by LINCHI KWOK Ph.D
When the pandemic hit the global hospitality and tourism industry barely more than a year ago, some experts estimated that about 50% of the U.S. hotels would close. By September 2020, 34% of hotels in New York City were delinquent.
WILL MORE HOTELS FILE FOR BANKRUPTCY IN 2021?
The number of businesses filing for bankruptcy went up nearly 20% in 2020. Surprisingly, only 77 hotels or gaming companies filed for Chapter 11 protection, down from 92 in 2019. It’s plausible that some hotel owners received forbearance from their lenders when the pandemic started. Meanwhile, the U.S. Small Business Administration’s emergency loans might also provide some buffer for hoteliers to deal with the crisis.
Unfortunately, not every hotel can survive such an unprecedented crisis beyond 2020. For example, the Bay Area had reported two hotel bankruptcies in January/February 2021 – one with more than $500 million in debt and another with more than $100 million in debt.
Although places like the U.S. and the UK finally reported fewer newly infected cases along with an increasing vaccination rate, the lodging industry is unlikely to see a full recovery until late 2023. Until then, more hotels will file for bankruptcy or need to find ways to consolidate their debts.
WILL ONE PERSON’S LOSS BECOME ANOTHER’S GAIN?
Investors are ready to buy hotels; many are looking for bargains in a buyer’s market. In March 2021, Blackstone Group Inc. and Starwood Capital Group agreed to pay $6 billion to acquire Extended State America, Inc. The economy extended-stay hotel segment reported a 75.4% occupancy even during the pandemic, more than 20 percentage points higher than any other category.
Through acquisitions, hotels can gain immediate access to a market or a product. A merger can help companies combine resources, cut operation costs, and share organizational knowledge through consolidations. Plus, a merger will result in fewer competitors in the market.
Sonesta International Hotels was one of those companies that went on a massive acquisition spree in 2020. Besides 60 properties, Sonesta also owned a 34% equity stake of Service Properties Trust (SVC) before the pandemic, a REIT with a focus on hotel management for large hotel brands. Sonesta took the opportunity to acquire those hotels that couldn’t make their minimum payments to SVC. Now, the hotel chain operates about 300 properties in eight countries.
WHO WILL BE THE NEXT IN MERGER AND ACQUISITION?
The rumor resurfaced last summer about the IHG-Accor merger. IHG and Accor total more than 1.6 million rooms. By comparison, Marriott has about 1.4 million rooms. Because 60% of IHG’s rooms are in North America, and close to 50% of Accor’s rooms are in Asia-Pacific, the merger would provide a complementary advantage for both. Operation-wise, the merger is expected to cut costs of $118 to $178 million, about 7% of IHG-Accor’s projected operating earnings of 2022.
In 2015, Hilton spun off its hotel properties into a REIT as a separate company. Hyatt began selling its $1.5 billion worth of real estate in 2017. Both hotel chains are well-positioned financially. Hilton announced in March 2021 that its Hilton Grand Vacations would acquire Diamond Resorts, adding 92 leisure resorts to its portfolio. Will Hyatt be the next?
IS IT TIME FOR HOTEL OWNERS TO BUY MORE PROPERTIES?
Possibly. Banks and hotel owners now offer buyers cheap rates and sometimes little money down to unload their unprofitable properties, some of whom even provide seller financing. On the flipside, a buyer’s market does not favor the hotels in trouble if one wants to sell a hotel.
MERGER AND ACQUISITION SHORT-TERM IMPACTS ON OWNERS AND OPERATORS
Brand acquisitions or mergers, or the change of a brand’s ownership, might not create an immediate concern. Suppose you happen to run a franchised hotel whose brand just got acquired or absorbed by another big hotel chain. In that case, you have no say in the franchisor’s decision. Terms, agreements, and brand expectations are unlikely to change in the short term.
The good news is you will have access to a larger reservation network and a bigger customer pool. Major hotel chains have been working hard for several years to encourage travelers to “book direct” on their brand website. Their efforts seem to have been effective. Moreover, “bigger” often means better when it comes to hotel loyalty programs. Marriott combined the Marriott-Ritz-Starwood program into one giant network called Bonvoy. Likewise, Accor’s Le Club AccorHotels Program was a creation of four loyalty programs: AccorHotels, Fairmont, Raffles, and Swissôtel. Imagine how big the IHG-Accor loyalty program would become if two chains merge into one.
A bigger network also can mean a better position when negotiating with the suppliers. Hotel owners and operators could possibly get better deals through the franchisor’s procurement list.
MERGER AND ACQUISITION’S LONG-TERM IMPACTS ON OWNERS AND OPERATORS
In the long term, the franchisor may want to roll out new brand standards or require additional renovations, meaning more cash is needed to keep the flag. Additionally, new ownership usually means reshaping the organizational culture, although it typically takes a long time for any organization to change its culture. When IHG acquired Kimpton Hotels & Restaurants, many worried if Kimpton could maintain its brand identity among its loyal customers and franchisees.
A bigger franchisor could also become more powerful when negotiating new contracts and terms with the individual hotel owners or operators. Dealing with changes and a more powerful franchisor could be frustrating and more challenging for some.
If you are running an independent hotel and see your competitors are merged into a bigger network, you may expect tougher competition. The question becomes: Is it time to roll up the sleeves to fight against the “big fish” or to consider adding a flag to the hotel?
Linchi Kwok Ph.D publishes viewpoints and articles in hospitality management and service marketing. His work has won several awards at academic conferences. He is an associate professor at the Collins College of Hospitality Management in Cal Poly Pomona and a visiting professor at Sun Yat-Sen University. Before moving to SoCal, Linchi worked at Syracuse University, Rochester Institute of Technology, Texas Tech University, and Marriott.