Hotel consolidation

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By Marwan Batrouni, Senior Director and Practice Area Leader

Consolidation trending

In April 2015, Starwood Hotels & Resorts Worldwide announced a review of its strategic options, which included the sale of the company. This news quickly set hotel consolidation as a trending subject, fueled by speculation about the potential suitors for the Starwood business. But in the months that followed, it was less well-known Chinese groups that drove the hotel consolidation story.

Jin Jiang Hotels Group was particularly active. Having already taken over Louvre Hotels Group and Vienna Hotel Group, it sealed a rapid entry into the major league by tying up a merger with Plateno Group. The new business has a combined
portfolio of more than 6,000 hotels with more than 640,000 guest rooms in 55 countries across all regions.  Ultimately it aims to create “a leading and competitive international group with global brand influence in the world.”[1] The merger not only created a clear leader in the Chinese market, but instantly propelled the new company into the global top ten.[2]

And then Marriott overshadowed this with a surprise deal to merge with Starwood, creating the world’s largest hotel chain.2 The new company will have more than 5,500 hotels, 1.1 million rooms, 30 brands and up to 75 million loyalty members. In the words of Starwood’s interim CEO Adam Aron, “Today, size matters.”[3] The merger provides increased leverage when negotiating with staff, suppliers and customers. And it also satisfies shareholders desperate for a positive growth story from their hotel investments.

The distinction between the two companies’ portfolios is a major reason for the merger. Starwood offers luxurious and distinctive hotels through brands like W Hotels, Le Meridien and St. Regis. As well as its own luxury offerings, Marriott is also strong in brands with fewer frills, like Courtyard by Marriott and Fairfield Inn. Although it is the smaller company, Starwood will extend Marriott’s geographic reach in markets outside North America. China is a good example. Starwood may be half Marriott’s size globally, but it has almost twice as many hotels in the Chinese market, and it has a strong pipeline of more than 130 properties scheduled to open by 2020. And while Marriott has 40% of its Chinese hotels in Shanghai or Beijing, 86% of Starwood’s hotels are outside these two cities. Starwood significantly extends Marriott’s reach in one of the world’s most promising markets.

While the travel industry digests the implications of the Marriott-Starwood deal, consolidation continues, with the action returning briefly to China. Leading economy hotel chain Homeinns Hotel Group, already the world’s 9th largest hotel company, will merge with Chinese hotel and tourist destination management company BTG Hotels during the first half of 2016. BTG is a much smaller player with just over 100 properties.

A year of consolidation closed with news of AccorHotels’ acquisition of FRHI Holdings Ltd, owner of Fairmont, Raffles and Swissôtel. The consolidation story won’t end there. Hyatt, at one stage a potential suitor for Starwood, may now be a candidate for takeover. And chains like Hilton and InterContinental Hotels Group (IHG) may feel increasingly under pressure to respond.

Despite the size of the Marriott-Starwood deal, it’s unlikely to face regulatory or antitrust issues, as the hotel industry is still fragmented. But pressure for a regulatory response will inevitably grow, as more chains are sucked into the consolidation story and concerns grow about reduced competition in some markets. Future deals may face more scrutiny, and hotels may need to make concessions, like asset or brand disposals, to secure a merger. The shape of hotel supply will continue to change in 2016 and in the years ahead.

The case of Marriott-Starwood

The Marriott-Starwood deal is unlikely to be the last merger of this magnitude, simply because it’s increased the pressure on other chains to act to remain competitive and survive. It’s worth taking a closer look at this merger, as the issues it reveals will most likely apply to other large mergers, too. There are implications for hotel owners, suppliers, travel buyers and travelers.

Hotel owners and suppliers
By joining together, Marriott and Starwood may be in a stronger position when it comes to negotiating with hotel owners. While chains like Hilton, IHG and Hyatt should benefit from one less major chain to compete with, they’ll also have to contend with a new, larger competitor in the shape of Marriott-Starwood.

The new company will likely take advantage of an increased loyalty membership and portfolio of hotels to increase the proportion of bookings made through its own distribution channels. This will change the negotiating dynamics with online travel agencies (OTAs), at a time when industry behemoths Priceline and Expedia continue to expand their portfolios and negotiating power. Hotel owners may benefit too from lower commission payments to the OTAs. But they may find any savings offset by higher management and franchise fees from Marriott-Starwood, as Marriott seeks to grow revenue to pay for its acquisition. Hotel property owners continue to see these charges increase.

The merger also presents an opportunity for new, smaller and more innovative brands to capture market share, especially if Marriott-Starwood abandons brands or removes properties from its portfolio to reduce any overlap in its business. Increasing fees or tighter franchise restrictions may also drive hotel property owners away from Marriott-Starwood to other chains or into the independent arena. This might be a chance for independent hotels to differentiate themselves from the global mega-chains that consolidation is producing. Independents may be more flexible and easier to work with, offering the individual experience that today’s travelers are increasingly looking for.

Travel buyers
With corporate rate negotiations concluded with most hoteliers, it’s unlikely that the merger will affect 2016 contracts. But buyers may find things more challenging as they approach future request for proposal (RFP) rounds. Marriott has made it clear it would like to reduce corporate business in favor of higher-rated retail business. And buyers will now need to deal with an hotelier that has become larger and stronger overnight.

A company of this size has the power to influence pricing in certain markets. It also has much more to offer to influence consumer behavior. Buyers will have to work even harder to find a balance between managing costs and traveler preferences. It’s now even more important for travel managers to engage directly with travelers, to help them make decisions aligned with the goals and objectives of their travel programs. 

But the merger does not mean less supply and fewer suppliers. Many new players, as well as new models like Airbnb, are finding their way into corporate programs. And the merger may be good news for global companies that want to do business with global hotel companies. Marriott-Starwood has good global coverage and the portfolio to offer options for different markets, travelers and reason for travel.

Taking note of the erosion of frequent flier benefits following airline consolidation in the U.S., members of Starwood’s Preferred Guests loyalty program worry the same will happen to the generous benefits they get right now. They may have good reason. The merger brings together 54 million Marriott Rewards members and 21 million Preferred Guests. That increases competition for reward stays in the group’s coveted luxury properties. Marriott-Starwood may have to tighten qualification rules to ensure it has enough capacity available to reward its most loyal customers.

Competitors are enticing Preferred Guest members with generous status match offers. But existing Hyatt Diamond members are unimpressed by the company “giving it [status] away like candy” to attract Starwood customers.[4] This activity should continue as hotel chains vie for the business of the most lucrative and frequent travelers during this period of disruption.

The Marriott-Starwood merger has revealed some important questions about the true loyalty of customers and the value hotels place on this loyalty. It’s possible that loyalty may in future become a less effective tool for hotels to affect traveler behavior and choice.

How you can prepare

Merger deals typically take months to complete, while the integration that follows can often take longer still. This means you have plenty of time to plan following a merger announcement. You can maximize the time you have by making sure you stay on top of the latest travel industry trends. That way you’ll be one of the first to hear about the next merger.

In the case of Marriott-Starwood, don’t expect to see integration any time before mid-2016. But it’s never too early to prepare for what a hotel merger could mean for your travel program.

Make sure you’re tracking your total spend and room night volume at the chain, brand and property levels. You should also monitor rate performance. Compare negotiated and booked rates, as well as booked and best available rate (BAR). You’ll then be better equipped to identify any issues or future opportunities. More importantly, you’ll have the data to assess the impact of the merger on your program.

If you have a chain-wide agreement with one or both chains in a merger, make sure you’re monitoring the year-over-year trend in spend and volume. That way you’ll be well-prepared when it’s time to renegotiate your hotel deal. You also need to assess how the merger might affect your chain-wide agreement – there’s a clear overlap in brands and locations across Marriott and Starwood.

The Marriott-Starwood merger brings the new hotel chain much closer to a truly global proposition. This presents an opportunity to consolidate your hotel program among fewer suppliers. But don’t forget, it may have repercussions for your other chain relationships, too.

Loyalty programs play an important role in engaging travelers to influence their behavior and choices. Find out if either hotel chain has a major following among your travelers. Think carefully how the Marriott-Starwood merger might influence their behavior in the future.

As the merger progresses, keep in touch with your contacts at the chains. They’ll be able to help your understand what it all means for you and your travel program.

Do you have questions or comments regarding this report? Please email us at [email protected] to share your thoughts.

[1] Jin Jiang completes merger with Plateno, Hotel News Now, Oct. 2, 2015

[2] Based on number of hotel rooms

[3] For large hotel companies, size matters, Hotel News Now, Dec. 2, 2015

[4] 10,000 + requests for Hyatt Diamond status, One Mile at a Time, Nov. 24, 2015

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