Hostel to fortune

The growth of online booking platforms such as Airbnb and Expedia have fuelled the growth of boutique hotels and apartment sharing, opening the travel accommodation market to a host of new players and providing a greater breadth of offer to prospective travellers.

As the hotel market evolves, previously dominant incumbents such as Hilton, Marriott and Radisson have to adapt. Whilst the brands and the hotels they operate are actively changing their offering, over the past few years these brands have increasingly looked to acquisition to grow revenues.

Although M&A activity in the consumer markets declined in Q3 2019 compared to the previous quarter, the total deal value of the hospitality and leisure sub-sector grew 21% from Q2 2019 (Thomson Reuters). Moreover, hotels, restaurants and leisure (hospitality more generally) accounted for the largest segment of M&A activity amongst consumer markets in Q3 2019 (S&P) up almost 30% year on year.

Whilst the pursuit of each individual deal will have differing rationale, we look at the three main reasons why we are seeing this sustained growth:

Consumer tastes
Travellers are becoming more discerning and want a point of difference whether it be luxury, experiential or something more unique. There are limitations to what an individual brand can change, especially when they are synonymous with certain characteristics. Best Western's acquisition of WorldHotels last year allowed the brand to serve a more luxury clientele and Hyatt's investment into Miraval added a specialist wellness resort offering to their portfolio. Through acquisition brands can access customers their previous offering did not serve.

Competitive threat
The hotel market is fragmented and becoming increasingly more competitive as smaller players enter through platforms such as Airbnb or Expedia. Acquisitions, therefore, beyond providing a broader offer, allow brands to compete better simply through a higher number and variety of rooms on the market.

Diversification
With increasingly varied offerings from luxury to budget, brands have more diversified portfolios which are better at handling changes in consumer preferences. There is now a movement away from direct ownership, with brands focusing on management or franchising. The largest brands, such as Marriott, Accor and Hilton, maintain full ownership in certain properties, building a portfolio of different asset types and varying revenue streams. Through acquisition, these brands inherit businesses with different operating models. Each has their own unique strengths which further diversifies their portfolio from an operational standpoint. 

Going forward it is unlikely this trend will buck; and as the travel landscape develops with new players and concepts brought to market, the desire by incumbents to acquire rather than build will remain. 

The key difference however will be that these deals are likely to focus on smaller, niche and more specialised players to truly expand their presence within the hospitality sector. As larger brands continue to reap the rewards of their investments, it is expected that other institutional and private investors will further drive M&A activity in the area to get a slice of the pie.

Tej Panchal