Hotel Group Evolution - Survival of the Biggest / KPMG / 1998

-- Hotel Group Evolution - Survival of the Biggest -- by William Barney, Director, KPMG United Kingdom

Summer 1998 - The leading challengers in the race for global domination among the major international hotel groups have raised the pace. The number of hotel sector transactions during the past 8 months has served to focus attention on the widely held belief that future profitability is being driven by scale.

It now seems dear that the international market, led by the North American groups, will be dominated by a few super-groups. The emergence of Starwood has been dramatic and its move to secure Sheraton has, perhaps, highlighted the true challenge that the REITs pose to "traditional" hotel groups. Others that have emerged in the super-group category include Marriott International, Hilton, and, most recently, the Bass / Holiday hospitality acquisition of Inter-Continental.

The underlying trend of emerging super-groups raises a number of interesting issues for the industry as a whole. The North American market is now heavily consolidated and future expansion is bound to move into more fragmented markets in Europe and the Far Fast.

So, as the market leaders search for new expansion opportunities, how will the domestic groups in these regions fare? Given the economies of scale afforded by the new enabling technologies in marketing and distribution, will the playing field slope in favor of the giants?

Western Europe must be the key market for all of these groups, with the Sheraton / Arabella tie-up in Germany. Immaturity in many of Europe's markets, particularly Germany, Italy, and Spain, evidenced by a low percentage of hotels under brands and owned by stock exchange-quoted companies, will offer a number of challenges and opportunities:

Can the steamroller approach of the super-groups work as well in European countries as it has elsewhere, or will cultural differences threaten the acquisitive strategy.

Will the domestic groups be able to maintain their market share in the face of the GDS and marketing clout of the super-groups?

Will the major European groups close ranks and use alliances among themselves to create a Pan-European Group? Is this a realistic possibility? Could Accor or Meridien achieve this? Is the industry's fragmentation likely to prevent cross-border activity?

There are so many changes occurring that it is difficult to isolate the key issues for the future. As the leading hotel brands become more pervasive it is hard to see how smaller groups will fail to be affected. Some of the more likely issues include:

Lower cost access to capital markets to fund expansion continues to be of prime importance. The cash - rich buyers have flexed their muscles in recent years and the results are plain to see.
Differentiation by product quality or design is becoming increasingly important, particularly for smaller groups.
Restructuring - for example, by outsourcing of finance, human resources, and food and beverage - is becoming increasingly common, along with clustering and shared-services policies at a regional level.

Perhaps the most important issue in the consolidation argument is that of post - merger integration. In many cases mergers are "sold" to shareholders and institutional investors on the back of economies of scale, and yet the financial reality, after the event, is often somewhat disappointing. For the super-groups, the effectiveness of their integration planning and execution will become more and more important.

It will be fascinating to watch the market develop - the global industry seems to have completely recovered from the battering it took in the early 1990s, and optimism is high. When the downturn comes, we will probably find out who the real winners are.

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