|Questions surrounding consolidation|
|Continued market and product segmentation|
|Editors Note: A Leader Forum held earlier this year in
the United States brought together CEOs from a number of the largest U.S.
hospitality companies - a group that covered a broad spectrum of the structure
of the industry - including real estate investment trusts (REITS), hotel
owners, branded management companies and franchisors. This premier leadership
panel moderated by Roger Cline reflected on where the hospitality industry
is going, how it is changing and what this leadership group is planning
to ensure success. At the same time, the audience members participated
by voting on multiple - choice questions posed using interactive technology
with opinions tabulated instantly. The following article offers a profile
of these opinions, as well as commentary on issues of critical importance
to hospitality enterprises as they plan for a future in a world of constant
change and much uncertainly.
Questions surrounding consolidation of the hospitality industry drive a vigorous debate. Surveying the current pace of corporate merger and acquisition activity, some industry observers have suggested that our industry will be dominated by a few global players in fairly short order. The countervailing view is that there is still plenty of room for mid-sized players and occasionally even for start-ups, particularly the entrepreneur with an eye for a good market niche. Presented with this issue, the Leader Forum audience divided almost evenly - nearly 40 percent agreed that we will eventually have just a few global companies, while one-third suggested plenty of new start-ups and mid-sized companies five years from now. By contrast, just over one-quarter of those convened opted for the status quo. suggesting that there will be about the same number of companies as we currently have five years hence.
Presented with this profile of opinion from the audience, our CEOs reflected a similar disparity of opinion. For those companies that raise capital in public financial markets, enterprise size is clearly important and gives advantage in terms of capital pricing and market acceptance At the same time, market scale and breadth were emphasized as critical to success in branding and marketing. A strategy of multiple-branding within the umbrella of a single organization has clearly gained favor - driven originally by segmentation and increasingly by consolidation. Owning more of the individual customer by developing "cross-over" loyalties between brands clearly has its merits especially as acquisitive companies take on brands that have been established by others.
But while conventional wisdom seems to promote these arguments in favor of consolidation, at least one CEO cautioned that this trend would soon run its course and that the expected savings might be somewhat illusory. And with property acquisitions becoming more expensive, there will need to be greater emphasis on productivity improvements and same store profit increases in order to sustain earnings growth at the enterprise level. Consolidation also requires a continued flow of inexpensive acquisition capital - an expectation that might be frustrated if hospitality companies begin to report flattening profits.
Consolidation also needs to he considered in the context of the growing appetite for strategic alliances. "If you can't beat them or buy them - why not join them" might be the refrain. Our CEOs all agreed that strategic alliances and joint ventures are significant growth vehicles. Indeed, Arthur Andersen '5 Hospitality 2000 study revealed that the majority of senior managers polled globally view such alliances as the primary growth vehicle for the future.
Customer relationships also need to be considered, suggested one CEO panelist. Consolidating hotel product will he important to the issue of size and scale, but more important will be the improvement and consolidation of the customer relationship.
On balance then, the outlook for consolidation looks mixed -extrapolating the current trends suggest a torrid pace to the dominance of a few global enterprises. But not everyone sees this future and most acknowledge the role of the niche player in the appropriate circumstances -undoubtedly a relief to many who continue to emphasize their special place in this rapidly changing industry.
Continued market and product segmentation - combined with the proliferation of brand names in this industry - have undoubtedly led to some customer confusion. More than 50 brands have been created in the U.S. in the last five years. with plenty of duplication across product lines. Brand consolidation seems to loom on the horizon. Polled on this issue, the Leader Forum audience members indicated they think there may be a moderate decline in the number of hotel brands during the next five years. Regardless, distinguishing hotel brands from the competition and generating customer loyalty will be one of the big competitive hurdles for hospitality companies in the future. Indeed, customer confusion may be one of the pivotal factors promoting brand reduction and consolidation in the years ahead.
CEO panelists acknowledged that establishing brand presence and critical
mass could contribute to over-building. Distribution in and of itself,
however, does not necessarily create the basis for brand strength. A successful
brand draws on an emotional bond with the customer - a bond that must be
supported by a consistent product and service delivery - a distinction
that will clearly separate the brand winners from the losers over time.
Members of the Leader Forum audience were split in terms of how chain growth will occur in the next few years with almost 40 percent indicating that mergers will be most important, followed by acquisitions of existing properties. Sixteen percent. however, said it will come from new development. while one-fifth believed franchising will be the strongest vehicle. Almost none of the audience believed that management contracts would be instrumental in promoting growth of hotel chains.
CEO panelists viewed the possibilities for growth in diverse ways. The hotel owners - both REITs and C-corps - saw continued acquisition opportunities (despite rising prices for hotel real estate - at least in the United States). The franchisors saw growth opportunity both domestically (in the United States) and internationally (despite overbuilding in the U.S. limited service sector and the challenges of franchising in most markets outside the U.S.). The management companies believe there will be a continued need for high-quality independent management services (despite the desire on the part of most investors and owners to control the management of their businesses). Reconciling these varied goals and objectives with some of today's (and indeed tomorrow's) realities will clearly represent some important challenges for this leadership group.
As hospitality organizations increasingly recognize the strategic value
of customer equity, they will need to balance their capital and resources
between investments in hotel real estate and investments in customer relationships.
While CEOs generally acknowledge this need the experience in practice is
undoubtedly quite mixed. Some of the larger companies are investing
in the technologies required for developing customer intimacy and one-to-one
marketing while others have been slow to take up the challenge. In a future
where competitive advantage will be
Organizing for Success
Current organizational theory encourages enterprises to be flat, flexible, empowered, networked, knowledge-based and creative. Most of our CEOs agreed with these concepts although we suspect deploy them quite variably within their own organizations. In any event, there is a growing emphasis on outsourcing as organizations emphasize their core competencies and leverage their real strengths into the marketplace.
In a separate study of business organizations globally, key drivers of strategy include: customer demands for higher quality and service; the ability to attract and retain the best people; international competition; and new and rapidly changing technologies. We see little reason to believe that these same drivers should not be the focus of the leadership in the hospitality industry in the future.
Public Capital Markets
Audience members at the Leader Forum were polled about bow long they believed Wall Street would sustain its interest in the hospitality industry. One-third suggested that the current strong support would last at least three more years. while an equal number put it at two years. For the CEOs of the country's leading publicly held hospitality companies assembled at the Leader Forum, the notion of any waning interest in the public markets was evidently not on their radar screens By and large, they continued to express enthusiasm for a future of unparalleled growth. This suggests that an interesting development. operating and marketing environment lies ahead.
(Roger Cline is Director of Hospitality Consulting Services and a partner in the New York office of Arthur Andersen.)
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