As Hilton, Marriott Reach Colossus Scale, US Accommodations Sector Seen Ripe for More Consolidation

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Fitch Ratings Views Hyatt in Potential ‘Kingmaker’ Position as Other Competitors Face Growing Size Benefit of Top 2 Rivals

Grand Hyatt, Washington, DC
Grand Hyatt, Washington, DC The growing size and rates power of the 2 mega U.S. hotel brand names is modifying the competitive landscape of the hospitality market and will likely lead to more consolidation, according to recent analysis by Fitch Rankings.

Marriott and Hilton stand head-and-shoulders above their peers in regards to system size and average everyday space rates (ADR). They also appear to be taking advancement share far from smaller brand name operators. The scale-related competitive benefit usually translates into such things as lower acquiring and space circulation expenses, bigger client commitment benefits programs, and more clout in drawing in property owners and franchisees.

To compete, smaller competitors, such as Accor, InterContinental and Wyndham, will need to include more rooms across the cost spectrum to stay competitive, Fitch asserts.

Nevertheless, smaller sized accommodations operators run the risk of taking on too much balance sheet risk to grow their rooms systems, which could damage credit quality, specifically smaller operators focused on the luxury and upscale sectors that Marriott and Hilton dominate, the rankings company notes, which compiled a chart of prospective targets for more market debt consolidation.

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While Hyatt would appear to be a logical acquisition target for operators such as Accor, Intercontinental and Wyndham offered its above-average ADR, Fitch stated Hyatt’s dual class structure complicates any potential sale without the approval of the Pritzker family, Hyatt’s controlling investor.

This month, Marriott International (NYSE: MAR) reported that its systemwide North American ADR increased 1.3% to $161.01 for the second quarter compared to a year earlier. The business included approximately 16,000 spaces during the second quarter, consisting of almost 2,300 rooms transformed from competitor brand names.

Hilton Worldwide Holdings (NYSE: HLT) added 13,400 net rooms in the second quarter, representing around 30% development from the same period in 2016. Its U.S. ADR increased 1.1% to $149.27 over the same quarter a year ago.

Hyatt Hotels Corp. (NYSE: H) reported including far less 3,366 spaces and its systemwide ADR increased simply 0.2%.

Hotel franchisees and owners are revealing a clear choice to aligning their hotels with the largest brands that use the largest consumer commitment reward systems. Marriott-branded rooms consisted of 28.1% of the U.S. hotel development pipeline since July 31, inning accordance with STR Global. This is well above the business’s 14.9% share of existing U.S. rooms supply.

Comparable procedures for Hilton, the industry’s second-largest player, were 23.4% and 12.1%, respectively.

Hyatt-branded hotels, on the other hand, consisted of 2.7% of overall spaces in the U.S. hotel pipeline, which approximately matches its share of the existing stock.

Fitch Scores anticipates U.S. lodging industry RevPAR development to decelerate in second-half 2017, but stay decently favorable (in the low single digits) through 2018.

Need from leisure tourists is anticipated to outpace group and corporate hotel business for the same duration, with organisation travel projected to stay lackluster through the balance of 2017 and 2018, Fitch said.

Nevertheless, Fitch included, total brand-new hotel supply will remain at or above need for the balance of this upcycle. For the most part, these brand-new spaces are focused in the restricted service sector.

The number of spaces under building is reasonably below its prior cycle peak. However, the pipeline is 27% above its previous peak after including rooms in final planning, which have a high completion possibility. The impact of the elevated supply varies by market, Fitch added, with New York, Nashville, Seattle, Dallas and Miami being of particular concern.

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