Hotels Rebound: Sustainable Over the Long Term?
The hotel industry has been on the path of recovery for some time now, supported by stronger economic metrics and an increasingly positive employment scenario. Demand remains strong, contributing to increasing occupancy levels this year. In spite of economic and political upheaval in certain markets, sales have risen on average and been robust in the U.S. However, the lack of significant average daily growth remains a concern.
On the brighter side, there are plenty of reasons to be optimistic about the broader hotel industry over both the short and long terms. Below, we discuss what investors can look forward to in the coming years:
Demand Exceeds Supply: The recovery in the broader economy has been a boon for the hotel industry as it has perked up leisure and transient business travel demand. With limited supply and strong demand, room rates are moving up. According to Hyatt Hotels Corp. (H) and Hilton Worldwide Holdings Inc. (HLT– Snapshot Report), the supply-demand environment in the U.S. is favorable as demand growth is better than supply, which is below the long-term average. This would lead to an increase in rates, thereby driving revenue per available room (RevPAR). In fact, despite the large pipeline of hotels, Smith Travel Research (STR) expects the sector’s demand growth in 2016 to be 2.2% in the U.S., with only a 1.4% increase in supply.
North American Occupancy Trends Strong: System-wide occupancies in North America appear pretty steady and mostly above the prior peak achieved in 2006. The solid occupancy levels are in tune with the economic recovery in the region. Hotel companies are poised to gain from easier lending standards, bright employment numbers, declining energy prices and improvement in the travel and tourism industry, mainly because of improved consumer spending power.
For Starwood Hotels & Resorts Worldwide Inc. (HOT – Analyst Report), North America is still the largest market where it plans to open most of its hotels. The company expects 2016 to be yet another year of robust growth in this region.
International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and the outlying areas surrounding major cities. These markets offer greater potential, driven by the higher pace of economic growth.
A number of U.S.-based hoteliers are targeting the unsaturated markets in Asia-Pacific, Brazil, Russia and Africa. Within Asia, China promises lucrative growth opportunities, despite its economic slowdown, with visits expected to increase substantially in 2016. In fact, the country is a major revenue contributor for both Starwood Hotels and Marriott International, Inc. (MAR – Analyst Report), which happens to be in a bidding war for Starwood with a Chinese firm, Anbang.
Apart from China, India is becoming a hot spot for U.S.-based hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, the country has great long-term growth potential as a tourism market. Among others, Japan, Australia, Singapore and Thailand continue to attract travelers. Major players in the industry are also targeting high-potential countries such as Turkey, United Arab Emirates (UAE) and South Korea which offer strong infrastructure.
Growth in Brazil and Argentina continue to be sluggish, mainly due to the economic slowdown in Latin America. However, Brazil is scheduled to host the 2016 Summer Olympics, which should boost tourism to a certain extent.
The European market is also improving. In fact, select regions in Southern Europe that were hit by the recession are turning around, per STR’s data. According to STR, 2015 marked the first year since 2010 in which the European hotel industry outperformed U.S. hotels in terms of year-over-year RevPAR growth.
Despite recent safety concerns across Europe due to the terrorist attacks and threats in key cities like Paris and London at the end of 2015, several markets in the region experienced overall strong occupancies throughout the year, especially during summer. According to the research firm, the weakened Euro and demand from North Africa were mainly responsible for the uptick. Europe’s strong performance trend continued into 2016 with 3% RevPAR growth in January compared with 2.5% in the U.S.
This is also the first time since 2010 that Europe has started the year with higher RevPAR growth than the U.S. This has resulted in major players like Hilton, Choice Hotels International Inc. (CHH) and Wyndham Worldwide Corporation (WYN – Analyst Report) targeting this region.
Brand Renovation to Boost Growth: Hotel chains are diligently working on guest satisfaction through brand conversion and re-modeling to gain a competitive advantage. Remodeling involves restoration of lobbies and other public spaces, preservation of decorative features when possible, and guestroom upgrades.
In fact, brand perception is likely to have a growing influence on the mass market as well as the luxury space. With the market becoming increasingly saturated, especially the luxury segment, hotels will have to differentiate themselves.
Brands that can offer something uniquely compelling are likely to grab market share and the ability to innovate will be the key to success. Therefore, many leading hoteliers like Starwood Hotels, Marriott International, Belmond Ltd. (BEL), Hyatt Hotels and The Marcus Corporation (MCS – Snapshot Report) are firing on all cylinders to make their brands more relevant in today’s environment.
In recent times, brand development is being shaped not only by economic trends but Millennials’ tastes as well, since they constitute a major portion of the current tourism numbers and have a different level of expectation than older generations. Eco-friendly, wellness and brand distinctiveness are important themes for this generation, according to players in the hospitality sector.
Big hotel brands are launching more lifestyle hotels, which are mainly boutique brands that benefit from parent companies’ infrastructure. These include brands like Starwood’s Element and Aloft, Marriott’s Edition; Andaz by Hyatt, and InterContinental Hotels Group’s Hotel Indigo.
Building Loyalty via Social Media and Smartphone Technology: Digital innovation and social media are starting to play an increasingly important role in the hotel industry. Social media can enhance a brand’s prospects by connecting directly with guests, especially the millennial, and can, in turn, increase loyalty and market share. Social media sites like Facebook, Inc. (FB), Twitter, Inc. (TWTR –Analyst Report) and TripAdvisor Inc. (TRIP – Analyst Report) are playing an increasingly important role in helping travelers select a hotel.
Moreover, more hoteliers are using apps to help guests manage bookings, and offer interactive maps/GPS as well as reward programs. Being tech savvy is no longer an option but a necessity to survive in the intensely competitive hotel industry.
In fact, according to Navis, a leading innovative hospitality technology solution provider which quoted eMarketer’s latest estimates of digital and travel research and booking, 51.8% of travelers who will have booked trips digitally in 2016 will do so through a mobile device. The percentage shows an uptick from 43.8% in 2015. Hoteliers are therefore looking to introduce responsive design in the apps, one-click booking and location technology.
Also, according to Alphabet’s “The Role of Click to Call in the Path to Purchase,” 68% of hotel guests believe that it is extremely important to be able to call a hotel during the purchase phase, and 58% are very likely to call a hotel if the facility is available in a smartphone search. These numbers highlight the importance of mobile in online travel. Guests typically take a cross-platform approach, so it is becoming necessary for hotels to offer a seamless multi-channel experience during the entire hotel booking process, as well as during and after the stay.
Many hotel companies are setting up analytics tools to understand consumer preferences — and deliver a differentiated experience — which could eventually motivate customers to visit frequently, stay longer and spend more. Loyalty programs are the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.
Currently, Intrawest Resorts Holdings, Inc. (SNOW – Snapshot Report) sports a Zacks Rank #1 (Strong Buy). Marriott Vacations Worldwide Corp. (VAC – Snapshot Report) and Red Lion Hotels Corporation (RLH – Snapshot Report) have a Zacks Rank #2 (Buy).
Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Hyatt Hotels, Hilton Worldwide, Intercontinental Hotels Group plc (IHG – Snapshot Report), Wyndham Worldwide and La Quinta Holdings Inc. (LQ – Snapshot Report), given the momentum in their underlying businesses and optimistic outlook for 2016.
We believe that the dark days are over for the lodging sector which is now a worthy investment proposition for 2016 provided the economic recovery and the low supply-high demand scenario continue. Although risks are easing out, near-term concerns related to a moderately sluggish economy and political trouble in certain pockets of the world remain the overhangs.
Thus, there are plenty of reasons to be optimistic about the hotel industry for the long haul. But what about investing in the space right now?
Check out our latest Hotel Industry Outlook here for more on the current state of affairs in this market from an earnings perspective.
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