In the face of uncertainty - Deloitte’s 28th European Hotel Investment Conference

When the organisers behind Deloitte’s 28th European Hotel Conference were brainstorming an overarching tagline for this year’s event, one wonders whether they were already taking one thing as a given, or being particularly prescient.

“Opportunity out of uncertainty?” neatly encapsulated any number of seismic happenings that had taken place since industry leaders last gathered at the Dorchester 12 months previously – disheartening IMF growth forecasts, Brexit and the plummeting pound, continuing fallout from tragic events in the Middle East – but none were the topic of conversation as arriving executives caught up over coffee and pastries on a wet London November morning.

To be precise, it was 9 November and the morning after the night before. Among a group that has learned to prepare for the unexpected, and inherently in-tune with geopolitical events in all four corners of the globe, the sense of disbelief was tangible. Overheard snippets of conversation followed a similar theme: “I was up all night”; “My phone wouldn’t stop ringing”; “It still doesn’t feel real”.

The Americans in attendance were wearing it particularly badly. Sleep-deprived, ashen-faced and, onstage and off, universally apologetic, they, like everybody else, were at a loss to explain it – despite being invited by fellow attendees to talk about nothing but. An outsider might have expected them to be happier: the US had just elected its first hotelier president.

One man who seemed less concerned than most was the delightfully outspoken economist Rodger Bootle, whose economic outlook is always a highlight of this daylong annual event. “Trump’s win probably means interest rates will eventually end up higher than if Clinton had won,” he acknowledged. “But the economic powers of the president are limited – major changes in the US economy have not corresponded with political shifts. Trump has threatened the independence of the fed, but he is so contrary, no one knows what he will actually do. A lot depends on who he appoints as advisers and how much he listens to them. I am not panic-stricken.”

A good year for growth

Within the hotel sector at least, this will be remembered as more than just the ‘Year of Trump’, though it was still all about the art of the deal. Arguably the most seismic events were two major portfolio acquisitions: Marriott International’s purchase of Starwood Hotels & Resorts, creating the world’s largest hotel company; and Accor, Europe’s biggest hotel operator, acquiring Canadian luxury group FRHI, owners of the Fairmont, Raffles and Swissôtel brands.

Joining Deloitte’s international travel, hospitality and leisure lead Nick van Marken onstage to discuss these purchases, and the state of the M&A market more generally, were key figures from both transactions: CDOs Gaurav Bhushan of AccorHotels and Marriott International’s Carlton Ervin.

The arrival of Chinese insurance giant Anbang at the 11th hour almost scuppered the Starwood acquisition and Ervin was invited to reflect on what must have been an incredibly stressful time.

“This sense in the press that Marriott was getting too good a deal became somewhat pervasive. That concerned us and meant we prepared for a counter offer from somewhere,” he revealed. “It was the timing that surprised us. But we’d had a lot of time between November and March to start the integration process and, in doing so, our conviction that we were making the right decision grew stronger.

“It took three days from Starwood turning down the initial merger for us to come back with a counter offer. We raised $3.5 billion that quickly. Let’s not forget that the first deal was all stock and the second was cash.”

Nick van Marken pointed out that Accor’s acquisition of FRHI was 30% cash and 70% forward stock. “It looked like it
was more of a bet on Accor,” he suggested.

“The deal was as much about the vendor’s interest in us as our interest in FRHI,” Bhushan agreed. “They wanted to be part of the consolidation that they saw happening in the industry and we had some great discussions. Clearly they didn’t simply want to sell up, that was never the intention. It made sense strategically for both sides.”

“There was pressure to get it right, but a lot of our international peers weren’t there. We bid; it was a private sale, so the process was quite different to what Carlton had to go through. Brands of this quality with such iconic properties don’t become available very often, and the fact we were able to structure the deal in a way that suited their demands made the difference.”

But getting the papers signed is only the first step. Integrating new propositions and people into an existing corporate culture is no easy feat. Following the acquisition, Marriott International now boasts a staggering 30 brands. Ervin insisted that the new arrivals still served distinct market segments, while also acknowledging that such a number brought inherent challenges.

“A real focus has been that it’s not enough to be the biggest operator out there; you still need to strive to be the best,” he explained. “If the new organisation looks like the best of both worlds, we know we’ll have succeeded. Both can learn lessons from one another. In terms of culture, that’s what we’re trying to achieve. It’s a big challenge.”

“You can do all the PowerPoint presentations in the world, trawl through the spreadsheets, and be certain the deal looks good on paper, but it will all mean nothing without the right people,” Bhushan agreed. “Accor is a French company and we’re dealing with a very North American culture. We were able to install people early on who were focused on the integration. It’s vital that you get the right people locked in and that they understand they have a career with this new, merged company. Toronto is now our North American head office. We have some people there and [sent] others from there to Paris. It’s gone amazingly well so far.”

Looking forward

Corporate culture and the changing hotel landscape were also some of the areas covered in a wide-ranging conversation with two of hospitality’s heaviest hitters, president and CEO of Hyatt, Mark Hoplamazian, and Mandarin Oriental CEO James Riley. Were they concerned by the amount of consolidation happening in the market, asked moderator Adam Wissenberg.

“Our business is not particularly scale-sensitive, and the largest players are increasingly franchise owners, not managers,” Hoplamazian replied. “Now, with Starwood’s acquisition, we’re the only multibrand multinational company exclusively focused on high-end travellers. That focus is what will propel us, and we’ve opened a record number of hotels this year.

“We’ve grown by acquisition in the past and we would look at that in the future, but it would have to fit that very distinct segment we’re trying to serve. Try to be everything to everyone everywhere and it’s hard to be anything to anyone anywhere.”

Mandarin Oriental is an even more niche proposition, with just 29 ultra-high-end properties around the world. James Riley was appointed CEO in March, knowing that bullish statements of ambition were not the best way to announce his arrival. “We are very small and, therefore, size and scale in terms of what’s happening at the other end of the spectrum doesn’t make a huge difference,” he said. “If anything, it helps us become even more distinct in terms of where we position ourselves in the market.

“Growth is an important ingredient in keeping an organisation healthy, but I don’t believe in growth for growth’s sake, particularly in the luxury space. I’d like to see Mandarin expanding slightly more quickly than it has been, but we’re certainly not talking about 100 hotels in five years. It’s not a flattering analogy, but I compare running Mandarin to driving a tug with the turning circle of a supertanker. Anything we decide today will take about five years to come through. Still, I’d like to see us being in a position of opening three to four hotels a year.”

The continued growth of the sharing economy was a subject that came up throughout the day and both CEOs were invited to comment on how players such as Airbnb had impacted their business. “I think the industry has to accept that Airbnb is here to stay, and established players of whatever size need to adjust and see the opportunities it opens up for us going forward,” Riley commented.

“There’s a lot happing in the regulatory space right now, but it’s vital we don’t focus on regulation as a protectionist measure; it needs to come from a positive perspective that seeks a fair outcome that benefits the consumer. I fear there’s a danger of it looking like a defensive lobbying for regulation to protect its existence.”

Hoplamazian was keen to stress the benefits of learning from Airbnb’s success. “What’s driving their growth is a great guest desire to have real, authentic human interaction, to meet locals, get to know a neighbourhood and feel a part of it. Operators in our industry are risking becoming anachronistic in relying on standard operating procedures and scripts in lieu of bridging humanity back into the equation.

“Running a multibrand multinational business and then tearing up scripts is not for the faint of heart, and I pissed off a lot of my long-term colleagues at Hyatt by announcing: ‘We’re not going to continue doing things this way’. Nevertheless, we have to recognise that genuine, human experiences are what a growing number of people are looking for.”

It’s a shift that Riley also sees in the luxury space, though he could do without some of the language accompanying its emergence. “I always loathe the term ‘millennials’,” he began. “Every ten years a new generation comes through, but in reality I don’t think we’re that different in nature. There is certainly a move towards a slightly more relaxed style of operation. The formality that has traditionally been inherent in the luxury segment needs to be adjusted and moderated slightly.

“We also need to adapt and moderate the way we engage with the new generation entering the workforce. They’re very focused on what we can do for them in terms of nurturing and developing their talents. If we as an industry can get that right, we’ll gain massively, and it will also feed into the guest experience. That’s a very exciting challenge.”

It was an upbeat closing note on a day when some attendees were struggling for positives. Riley and Weissenberg, like pretty much everybody else on stage throughout the event, said it was far too early to predict what impact Trump’s election might have on the international hospitality sector. It will be instructive to see what the organiser’s go for as a tagline in November 2017.