16 February, 2017
Introduction
In Hong Kong last October at HICAP (Hotel Industry Conference Asia Pacific) Baker McKenzie discussed this topic with a panel of industry experts representing owners, operators and consultants in front of an audience of approximately 200 conference attendees. To view the PowerPoint for the presentation please click this link which will take you though to Graeme's LinkedIn page.
What the audience had to say
We polled the audience and asked four questions, being:
- Will fewer global hotel management companies be financially better for owners and operators?
- Will smaller hotel chains benefit as a result of mega mergers?
- Will loyalty scheme members be better off with a merged loyalty scheme?
- Will mega hotel management companies be better able to reduce OTA (Online Travel Agents) fees?
For each question we asked the audience to respond to a multiple choice questionnaire which in each case consisted of:
Yes
No
I don't know
If you would like to know how the audience responded then please go to Graeme's Linkedin page.
What the panel had to say
With our panel of industry experts we covered the following 10 topics. Generally we asked some, but not all, of our experts to comment on each topic. On some points our experts agreed and on others they had different or opposing views. What we set out below is a broad summary of the diversity of views provided.
Topic and Discussion
1. Reduction in the number of global hotel operating companies – What will some of the affects be of
the concentration of ownership of operating companies?
- Less choice for owners and guests but the prospect of an enhanced service and accommodation offering
- Potential economies of scale for the merged operators
2. Potential advantages of consolidation – What will the advantages be to owners, operators and guests from the consolidation of ownership of hotel operating companies?
- For owners, the opportunities that arise when partnering with multi billion dollar global behemoths particularly the potential that it may lead to less reliance on OTAs
- For operators, the opportunity to invest significantly greater funds on research and development to create a far most distinctive image and service experience
- For guests, the potential to benefit from significantly enhanced loyalty programmes
3. Potential disadvantages of consolidation. What will be the disadvantages to owners, operators and guests from the consolidation of ownership of hotel operating companies?
- For owners, potential contraction of choice and erosion of bargaining position when negotiating hotel management agreements
- For operators, the potential loss of focus brought about by combining operating companies with
- dysfunctional cultures and ways of doing business
- For guests, erosion of choice
4. Impact on listed hotel operating companies that have not merged. What will the impact of the mega mergers be on the large global hotel operating companies that have not merged? Does it mean increased profits or increased risk for those companies?
- Increased pressure on boards to acquire or face the prospect of being acquired
- A potential struggle to compete efficiently with merged companies with a significantly lower cost base
- An opportunity to capture and own a niche market with the prospect of enhanced profitability
- The potential of embarking upon an irreversible ill conceived or disastrous merger or acquisition
5. Impact on unlisted hotel operating companies that have not merged – Four Seasons, Shangri-la, Mandarin Oriental, Peninsula. Will they have a point of difference? Will their brands be less attractive or more attractive to guests?
- An opportunity to capture and own a niche market with the prospect of enhanced profitability
- A potential struggle to compete efficiently
- The opportunity to create a point of difference if a proper strategy is devised and executed
- Brand attractiveness with be a function of the point of difference strategy
6. Opportunity for smaller boutique international and domestic chains. Will the guest experience with small boutique chains and local domestic chains be more attractive to guests rather than a global mega hotel operating company with multiple brands?
- The prospect of competition from mega merged competitors may energise and remove complacency
- Far more focus will need to be given to determine what owners and guests want from their operator and how they can be best placed to provide it
7. What will happen with loyalty schemes? Will it be one size fits all or multiple loyalty schemes for multiple brands? Will loyalty schemes pay off with mega mergers?
- Generally considered that irrespective how large operating companies becomes loyalty schemes will apply to all brands and not split up into specific brands
- Enhancement of loyalty schemes generally considered to be primary benefit of mega mergers to both guests and owners
8. Lack of brand differentiation Will all of the brands of the mega global hotel operating companies start to merge from the perspective of owners and guests Will owners and guests regard the mega hotel operating companies as providing less choice. Will the multiple brands of the mega hotel management companies start to disappear?
- It is unclear whether the mega merger companies will maintain, increase or contract or consolidate the number of their brands
- Consolidation would be a tricky exercise as it would generally require individual negotiations with each owner to effectively amend in a fundamental aspect a potentially long term contractual commitment
- When an operating company has access to a vast number of brands it is questionable whether true differentiation can be achieved between each brand
9. Impact on hotel management agreements. What will the impact be on some of the usual clauses in hotel management agreements including area of protection, sharing of resources, marketing and reservation fees?
- Widely divergent views. Some experts considered it would simply be "business as usual". Others suggested that there may be a move away from locking in a specific brand for the term of the agreement and the knock on consequences this would have especially to the term of the agreement
- As operators aggregate more brands then a brand specific area of protection becomes increasingly questionable
- The economies of scale that should follow the enhanced size of the mega merger operators should translate into identifiable and measurable cost savings
10. Will mega mergers guarantee mega profits for owners and operators? What will the logistics be like for the mega hotel companies running multiple properties in numerous jurisdictions with multiple owners? Will there be greater bargaining power with OTAs?
- It is unclear whether mega mergers will guarantee mega profits for both owners and operators or just the mega operator (with the potential for profit diminution to the owner as a function of the reduction in completion amongst operators)
- It is equally unclear whether mega growth will lead to significant economies of scale with consequent financial benefits to both the owner and operator or monolithic bureaucracies which become increasingly out of touch with the needs and wants of individual owners
Our comments
It is fair to say that at the end of our discussion it became increasingly unclear to predict what the future of the hotel industry would look like if mega mergers continue to occur at the current pace or at an increasing pace. A mega merger in itself is not a recipe for financial and competitive success. It's what the people in charge of the merger do once it has been undertaken. There will undoubtedly be winners and losers. Those who get the timing brilliantly right and those who get it hopelessly wrong.
There will be those operators who thrive by sticking to their knitting and growing organically and those that become increasingly irrelevant because the market has moved on and they have been left behind.
For further information, please contact:
Graeme Dickson, Partner, Baker & McKenzie
graeme.dickson@bakermckenzie.com
