So what is driving the recent consolidations? In our view, there are four primary causes: the shift in hotel booking behaviours, the race for geographic expansion, the rise of industry disruptors and readily-available capital.
Consumers are increasingly using online booking platforms and mobile devices for bookings and other services, and hoteliers must make significant investments to constantly improve their reservation systems and remain technologically competitive in order to satisfy their customers. Small- and medium-sized players are extremely reliant on online platforms which lead to reduced margins, whilst larger groups tend to invest heavily to develop and improve their own platforms and tools. The natural evolution of this could be the latter acquiring the former, or smaller players merging until they reach critical mass.
The second driver we identified is the shift in expansion strategy from developed to emerging markets and the need for established hotel groups to focus their growth ambitions in these areas in order to meet customers, investors and owners’ expectations. This in turn drives a need for scale in order to build presence rapidly, as well as an appetite for small- to medium-sized hotel groups already developed in these markets who can provide a ready-built platform for growth, or become local partners. An example of this type of consolidation is the acquisition of the Indian chain Sarovar Hotels by Louvre Hotels, giving them access to 75 hotels in 50 destinations across India. As much land remains unconquered, everyone wants their fair share of the cake and we expect this factor to continue driving deals over the next decade.
Third on the list of consolidation drivers are the industry disruptors including OTAs, accommodation-sharing platforms and alternative accommodation concepts. The number of players in these spaces is growing, as is their scale and power, and the OTA business has been much faster at consolidating than the hotel industry with Expedia and Priceline.com dominating the market. To avoid being left behind, hoteliers are either getting into bed with the enemy or merging with other traditional hotel groups to maintain their market share. Here again, small groups and independent hotels are the most at risk as they don’t have the appropriate distribution channels to defend themselves against these disruptors, increasing the likelihood of them being absorbed by other hotel groups, or even disappearing in some cases.
Finally, let’s not forget that none of these deals would happen without the ready availability of cheap debt and capital from the US, Asia and Middle East. These have been fuelling M&A deals across the spectrum from micro-luxury to major global groups. However, the list of recent events that could interfere with global capital flows is long, and this could undoubtedly slow down consolidation.
An industry trend that goes against consolidation is the acceleration of “technology for all”, enabling smaller groups to use or create their own apps, online concierge and automation systems at a reasonable cost, thereby offering the bespoke experience and services required by the time-conscious, experience-focused generation of travellers, and reducing the need for consolidation.
Are we saying that the hotel industry will become highly consolidated, with the smaller groups condemned to be absorbed by the big guys? Thankfully, we don’t think so. Today, the volume of bedrooms branded by the three largest hotel groups globally - Marriott, Accor and IHG – represents approximately 16% of the total number of hotel rooms globally, compared to a 70% concentration index for soft drinks brands, one of the most consolidated industries of our times. In other terms, to reach a modest 20% concentration, another 650,000 rooms would need to be absorbed by these three groups, which we do not expect to happen in this industry in the foreseeable future.