As the global hospitality industry enters an unprecedented period of consolidation, Hotel News ME examines the impact of merger trends on the Middle East market.
Just two years ago, some of the world’s leading hotel groups professed that big mergers were just too complicated. Speaking at the 36th Annual New York University International Hospitality Industry Investment Conference in New York on June 2, 2014, the CEOs of Marriott, InterContinental Hotels Group (IHG) and Four Seasons all agreed it was unlikely that big players would merge any time soon.
Marriott International CEO Arne Sorenson said it would be too complicated for the big chains to combine their massive rewards programmes and IHG CEO Richard Solomons dismissed reports of a rejected $10 billion takeover offer, claiming the chain was focusing on organic growth. Both Sorenson and Solomons agreed their prime focus should be to grow existing brands, while Four Seasons CEO Allen Smith said maintaining the company’s culture was top priority.
Fast forward two years and at least one of these CEOs has demonstrated a complete change of heart, and another looks to be eyeing merger opportunities. The global hospitality landscape has rapidly evolved with the past six months witnessing two high-profile acquisitions that appear to have ushered in a new era of consolidation.
Accor kicked off proceedings with the $2.7 billion purchase of Fairmont Raffles Hotels International (FRHI) in July this year, followed by Marriott International’s $13.6 billion acquisition of Starwood Hotels and Resorts on 23 September, which created the world’s largest hotel company. And all the while, speculation continues over possible buyers for IHG.
China’s Anbang Insurance Group, the company that attempted to buy Starwood for $14 billion earlier this year, was said to have bid for the London-based hospitality group, but to no avail.
In the meantime, another Chinese conglomerate, HNA Group, has reached an agreement to buy Carlson Hotels Inc. for an undisclosed sum. The deal includes Carlton’s majority stake in Brussels-based Rezidor Hotel Group, which is publicly listed and manages more than 1,400 properties across Europe, the Middle East and Africa. As for Hilton and Hyatt, watch this space, but with Marriott and AccorHotels now in control of more than 1.6 million hotel rooms globally, competing hotel groups such as these will surely be considering their options.
Strength in numbers
Ali Manzoor, associate partner, Knight Frank, says although there have been a number of high-profile mergers in recent years, Marriott’s acquisition of Starwood is “undoubtedly the most prolific, resulting in the creation of the largest hotel operator in the world.” “The consolidation has swelled Marriott’s global portfolio to approximately 1.1 million keys, creating a monolithic entity that is not matched in scale by its competitors by a substantial margin,” he says.
Marriott now boasts a combined collection of more than 5,700 properties across 30 brands in more than 110 countries. In the Middle East, Africa and Asia, its portfolio has doubled.
“When you look at the brands of the two operators [Marriott and Starwood], there is a significant amount of overlap and as such it becomes clear that the acquisition was not because Starwood’s brands had value propositions that were significantly different to the ones that Marriott already owned. It was more likely a question of scale, the strength of the loyalty programme, and Starwood’s penetration in the Asian market,” says Manzoor.
Alex Kyriakidis, president and managing director of Middle East and Africa, Marriott International, confirms the company now offers the “broadest portfolio of brands in the MEA region” and offers a winning combination – “Starwood’s leading lifestyle brands and international footprint with Marriott’s strong presence in the luxury and select-service tiers, as well as the convention and resort segment.”
“This combination is also an opportunity to introduce key brands to newly emerging markets,” he continues. “In the MEA, our newly combined portfolio has 238 hotels, 51,877 rooms, in 30 countries and we have effectively doubled in size overnight (from 25,000 rooms to almost 52,000 rooms). We go from nine operating brands in our region to 17 and we have a further 155 hotels in the pipeline, comprising more than 37,000 rooms by 2025. “By this point, we will be in 38 countries across the Middle East and Africa with almost 400 hotels, and well on our way to 90,000 rooms.” Kyriakidis adds: “Marriott International’s acquisition of Starwood is about more than simply adding scale to our business. This combination better enables Marriott to reach our goal of having the right brand in the right place to serve our loyal guests and welcome new ones.”
Brand equity boost
Mergers and acquisitions in the hospitality sector are “often driven by different motivators”, says Manzoor. “Sometimes acquisitions serve to strengthen the operator’s presence in a particular region, as seen with Marriott’s acquisition of Protea to bolster operations in Africa. Other times it may be because the operator being targeted possesses brands that are significantly different to the product offering of the purchaser. “Accor’s acquisition of Fairmont Raffles Hotels International is an example of this, as the brand equity associated with both the Fairmont and Raffles brands is something that Accor has not been able to replicate internally with the same degree of success.”
With the FRHI brands now part of its portfolio, the number of luxury properties AccorHotels operates almost doubles.
Before the merger the company operated 121 Sofitels, the company’s luxury brand. Now it can count 70 Fairmonts, 32 Swissotels and 12 Raffles as part of its offering, including iconic and often historical hotels such as The Plaza in New York, the Savoy Hotel in London, Le Royal Monceau Raffles Paris, and the original Raffles Hotel in Singapore.
The Fairmont brand has more than 41 properties in the Americas, which is new territory for Accor too. Luxury hotels now represent 35% of the French group’s portfolio, compared to 15% before the merger. Accor also purchased London-based luxury alternative accommodation provider, Onefinestay for around $148 million in April – another move designed to ramp up its luxury offering. “I strongly believe that the integration of the Fairmont, Raffles and Swissôtel brands is the perfect addition to our existing portfolio of brands in the Middle East,” says Olivier Granet, managing director and chief operating officer, AccorHotels Middle East.
“AccorHotels has stood proudly as the number one hotel operator in the economy and mid-market segments in the region. The deep understanding of luxury and expertise in managing these properties that comes with the deal presents AccorHotels with an excellent opportunity to further diversify our offerings into the luxury and upscale segments.
“In the Middle East, AccorHotels is planning to open more than 100 hotels within five years in order to double our network and reach 50,000 rooms in operation by 2020 across each market segment, from luxury, to upscale, midscale and economy.” The group will look to operate more than 50 properties (25,000 rooms) in the upscale and luxury segments by 2020, adds Granet.
“Consolidation leads to fewer players in the hospitality sector, so a number of changes are likely to occur in the short term relating to market dynamics,” says Manzoor. “As operators continue to get larger, they will benefit from economies of scale, and through streamlining operations, they would be able to deliver a more profitable bottom line to hotel owners. “Furthermore, these entities will have more bargaining power with OTAs and be able to price more aggressively with less competition in the market. This increased power also extends to management contracts, as operators would have more bargaining power with owners when negotiating terms.”
With the Starwood purchase now signed and sealed, Marriott’s next step is to ascertain how best to use its enhanced power of position, particularly when it comes to the ongoing battle with the likes of Expedia and Priceline.
In the US alone, these and other OTAs capture around 15% of total room nights according to lodging data provider, Kalibri Labs and in some markets, the percentage is even higher. Regaining control of its inventory and vital customer data by cutting out the middle man is a top priority for Marriott now that its negotiating power is stronger post-acquisition.
Kyriakidis says each hotel within its massive portfolio operates in its own, “very competitive”
micro-market. “However, we should be able to drive top-line performance of the hotel through leveraging our scale and strong global distribution channels,” he says. “Of course, our loyalty programme is going to be that much richer with places to earn points and places to redeem points. We know that SPG members and Marriott Rewards members have stayed in competitors’ hotels in many markets where Starwood or Marriott properties did not previously exist. So by having those hotels within one portfolio, we think we’ll be able to drive incremental share of the customer’s wallet.”
Sorenson has been clear that one of the major reasons for purchasing Starwood was the power of a combined loyalty programme. Marriott Rewards and Starwood Preferred Guest (SPG) are not slated for full integration until 2018, but members of both can already link their accounts.
The linking of the two programmes includes immediate status matching and point transfers and redemptions whereby three Marriott Rewards points are the equivalent to one Starpoint. Another small step to integration was taken last month (October) when loyalty programme members using a co-branded credit card from one operator became permitted to earn bonus points when booking a hotel room on the other. Ritz-Carlton Rewards, which is a separate programme operated by Marriott, will also take part in the joint benefits scheme. Both Marriott and Starwood operate co-branded credit cards that are very popular amongst the business travel community.
Kyriakidis notes that Marriott Rewards and SPG combined have more than 85 million members worldwide who have access to the hotel industry’s “most diverse portfolio of brands” and its “largest luxury portfolio”, both of which appeal to Middle East travellers.
No changes have been made to the AccorHotels and FRHI loyalty programmes as yet, but AccorHotels CEO Sebastien Bazin says: “Over the coming months, we will be working to leverage the AccorHotels platform to enhance FRHI members’ experience. This will include opportunities to discover AccorHotels extensive portfolio of more than 4,000 properties in 95 countries and access to the Le Club AccorHotels loyalty programme, which was recently awarded with 5 Freddie Awards – the most prestigious member-generated awards in the travel loyalty industry.”
From a Middle East perspective, Le Club AccorHotels is now reaching the one-million-member mark, including approximately 100,000 downloads of the accompanying mobile application from the AccorHotels.com website, reveals Granet.
This programme is “dynamic” he says, while each of the FRHI brands have their own “distinct loyalty programmes” that are “unique in their focus on guest recognition”.
At this stage, all Granet can reveal is: “We will be working to integrate the strengths of AccorHotels and the Fairmont, Raffles and Swissôtel brands’ loyalty programme.”
Middle East destinations where Marriott and AccorHotels operate a large portfolio of properties are also set to benefit from the recent acquisitions.
Marriott’s Sorenson told Arabian Business that Dubai’s status as an events hub would be strengthened as a result of the acquisition, referring specifically to the close proximity of the 1,600-room JW Marriott Marquis and a combined 1,600 rooms at the W, the Westin and St Regis hotels, at Habtoor City.
This will allow the company to accommodate some of the world’s biggest gatherings, such as financial or medical conferences, global product launches and customer events held by large international brands, and the benefits of staging these would extend to the emirate’s economy, he says.
“We’re talking about substantial pieces of business, where you can say, we can host your business in Dubai – there’s great airlift, great centrality, especially for European people and Asian people meeting together,” he explains. “There are relatively few places in the world where you can get a 3,000-4,000 room block right there. (Las) Vegas is one and Vegas does a lot of huge global meetings.”
Las Vegas is the largest MICE market in the world, staging 22,000 meetings and five million attendees in 2014, according to the Las Vegas Convention and Visitors Authority (LVCVA).
“[But] for a global group to sometimes get into the US is difficult,” Sorenson says.
“So if Dubai says we’re going to provide this great airlift and make it easier for people to enter Dubai, I think it makes them more competitive,” he adds.
Granet agrees that following merger activity, there is an opportunity for hoteliers to “scale up the total number of rooms on offer for large-scale conferences or conventions taking place in the region”.
“Through the integration of additional brands within a merged group, hoteliers can present greater and more diverse offerings and a wider number of rooms across properties through their distribution networks,” he says.
AccorHotels will combine its strong track record serving the MICE sector in the UAE and KSA with FRHI’s “talent, expertise and resources” in the upscale sector to drive more meetings business to both destinations, Granet adds.
Recruitment and career opportunities
The job market will also get a boost from merger activity, with Marriott planning to double its MEA workforce over the next three years, according to Kyriakidis.
The company expects to add 30,000 more people to its current regional workforce of 41,000 as new properties are opened, he says.
About 6,000 of the new jobs will be in Dubai, the company’s largest market in MEA. “Within three years, we are going to grow to 90,000 rooms and we are going to need another 30,000 associates’ across the region,” he says. “This company will be one of the most significant employers in the region and particularly in the UAE.’’ Kyriakidis says Marriott will retain its “people-first culture” and remain focused on “fostering talent”.
AccorHotels says it is committed to providing “greater opportunities and career development prospects” for employees across its new expanded Middle East network.
“AccorHotels employees are now able to access greater career options within both the luxury and upscale segments alongside additional prospects in North America,” says Granet.
“Our colleagues at FRHI will now also be able to enjoy the global presence of AccorHotels across a number of markets. The deal will enable both groups to share best practice that has been developed within our core markets and apply this expertise into new initiatives aimed at enabling our teams to attain their full growth potential.”
AccorHotels is also the only international hotel group to operate a permanent and dedicated training academy in the Middle East – Tamheed – and the only firm to develop a special management education course, the Saudi Management Training Programme, which is certified by the Saudi Commission for Tourism and National Heritage, notes Granet.
“The initiative is tailor-made for Saudi nationals to encourage them to enter the hospitality industry and nurture their skills to take senior roles in our management teams. Following the acquisition, we are keen to further develop and increase the scale of our regional training programs by combining FRHI’s expertise in the luxury and upscale segments with our solid track-record of developing talent in the Middle East,” he explains.
What happens now?
While Marriott and AccorHotels both forge ahead with their integration strategies and leverage their new-found economies of scale, the smaller groups must re-think their game plans too, says Knight Frank’s Manzoor.
“For those left behind, the challenges lie in driving an efficient operation, which does not have the same scale as that of the larger players,” he says. “It is essential for smaller operators to have a differentiated product offering that is compelling enough to attract developers.” Manzoor says “it remains to be seen” how the market will evolve following the two high-profile mergers, “but it is not difficult to see how enticing continued consolidation is from the perspective of hotel operators”. “This is because these entities stand to benefit from a less competitive environment and a more efficient operational structure. From a more practical standpoint however, consolidation almost always leads to redundancies as roles are centralised, as seen in the Accor-Fairmont deal which led to immediate dismissals.
“From the perspective of end users, consolidation will not necessarily improve the guest experience. As the market landscape becomes less competitive, there is less incentive for operators to maintain their brand standards or price effectively and there is a genuine possibility that guests will ultimately lose out.
“From the perspective of developers, there are both positive and negative implications associated with continued consolidation. On the one hand they will have less leverage when negotiating management contracts, but on the other they will be able to benefit from the economies of scale that large players may bring with them.”
“Our vision for Marriott International in the Middle East and Africa is to continue to expand and to become the preferred travel company across the entire region,” says Kyriakidis.
“We have a strong plan leading us into 2022 and we believe that Marriott now has the world’s best portfolio of hotel brands, the most comprehensive global footprint, and the most extensive loyalty programmes.
“Throughout Marriott International’s nearly 90-year history, we have never stopped searching for fresh ways to serve our guests. With the addition of Starwood’s strong brands, great properties, and talented people, we have dramatically expanded our ability to provide the best experiences to our customers.
“We also welcome the tremendous responsibility as the world’s largest hotel company to be a good global steward, providing new opportunities for our associates and building the economic strength of the communities we call home.”
AccorHotels’ acquisition strategy is to transform the group into “a more wholesome provider of products and services that bring added value to guests”, explains Granet.
“Over the past two to three years, our acquisition of Fastbooking, Wipolo, Oasis Collections, SquareBreak, onefinestay and current talks to acquire John Paul, a leading player in premium customer and employee loyalty services, have demonstrated our commitment towards moving beyond being just a hospitality company,” he says.
“The goal is to transform AccorHotels into a travel companion that provides innovative services to travellers.” Granet anticipates that other hotel groups will follow suit, broadening their portfolio beyond properties to provide guests with a holistic experience.