing approaches. Whitbread has spotted a market sector it feels is not currently adequately provided for, and is going to grab that with a planned national roll-out that it can, probably, do at speed, once it has trialled the format and got it right. Hilton has to sell Motto to those that will build their hotels, as well as demonstrating it has created a new product that will fit neatly between hotel and trendy hostel markets.

While Zip is largely aimed at finding its customers from those using mom and pop B&Bs, there will be some existing chains worrying about its arrival. Anderson admitted the brand could challenge EasyHotel in a few locations. But close to the Cardiff testbed site, we suspect the manager of the city’s rather tired, first generation Campanile will also be having sleepless nights, once the white van men, rugby fans and visiting contractors get the hang of booking into Zip.

05Top left-right: Katherine Doggrell, editor, Hotel Analyst, Mark Anderson, managing director property & international, Whitbread Group,

Patrick Fitzgibbon, SVP development – EMEA, Hilton Bottom left-right: Laura Brinkmann, VP – real estate, Brookfield Asset Management, Erik Jacobs, partner, HORECA Investment Partners (then) Patrick Fitzgibbon, SVP development – EMEA, Hilton


hotelanalyst

The group said that it was aiming to increase its rate of opening from one hotel every 33 hours last year to one hotel every 24 hours in the mid-term. It was looking to increase growth in its fees by 1.7 times over the same period.

AccorHotels said that had “a clear path” from EUR626m in Ebitda in 2017 to EUR1.2bn in 2022.

In a presentation to investors, Sebastién Bazin, chairman & CEO, AccorHotels, described the various players in the sector as “intertwined across the hospitality value chain”, pointing to the rising role of Airbnb as a distributor, the global hotel companies moving into the private rental market and moves by Expedia and Trivago to manage in-stay experiences and restaurant booking.

Bazin described AccorHotels as the “most diversified” in the hotel sector, with 33 brands, with rooms split 41% in the economy segment, 34% midscale and 25% luxury and upscale. In terms of geographical diversity, 49% were in Europe, 30% Asia Pacific, 9% MEA, 8% South America and 5% North America and Canada.

The CEO said that the company had the leading position in Europe, with 30% brand penetration and 45% of rooms in the top five chains. It also described its position as leading in Asia Pacific (excluding China), MEA and South America, having expanded its network by 40% between September 2015 and September 2018. These regions, Bazin said, were also those with

the most potential.Bazin said that the company would look to

accelerate its growth in China, while also “selectively” expanding in North America. He also identified the “opportunity” in lifestyle, F&B and events.

In China, the company has set the target of growing its Chinese traveller roomnights outside the country by 3.5 times by 2020, against its 2017 levels.

The company indicated that it had not abandoned acquisitions entirely, with Guarav Bhushan, global CDO, describing the company’s expansion strategy as combining both organic growth and “strategic M&A as a key lever”. His key objectives were to increase the pace of organic openings while increasing the fee per room through the higher fee yielding segments of luxury, leisure and lifestyle. Between 2015 and 2018 the company had increased its pipeline by 15%, with a 75% increase in luxury rooms.

AccorHotels said that it now had the “most comprehensive brand portfolio in lifestyle in the industry” and held 2% of supply, with 10% of pipeline.

Chris Cahill, deputy CEO responsible for hotel operations, illustrated the shifting focus towards luxury as well as towards management, with the Sofitel brand accounting for less than 3% of the number of hotels, but 8.4% of fee income. Between 2017 and 2018 the company went from

41% of its rooms under management contract to 61%, with franchised remaining at 33%, squeezing ownership back from 26% to 6%.

Bazin said: “AccorHotels has gone through a major transformation over the last few years. This was evidenced by numerous acquisitions of brands and new ancillary business activities, the strengthening of our digital platforms, and the shift to an asset-light model with the sale of a majority stake in AccorInvest.

“These major steps behind us, we are now focused on executing on our strategy to unleash the group’s full potential. Our targets are ambitious yet achievable. AccorHotels is more agile, more profitable, and more global, with a well-balanced brand portfolio. These assets are unique in the industry. Combined with a rigorous management, this will enable the group’s to create sustainable value for our shareholders, our clients and our employees.”

At Orbis, the offer for 21.8 million shares was priced at 87 zlotys per share, putting the bid at just over USD500m. AccorHotels plans to delist Orbis if successful.

Bazin told analysts at the capital markets day that the deal was the “continued rollout of the asset-light strategy, replicating the value creation at AccorHotels through the monetisation of assets”

Bazin said: “As its largest shareholder since 2000, AccorHotels has fully supported Orbis’ growth in Poland, then across Central Europe since 2014, where Orbis has become today a formidable leader. The proposed transaction will enable AccorHotels to accelerate its development in the region. In addition, it will enable AccorHotels to further implement its active asset management policy.”

The group said that the deal would allow it to consolidate its leadership in Central Europe and improve optionality on Orbis’ asset portfolio management, including replication of the active asset management strategy implemented by AccorHotels for several years.

HA Perspective [by Katherine Doggrell]: And so it is with terrible sadness that we note AccorHotels’ plan not to buy everything in sight and keep us hacks constantly entertained. Say it ain’t so. There is hope. As Bhushan pointed out, there is still room for “strategic” deals and a little strategy can go a long way. (...)

AccorHotels used its capital market day to described its “numerous acquisitions” as behind it, as it focused on its strategy to “unleash the group’s full potential”.

AccorHotels to 'unleash' its potential

The reimagined Ibis lobby


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Aprirose said that it was looking to growth both in the UK and internationally, with hotels under a variety of brands.

Kew Green Hotels will provide systems and support while the new service is established.

Aprirose operates across a number of sectors, recently acquiring a 22-strong Marston-branded pub portfolio from property investor, manager and developer New River, for GBP15m.

Fifteen of the pubs from the portfolio will be leased back to Marston. The portfolio was comprised of assets located across the UK including

the Midlands, Yorkshire and the Humber, North West, Wales and the South East. The acquisition will bring the total number of pubs in Aprirose’s portfolio to 94.

Last summer also saw the group acquire a site on Dalston’s Kingsland Street for the development of a GBP40m aparthotel. Aprirose appointed Saco Property Group as development manager to oversee the build through to practical completion and operate the finished scheme under a management agreement. The aparthotel will be run under the Locke brand.

The decision follows a growth period for Aprirose hotels since the acquisition of the QHotel portfolio for GBP525m in 2017. The most-recent acquisition saw it pay GBP24.2m for the Theobalds Estate Hotel in Cheshunt in December.

The 140-room property was acquired from Starwood Capital.

Tim Shearman was appointed as CEO of Aprirose Hotels in June last year, joining from London & Regional where he was COO of hotels, prior to which he was VP, asset management for Westmont Hospitality Group with responsibility for European hotels. He also worked at Kew Green Hotels leading its operations strategy.

Aprirose’s hotel assets now total 25 under a number of international brands from the major franchises, including Hilton, Marriott, Accor, plus...

...Bazin made much of the group’s primary challenge being digital technology, the need to quickly prove to customers that AccorHotels could offer them the best hotel at the best price wher-ever they went. He ruefully told L’Echo that the hotel sector should have bought platforms like Booking.com, Expedia or Tripadvisor when they were not so expensive.

The current digital strategy was aligned, as with the other operators, around loyalty, with an appreciation that the company also needed strong partners, such as Huazhu. The group was investing in using the knowledge it had on the guest to improve personalised service, something Bazin appreciated the group had not focused sufficiently on in the past.

By looking to its luxury brands for growth, the company is looking to a segment where loyalty is more easily gained as the opportunity for exceptional service is more readily available. It is the economy and midscale – both markets it needs to build on in China – where going that extra mile is harder to achieve without stressing the bottom line.

Additional comment [by Andrew Sangster]: Accor is the smallest of the four biggest global majors (in room number order the others are Marriott, Hilton and IHG) and it has struck out on a distinctive course.

Firstly, it is far more focused on management than the other three. While the big US players can be seen as hospitality brand companies, Accor is much more of a hospitality services company. This is an important distinction in markets which are fragmented – pretty much everywhere outside of North America.

Secondly, it has been prepared to fail in its rush to buy things and try things: Accor Marketplace was a complete flop, and Onefinestay has been written down. The failure has been embraced, and it has been far more prepared to try new things than its rivals.

It is now signalling, however, that this push into new niches is over and the focus is going to be its core hotel business going forward.

Thirdly, Accor is a true global player. While it does dominate its home market of France, it has proportionally far greater exposure outside of its

domestic markets than the other three global majors (and we’re treating IHG as a US player for these purposes). This ought to give it an edge in the higher growth emerging markets.

The final point about Accor is its relationship with Jin Jiang which is the single biggest share-holder at 12.3%. The Qatar Investment Authority has 10.1% and Kingdom Holding has 5.7% (as a result of the Fairmont Raffles deal).

Now that Jin Jiang is the world’s second or third largest hotelier following its takeover of Radisson, a combination with Accor would be a compelling proposition. Could Accor move from being predator to prey? Probably not.

A takeover of Accor is likely to attract the attention of the French authorities and CEO Bazin is well connected politically as the presence of former French President Nicolas Sarkozy on Accor’s board demonstrates.

More likely is a further deepening of Accor’s China ties. The relationship with Huazhu, the former China Lodging, is more friendly than that of Jin Jiang and may result in a deeper union.

Aprirose launches operating platform

Real estate investment company Aprirose has launched its own hotel operating platform, with initial assistance from Kew Green Hotels.


hotelanalyst

...its own QHotels brand. The QHotels are currently undergoing asset management and modernisation, with the rebrand of seven of the hotels, the launch of five Doubletree by Hilton last year and two Delta by Marriott due in early 2019.

Shearman said: “The creation of our own hotel operating platform is an exciting new development in the growth and evolution of our hotel portfolio as we have further expansion plans nationally and internationally. It demonstrates our long-term commitment to the sector and will allow us to recruit industry leading talent and drive value for our clients. By initially working with the experienced Kew Green Hotels team it will allow us to hit the ground running and offer a seamless and best-in-class service to our customers.”

Alex Pritchard, CEO, Kew Green Hotels, said: “We are delighted to have partnered with Aprirose in the establishment of their new operating platform. These additions are part of our continued strategy to grow our managed division, alongside our owned estate, with a target to reach a portfolio of in excess of 100 hotels.”

Aprirose bolstered its hotels team at the end of last year with the appointments of Kym Kapadia as chief commercial officer and Bastien Anouil as asset manager.

Kapadia joined from Michels & Taylor, where she was a founding partner and board member for 11 years. Anouil joined from Columbus Hotel Monte Carlo where he was general manager, having worked at the company for almost eight years.

Aprirose was not alone in looking to the potential of an operating platform. Interstate Hotels & Resorts used the ALIS conference to underline its global ambition, describing “monumental strides” in continental Europe last year, where it described itself as “the only dedicated hotel management services company with the global scale and a comprehensive pan-European operating platform”. Developments in 2018 included a new regional office in Amsterdam, expanded management offerings in The Netherlands and Belgium and the company’s first entry into France.

“2018’s successes allow Interstate to start 2019 with a strong lead,” said Mike Deitemeyer, president & CEO of Interstate Hotels & Resorts.

HA Perspective [by Katherine Doggrell]: I know what you’re thinking: “Why don’t I have an operating platform when all the cool kids have them?” And yes, this does appear to be the era of the hotel operating platform, you’re no-one without one.

The move marks an ongoing shift from the

early days when it all looked too much like hard work to wrangle all those beds, all that cleaning, all that revenue management to a point where the owners have realised that if they want to make sure someone is looking after their invest-ment and not just thinking about how they really must target Peru for their next 100 hotels, they are better off doing it themselves.

What will prove interesting for platforms such as Aprirose is whether they are just in it for themselves or whether they open them up to all comers and build an empire that way.

Additional comment [by Andrew Sangster]: Is this finally the answer to the long tail problem of hotel assets? By this, I mean is there now a solution under which the various small groups of hotels in the three- and four-star space in the UK can be gathered together under one manager?

For the past couple of decades there have been repeated attempts to consolidate these disparate groups into one mega chain that numbered in the three digits for total properties. But the diversity of the portfolios and the diversity of the individual assets meant that a solution could not be found.

There was no single brand or group of brands under which all the assets could be easily badged and similarly there was not a single owner for whom owning such a diverse range of assets made sense.

The separation of the hotel vertical into asset, management and brand – dubbed the bricks, brawn and brain split – means that the much- heralded consolidation can now come to pass.

It remains a pick and mix type of affair, with

different owners plugging into different managers who in turn plug into different brands. But the point is that there are, in total, fewer owners, fewer managers and fewer brand companies (note I’m not saying brands here).

The bricks and brains separation enabled brand owners to grow quicker through management and franchising. Now these same brand owners are quickening their pace in Europe by mainly focusing on franchising.

The emergence of a new class of white label or third-party operating companies is facilitating this push into franchising. And looking beyond the UK into lease orientated markets, third-party op-erators with sufficient covenant can further push forward the brand owners franchising ambitions.

In such a fast-developing market, there is some confusion between these disciplines. Asset owners feel the need to have their own operating platform and sometimes asset managers, working on behalf of owners, push into this space too. It’s not clear that this is always a wise idea. Breaking out of your swim lane is going to disqualify you from racing alongside certain other players.

So, for example, asset managers who move into operations will find themselves in a conflicting environment the next time they sit down with a brand owner that is also a manager. Owners focused on owning, operators focused on operating, and brand owners focused on branding helps make it clear who is a partner and who is a competitor. Business is never going to be that simple but trying to be both a partner and a competitor will create challenges.

08

Dalston's Locke aparthotel


News

The company is planning to expand the brand into Europe under a licensing agreement, while Zleep’s founders will grow it in Scandinavia.

Peter Haaber, the founder & CEO of Zleep Hotels, told us that the deal came about as a result of good “chemistry” with Deutsche Hospitality. He said: “They understand this for the long-term. Zleep Hotels in Denmark will look at the Nordics and Deutsche have a team in Frankfurt who will look at the rest of Europe.

“They will be operating out of Germany and we will be supporting them like a franchisor. How exactly this is going to work we haven’t exactly agreed on, but we will work it out with the first couple of sites. They are highly motivated to get lots of hotels in Germany and Europe – they have a lot of opportunities now that they have this brand that they could move on before.”

Deutsche was expected to look to leases in Germany, with Haaber adding: “It’s going to be difficult to do management contracts, we have some in Denmark, we have some leases and one franchise – we need to work on the franchise model. We are better operators than franchisors.”

In 2017 Haaber created third-party operator Core Hospitality, looking to benefit from the appetite for growth through franchises in the Scandinavian region. He said: “Core is a separate company with a new CEO which sits alongside us, giving Deutsche opportunities with its other brands.”

Andrew Harrington, retained investment banking

advisor to Zleep, told us: “Zleep is a wonderful business. The Scandinavian countries are high labour cost countries, so you need to be efficient on the labour side. Right from the beginning Peter found ways to minimise the labour costs – his great secret is good quality, limited service and manageable costs.

“It’s not just Denmark, it’s the whole of Scandinavia which has a dearth of limited service brands. There are no big brands in Scandinavia, there’s an opportunity there.

“The company was approached by a number of investors – private equity groups, real estate investors, strategic investors, with lots of interest from private equity, family offices, trade buyers and Deutsche Hospitality was the one where the fit was good. They were looking for a limited service brand that they could take into Europe, into Germany and there were good synergies on all sides. It’s a win win.”

Commenting on the issues which have so far faced international flags looking to expand in the region, Haaber added: “Every international brand continues to have difficulty operating here if they don’t have good local partners. Labour costs her are extremely high – we pay a housekeeper EUR20 per hour, so we need to be more efficient. You need fewer people here because we have a flatter management style and people are taught to take responsibility. If you look at the social models of Scandinavia, we can cut out a lot of

middle management and give opportunities to the workers instead.”

Deutsche Hospitality CEO Thomas Willms added that Haaber had “created a remarkable success story in the past few years in establishing a well-known brand among those guests who are price-conscious but at the same time emphasise on design and quality during their hotel stay.

“With their strong presence in Scandinavia, Zleep Hotels are the ideal partner for the further growth of Deutsche Hospitality.”

The four other brands in the group’s portfolio were: Steigenberger Hotels and Resorts, Maxx by Steigenberger, Jaz in the City, and IntercityHotel.

Zleep currently has 10 hotels in Denmark and one hotel in Sweden, with four in the planning stage. Both parties, Deutsche Hospitality and Zleep, will invest a multi-digit million amount in the further development of the company.

Haaber added: “Zleep’s vision is to always deliver quality, service and design at a great rate for the many. Since our founding in 2003, Zleep has developed into a well-known and successful hotel brand in Scandinavia. The cooperation with Deutsche Hospitality enables us to gain a foothold in Central Europe in particular. So the different brands complement each other perfectly and we can develop together.”

HA Perspective [by Katherine Doggrell]: Many operators have looked at the Scandinavian market with a certain covetousness, but with the kind of wariness reserved for battering themselves with birch twigs, eating pickled fish and other Scandi clichés. Success has not been a feature – as Haaber noted when he set up Core.

Deutsche Hospitality is not looking to take any Northern risks, leaving that to Haaber and his team and focusing instead on the regions which it knows.

As Haaber noted, the Scandinavian market is not the only one with staffing issues and the learnings made at Zleep are infinitely transferrable, making it a brand which can immediately prove its worth.

Additional comment [by Andrew Sangster]: Here at Hotel Analyst we were very happy to see the consummation of this deal. Andrew Harrington first got to know Peter Haaber at one of our events. To have the buyer be one of our long-standing corporate subscribers was the icing on the cake. (...)

Deutsche Hospitality has made a 51% investment in Zleep Hotels, giving it an economy brand and taking its stable to five flags.

Deutsche Hospitality adds Zleep


hotelanalyst

Fuller’s said that it was committed to “running a stylish, high quality estate” and would expand through organic growth and acquisitions.

Simon Emeny, Fuller’s CEO, said: “This deal secures the future of both parts of our business including protecting the heritage of the Griffin Brewery in Chiswick, which was particularly important to the Fuller’s board. Brewing has formed an integral part of our history and brand identity, however the core of Fuller’s and the driver of our future growth is now our premium pubs and hotels business.

“Asahi, as a company recognised for brewing excellence, is an appropriate custodian of our rich brewing history and the Griffin Brewery, and will ensure the Fuller’s Beer Business brands will reach an even wider global audience.”

The company said that the sale would allow Fuller’s management “to focus solely on the core of the business and it will provide significant capital to accelerate investment in the premium pubs and hotels business both organically and through future acquisitions”. The group plans to look to the south of England for its expansion.

The business being sold comprises the entirety of Fuller’s beer, cider and soft drinks brewing and production, wine wholesaling, as well as its distribution and includes the Griffin Brewery, Cornish Orchards, Dark Star Brewing and Nectar Imports.

Asahi will be able to licence the Fuller’s name and logo in relation to the drinks business and will supply Fuller’s pubs and hotels.

In explaining the rationale behind the deal, the company said that, in the 52 weeks to 31 March, its pubs and hotels business accounted for 75% of external revenues and 87% of operating profit (excluding unallocated costs) and had grown at 6% p.a.

The company also announced its trading update for the 42 weeks to 19 January 2019, which saw sales up by 4.7% for its managed pubs and hotels.

The announcement was made as Marston’s reported that it would be scaling back its new-build investment, but reassured that new-build pubs and accommodation delivered “strong returns”. The group has 1,551 hotel bedrooms across its accommodation portfolio.

Ralph Findlay, CEO, said: “We operate in increasingly uncertain times from a political and macro-economic perspective and, as such, we remain cautious about the potential consumer outlook until there is more clarity.” (...)

Fuller, Smith & Turner said that it would focus on its hotels division after selling its beer business to Asahi for GBP250m.

Fuller’s to pursue hotels

...Looking at the wider implications of the deal, it is clear just how intent Deutsche Hospitality are in becoming a pan-European group that reaches beyond its German roots.

Previous CEO Puneet Chhatwal (now CEO at Taj) created the umbrella branding Deutsche as a platform for such growth and now Willms is executing on that vision while tweaking with his own perspective.

With Zleep, Willms has taken Deutsche in an unexpected direction – towards economy hotels. But the move gives the company a full offer across the chain category spectrum.

Hotel brand companies like Deutsche face a challenge, being squeezed from above by the big global brand companies and squeezed from

below by the newer and nimble start-ups which are often geared into emerging lifestyle segments.

By building strength and depth in home markets, national and regional chains can construct a bulwark against the twin threats. For Deutsche, it has the added advantage of operating mostly in markets that are predominately leased.

For global brand companies, leases are anathema – witness Core Hospitality’s deal to run two Moxys – and start-ups do not have the same covenant to offer.

There are still challenges, not the least being how do you develop a brand with the more limited resources available when compared to the global players, but this too can be an advantage. Regional chains can be more flexible in how they approach the distribution of their room inventory,

particularly if they are operating leased or partially owned properties.

A decade or so ago, many in the hotel industry were writing the obituary for midmarket hotels. While these properties were indeed squeezed between branded budget hotels and more upscale offerings, nearly all survived and have reinvented themselves, even if sometimes under new ownership and branding.

The same is now true for Europe’s mid-sized hotel chains. While some are indeed being consolidated, many continue to offer a unique and compelling proposition to property owners and their company shareholders. They do so by constantly reinventing themselves as Deutsche has done.

10


News

...In Christie & Co’s Business Outlook 2018, Neil Morgan, managing director, pubs & restaurants, said: “Aside from the negative impact of some cost inflation, the devaluation of the pound following the referendum on EU membership has driven an increase in tourists visiting the UK and boosted the popularity of staycations. As such, pubs with letting rooms have increasingly proven themselves as capable of successfully competing with both budget accommodation providers and the boutique market.”

Graeme Smith, managing director – regional community leader, AlixPartners, told Hotel Analyst: “It’s a trend which is going to continue and grow and grow. What the pub groups have realised is that they generally have a lot of underutilised space – staff accommodation where the landlords used to live. But now they have more professional managers as tenants or manage themselves and the landlord living above the pub is something which doesn’t exist so much any more.

“Pubs are generally quite well located, many of them used to be coaching inns. It’s difficult to build new hotels in the centre of cities. There is also the fact that Monday, Tuesday and Wednesday are the busiest days for hotels, but the quietest nights for pubs – so it’s a nice mix for them. It makes a tonne of sense.”

HA Perspective [by Katherine Doggrell]: There were many shocked faces the morning Fuller’s decided to sell its brewing businesses, not least wondering what this meant for the 7am London Pride which was traditionally served to journalists and analysts at its results presentation.

Fuller’s sought to reassure with comments about Asahi being devoted to the quality of the brands and viewing the Griffin Brewery as “an integral part of Fuller’s Beer Business” with the intention of continuing to brew on site. For those of us who remember the sale of Young’s Wandsworth brewery to a property agent, we wonder how long before the Griffin, in a prime Chiswick location, goes the same way.

While hanging onto the past is what got us unto Brexit in no small way and is therefore to be avoided, what is at stake here is not whether Asahi can continue to brew Pride to the quality we have all become used to at 7am, but what happens when you put the most valuable part of your brand in the hands of someone else.

Fuller’s operates its hotels at the top end of the pubs-with-rooms market and has 199 pubs and hotels – they are much closer to boutique hotels. And in brands such as The Stable, its pizza restaurant, it has huge expansion potential which doesn’t draw on the heritage of Fuller’s at all. But should there be any taint around the core brewing brand, the rest will follow.

Additional comment [by Andrew Sangster]: As a former assistant editor of the Campaign for Real Ale’s newspaper, I was sad to hear the news of this transaction.

The beer branding experts will tell you that what matters with consumers is provenance: handing over your brewery to a global purveyor of fizzy lager is not the best way to ensure that such provenance is maintained.

Asahi, Japan’s biggest brewer, now owns

Grolsch, Peroni and the London-based craft producer Meantime. It also owns a range of East European beers including Pilsner Urquell. It might be a while before you have to ask for a pint of Tokyo Pride rather than the current London Pride but the history of beer conglomerates has been all about consolidation rather than preservation of unique heritage and character.

But then, how important is beer provenance to pub operators? Most people do not go to a pub because of the beer. Location and price are nearly always more important factors.

The danger though is that Fuller’s has jumped in precisely the wrong direction as the experience economy gains hold. Customers want something authentic, something unique.

Centuries of heritage and a position as the only major brewer in London that was still family- owned was about as authentic and unique as it gets. This has now been dashed.

Fuller’s will never have the means to be truly competitive as a major accommodation brand or even as a national restaurant brand. It did have the means to offer something truly unique in terms of food, drink and accommodation. It can still do something special with food and accommodation but its beer offer is now very much me-too. .

11

Whitbread ‘cautious’ as regions weaken

The forecast came as EasyHotel reported a strong quarter but said it would be leaning on the OTAs in what it expected would be a “challenging” 2019.

At Whitbread, CEO Alison Brittain said that, despite regional weakness, the company would continue to invest in growth, in addition to

starting a GBP500m share buyback programme fuelled by the sale of Costa Coffee.

Commenting on the third quarter, Brittain said: “The regional market was lower due to lower confidence and higher levels of inflation. We think that the UK hotel market constitutes an attractive long-term opportunities and we continue to attract market share from the independent market. (...)

Whitbread said that it expected to see weaker performance, particularly in the UK regions, but remained confident of the group’s long-term performance.


hotelanalyst

12

...We’d like to maintain our investment in UK and increase that in Germany, despite the weaker environment, We expect the underlying profit to hold up and be consistent with last year.”

CFO Nicholas Cadbury added: “The lessons learned from 2008 and 2010 were to continue to invest and put pressure on the independent market.”

The company was due to open its second hotel in Germany in Hamburg in February and has a committed pipeline of over 6,000 rooms across 34 hotels in the country. Whitbread said that it expected to see losses of GBP12m from Germany next year, more than the GBP6m expected, as revenues were not expected to materialise until the end of the period, with Brittain commenting: “We’re going to have to invest ahead of revenue generation”.

Brittain continued to hold faith in the company’s strategy of looking to Germany for future growth. She said the company was “looking at all opportunities – freehold, leasehold, organic expansion and bolt-on acquisitions”.

Looking to FY 2020, the group said that it expected weaker UK market revpar, especially in the regions. Cadbury would not be drawn on a figure, but said that revpar growth was likely to be flat or negative. It said: “We are cautious about the macro environment for the next financial year due to increased uncertainty and

continuing high inflation.” The group expected pre-tax profit to be flat against FY19.

The company anticipated greater investment in the UK, including capacity addition of 3,000 to 4,000 rooms. For the current year, Premier Inn expected to open 3,500 to 4,000 rooms.

When asked why the group was giving such long-range guidance, the CFO said: “It is a very uncertain time. What we’re trying to do is give a little bit of certainty, we’re trying to guide in a way that is sensible. We expect a weaker top line and a weaker revpar and macro experience. In previous situations we have not invested in down-turns and regretted it. In a down environment the independent sector suffers quite badly and we can fill that gap.”

At EasyHotel, the company said that it had outperformed both its competitive set and the wider hotel market, with revenue up 60% and like-for-like revpar at its owned hotels up by 11.2% in the third quarter.

Despite this statement, the company added that the 2019 financial year would be more challenging than 2018 and had taken the decision “to continue to drive revenue growth and brand recognition, at the expense of gross margin, through increasing the use of online travel agents as compared with prior periods”.

Guy Parsons, CEO, EasyHotel, said: “These

current uncertainties are presenting us with opportunities, which might not otherwise be possible, to acquire sites on good terms in central locations in our core target cities, such as Dublin, Bristol and Paris Charles de Gaulle.

“Well-publicised uncertainties and frequent regulatory delays can postpone completion of our hotels and how quickly they reach maturity. However, we are making good progress with our strategic priorities and are confident that the appeal of EasyHotel’s super budget brand will deliver long-term growth.”

The group has continued to extend its pipeline during the period with new hotel developments added both in the UK and mainland Europe, including sites in Paris-Charles de Gaulle Airport, Milton Keynes, Oxford, Cambridge and Blackpool.

The group currently has a further seven franchised hotels currently under development including openings in 2019 in Malaga, Zurich, Basel and Amsterdam Schiphol Airport – all planned in 2019 – and Bur Dubai, which will open in 2020.

HA Perspective [by Katherine Doggrell]: The strength of the UK regions for the large brands has been a feature which has been keeping brokers happy over the past few years, as the clearout of independent hotels in favour of flags such as Premier Inn has meant growth for those brands, growth which may have meant that the true state of demand has been somewhat blurred.

This year, with rising costs of food and staffing, the chickens are coming home. Premier Inn, which has a healthy war chest despite its share buybacks and pension-pot bolstering, is hoping to pick off the weak and then power through to the other side. EasyHotel is going to take a short-term hit via the OTAs. For both these brands, it is a matter of how long the downturn will last and whether we are going to see a protracted bought of suffering or a sharp shock with a visible climb back up.

Analysts were, in the main, cheered by the idea of growth in Germany – best not to mention the country’s sickening economy – but the increased loss next year lent something of a foreboding air. The delay in expansion was, we understand, related to the hotels acquired from the Foremost Hospitality Group, which traded under the Holiday Inn Express brand and had contracts left to run. For Premier Inn to reach scale in the country it needs fewer deals like this and more purchase-without-delay. Perhaps Scandic? Former CEO Frank Fiskers joined as a non-exec in February. (...)

Zip, Whitbread's latest budget brand


News

Two years on from the purchase of Starwood Hotels & Resorts, Marriott International said that its combined loyalty programme was helping to drive direct bookings.

Marriott pulls on combined strength

The company said that it was “conservative” going into the fourth quarter after a weak September, but remained confident about the full year.

Arne Sorenson, president & CEO, told analysts that the group would continue to look at “what-ever is available in the M&A side. While I think the portfolio is great, I think we believe we’re in many respects leading in the lifestyle and luxury and resort space and believe it’s one of the strengths of our loyalty programme. We’re certainly not satisfied and will continue to seek more distribution in those spaces.”

Sorenson pointed to a number of technology moves the group had made, including rolling

out its Enhanced Reservation System to over 500 hotels. The product allows guests to select rooms based on a greater variety of room characteristics such as bed type, view, high or low floor, corner room balcony, with more photography and hotel descriptions allowing, he said, greater customer choice and more effective marketing.

Beginning in 2019, the company was also implementing a new programme services fee structure for owners that will allow it to manage cost for programmes and services more simply. The group said that it expected that over three-quarters of hotels would see costs for these programmes and services decline.

Looking at distribution, the Sorenson said that the focused on profitability as well as revpar in terms of revenue management, commenting that, “some distribution channels are just too expensive for the value of the business they deliver”.

He said: “In North America, our revenue management systems now consider these distribution costs when deciding which channels to open on any particular night. This has resulted in a decline in OTA business during peak occupancy nights and an increase in direct bookings.

“We think even though we might be giving up a little bit in the top line, we’re if anything growing the bottom line because we are replacing some of the business we would have taken with lower-cost business.”

On a worldwide basis OTA share of Marriott’s room nights was flat year-over-year in the third quarter and declined in North America. Sorenson said: “We believe this likely had a few tenths negative impact on revpar growth, but a favourable impact on hotel profits.”

Sorenson said that direct digital was nearing 30% of total business. The group is currently in negotiations with Expedia Group.

Marriott International reported a 2% increase in global revpar – up 0.6% in North America – and forecast a global 2% growth in the fourth quarter and 2% to 3% for the full year 2019. Ebitda was up 12% on the year to USD900m.

Sorenson said: “Our assumptions are more conservative for Q4 than they would have been...

Additional comment [by Andrew Sangster]: Whitbread desperately needs to get its German strategy right. Having spent decades faffing around with its international expansion, time has just about run out.

The UK will remain a solid and highly profitable business but it is not going to offer the opportunity for growth that Whitbread needs. Germany, if the execution is right, will.

Morgan Stanley analysts point out that the

German economy and midscale market is much less developed than the UK and France. The top 10 brands in the UK and France command around 200,000 rooms in total while in Germany this figure is less than 100,000, according to the data based on Horwath reports. And yet Germany is the second largest hotel market by room supply in Europe, just behind Italy.

The big challenger in Germany is Accor and the French giant, Europe’s largest hotelier, is not going

to give Whitbread an easy ride. But Accor is now fully committed to an asset light strategy which precludes leases. In a lease orientated market like Germany this ought to give Whitbread an edge.

But Whitbread needs to spend some cash on an acquisition. Thanks to selling Costa it has the money, it just needs to convince its shareholders that it can spend the money wisely.

13

JW Marriott Los Cabos


hotelanalyst

...had we not had the experience we had in September. The sky is not falling, notwithstanding the weak September. We do think September was more an industry story than it was a Marriott story.

“It does not impact our expectations for 2019, in part, because we return to a stronger, more normal traveling months, in part, because when we look into Q1, we see fairly good group bookings on the books and all of this tells us that we should expect a steady-as-she-goes for the whole year kind of numbers from 2018 as we head into 2019."

The group’s development pipeline totalled roughly 471,000 rooms including more than 212,000 rooms under construction. The company forecast net rooms growth of around 5% in 2018, after deletions of 2%, with deletions moderating to 1% to 1.5% next year and net unit growth of 5.5%.The CEO said: “We do not see an economic downturn on the horizon, but given recent stock market volatility there is clearly uncertainty about the direction of the US economy.”

Commenting on the extension of the group’s homesharing trial with Hostmaker, Sorenson said: “We saw really good results. I think 85% of the folks that booked were our loyalty members. It looked like it was accretive to our total business in the market, with good synergy with hotel bookings too. So we saw people that would look at our home sharing units and ultimately many would book with those, but many would come book with hotel rooms too because they were looking at essentially both portfolios.”

HA Perspective [by Katherine Doggrell]: While many would look at Marriott International and its 30 brands and think that it was big enough, as it goes, Sorenson knows that to make the direct booking argument compulsive, ever bigger is ever better. In this case, he is still seeing holes in the resort and lifestyle end of the market, where Hilton has so recently done a deal with Playa.

Sorenson commented early on in the integration process that the company saw itself promoting not individual brands but a whole product. With the customer more demanding by the second, this product must be multi-faceted. The group may well have its trial with Hostmaker, but it doesn’t have its own flexible brand in the manner that AccorHotels has Jo&Joe and Hilton has Motto.

While owners lament that they don’t have access to flip-down beds and yurts, they can take some solace from the other advantages of heft, which are likely to see them looking pretty

smug when the negotiations with Expedia Group are concluded. Marriott has also come out and said that it is looking at the cost of acquisition in terms of profitability rather than revpar, which should help bring an end to the ‘any filled room is a good filled room’ argument which has cost the sector so much in recent years, in terms of profitability and control.

Additional comment [by Andrew Sangster]: It is often things under the bonnet (known as hood in North America) that matter the most. While everyone admires the shiny new paintwork on the outside, if the engine isn’t up to it during the journey, the complaints will fly.

And so it is with Marriott’s new Enhanced Reser- vation System. At last, hoteliers can compete with third party distributors on something other than price.

Being able to select on the basis of room characteristics may not seem a huge leap forward but it is going to matter. In particular, the better photography and descriptions mean that if you really want to find out about your hotel, you now actually have a reason to go to the hotel website.

Airbnb, for all its question marks regarding security, life safety and so on, succeeded because it could show guests what they were getting. Rather than spend money with Google, Airbnb spent it on photographers.

And now Marriott can offer something that rivals the very best third-party sites. Plus, you can actually book at a price which, in most cases, is the most competitive you will find.

Having slashed commissions to group bookers from 10% to 7%, Marriott is now eyeing OTAs. Market rumours suggest it has already negotiated a deal with Booking.com in the US for commissions as low as 8%. Expedia is now in the firing line.

Marriott showed it was playing tough from the start of these Expedia negotiations by warning its owners that it may delist properties from the Expedia system. It will probably take a while for the outcome of the current negotiations to leak out, but it is hard to see Expedia doing anything other than taking a haircut. Maybe not single digit, but very low teens seem highly probable.

On top of this, Marriott’s whizzy new ERS, which is powered by an unspecified amount or type of Artificial Intelligence (read that as techno sparkles), is going to turn the OTA channel on and off as needed. The question here, of course, is whether the OTAs will allow this. If you have an effective retail channel, you need to have a good

relationship with the retailer. Only wanting them in the tough times is not going to endear you to them.

This is the biggest showdown yet in the OTA vs hotel battle. Marriott admits that switching off “expensive” distribution channels cost its hotels in revpar terms but that they benefited on the bottom line. The impact on the hotels will be significantly tougher if the Expedia channels, which have around 75% of the US market in OTAs, are no longer available to Marriott properties.

For owners, the position is more complex. It is not a given that they have to use Marriott and thus the calculation for how much a particular distribution costs is set up as a different equation that includes franchise or management fees.

Right now, most owners need a brand to access debt finance. But this is becoming less of a necessity in gateway locations with a pool of mature lenders who have taken the time to understand the hotel market.

It seems likely that Marriott and the other big hotel brand companies will prevail in North America for the time being, given that they have an effective distribution system and reach in that market. In Europe, however, their position is much weaker. They need OTAs much more.

And the reality is that hotel brand companies will never be the most effective retailer of their own rooms given how far they are behind in technology and marketing spending. Hotel brand companies do, in most cases, need a direct channel but this needs to be seen as a tool to maintain brand control and to work with retailers.

At the same time, these retailers need to stop treating hoteliers like naughty children, and they need to start handing over customer data. On a recent panel I moderated a representative from Booking had the cheek to blame GDPR as the reason for not handing over these details. But Booking has been hiding customer emails from hoteliers for decades, as was pointed out to her by another panelist.

The whole relationship needs a reset. Maybe Marriott is trying to do that. But the temptation simply to grab a short-term will, I suspect, be the priority.

Rather than the hotel brand vs OTA face-off being resolved, a solution is more likely to come through the new wave of aggregators like Airbnb which force a market restructuring. Marriott has dipped its toe into these distribution waters with its deal with Hostmaker. This is now entering phase two and will be seen in Paris, Lisbon and Rome as well as London.

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The company said that it would continue to pursue growth through its own brands, with at least 20 new hotel openings planned across Europe.

The company saw its share price fall by 20% after issuing the warning – its second in two months – in which it said that it expected underlying Ebit of USD250m, GBP58m lower than prior year on a like-for-like basis.

The group reported an GBP88m fall in tour operator profits, hit by heavily-discounted late bookings. It also included GBP28m of “legacy and non-recurring charges” to underlying operating profit, which included a write-down of historic hotel receivables, GBP4m-worth of flight disruption costs and GBP10m in “transformation” costs.

CEO Peter Fankhauser said: “Looking ahead, we must learn the lessons from 2018 and go into the new year focused on where we can make a difference to customers in our core holiday offering. We will put particular attention on addressing the performance in our UK tour operator where the challenges of transformation in a competitive environment remain significant.”

The CEO said that the launch of its alliance with Expedia, now in five of its markets, offered customers a much wider choice of city and domestic hotels at lower cost to the business, which was helping to transform its opportunities for growth.

The company will open 20 own-brand hotels due to open between now and end of 2019.

Enric Noguer, the company’s chief of hotels & resorts, said: “Expanding our own-brand hotel portfolio is central to the success of the whole business. Operating and overseeing a group of well-managed and high-quality hotels that our customers recognise and turn to for the better service and reliability they experience is an

important part of our strategy as a group.“Next year we will add three more managed

hotels taking our total to 24 hotels as we accelerate our ambitions to take on more management contracts for hotels around the Mediterranean.”

Langton Capital’s Mark Brumby said that, after hopes of a takeover by Fosun International had ebbed away, the group had disappointed on trading “more than once”. However, he said that the fall in share price after the profits warning “should be taken in context”, adding that Thomas Cook was “much-changed over recent years and its finances have been overhauled. It has relied a little on exceptional charges" that had begun to look a little less than exceptional but underlying trading had been improving. It may be that discussion with auditors, in the wake of the Patisserie Holdings scandal, were a little more forthright. Non-executive directors may also have felt a little more compelled to suggest that some non-trading items were put through the P&L in the normal way.

“There is no suggestion that Thomas Cook has done anything wrong – either now or in the past. Just that the interpretation of already-disclosed information may be treated a little differently.”

He added: “The group says that its work to fundamentally improve the quality of its income is ongoing and it is differentiating its product. Reducing capacity next year cuts the risk that the group will need to discount and it is offering markets outside of the EU for would-be travellers who have concerns as to queues and the like post Brexit. Travel remains an aspirational product, Thomas Cook is well-positioned and the shares do seem to have dropped a little further than might be warranted.”

Thomas Cook’s warning came as On the Beach reported preliminary results for the year to 30 September with revenue up 24.5% to GBP104.1m.

Simon Cooper, CEO, said: ‘I am pleased with the group’s performance. This performance was delivered despite the previously highlighted exceptionally hot weather that was prevalent over the summer in the UK and in the Nordics, which combined with the football World Cup, suppressed holiday demand. Whilst this impacted our headline revenue growth during the period, the weaker demand also drove a significant reduction in the Group’s marketing spend, ensuring growth in revenue after marketing costs remained strong. This is further testament to On the Beach’s resilient and flexible business model’.”

HA Perspective [by Katherine Doggrell]: Thomas Cook has one of the most well-known brand names in travel, certainly in this part of the world, and that helped it through its transition from high street to online. It also means that when anything sticky happens, it gets a great deal of attention as a possible trend setter for the wider travel world.

Without wishing to come across like a raging patchouli-dousing hippie, it’s likely that this climate change thingy isn’t a one off and future summers may also be warm in the UK. There is hope, bookings-wise at least, to be had, with the latest figures from Abta reporting that holiday bookings were up 12% on the same period last year despite Brexit uncertainty. There were 5% more people taking an overseas holiday this year than anytime in the last seven years, while domestic holidays declined slightly.

The issue for Thomas Cook, then, was less that people were staying at home and more that they were delaying choosing a holiday when they were having such a brilliant time burning sausages in their gardens. They still went, but by then Thomas Cook had lost its nerve and pushed the last-minute booking discount button. The appetite of the public for a last-minute bargain has made its presence felt in the hotel sector for the past few years and the canny have changed their revenue management strategies accordingly. When it’s whole holidays and not just rooms the nerve to be held is larger, hence Thomas Cook’s ‘if you build it they will come’ attitude towards its own-brand hotels. A combination of all these will be needed to deal with this warming world.

Thomas Cook overheatsThomas Cook issued a profits warning ahead of its full-year results, blaming the hot summer, but described 2018 as an “outlier”, with 2019 starting “well”.


hotelanalyst

IHG tops luxury with Six Senses

IHG said that it expected to expand Six Senses from 16 sites to 60, through management contracts, including moving into urban destinations.

Keith Barr, IHG CEO, said: “Six Senses is an outstanding brand in the top-tier of luxury and one we've admired for some time. You only have to look at its iconic hotels and resorts to see how this acquisition will further round out our luxury offer. With a focus on wellness and sustainability, Six Senses has been voted the world's top hotel brand for the past two years, which is testament to its impressive management team who bring deep experience to IHG's luxury operations.

“This acquisition continues the progress we've made against the strategic initiatives we outlined a year ago, which included a commitment to adding new brands in the fast-growing USD60bn luxury segment.”

Six Senses currently manages 16 hotels & resorts with 18 management contracts in its pipeline and a further 50 deals under active discussion. The transaction takes IHG’s total portfolio of luxury hotels to 400 properties with 108,000 rooms, out of a total portfolio of 5,518 hotels with over 825,000 rooms.

The acquisition includes the entirety of Six Senses' brands and operating companies and does not include any real estate assets. Six Senses currently generates fee revenues of more than USD13m, with the acquisition expected to be Ebitda breakeven in year two and to generate a return approximately equal to its cost of capital by year four.

Pegasus acquired the brand in 2012, bringing in Neil Jacobs as CEO in 2013 from Starwood Capital, where he was president of global hotel

operations and was responsible for the development of the Baccarat and 1 Hotels brands. Previous to that he was vice president of operations for Four Seasons in the Asia Pacific region. Jacobs will remain at the brand.

Under Jacobs the brand was overhauled and expanded into residences, with 10 properties in locations including Vietnam, Brazil and Austria. IHG currently has nine residences, under its InterContinental flag and told Hotel Analyst that residences were “key” to a luxury offering and that the group would continue to look for residential projects which were complementary to the hotel and resort, for example where the hotel offers services to the residences.

Six Senses will join the eponymous brand, Regent Hotels & Resorts and Kimpton Hotels & Restaurants in IHG’s luxury stable, sitting at the top. The company also sought to bolster its position in the upscale sector with the launch of Voco last year.

HA Perspective [by Katherine Doggrell]: Luxury is where everyone wants to be (with a side of select service) as the mid-market gets left further behind, to be picked off by hopeful types set on building platforms rather than experiences. Where investors and consumers are feeling that all-important tingle is in innovation at the economy end and in what this hack will be terming “extreme” luxury at the other end.

Hyatt Hotels Corporation has led the way on realising the role of experience in the lives of its customers and how being able to offer that takes the company beyond traditional hotel stays,

generating the kind of loyalty which isn’t related to member discounts but which, happily, loyalty members also want. The other operators are now following its lead.

Operating these extreme luxury brands is a job for a specialist and IHG is wisely keeping the Six Senses team in place, after Pegasus’s investment took the flag up to the status of destination spa. It also strengthens IHG’s hand in the residences market, knowledge which could be passed down through its estate as a growing number of operators have noted that consumers are not just demanding high-end houses any more. IHG is not just buying in a luxury brand, but a luxury brains trust.

Additional comment [by Andrew Sangster]: Getting USD300m in cash for a loss-making business is not a bad day’s work for the PE outfit Pegasus. Given fee revenues are just USD13m, IHG looks to be paying quite a premium for the brand.

IHG will be able to offset this investment against tax meaning the cash consideration is more like USD225m, reckon analysts at Morgan Stanley. If you buy into the growth projections of the business which has revenue at USD28m with-in a couple of years, Morgan Stanley estimates the multiple, taking into account the tax benefits, is something like 16 times EBITDA.

There are some heroic assumptions in here, and as we saw with the Kimpton deal, even the existing business can see the wheels come off (IHG lost a number of management contracts once it took control of the business) let alone realise all the benefits of the pipeline.

But this does not mean it was a silly deal for IHG. There is a need for IHG to further strengthen its grip in the luxury segment and the resort market was an obvious opportunity.

Six Senses currently gets the biggest share of its clientele from Europe (40% according to a 2016 company presentation, 25% Asia Pac and 10% US plus Europeans generated 70% of room revenue) and the IHG platform ought to be able to grow Six Senses customer base in North America substantially.

What this deal is not, however, is transformational for IHG. Rather it is a useful infill as IHG continues its journey to becoming a leading brander of hotel product. Although property brokers are reporting that the current surge of interest in the hotel market is for luxury, the underpinning of this demand is the need for differentiated product that positions buyers in the experience economy.

InterContinental Hotels Group has paid Pegasus Capital Advisors USD300m for Six Senses Hotels Resorts Spas.


News

We in the hotel sector are very lucky. Given our close contact with the customer, we have many opportunities to gather topical and relevant data so that we can understand our customer’s needs and wants. The already rich clickstream data from website bookings can (theoretically at least) be supplemented with transactional data from the Property Management System and insights noted by our customer service focused staff, allowing us to build up a valuable data resource that can be further enhanced over time as ‘loyal’ customers return for subsequent trips. Unfortunately, despite this interesting potential, and the need to be ever more competitive, we as a sector are not very good at exploiting what should be an exceedingly valuable data resource.

If we start to dig deeper into this issue, we can see that hotels are very good at collecting data. In most modern hotel companies, technology has been deeply integrated into the customer journey, using digital to enhance the customer experience from reservation to check-in, during the stay itself and during the post-stay evaluation and relationship-building phase. As a result, it has become comparatively easily to gather large amounts of highly relevant data about our customers.

Where we initially fall down is in terms of integrating these disparate data sources together. Despite some progress in recent years, for the most part technology-based hospitality systems are notoriously bad at sharing data with each other, with the result that our data sources remain siloed. Even when systems do interface

(forget about the concept of integrating) with each other, consolidating all of the resulting data and structuring it in a meaningful and useful way is challenging. Problems uniquely identifying the guest, something that in theory should be quite easy given that we have actually have physical contact with them, complicate this process, leading to databases with questionable data quality.

And unfortunately, we as a sector are even worse at proactively managing our data resource. Within most hotel companies there is little if any data management. Even if (and as stressed above, this is a very big ‘if’) data is successfully compiled, little effort is put into validating and cleaning it. Data security is almost a second thought, a particular challenge given that hackers, identity thieves and other dubious individuals have identified the potential of our databases and the lax nature of our security, making hospitality businesses a the top target.

But where we are really lacking is in exploiting the undoubted vast potential of this data, be it for marketing or operational purposes. As part of my research I regularly test the loyalty programmes of hotel brands, large and small, by registering multiple personas with different geographic and demographic characteristics, and waiting to see how this data is used in marketing and promotion. Invariably I find that despite vastly different profiles, each address receives exactly the same promotional messages, suggesting that most companies are use a one-size-fits-all approach in their email marketing, something we know from other sectors basically does not work.

Similarly, few companies seem to be using their insights about the guest within the property in either a macro or a micro sense. New concepts are designed to appeal to very broad demographics rather than clearly identifiable micro customer segments. Hotel stays have become standardized and bland, despite the supposed segment-of-

one type insights we supposedly have about our customers. Meaningful personlisation during the guest stay is something we frequently talk about, but how many companies can successfully pull it off? Such personlisation is the key to success, both in terms of marketing and operations. But for some reason hotels seem to lack the time, expertise, willingness or perhaps the ability to make it happen.

Ironically the challenge that is European Union’s GDPR (General Data Protection Regulations) may help use address this problem, as it is forcing us, as a sector and as individual companies, to professionalize our use of data. Having to comply with such heavy and stringed regulations is forcing us to think about what data we collect, how we manage it and what we will do, or not do, with it. Staff with new skills, proficient in data management, have to be hired, with systems and procedures put in place to make sure that what we collect and store about the customer is accurate, relevant and secure.

While some perceive this process as unnecessary bureaucracy, it gives us the opportunity to address the challenges of the past, more thoroughly manage our data assets and thus better exploit our guest insights. With these changes, it’s now time to tap the potential of our intimate knowledge of our guests, and put an end to our dreadful data drought!

by Peter O’Connor In addition to his role as Editor-at-large of Hotel Analyst, Peter O’Connor is Professor of Information Systems at Essec Business School, France.

Data, data everywhere but not a drop to drinkPractically every sector is awash in ‘big’ data. Ecommerce companies, including travel giants like Expedia and Booking.com, base practically all of their commercial decisions on deep insights gleamed from the vast amount of data that they collect online about their customers. Traditional businesses such as retail spend fortunes on running rewards and loyalty programmes in an effort to better understand their customers to achieve similar objectives.

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hotelanalyst | distribution&technology Insight

Marriott moves into Bonvoy age

The company said that it was “more than a loyalty programme” as it looked to greater personalisation and other member benefits.

Stephanie Linnartz, global chief commercial officer, Marriott International, said: “Marriott Bonvoy marks an evolution in travel because it represents more than a loyalty programme. Marriott Bonvoy is a travel programme designed to bring to life our extraordinary portfolio of global brands in 129 countries and territories, while also providing endless inspiration for members to keep traveling and pursuing their passions.

“Represented by a simple, bold and modern logo, Marriott Bonvoy is welcoming and optimistic. Our 120 million members have access to the world’s leading hotel portfolio at the best room rates and member benefits, as well our collection of Moments experiences that bring exploration and discovery of the world to the forefront.”

The launch of Marriott Bonvoy introduced two new names for previous Elite status tier names:

Marriott Bonvoy Titanium Elite replacing Platinum Premier Elite for members who surpassed 75 nights and Marriott Bonvoy Ambassador Elite to replace Platinum Premier Elite with Ambassador. The top Elite status tier recognised members who surpass 100 nights and more than USD20,000 in spend annually. The company said those members would enjoy “the highest level of personalisation with a dedicated ambassador to help plan their travel and cater to their needs one-on-one”.

James Bland, direct, BVA-BDRC, told Hotel Analyst: “Having sold off physical assets, brand owners still need something to put on the balance sheet so the logic behind applying a distinctive name to a frequency programme is completely

sound. One assumes this particular decision has not been taken lightly by Marriott either, as ‘Marriott Rewards’ was a pretty clear, pretty resounding and pretty well-known proposition. Everyone likes Rewards, right?

“And perhaps that’s the point. What I suspect this particular name may be trying to do is move away from that particular motivation for joining the programme, instead giving the impression that one’s voyage may well be made a little more, well, ‘bon’ by being a part of it. Marriott have acknowledged that the good travel connotations are not accidental. The name is certainly distinctive – and that’s perhaps the most important thing – that, and ensuring it probably doesn’t translate into anything rude nor offend any of the world’s largest superpowers. Also, somewhat disappoint-ingly, in all of fifteen minutes I haven’t been able to work it into anything more offensive than “convoy” – perhaps I’d better do some more clicking around.

“You may have noted I used the term ‘frequency programme’ rather than ‘loyalty programme’. This is because I consider a loyal customer to be one who forsakes all others, and is prepared to pay a little more to stay with their favourite brand. Someone joining just to get free stuff is probably not loyal, although they may be frequent. To that end, the word ‘Rewards’ did perhaps motivate the wrong kind of joiner – or, at the very least, set an incorrect expectation as to the purpose of the programme. I think this change of name is part of the journey towards creating an engaged community of customers for whom the brand hopefully represents far, far more than just the application of the product.”

At the end of 2018 Marriott International said that, two years on from the purchase of Starwood Hotels & Resorts, its combined loyalty programme was helping to drive direct bookings.

President & CEO Arne Sorenson told analysts on the group’s third-quarter earnings call that the costs for both legacy Marriott and legacy Starwood hotels had been cut through reduced loyalty programme charge-out rates across the system.

The programmes were combined in August 2017, with Sorenson saying in November that call volume to loyalty lines was running roughly 2% to 3% over seasonal norms, with waiting times back to normal.

Sorenson said: “While we have solved the most significant problems, we are still addressing issues for some customers. One powerful learning from this aspect of the integration, we discovered just how passionate our members are about our loyalty programme.”

He added: “Post-programme integration data reveals accelerated bookings from loyalty members, higher luxury redemptions and a growing proportion of bookings from our direct digital channels.”

The CEO said that around 30% of total business was coming through direct digital channels.

He added: “We are seeing the substantial increase in digital volume. We are seeing more and more eyeballs look at hotels in the combined set. Our preliminary data gives us comfort that what is logically obvious will turn out to be reality and what is logically obvious is that by offering our customers more choice with more places both to earn and redeem points, and more of our customers going to one single site to see all of our portfolio that we will increase share of wallet from the customers as well as grow the loyalty programme. But stay tuned for that.

“Lifestyle and luxury and resort are important growth areas for us, and important features for us to have in our loyalty portfolio. One of the things that motivates regular business travellers who are the folks for whom the loyalty programme is most relevant is ‘where can I go when I take my free vacation, if I’ve earned enough points to get a free vacation’."

One area which attracted the loyalty programme members was the group’s homesharing trial with Hostmaker. Sorenson said that 85% of the people booking during the trial in London were loyalty members. (...)

Marriott International announced that the loyalty brand replacing Marriott Rewards, The Ritz-Carlton Rewards and Starwood Preferred Guest would be called Marriott Bonvoy.

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The company was eager to illustrate the ways in which it worked with its hotel partners, but the strategy was likely to clash with the operators’ direct booking strategies.

CEO Mark Okerstrom said: “We have become the largest travel platform that exists in the world. We are sitting in the centre empowering all of it. It’s not about traffic and transactions any more, it’s about customer behaviour. They’re trying to tell you something, listen to them. You will see our brands tailor experiences for our customers.

“If Amazon is the global platform for the ordering of consumer goods, then Expedia is the global platform for the physical movement of people.”

Okerstrom acknowledged that the group needed more hotel properties, but reiterated past statements that he was not planning to undertake significant M&A activity to achieve it.

Commenting on the role the company played with the global operators, the CEO said: “For the last five years we have been on a journey to change our relationship with the chains. If you think of all the ways that we can work together with data and revenue management, what we have done with Red Lion, I am confident that we can work together – not partnering can be an existential threat.”

Asked about the push by chains towards rate parity in some locations, Okerstrom said: “What’s

very interesting is that hotels have pushed their book direct strategies with discounts on their own sites. What we have noticed is that independent hotels have come to us with offers and we are seeing customers choose them and the chain hotels drift to the bottom.”

The company told delegates about the data it had access to, which was used to drive its portfolio of partner tools.

Expedia CMO Aaron Price said: “It’s not enough to just be a billboard and have a brand out there. There are billions of paths out there and it’s not a job you can do manually, you need machines and machine learning.”

Okerstrom said: “AI changes the game. We used to take huge data sets and run algorithms on them to tell us what to do next, it would take us days in many cases. We’re now doing that in hours, soon it will take minutes and then seconds. With that type of power, you can start to treat every individual...

Expedia moves closer to consumers

Expedia Group has shifted its strategy from being about transactions to being more customer-centric, attendees at the group’s Explore ’18 event in Las Vegas were told.

...Marriott International was in the final stages of negotiating its contract with Expedia Group, negotiations which were expected to have been significantly influenced by the hotel group’s increased size and by its enhanced abilities to drive its own bookings.

The company commented last year that it was focused on profitability as well as revpar in terms of revenue management, commenting that, “some distribution channels are just too expensive for the value of the business they deliver”.

HA Perspective [by Katherine Doggrell]: There’s nothing like being slapped in the face and reminded of your age, something one expects one’s children to do, not a global hotel operator. So, thanks to Marriott International for forcing the words “Bonvoy sounds like something a Millennial would say, what’s wrong with finishing words?” out of this hack’s mouth.

Totes. One hopes that Marriott had other things on its minds, unless Bonvoy is playing the long game until the Millennials (this season’s most-picked-upon) have reached Ambassador status.

But the name has to stand out. Marriott now has more than 30 brands, some you’ll like, some you won’t, some you’ve never heard of. While it’s hard to engender the kind of loyalty which means you absolutely must book a Sheraton every time, that kind of loyalty must be engendered some-where, so why not to the scheme itself? It’s more than just a member discount, Bonvoy must now be the company’s most important brand of all.

Additional comment [by Andrew Sangster]: Marriott believes that Bonvoy is the tool to enable it to win the direct booking race. Maybe. I hope its aspirations are more nuanced than this.

Kalibri Labs has just issued its second report on the “success” of hotel direct booking campaigns in the US. It looked at the period between January 2016 and August 2018. Hotel company websites, brand.com, grew from 20% to 23% of all bookings.

Digital now accounts for 49% of US hotel industry room nights sold but more than half of these are sold through indirect routes, OTA at 15% and GDS at 11%. While GDS is largely stable, OTA bookings have grown from 10% at the start

of 2016 to 15% by August 2018.It is certainly true that most guests do book

direct: 29% go straight to the property; 8% phone the call centre and 14% are direct group bookings (FIT / wholesale is just 1%). But indirect digital channels are dominating and taking a growing share of the growing digital slice.

This is a big challenge to the traditional business model of a hotel brand which sees itself as both the retail brand and the product brand. We have long argued at Hotel Analyst that brands need to see the need for a retailing presence as necessary to enhance the product brand. Hotel companies that try to be the dominant channel in online retail look doomed (in most cases, Whitbread being a notable exception).

Similarly, the loyalty scheme should be seen primarily as a way to enhance the product experience for guests and not as a way to drive direct bookings. Apart from the early mis steps in 2016 with the flurry of ill advised book direct campaigns, the majority of the big brands are adjusting to the new reality.

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...as an individual in real time. A subset of that is what happens with personalisation, what happens with voice.

“We’re now using AI to suggest to our hotel partners what to change, what to improve and it is getting more and more like real time.”

Commenting earlier in the event, Benoit Jolin, SVP, global product & design, Expedia Group, said: “The biggest gift an OTA can give to the hospitality industry is data.”

Jolin also looked at the increased interested in voice technology, telling delegates: “Voice search is an interesting space to be, if it helps customers refine their search in advance. It may ease some anxiety about where the customer wants to go.”

When asked how the platform planned to work with hotel brands to ensure that they were able to use voice to sell rooms. Okerstrom told Hotel Analyst: “Last year we would have said that voice is the next big thing, but increasingly we are seeing voice as a subset of AI. We now have the ability to process vast amounts of data in real time and one of the applications of that is taking voice, translating that into data that we can understand. We are training algorithms to respond to questions and we’re starting to put the answers on the website.

“What will happen from a consumer perspective with voice is hard for us to imagine. So far voice is used for music and for kids to tell jokes, but people still want to see stuff – ultimately it will be a hybrid experience, there will still be photos when you use it to find hotels.”

The data breach suffered by Marriott International was on the mind of many at the gathering. Oker-

strom said: “This is a reminder for the world that there is no distinction any more between offline and old economy and technology companies. They are the same. This is a wake-up call for everyone, cyber attacks are very sophisticated, they are being carried out by nation stakes. There are pots of money to be made.

“We have a security operations centre, we have AI looking for things, we are segmenting all of our data to make sure that the important stuff is sitting in a virtual vault with 12 feet of virtual concrete around it. I think Marriott took this very seriously, but you have to be able to detect when people got in and how they got in and you have to set traps to catch them.

“The problem is that humans are still involved in this and it only takes one email to someone that looks like it’s from their boss, asking for their password and they have you. The weak link is humans. You know someone is going to get in. We hope like hell that Expedia Group never gets hit but it’s a case of man vs machine and we have some of our smartest machines and our smartest men on it.”

HA Perspective [by Katherine Doggrell]: The relationship between the OTAs and the hotel sector – in particular with the big chains – has been through many a flux over the years and is currently in ‘frenemy’ status. After all, they both want the same thing: heads in beds. Cyril Ranque, president of lodging partner services, Expedia Group said that the group saw its new role as that of “a multi- channel advisor to hotels”.

Unfortunately, Expedia Group wants that other

thing which hotels (mostly) want: a relationship with the guest. It’s not just transactions any more. They want to know all about you and be the best travel agent they can be. Meanwhile, the chains want you to shun the OTAs, join their loyalty scheme and book direct saving – they tell their owners – many doubloons.

Of course Okerstrom has his bogeymen. He said: “The internet is littered with the bodies of companies that have been put out of businesses by Google. We spend lots of money with Google but we have more engineers working on travel than they do. They are a great partner, but one which has some advantages over us, so we have to be mindful. We’re creating amazing products, we’re doing things which Google can’t do, which Google might never do. Yes we have a strategy, it’s a strategy to treat customers better than they’ve ever been treated.”

There was some hope for hotels and their customer relationships to be gleaned from this comment. Explore ’18 was three times the size of the IHIF in Berlin, because it wasn’t just filled with hotel folks, it was filled with car rental people, cruise people, airline people, all the different products that Expedia Group offers. Hotel groups do, in the main, just offer hotels and, it should be noted, operate them too. Surely, you would think, there must be something in that expertise.

The company also seemed to realise the threat posed by its size, if only obliquely. Ben Blake, VP, global customer & business development, Expedia Group, said: “Over time, what we have seen is not that platforms will take over the world, but the rise of niche players. The largest websites in the world are platforms like Amazon, but the most loved are all niche players.”

Good news for those niche players, but whether this means that hotels should give up on selling rooms and stick to their knitting is something which is frequently discussed in these pages. The answer is, rather boringly, rather nuanced. The OTAs remain great at customer acquisition and what hotels do with that customer is up to them. Where hotels are running a growing risk is letting the likes of Expedia Group know more about their guests than the people tucking them in at night.

Additional comment [by Andrew Sangster]: At Hotel Analyst we make this same point repeatedly, but it is so important it bears repeating: hotel brand companies are about the product, OTAs and the like are all about retail.(...)

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The agreement came as speculation suggested that Brookfield Asset Management was close to acquiring a majority stake in Hotel Leelaventure.

At Lemon Tree, under the terms of the agreement, the jv will be 30% owned by the company, 68% by Magnolia Grove Investments, an affiliate of Warbug Pincus, and the remainder by Patanjali Keswani, Lemon Tree’s founder.

The pair have had a relationship for over a decade, after Warburg Pincus made its initial investment in Lemon Tree in 2006. Lemon Tree currently owns and operates about 5,300 rooms in 52 hotels across 31 Indian cities.

The agreement came less than two months after Warburg Pincus said it was investing up to USD413.5m in Weave, a co-living provider established in 2016 with plans to grow its portfolio to over 10,000 bedrooms across major Asian cities over the next five years.

The investment by Lemon Tree and Warburg Pincus will be around INR3,000 crore (USD430m) with the partners initially investing INR1,500 crore. There were no specific targets for the project, which will look at developing rental housing projects through a combination of greenfield purpose-built properties, refurbishment of existing under-managed/ stressed commercial and residential assets taken on lease/acquisition basis as well as management of existing for- rent accommodation projects.

The platform said that it would aim to provide

“affordable and conveniently located co-living spaces for students and young professionals, who are increasingly looking to be part of a vibrant community with like-minded individuals”. The jv’s projects will also include shared spaces like living room, gym and well-equipped cafeterias in order to provide its residents with, it said “a high-quality and full-service co-living accommodation”.

Keswani said that the deal would allow Lemon Tree Hotels “to move into a segment which is nascent but closely aligned to our existing target customers and which is expected to see tremendous growth, going forward. Driven by the lack of quality accommodation and high rental/capital costs across key Indian cities relative to salary levels, the rise of co-living spaces is a part of the evolution of the sharing economy that will continue to gain significant traction.

“Our purpose-built developments will offer efficient and community-oriented living solutions in a hassle-free environment for our residents through a combination of unique product design and diversified service offerings.”

Anish Saraf, managing director, Warburg Pincus said: “lndia has a large addressable rental population across students and young professionals which is expected to grow significantly as a result of rapid urbanisation, increasingly unaffordable housing prices/rentals and shortage of on-campus housing infrastructure.

“Moreover, this Millennial population desires modern housing facilities with a sense of community living, which is missing in existing accommodation offerings.”

Anupam Narayan, chairman, Rockwood Associates, which invests in the country, told us: “This has potential. Clearly more in the urban centres where you have many start-ups and lots of single men/women working looking for a safe collaborative space.

“It is time that hotels began using their space more efficiently and with higher utilisation. And Lemon tree’s customer base is very much the target customer. And if they just convert part of their hotel to this thing, then they can make it profitable must faster compared to the others in the industry who have to invest in real estate too.”

The jv was announced as shares in Hotel Leelaventures rose on speculation that Brookfield Asset Management was to take a majority share in the hotel group, paying INR4,500 crore. Leela had, as at 21 March 2018, debt of INR3,798 crore.

Brookfield Asset Management was not the first company to have looked at Leela – Minor International was also thought to have shown an interest and Blackstone Group has been linked to the company since 2007.

Brookfield was thought to be negotiating with JM Financial Asset Reconstruction to buy the debt, with the latter reported to be eager to...

Lemon Tree Hotels and Warburg Pincus have agreed to form a joint venture which will focus on co-living and student housing in India.

Co-living jv for India

...This does not mean that hoteliers should not have a retail channel of their own – again some-thing we keep emphasising – but that hoteliers should recognise that others have superior retail skills and should be partnered with on this basis.

Right now Expedia appears to be in a weaker position than it has for some time. In particular, Google is seen as a major competitive threat. This offers a chance for hoteliers to rebalance their relationship with the retailer Expedia.

As always, commission levels are seen as a key

problem. But it is more than this. Hoteliers should be deepening their relationship with customers and by working more closely with Expedia it ought to be possible to do this by getting email addresses and the like directly from Expedia. It is in both parties interests to ensure guests have a great stay. Expedia needs to amend its practices here to demonstrate it wants to be a true partner.

Also, Expedia’s breadth and reach ought to enable hoteliers to hold their prices in a market that is coming under huge pressure thanks to

the entry of alternative hotel accommodation. While Expedia itself is assisting the onslaught of alternatives, its global reach should help hoteliers maximise prices better.

Expedia ought to be promoting its ability to do this too. It’s a nuanced message, with one story for consumers (we’re the cheapest) and one for hoteliers (we’ll get you the highest price) but Expedia ought to be able to communicate this to stakeholders in the right way.

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The company said it was trialling growth outside China, with a hotel in Singapore, while commenting that its domestic penetration was still “limited”.

Jenny Zhang, CEO, Huazhu, said the company would “continue the fast expansion of midscale hotels by leveraging multiple brands. There are about 400 cities in China that we believe are suitable for midscale hotels. This means a huge

market, well above what we’ve already penetrated in our midscale brand.

“In the future, we aim to have two or more midscale brands, reaching or exceeding 2,000 hotels each.”

By the end of the third quarter, the group, which changed its name from China Lodging earlier this year, said that its mid and upscale

rooms inventory had increased by 39% from a year ago, accounting for 36% in total rooms in operation. The pipeline for mid and upscale rooms accounted for approximately 80% of the total number of rooms in the pipeline, up from 66% a year ago. Of the hotels in the pipeline, half were conversions. The company said that it expected hotel openings to accelerate to between 800 and 900 hotels next year, with 75% to 80% under mid and upscale brands.

During the quarter, the revenue from mid and upscale hotels increased by 36% to CHY1.4bn (GBP156m), or 61% of total net revenue, up from 43% a year ago. Across the estate, the company...

...retain around 10%. In June the board approved a share issue of up to INR125 crore shares on to JM Financial Asset Reconstruction Company for converting of part of debt into equity.

According to Bombay Stock Exchange data, JMFARC had a 26% stake in the company as of March 2018. JMFARC took over 95.6% of Hotel Leelavanture’s debt in 2014.

In September Hotel Leelaventure confirmed that it was in talks with three or four investors “and Brookfield is one of them”. Brookfield made its first investment in India in 2013 with the acquisition of real estate group Unitech Corporate Parks, gradually building its position until it owned the group.

HA Perspective [by Katherine Doggrell]: Co-living has become quite the thing of late, with any number of investors noticing that, well I never, many parts of the world, particularly its large cities, were suffering from housing crises which were knocking the younger sections of the workforce out into the suburbs and their parent’s basements. Just at a time in their careers where they could be convinced that 18-hour days were a good thing too. Clearly this wasn’t going to work for anyone.

This was particularly pronounced in India, where supply of suitable housing lagged demand and where landlords were not eager to rent to

The Youth in any case. Particularly The Youth which does not earn a spectacular amount of money, in a market where real estate costs were high. Where co-living works for everyone is that the typically small bedrooms, which come with larger public spaces mean you can cram more people in (sorry, ‘build a thriving community’) and cut the cost of more expensive spaces such as kitchens, which can go from being one-per-per-son to one-per-many.

Lemon Tree was not the first to see gold in them there hills and it will be joining Oyo, Nestaway, CoHo and any number of niftily-named groups in India. That, and the feeding frenzy over Leela tell of a country where, after years of showing promise, investors at least are starting to roll the dice.

Additional comment [by Andrew Sangster]: How do you sex up an investment in a mid-market hotel chain? In the case of Warburg Pincus, form a JV to create a co-living concept with the said hotel chain.

Lemon Tree had an IPO back in March last year and its share price went on something of a run, climbing from its listing price of INR56 hitting highs over INR72 by the autumn of last year. Since then, however, there has been little movement so a neat announcement about co-living should help move things along nicely.

Indian real estate exhibits many of the classic signs of emerging markets: high, bubble-like, prices which are usually followed by a crash. Factor in issues like corruption and you have a sector which many international investors want to steer clear of.

But India is tidying up its act. The Real Estate (Regulation and Development Act) 2016 is a key step in ensuring a fair and level playing field and there is hope that a more stable sector is now evolving.

With stability in the underlying real estate should come more stability in the brand and operating companies running real estate investments. Lemon Tree looks well positioned to benefit.

The Lemon Tree JV also speaks to developments beyond Indian borders. There is no getting away from the fact that the silos between all sorts of accommodation are being knocked over: student accommodation, short-term residential and hotels are all part of a continuum.

Hospitality brand companies, hospitality operators and hospitality real estate investors are all strongly positioned to benefit from this trend because a key part is understanding how the underlying business proposition paying the rent on the property works. And most of these new and emerging business ideas involve an element of service for which hospitality has the right skill sets.

Huazhu announced that it had become “more confident” in its midscale expansion, with rooms in the mid and upscale markets now accounting for 80% of the group’s pipeline.

Huazhu continues midscale push

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...saw revpar rise by 7.1%, drive largely by rate.At the end of the quarter, the group’s open

portfolio reached 4,055 hotels. It opened 235 hotels and closed 83 hotels in the third quarter, giving a net opening of 152 hotels in this quarter. Half of the closures were attributed to expiring leases, with quality control accounting for some of the remainder.

The group reported revenue growth of 15.9% to CHY2.77bn. Ebitda increased 38.5% year-over-year to CHY1.17bn for the third quarter For the full year, it has forecast revenue growth of close to 22%.

Looking overseas, Zhang said: “China is a very huge market, our penetration in China is still very limited. If you take the room count perspective, China Lodging accounts for only 3% of the total rooms supplied in this market. So our top priority will be domestic expansion.

“With that said, we are very interested in learning more about other markets. So we have started a few tests in different countries and areas in Asia and the Singapore hotel is our first hotel overseas. We’re still in the learning phase, so I cannot really give accurate prediction about how many hotels we’re going to open in the next few years.”

Zhang said that the company would expand overseas with leased and owned hotels, before looking at franchising.

Ctrip was also looking outside the domestic market, with CEO Jane Sun commenting that the group’s global brands, Trip.com and Skyscanner, represented over 90 million monthly active global

users, putting them in “the prime position to capitalise on our opportunity to bring more foreigners to China”.

James Liang, chairman & co-founder, said: “In past years, China’s new passport issuance maintained annual growth of approximately 20%. Moreover, the Chinese passport can now allow Chinese to travel to 74 countries and territories around the world with no visa or visa on arrival requirements. In spite of the short-term fluctuation in the outbound travel growth, Ctrip is dedicated to expand our core competencies in international destination to meet the long-term demand of Chinese international travellers.

“Foreigners travelling to China accounts for fewer than 30 million overnight trips once you take out visitors from Hong Kong, Taiwan, and Macau. According to the Ministry of Culture and Tourism, there is a vast potential to increase its volume when compared to United States which has over 75 million in-bound visitors every year. And according to global research firm Euromonitor in the recent report, China is set to become the world’s number one tourist destination by 2030.”

The OTA reported a 21% increase in accommodation revenue grew 21% year over year, to CHY3.6bn, driven by volume. The group said that in the mid to high-end hotel segment, it had seen growth at double the hotel industry rate.

Total net revenue was up 15% CHY9.4bn, with the company forecasting that net revenue next quarter would rise by 15% to 20%, with accommodation reservation expected to grow at about 20% to 25%.

HA Perspective [by Katherine Doggrell]: The Chinese are coming, the Chinese are coming but, like Donald Trump’s migrant caravan, as far as hotels go, thus far it’s all hype unless you count one site in Singapore. But the advance parties are closing in – Ctrip owns Skyscanner, which is a standard first, if not last step in the travel planning of, one suspects, most people reading these words. To labour the Trump caravan analogy, the reality is one of peaceful friend making: Huazhu also has a stake in AccorHotels, while AccorHotels also has a strategic relationship with Ctrip. Meanwhile, AccorHotels’ CEO & chairman Sébastien Bazin sits on the Huazhu board with Qi Ji, founder of Ctrip.

But while there is clearly money to be saved on joint Christmas parties, this is all good preparation for global expansion which hasn’t quite happened yet. With a population of 1.4 billion to encourage to pack their bags in China, it’s not as though either party has to scrabble around for customers and so the focus for the moment is to move away from the cheap, volume business and build their houses on something more substantial and profitable.

It is these brands with which Huazhu is likely to make the first moves outside China, relying on the desire for the familiar as all those Holiday Inns have gone into China in the other direction. One wonders when the company will lean on its shared board members and look to own the consumer all the more completely.

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Ctrip launches hotel brand

The company told Hotel Analyst that the concept was still in its “beginning phase”, but the group is thought to be targeting top-rated hotels in primary and secondary cities in China.

Rezen Hotels Group was also reported to have signed a strategic agreement with Shanghai Jin-mao Hotel Management agreeing to collaborate in improving conversion rates, hotel branding and big data application.

Ctrip has been deepening its business over the past year, after announcing that it wanted to expand globally. Over the summer the group strengthened its relationship with Booking Holdings, with Gillian Tans, CEO, joining the China-based group’s board as an observer.

The news of the appointment came on the heels of commercial partnership announced between Ctrip, and another Booking Holdings business, OpenTable. Through the partnership OpenTable, linked its North American restaurants to Ctrip users.

The OTA has also been working more closely with the global operators, signing a memorandum of understanding with AccorHotels. The move will see the Accor global portfolio promoted to Ctrip’s 300 million registered users. The pair will collaborate on loyalty programmes and IT, and build a flagship store for Accor properties. Accor will also train staff at its international hotels to specifically support Chinese visitors.

October also saw it announce a strategic global partnership agreement with Radisson Hotel Group.

Eric De Neef, EVP & chief commercial officer, Radisson Hotel Group, said: “Ctrip is a powerful partner supporting our reach expansion in China and the entire Asia-Pacific region. At the same time, we will be able to jointly bring more Chinese travellers to our EMEA and US properties and to further strengthen Radisson Hotel Group’s upcoming ‘Welcome China’ value proposition for our guests.”

Ray Chen, CEO, Ctrip accommodation business unit, added: “With our influential industry-leading position in China, our huge consumer base of more than 300 million travellers and AI-driven insights into Chinese consumer behaviour, we’re perfectly positioned to help Radisson Hotel Group expand its reach both at home and abroad.”

The OTA’s Rezen launch has echoes of efforts

being made by the other OTAs to try and offer services to the hotels which list with them.

Speaking at Hotel Analyst’s Hotel Distribution Event in October, Sue Spinney Corlett, VP, owner relations, Expedia Group said the OTA was “shifting to bring more value to our partners” and has invested USD1.4bn in tech over the last year. Among the innovations was a revenue management solution, which in client trials has shown a 10% growth in revenues.

In July Booking Holdings confirmed that it was to scrap the rate management tool in its BookingSuite product. The move was taken as a sign by some observers as an indication that hotels’ direct booking strategies were being successful and that hotels were becoming more sophisticated in their sales strategies.

RateManager was used to help hotels and accommodation owners anticipate demand shifts and set the best rates for the best days and times, based on demand and competition in the area.

Booking Holdings told Hotel Analyst: “As part of our commitment to continuous learning and innovation, we are going to continue our efforts in products where we see significantly more demand in the market. This includes our other existing BookingSuite solutions as well as developing new ones to best meet the needs of our partners.”

Booking would not be drawn deeper into the reasoning for its decision. Michael McCartan, managing director, EMEA, Duetto, told us: “In my opinion this is because hotels have resisted putting all their eggs in one basket. Hotels are already too dependent on OTAs for business and by allowing them to see 100% of business and influence the pricing – where and how they sell, and segment and promote their rates, ultimately could mean hotels giving up the keys to their business to the OTAs. I think the bigger hotels have more to lose and have therefore resisted going down this path which may be one reason why the adoption of RateManger has been unsuccessful.”

HA Perspective [by Katherine Doggrell]: Well it’s happened, an OTA has launched a hotel brand and the operators can go ahead and freak out now. The question now for owners is that raised by McCartan of eggs and baskets – should they hand over their distribution to one party and

what does it mean if they do?The question of what a brand means has never

been in sharper focus. On the one side, the OTAs are pushing the belief that brands are 100% distribution. On the other side, Airbnb and its ilk are selling the story that brands strip the joy and personality out of travel. The operators are responding, with a proliferation of brands and with loyalty programmes, but the story needs to be sold harder and, with the OTAs now pushing the data angle, hotels need to look to their own silos of information.

At Ctrip, the company is not, as at Oyo and the OTAs, about budgets and lost independents, but at the top end, where hotels might previously have been tempted to join soft brands, where the message is very much: distribution only.

For those who don’t form closer relationships with the OTAs, what does it mean if they don’t? Demotion to lower positions in the listings unless they pay higher fees? The OTAs are starting to leverage their power, hotels must check their strategies to see how much of that power they retain and how much is lost for good. Far fewer rooms are sold through the OTAs than many, hotels included, realise, but image is all. And in a world where hotel image is often slapped on via a brand, what is the cost?

Additional comment [by Andrew Sangster]: In the West, the focus is on the duopoly of Expedia and Booking when it comes to OTAs. But globally, Ctrip are very much the third force and the strongest force in their home market of China, which is now the world’s biggest outbound travel market.

According to UNWTO figures, the Chinese spent USD258bn on international tourism in 2017 while the next biggest spenders, the US, spent USD120bn. Thus the importance of Ctrip is hard to overstate.

It is worth noting that Ctrip still feels the need to involve an established hotel management company in the form of Jinmao. This latter company is a significant player in its home market and is currently working with Hyatt to rebrand the Grand Hyatt in Shanghai to Jinmao Hotel Lijiang under the Unbound Collection flag.

For Rezen, the ambition is to get to 50 hotels by the end of this year, 250 in 2019 and 500 more in 2020. Not clear in the details of this expansion is whether there is any role for Hyatt. The US brand has worked with Jinmao for 20 years, passing on what Jinmao itself describes as its “global expertise”.

Ctrip has launched its own hotel brand, Rezen Hotels Group, with the OTA planning to use its data resources to improve the performance of existing hotels.

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The deal was expected to be confirmed as Indian Hotels Company successfully retained the management contract on the Taj Mansingh Hotel in Delhi in an auction.

Brookfield was thought to be negotiating with JM Financial Asset Reconstruction to buy the debt, with the latter reported to be eager to retain around 10%. Hotel Leelaventure’s debt exceeded Rs3,000 crore (USD409m) and, in June the board approved a share issue of up to Rs125 crore shares on to JM Financial Asset Reconstruction Company for converting of part of debt into equity.

According to Bombay Stock Exchange data, JMFARC had a 26% stake in the company as of March 2018. JMFARC took over 95.6% of Hotel Leelavanture’s debt in 2014.

Hotel Leelaventure has defaulted on a series of loans in recent months, issuing a statement to the Bombay Stock Exchange at the beginning of October in which it said: “The company’s operating cash flows are not sufficient to service its term loans and non-convertible debentures and the funds of the company are escrowed with its lenders and the inflows and outflows are also monitored by the lenders.

“The company is evaluating various options for a viable restructuring, including sale/monetisation of non-core assets, sale of hotels, equity infusion and debt refinancing by investors.”

In September Hotel Leelaventure confirmed that it was in talks with three or four investors “and Brookfield is one of them”. Brookfield made its first investment in India in 2013 with the acquisition of real estate group Unitech Corporate Parks, gradually building its position until it owned the group.

In August Hotel Leelaventure reported a stand-alone net loss to Rs66.69 crore for the quarter ended June, blamed on a rise in expenses.

The company had posted a net loss of Rs23.64 crore in the same period last year.

“The results for the first quarter are not indicative of a full year’s working, due to the seasonal nature of the hotel business in India,” the company said.

The group has nine hotels open and a pipeline of five sites, as it looks to pursue growth through management contracts. It has been attempting to sell hotels for the past three years, after selling its Goa property in 2015 for USD111m. In 2016 the company was given permission by its shareholders to market hotels in Delhi and Chennai, with proposals thought to be under consideration.

At Indian Hotels Company, the company was celebrating the end of seven years of court cases. The Taj Mansingh Hotel opened in 1978 after Indian Hotels entered a 33-year contract with NDMC. From 2011 the contract was extended nine times, until the owner sought to find a new contract via the auction process, which Indian Hotels challenged and lost, before wining the eventual auction.

“We are delighted that the iconic Taj Mahal, New Delhi, which has been an important part of the cultural and historic fabric of the National Capital, will continue to remain a part of the IHCL family,” said Puneet Chhatwal, managing director & CEO.

The company also announced the signing of a new Taj hotel at the Deira Creek in Dubai in partnership with Ithra Dubai, a subsidiary of Investment Corporation of Dubai.

Chhatwal said: “The Middle East is a significant market for IHCL. We are honoured to partner with Ithra Dubai for this new hotel in Deira – the historical and cultural center of Dubai. IHCL has a long tradition of managing marquee hotels with rich heritage links across the world.”

The hotel is due to open in 2022.

HA Perspective [by Katherine Doggrell]: While this potential transactions looked to be a debt deal, Hotel Leelaventure’s previous support for swapping debt for equity suggests this may be a way in for the Canadians after all. Despite the hotel group’s issues, it has a number of hopes pinned to it and the interest of Brookfield and its turnaround skills perked up the share price when rumours were first released.

The hotel market in India is on the up. Commenting on the performance of hotels in India in the first half of the year, Horwath HTL described “increasing robustness”, which it said clearly reflected as hotels were able to achieve higher occupancy, ADR and resultant revpar. Speculation suggests that this and Brookfield’s involvement were why JMFARC wanted to keep a piece of the action.

But what of the other bidders? The press in India, which likes a story almost as much as British hacks, suggested that other potential investors had approached a number of the global hotel operators with a view to rebranding the sites, while Brookfield wanted to work with the founding family. As at Indian Hotel Company, a rebranding was always going to be hard fought.

Brookfield looks to LeelaBrookfield Asset Management is thought to be close to acquiring the bulk of the debt of Hotel Leelaventure.

The hotel market in India is on the up. Commenting on the performance of hotels in India in the first half of the year, Horwath HTL described “increasing robustness”, which it said clearly reflected as hotels were able to achieve higher occupancy, ADR and resultant revpar. Speculation suggests that this and Brookfield’s involvement were why JM Financial Asset Reconstruction wanted to keep a piece of the action.

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Brexit is the most significant development in the politics and economics of the UK since it became a member of the EU in 1973. The EU era also produced the most significant advances in the UK hotel business. I will consider the developments in the economy and in the hotel business before analysing implications for the future, with and without Brexit.

The UK economy and the hotel business: the EU effectOver the EU era the employment structure of the UK was overhauled. The share of national employment in the primary segment: agriculture and fishing fell from 3% to 1% as agriculture became an even more marginal activity. The secondary segment: manufacturing, construction and energy production fell from 38% to 18%, within which manufacturing fell to 9%. Collectively, the two segments shrank by 4.5 million jobs. The public sector rose from 21% of national employment to 29% with the addition of four million jobs. The service business sector: financial services, retailing, communications services, professional services and personal services rose from 30% of national employment to 38%. The experience business sector: hospitality, travel, sports and culture among others rose from 8% to 13% and together the two sectors added six million jobs. Over the EU era, the employment structure of the UK saw a sharp increase in employment in professional and white collar careers and reflected the progression in household demand. The mass of the population maintained demand equilibrium in domestic food consumption and two thirds maintained demand equilibrium in household and

personal goods at a progressively declining share of their income. As a result, the demand priority of the majority advanced from buying things to greater involvement in service businesses. The main development was the escalation in home ownership with its benefits to personal wealth and easier access to both short-term and long-term credit. The other major beneficiary of the EU period was the experience business sector with more frequent participation by home owners and by foreign visitors who participate predominantly in experience businesses.

The UK hotel business was elevated economically by all of these developments. Since 1973, it has added 250,000 rooms, an increase of more than 70%. Hotel room nights sold rose by 85 million to 135 million, an uplift of 2.7x. Over the years, hotel RevPAR data has shown that there is an efficient market in new hotel room supply. Concentration into hotel chains leapt from 23% to 62% and from two universities offering a degree in hospitality management there are now 32. Not only did hotel demand grow over the period, but also its structure changed. Domestic business demand grew from 16 million room nights in 1970 to 54 million in 2017. The UK service business and experience business sectors, the highest yielding sectors for domestic business demand, added 30 million room nights. On the other hand, the UK primary and secondary segments, the lowest yielding sectors for hotel demand, fell in both their economic significance and their significance to the hotel business in which they gave up one million room nights. Otus estimates that in 2017, the primary and secondary segments generated 8% of domestic business

nights in UK hotels, while the service businesses and experience business sectors accounted for almost three quarters.

Over the period, domestic leisure room nights sold grew from 20 million to 32 million, but the interest is in the change in the structure of demand. The main summer holiday to coastal resorts, which had been the bedrock of domestic leisure demand for over a century, collapsed as the market shifted to outbound package holidays with a greater guarantee of sun. The leisure market for hotels converted to short breaks all year round, which were nascent when the UK joined the EU, but are now the bedrock of domestic leisure demand. The biggest change in hotel demand was the growth in foreign visitors, both business and leisure. By 2017, foreign visitors grew to 36% of rooms demand, an increase of 35 million.

During the first 17 years of the 21st century, the Great Recession and the new normal were the most severe economic challenges for households. In the period of relatively flat income, personal debt doubled, which enabled more frequent participation in experience businesses. It is a testament to the progress made in the employment structure of the UK that most employees are owner occupiers of their home and their demand priority progressed to more frequent participation in experience businesses. A measure of this progress is that between 2009 and 2017, direct and indirect hospitality alone accounted for 15% of the total UK employment growth. The Economic Contribution of the UK Hospitality Industry, The British Hospitality Association, 2017.

The majority of UK adults and particularly those living in rented homes increased their spending in experience businesses until they reached their credit limit and simultaneously, the UK savings ratio fell to low single digits. Most home owners were able to recycle their short-term credit card debt into long-term debt secured on their equity value in their home enabling them to create more immediate cash flow. Increasing numbers of home owning baby boomers, who account for 21% of the population, have seen their families grow to live independent lives and have paid off their mortgage. Their resulting collapse in household expenses enabled boomers to progress to more frequent participation in experience businesses elevating them to be the largest generational customer group in hotels and they rely less on debt.

The UK Hotel Business and BrexitOtus & CO’s Paul Slattery examines the state of the UK economy as Brexit looms and considers the implications for the sector.


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International travel is solidly established as the fastest growing export market in the world having grown since 2000 at an average annual rate of 4% till 2016 and then accelerating. Since 2000, the investment by the UK government in attracting foreign visitors has produced consistent underperformance of the global market. In parallel, outbound travel from the UK has out-performed the global market consistently despite the imposition of the Airline Passenger Tax on flights out of the UK set at the highest level in the world. The indifferent UK governance of international tourism produced a progressively rising trade deficit reaching £21 billion in 2016, double the primary segment deficit, despite annual subsidies from the EU to farmers and landowners. In 2016, the agricultural subsidies amounted to £38/capital whereas the investment by the UK government in penetrating the fastest growing export market in the world was a measly £1/capita. In 2016, the EU accounted for 54% of foreign visitor nights in the UK and the share has been relatively constant for the past 10 years. All experience businesses require travel from and to the home of customers. Consequently, the growth in demand for experience businesses places pressure on travel infrastructure, which in the UK is proving to be inadequate for the volume of travel by air, rail, road and sea.

The Brexit perspectiveThere is an economic perspective and a political perspective on Brexit. The most avid supporters of Brexit start from the political perspective with nationalist and populist slogans such as, “take back control of our country” and a belief that there are too many immigrants in the UK. They long for a return to the social, cultural and economic era when “Britannia ruled the waves” and the relative significance of the British economy merited the prefix, “Great”. They believe that the longer that the UK remains in the EU, the more that British values and the position of Britain in the world will be diluted. For them, the economic perspective on Brexit is secondary and tied to the time a century and a half ago when agriculture and manufacturing dominated the economy.

They provide little or no empirically grounded analysis of the post-Brexit economy other than their proclamation that the UK will once again become “a global trading nation”. However, clues to their economic hopes can be seen in the

centrality of agriculture and manufacturing to the Brexit negotiations. They can also be seen in their commitment to greater production of goods for export and the reduction of imported goods to recover the economic significance of agriculture and manufacturing. Indeed, the economic core of the Brexit negotiations and debate have been about the countries with which Britain will trade and how much will be paid to export and import goods.

The remain perspectiveThe most avid supporters of the UK continuing to be a member of the EU start from the economic perspective. They ground their position in the empirical reality that the UK is a complex advanced economy in which the share of national employment and contribution to GDP of the primary and secondary segments, like those of all Northern Atlantic economies, have declined naturally since World War II and continue to fall. The natural decline is based on improved productivity and the mass of the population reaching demand equilibrium in consumer goods. For decades, more than half of the UK popula-tion has advanced its demand priority to service businesses whose growth has been the major development since World War II, but the progress has not ended there. Owner occupiers of homes in the UK have increased the frequency of their participation in experience businesses. Together, service businesses and experience businesses account for more than half of national employment and of GDP. They are the critical core of the economy, yet they have been forgotten in the negotiations and debate about Brexit having lost out to the minor agriculture and manufacturing segments.

The political perspective of remainers is secondary to the economic perspective. They are increasingly cosmopolitan compared to the increasingly parochial Brexit supporters. They believe that immigration has enhanced the social, cultural and economic life of the UK. They are also aware that Britannia ruling the waves is a distant history from which not only the UK, but also the rest of the world has progressed. Fundamentally, the hotel business is cosmopolitan and not parochial. Rooms demand is from people staying away from home both nationally and internationally. Additionally, a significant and rising proportion of hotel employees come from other countries. Parochialism and professional hotel management do not sit well together.

The future without BrexitLet’s start by assuming that the referendum on the UK membership of the EU never happened. What would be the UK economy and hotel prospects into the medium to long-term future? The Office of Budget Responsibility (OBR) estimates that Annual GDP growth for the UK till 2022 will only exceed 1.5% in one year and then only to 1.6%. So, the economic outlook is not great. The natural progression for the primary and secondary segments is for continuing decline in their share of both national employment and contribution to GDP. The rate of growth in the public sector has been constrained by fiscal tightening for the past 10 years, but it is not expected to fall due to the growth in the population and the demographic tilt towards seniors who are living longer. The more severe problem for future business demand is that since the start of the 21st century, the service business sector has flat lined in terms of employment growth for three reasons. First, retailing is moving from shops to online retailing with the net effect that it needs fewer employees. Second, communications services is coming towards the end of mass buying of mobile phones, iPads, laptops, pcs and other digital equipment. The growth in communication services is now more reliant on the winning and renewal of service contracts. Third is the decline in financial services, which is the most serious for the economy and for the hotel business. The debt ceiling of home renters has been reached and the UK savings ratio has fallen cutting off the route to growth through more short-term unsecured credit. More mortgages than ever before are being paid off. Since the Great Recession, financial service businesses have restricted demand for mortgages by applying more onerous terms to raise and repay a home mortgage for first-time buyers, which has driven millennials into the home rental market. Moreover, many of the nine million middle household home renters are on the verge of progression in their demand to buy a home, but they have been blocked by the more onerous terms of mortgage providers. The repair of personal finances will not be fast. It will take longest for home renters because they have access only to unsecured shorter-term credit. For home owning families it will take less time because they can recycle unsecured shorter-term debt into secured long-term debt. The only domestic hope for increasing hotel demand is the boomers, but they travel internationally as well as within the UK. (...)


Analysis

29

By Paul Slattery: Otus & Co Ltd [email protected]

The future with BrexitThe evidence from manufacturing, foreign visitor demand and travel infrastructure is that post-Brexit, the economy will perform worse than the OBR projections. There are four points about manufac-turing. The first Brexit risk for UK manufacturing has been highlighted by many economic analyses of which the conclusions of The UK Trade Policy Observatory are typical, “none of the five Brexit scenarios that we model leads to a positive outcome for UK manufacturing. Even if the UK were to remain a member of the European Economic Area, UK manufacturing industry risks shrinking as a result of the UK leaving the EU”. Which Manufacturing Sectors are Most Vulnerable to Brexit? United Kingdom Trade Policy Observatory, February 2018. Second, with the potential loss of the largest short-haul, open market taking half of the UK exports, the government will need to negotiate long-haul trade agreements for the export of UK products. Long-haul export markets are higher risk than short-haul due to the higher UK production costs, higher costs to transport the goods from the UK, longer delivery times and the growth in lower cost competition from economies closer to the target markets. Third, China employs 150 million and rising in manufacturing, while the UK employs 2.5 million and falling. For the mega markets such as China, the UK has production capacity to deliver only marginal volumes of marginal products. Fourth, the 158 least developed economies are realising that their economic progress requires them to expand their manufacturing industry to produce household and personal goods for their population and to reduce higher priced imports from higher cost economies such as the UK.

More than one third of room nights in UK hotels come from foreign visitors, the fastest growing export market in the world and at least half of those come from the EU. The specific regulations to be applied to visitors from the EU could relate to none, any or all of the following: if planes will be allowed to fly from the UK to the EU and vice versa; if EU citizens will need a visa to enter the UK and vice versa; how much longer it will take to process visitors from the EU and vice versa; if international driving permits will be required and whether the European Health Insurance Card will continue to be valid for NHS equivalent access for British citizens in EU countries. The more that these regulations are applied the more severe their negative impact on travel from

the EU to the UK and to its hotel business. If all of these impediments are avoided, the UK will be left having illustrated to EU nationals that post-Brexit they are less welcome. The Brexit uncertainty is not limited to demand. There is significant concern about the UK hotel workforce. KPMG estimates that between 12% and 24% of UK hospitality workers are EU nationals. Further, market research by YouGov concluded that around 330,000 of them are considering leaving the UK as a result of Brexit, which would be a sharp disruption for the largest creator of new jobs in the UK.

The preoccupation of the UK government with the minor agricultural and manufacturing businesses has blinded it to the implications of the growth in travel to the extent that its own economic analysis has been overruled by its political priorities. Its view on travel demand is that, “By 2040 traffic on England’s roads is forecast to increase by between 19% and 55% to between 300 and 400 billion vehicle miles under different scenarios. By 2030, rail journey demand is forecast to increase by 40%, and with unconstrained growth, rail freight has the potential to nearly double. UK air passenger numbers through UK terminals are expected to increase by an average of around 2% per year (33% overall), reaching 315 million by 2030.” The Department of Transport, Transport Investment Strategy: Moving Britain Ahead, HMSO, July 2017 p14. The government response to the escalation in travel demand has been to ignore it. It has committed to the main-tenance of infrastructure spending of between 1% and 1.2% of GDP between 2020 and 2050, The Department of Business, Energy and Industrial Strategy, Building Our Industrial Strategy, Green Paper, HMSO, January 2017, p55. The World Economic Forum ranks the US higher than the UK in terms of travel infrastructure. Currently, the US spends 2.5% of its GDP on travel infrastructure with the recognised need for it to be lifted to 3.5% by 2025 to keep pace with demand growth. The UK government position on travel infrastructure is based on stubborn insistence to continue the undersupply of travel infrastructure in the face of substantial on-going growth in demand.

Conclusions The Brexit strategy of the government has been dominated by the political perspective rather than the economic perspective. Its preoccupation

with the minor agriculture and manufacturing businesses at the expense of the dominant service business and experience business sectors means that in terms of economic governance the tail is wagging the dog.

Brexit has deflected government attention from other problems, which also have the potential to derail the economy. The slowing of employment in service businesses and in particular the decline in financial services and retailing is one. The policy to continue the chronic underfunding of travel infrastructure is another. They are two of the biggest non-Brexit economic problems, which also depress demand for experience businesses.

The elevating history of the hotel business throughout the EU era has been driven in the first instance by growth of the service business sector, which escalated domestic business demand to 40% of room nights sold in UK hotels. The government inaction on financial services and retailing decline in employment is threatening around 15 million room nights. The second driver has been the growth in foreign visitor demand. With Brexit, the government has put at risk 25 million room nights sold to EU nationals. Its indifference about investment in travel infrastructure is endangering the essential component of all demand for experience businesses and limiting future growth. When the on-going natural decline in the primary and secondary segments, the on-going tightening of public sector budgets and the fragility of personal finances are added to the more uncertain prospects for hotel demand, government action and inaction is putting at risk as much as 30% of room nights sold in UK hotels. Without Brexit, up to 15% of hotel demand is at risk.

Without Brexit, the UK hotel business is faced with tough demand challenges. With Brexit the challenges multiply. At a time when the government and corporate policies in most countries are growing demand for experience businesses, the UK government has engaged reverse gear leaving the hotel business to cope with its biggest demand crisis since World War II. Those in the hotel business who are relying on hope to avoid the impact of Brexit and the other economic problems are party to the risk. They have little time left to construct a more effective response.


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Okerstrom wriggles out We’re always being told how important it is to broaden our minds, see new things and have new experiences and the hotel sector is only too happy to provide a growing array of experiences along with its traditional offerings.

Of course the OTAs - and Airbnb - have also looked to own more of the travel funnel by bringing experiences with a big E to the fore, but it has mostly been along the lines of pottery courses and local gastronomic tours. We all enjoy a chance to stuff ourselves in the name of cultural awareness, of course.

But as has become the theme in the arms race between hotels, the OTAs - and Airbnb - things do occasionally get out of hand. At Expedia Group’s Explore ’18 event in Las Vegas in December last year, there was a lie-off between president & CEO Mark Okerstrom and the company’s lodging parter services

president, Cyril Ranque, where the two had to guess which outlandish life experience was a fabrication. Attendees heard that yes, Ranque had once flown in a plane where there had been some frightening safety issues. They also learned that Okerstrom was able to perform breakdancing move The Worm, where the entertainer undulates across the floor much as a worm might under extreme duress. He then proceeded to perform the move across the stage, to the whooping delight of attendees - the majority of whom rely on Expedia for their livelihoods - and the shock of European journalists, who prefer their CEOs the right way up.

To contrast, at IHIF last year, the main source of excitement was Accor chairman & CEO’s Sébastien Bazin’s cancer-charity supporting bright pink watch. There are those who believe that’s thrilling enough for a conference and they may well be correct.

Robots have their chips Hotel staffing has been an issue for as long as there have been hotels, for the simple reason that there are very few people out there who want to stay awake all night just because someone, somewhere, might want to eat a tepid Club sandwich at 3am. In the UK, the decision to leave the EU has combined with the British lack of enthusiasm for service to bring staffing into focus, but a lack of enough talent to match the expansion aspirations of the global brands means it is being felt everywhere.

In 2015 a Japanese company leapt into the breach and offered up a hotel where guests were instead served by robots and a series of jokes questioning the difference between the technology and the computer- says-no attitude of some checkin staff was born.

Four years later and the Henn na Hotel in Japan has announced plans to cut its robotic workforce by more than half and return to the human option, after a series

of complaints from both guests and staff - the latter because they had to keep working overtime when the robots broke down. Nothing too out of the ordinary there, but some of the failings were ones you would hope to avoid in the human world.

In one case, the in-room robot kept waking a guest up to get clarity on what it thought were questions, but were in fact just rambunctious snores. The same robot would also attempt to join in conversations between guests, in a trying fashion. Another issue became apparent when robot luggage carriers were unable to access any rooms without perfectly flat floors.

There are some in staff training who would suggest that you could halve your workforce just by empowering the ones you have and stop making them feel like automatons themselves, but that’s another story for another day.

The Insiderhotelanalyst

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Consumers crave experience · 2019-03-04 · Consumers crave experience The intelligence source for the hotel investment community Volume 14 - Issue 1 Spring Experiences were increasingly