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Hotels have piled on the brands. In a downturn, that could be a problem
[NEW YORK] Moxy and Motto. Autograph, Avid and Alila. Edition, Element and Even. Big hotel management companies have been acquiring or inventing new brands at a dizzying pace in the past several years.
But as the long bull market shows signs of fatigue, some industry analysts are starting to ask: What will become of all these upstart brands when the economy sours?
"The hotel industry historically has been very cyclical," said Flo Lugli, principal of Navesink Advisory Group, a travel technology consulting firm. "It's not a matter of if, it's a matter of when the downturn will happen."
The major hotel companies, including Marriott International, Hilton Worldwide Holdings, Hyatt Hotels Corp and Wyndham Hotels & Resorts, have had all sorts of reasons to add brands, starting with the changing tastes of travelLers, particularly younger ones, who no longer want the cookie-cutter sameness that was once the industry's strong suit.
"The uniformity of brands has actually become a negative," said Bjorn Hanson, an industry consultant. "More and more consumers are looking for something that reflects local tastes and cultures."
All the same, he said, hotel companies can have only a limited number of a particular brand in a market. "If there are 20 of a brand in a market, it becomes difficult to attract developers," he said. "The benefit is perceived to be diluted if the brand expands beyond certain numbers."
Or to put it another way, a hotel management company with a branded property on one street corner would typically be contractually prohibited from letting a competitor open another hotel of the same brand on the opposite corner, said Michael Terry, associate instructor at the University of Central Florida's Rosen College of Hospitality Management. Starting a new brand is a way around that. "What I can do is put a brand that's not the same but similar" on that corner, he said.
Another factor driving the brand arms race is the ubiquity of digital booking platforms like Hotels.com and Expedia.com. Hotel companies with more brands and bigger room portfolios can negotiate more favorable terms with the online travel agencies. And by offering travelers a plethora of options — from highway budget hotel to luxurious resort — under one umbrella, hotel companies increase the odds that a guest will book within the hotel's own booking ecosystem rather than through a commission-earning third-party.
"There's really not much incentive for a brand owner to phase out a brand," said Chekitan Dev, professor of marketing and branding at the School of Hotel Administration at Cornell University. "It benefits a brand owner to create additional brands."
The numbers tell the story. In December 2007, there were slightly more than 140 hotel chains with more than five properties in the United States, according to the hotel analytics firm STR. In June, there were about 180.
"It's kind of a reflection of what's going on everywhere else," said Bobby Bowers, senior vice president of operations at STR. "There's so much to choose from and so many flavors, you almost have to launch brands."
He added: "Companies kind of have to do it even if they don't want to. If they don't, competitors will eat into their share."
Financing for new hotels has also been readily available, buoyed by low interest rates and record travel numbers. "Demand and occupancy levels are at an all-time high," said Michael Bellisario, a vice president and senior research analyst at Robert W. Baird & Co. "Development capital is widely available so the brands are feeding into that demand."
Although costs for labour, building materials and land have all gone up, developers can "still get loans," Bellisario said. "You're still seeing financing. There are a lot of alternative lenders today that didn't exist last cycle."
The question now is whether the hotel companies have been too aggressive in adding new properties.
Dev said that in the long term, "brand survival rate in our business is close to 50 per cent."
But unlike phasing out an obsolete cellphone or discontinuing production of an unpopular sneaker model, killing off a hotel brand tends to be legally fraught and logistically messy, Dev said. "This has happened the last two cycles. Lawsuits. Lots of lawsuits between brands and owners fighting it out."
The complex way hotels are built, financed and managed means that the stakes are relatively low for the big management brand whose name is on the marquee. The bulk of the risk is shouldered by the property developers and owners, typically people or entities with a variety of real estate investments.
In a recession, financially struggling owners might sue to break their franchise agreement or let the building slide into disrepair. "Sometimes it's kind of an owner inviting the death upon themselves," Dev said. If a big hotel company wanted to discontinue a brand, it would face legal disputes from property owners who had invested — and probably borrowed — to build a hotel in accordance with the brand owner's required specifications.
Tina Edmundson, Marriott's global brand officer, made much the same point. "We have contracts and we have owners and we have commitments," she said. "It's not something we can take lightly at all."
Hyatt boosted its brand total to 17 from 12 last year when it bought a smaller rival. "We had a real decision to look at," said Heather Geisler, vice president of global brands. "How do we think about how we position those collection brands relative to each other?" Ultimately, she said, Hyatt decided to keep all of its new and existing brands.
A similar dynamic — albeit on a much greater scale — played out at Marriott, which wound up with 30 total hotel brands after acquiring Starwood in 2016, an increase from 19.
"We had brands that, yesterday, they were competing with each other, and today they're part of the same family," Ms Edmundson said. Although analysts had speculated that Marriott might phase out or combine a few brands either as part of the merger process or more gradually, Edmundson said the company is committed to keeping all of them.
"We were able to push these brands apart and continue to provide varied experiences," she said.
Avoiding overlap between brands is a particular concern for owners, she said. "We have a lot of governance in place to make sure that we're being very fair and transparent to our owners. We have a whole process that really evaluates if any one hotel or one owner is going to get hurt."
Ms Edmundson acknowledged that the landscape could change when the economy softens. "We do have a slew of contingency plans," she said. "We would be very careful about introducing new costs to our owners. We'd want to make sure we're not doing that in a down economy."
Phil Cordell, global head of brand development at Hilton, said hotels have to execute a balancing act: Differentiation between brands keeps customers and owners happy, but shaping a brand around a narrow niche can backfire.
"If brands get too focused on a specific segment, that's where things can run off the rails in the longer term," he said.
Hilton has 17 brands, including three introduced in roughly the past year. Its chief executive, Chris Nassetta, said on a recent earnings call that another would be introduced by early next year, and suggested that Hilton wasn't done growing just yet.
"I don't know if there's a magic number," Mr Cordell said. But he later added: "The more you have, the more you have to be incredibly disciplined in ensuring that difference is there. Bigger isn't always better."