Richard Clarke is a Senior Analyst at Bernstein Asset Management in London, covering the European Hotels and Leisure Sector. Here he tells us why branded hotels are giving the “disruptors” a run for their money and why we should all be brushing up on our Mandarin
Travel disruptors will have to evolve
There has been a long-running trend in travel that you should buy shares in the disruptors, such as Online Travel Agents (OTAs) and airlines like Ryanair; this makes sense. The world evolves and buying companies with cost structures aligned to the future rather than the past should outperform. But in the last six to nine months the likes of Hilton and Marriott have been performing extremely well and what are often perceived as the real dinosaurs in this sector – the package travel companies like Tui and Thomas Cook – have done spectacularly well too.
I wonder, with my crystal ball, if they – the OTAs – will develop some content of their own as well. But the $64,000 question is what does that actually mean? I don’t expect you’re going to see a Booking.com hotel but what I could imagine is that they build unique content. For example, some hotels where they could act as the sole booking platform for that property, outside of that hotel’s home market. So the only way you can book that hotel is through a particular OTA, which gives the latter a strong position.
China remains a huge economic opportunity
Our firm put out a piece last year where we said that China outbound and domestic travel growth is the world’s largest economic opportunity. It’s estimated at US$400bn of incremental spend by 2025; it trumps even the hottest investment areas like Artificial Intelligence. As you get an increasingly mobile and wealthy Chinese middle class, there is a huge opportunity to open new hotels to service that. However to address this growth, there is a shortage of hotels in Asia, especially if compared to the US market. In terms of where that growth will go, right now Western brands are proving very, very popular. In the Asia Pacific catchment area, the big four international firms – Marriott, Hilton, Accor and IHG – are 12% of the current supply but 64% of the upcoming hotels being built. They have successfully brought a badge of quality and that’s resonating in the region.
Wave of new hotel openings
Post financial crisis, we saw a few very constrained years of hotel openings. In the US for example 2008-2009, we were north of 2% net openings and by 2012 that had slowed to 0.5%, which was well below the demand growth. Worldwide this led to great occupancy growth and the underlying profitability of hotels has been in good shape, even with some of the cost inflations we’ve seen coming through.
That’s beginning to revert…finance is beginning to become available again, we’ve seen an inflection point in almost every market, apart from Europe, in terms of supply, and even Europe it’s coming: the number of hotels under construction is double what it was just a year ago.
Package tourism – dinosaur or phoenix?
Accor has recently shown an interest in Air France so it’s fascinating to see companies think about becoming integrated platforms. Marriott has invested in tour companies, and even some of the OTAs are diversifying their offerings. Everyone wants to get a slice of different parts of the holiday pie.
Everyone wants their portal to be where you start your holiday. In that sense, everyone is trying to replicate Tui, which is fantastic at driving direct bookings – it doesn’t rely on third party traffic. It controls its own airline, hotels, cruise ships, transfers, resort reps in resorts and there is no way you can put together that package independently, which means it has a very strong position.
Clearly the mergers and acquisitions actions of other travel firms suggest that is the way they think the market is going.
I think it fits in with the zeitgeist of the moment. People say we’re living in an age of “perma-anxiety” – people want to travel but they’re nervous about doing it. Millennials are meant to be a much more cautious generation and packages suit that quite well. You suddenly have a package company that will allow you to travel and visit new places but will also hold your hand. You know you’re insured, you know that they’ll get you home if something unexpected happens.
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Author image: credit to Photo Mark Earthy. Hero image: credit to Margo Brodowicz
Richard Clarke is a Senior Analyst at Bernstein Asset Management in LondonMore by Richard Clarke
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