2015: Still bigger, but bigger better
Just how important is size to a hotel company's future competitiveness? Strategically, says Nicolas Graf, Director of the IMHI Center of Excellence in Hospitality, Food & Travel at ESSEC Business School in Paris, size will be of the essence: but not necessarily for all the conventional reasons. What matters more will be the ability of a hotel chain to maintain a dense digital ecosystem, and given the level of investment this requires, the only way to do this is to grow. Read his fascinating take below.
Did size matter?
Back in late 2012, I made a few predictions for the Hotel Yearbook 2013. I titled the paper "Size matters" as I envisioned the short-term future of hotel chains to be about even more growth in order to regain some power in the online distribution space. The three engines of growth I had predicted then were these:
- new conversion-friendly brands and more development through conversions in mature markets,
- an increase in M&A activities, and
- enabling independent hotels to utilize – for a fee – hotel groups' booking engines.
Reflecting on developments in the two years since then, it appears that two of these engines of growth have warmed-up – namely conversion-friendly brands and M&A. The third – opening-up chains' booking engine capabilities to independents – remains however a prediction.
A brand and M&A story
In 2013 and 2014, conversion-friendly brands have been created, such as Curio or even Canopy by Hilton, or BW Premier Collection by Best Western, and existing conversion brands have further developed. For instance, Marriott's Autograph collection has converted over 6,800 rooms in 2013, more than the double the number of converted rooms in 2012.
M&A activities have also increased – albeit not as significantly as predicted. A quite impressive number of small and medium size acquisitions have taken place in the past two years, including Protea's acquisition by Marriott, Rica Hotels' acquisition by Scandic, or Vantage's acquisition of America's Best Franchising group to name just a few. The recent acquisition of Louvre Hotels Group by Jin Jiang International Holdings represents the largest of those acquisition over the period and propels the Chinese firm into the top-10 largest hotel chains by room count.
So indeed, size appears to have mattered over the past years, and 2015 will be no different.
Why more growth for 2015?
Together with investors' imperative for growth, size will be needed in 2015 and beyond for at least two intertwined reasons: first, the need to offer a complete online ecosystem for the travel journey, and second, the need to be able to finance the development, maintenance and operation of this ecosystem.
The control of the customer journey is thus the first reason for more growth. As consumers travel and the "maintenance" of that journey is increasingly moving online and onto mobile devices, the entire journey – from destination selection to post-trip review – needs to be streamlined. Thus, the control of not only the booking, but also pre- and post-booking activities become critical to increase direct sales and to lock consumers into a single ecosystem.
What this means is that booking ecosystems will need to evolve and to integrate parallel, up- and downstream relevant content. The success of aggregators such as Trivago is an indication of the need to streamline the online customer journey. Similarly, Amazon's choice to offer hotel bookings in its portal (as does Alibaba), bundling hotel rooms with retail products, is another indication of the potential value of creating an online ecosystem covering more stages in the travel journey.
Will hotel chains be capable of creating valuable ecosystems? Well, it will depend on their size, and on the quality of their geographical scope.
The second reason for more growth is essentially related to the economic model of most hotel chains. As the largest chains, for the most part, have fueled their growth through a "capital light" development, their cash flows are mostly fee dependent. Fee-based cash flows require significant size to enable firms to generate budgets that are competitive in the digital arena.
Look at Amazon again. Amazon's annual capital expenditure in 2013 was close to US$ 4 billion, with more than half that amount spent on real estate (storage of goods and servers, shipping facilities and offices). But more than half a billion dollars were spent on website and software development. Compare that to Accor's announcement during its digital day in London in October 2013: Amazon's one-year expenditure represents twice the amount that Accor is planning to spend over four years – i.e. a whopping multiple of 8 for annual spending on website and software.
While comparing Amazon to Accor may appear to be a stretch, the convergence of firms from various sectors into the travel digital space is evident. For hotel chains to be able to compete in that space, significantly more cash will be needed to develop, maintain and operate digital ecosystems. Growth is the only means I can think of to meet such cash flow needs.
Growth, yes: but in controlled scope and for gaining from network effects
While growth of room count will remain crucial for hotel chains, their development strategies will need to strike a good balance between pace and scope. A disciplined approach to market selection will need to take priority over a faster pace of growth.
In 2015 and beyond, growth will need to about densifying the network and diversifying it through partnerships at the local level, as much as it will be to increase the scope of markets. These two dimensions – densification and diversification – are required to increase the value of the ecosystem as a whole, but also to increase the value of each participant within the ecosystem. This is what is generally referred to as network effects, or externalities.
In short, hotel chains will need to make more products and services available to the ecosystem users at the local level in order for the system to attract more users. As more users join, then the value of the ecosystem increases for the hotel units and for the local partners, thereby enticing more units and partners to join. As an illustration, think of the value of an online ecosystem to a user if that ecosystem offers only a few hotels to choose from in a given location. The value is low for the user and is low for local partners to join. This phenomenon also applies to loyalty programs.
To sum up, 2015 will see more growth for hotel chains, but it will be a growth focusing on densifying existing markets as opposed to developing entirely new ones.
