Hilton Hotels Corp., InterContinental Hotels Group, Marriott International and Starwood Hotels and Resorts in recent months each announced robust global pipelines, further diversifying their investments in underdeveloped markets partly to offset risks associated with dependence on the precarious U.S. economy. The four major lodging companies are developing and converting properties, as well as introducing brands, in such burgeoning markets as India, China and the Middle East.
Dubai, Mumbai and China are attracting the most activitydue to their market "immaturity," but also because infiltration into those markets is eased by political and economic acceptance; U.S. business has been welcomed by government officials, making the building or conversion processes less complicated than in regions with high barriers to entry.
"Investors want to invest in new hotel construction or development in certain countries over others because some legal systems and financial markets are viewed as having more risk than others. As an investor, you want your return to match your risk," said PricewaterhouseCoopers lodging consultant Bjorn Hansen.
Investors are attracted to such areas as China and the Middle East because local investors are willing to share the risk, Hansen added. In Russia, however, the risk is placed solely on the hotel company, making it a less desirable locale for investors.
Answering the demand for hotels in emerging markets could force hotel companies to reduce average daily rates in order to compete, Hansen noted. According to analysts, the broader the scope of investments, the better chances each lodging company has to increase net income and avoid dependency on one economic market.
"For all kinds of reasons, the timing is right, and it is an appropriate global growth strategy," Hansen said. "The U.S. lodging industry is in the mature phase, the favorable trends are slowing and other economies are really accelerating. Companies can have less cyclicality, redirect their resources to other opportunities and focus on less development in the U.S. and more in their other markets."
Starwood said only about 22 percent of its earnings may be affected by a U.S. slowdown. According to president and CEO Frits van Paasschen, Starwood "is not nearly as dependent on the U.S. economy as it has been in prior cycles."
Half of Marriott International's planned pipeline is outside of the United States, including 60 percent of its new full-service hotels. During the three-month period ending in December, just 25 percent of rooms opened were located outside the United States. "As they say, 'smooth seas do not make skillful sailors.' While we cannot predict the future, whatever it brings us, we are well-positioned," said Marriott CFO and president of Continental European lodging Arne Sorenson.
Traditionally, hotel companies based outside the U.S. are known to have more independently owned hotels as opposed to branded hotels, but with such an aggressive effort to increase global pipelines, hotel companies are persuading owners to operate under new flags--ultimately reducing building costs and decreasing long-term risk, Hansen said.
In appealing to underdeveloped locales, hoteliers--in addition to reconditioning their familiar brands--also are introducing brands that previously were not located in these areas. For example, Starwood announced new additions to The Luxury Collection, with plans to open a new hotel in Ras Al Khaimah, United Arab Emirates.
"I think it's from a pure risk management perspective. You just don't want to expose yourself to one kind of traveler or one kind of company," said Jan Freitag of Smith Travel Research. "There are different price points to different economies and [developing brands] makes sense for them."
Among other developments, Hilton Hotels Corp., which currently has 43 properties in the Middle East, plans to double that number during the next five years. Hilton also plans to open 75 hotels in India during the next five to seven years, in addition to the 10 it opened in 2007. In Beijing, Hilton in August opened a 266-room full-service hotel as the most recent addition to its 32-property roster in the country.
InterContinental Hotels Group announced that deals in China grew at a "record pace." IHG Asia Pacific CEO Peter Gowers said the company is adding almost 100 new hotels in greater China and by year-end 2008 will open its 125th hotel.
By the 2010 Olympics, Starwood will have 11 new hotels in China, and is planning to open an additional 20 properties there within the next five years, according to Starwood Asia-Pacific president Miguel Ko. Starwood expects to generate about 55 percent of its 2008 revenue from outside of the United States. It derived about 20 percent of profits from the United States last year.
Marriott has 115,000 rooms under construction or awaiting conversion worldwide, all due for completion by 2009. Marriott last month opened its 25th property in India and in 2007 opened 31,000 rooms outside of the United States.