The International Hotel Industry

The international hotel industry consists of about 15.5 million rooms and 160,000 hotels that can be divided into branded hotels and independent hotels. About 53% of all hotels worldwide belong today to hotel chains, which implies that the global hotel industry is still relatively fragmented. The more developed market of North America leads the world in branded hotel inventory, with 67%. However, in less mature markets, such as the Middle East & Africa,

Rezidor's Largest Shareholders

Name # Shares Ownership/Votes (%)

The Carlson Group 87,552,187 50.2%

JP Morgan 6,971,940 4.0%

Fidelity Management & Research 5,376,051 3.1%

Handelsbanken Fonder 4,999,537 2.9%

Fjärde AP-fonden 4,200,150 2.4%

Norges Bank Investment Management 3,907,910 2.2%

AMF Aktiefond Sverige 3,742,233 2.2%

Rezidor Hotel Group 3,681,138 2.1%

Nordea 3,522,611 2.0%

Group SBB 3,291,649 1.9%

36

branded hotels are less established, only making up for 44% of the total number of hotels.

Among all branded hotels, approximately 50% belong to one of the top six hotel companies, namely IHG, Hilton Worldwide, Marriott Hotels and Resorts, Wyndham Hotel Group and Choice.

(Rezidor, 2014b) 4.5.1.1 Characteristics

As mentioned in the paragraph above, the hotel industry is a fragmented industry. Not only is there a large number of companies operating hotels, but there is also a wide number of individuals and corporations owning hotels, outsourcing their operation to hotel operators.

Moreover, customers are fragmented, as they can be either companies or individuals. Customers can be of almost all age groups and be travelling for either business purposes or for leisure.

Customers of the hotel industry are mostly end consumers and are consuming the service at the same place and time at which it is produced.

Furthermore, hotel services are intangible, which means that its quality is difficult to demonstrate or to be tested in advance. This means that hotel services are unique and as opposed to tangible products, hotel services are labelled as experiences. The intangible nature of hotel services implies that customers face uncertainty about the quality of the service prior to their stay. The aspect of thorough investigation is therefore important for price-conscious customers, reducing the uncertainty. Another way of reducing uncertainty is to choose a hotel operator that is known for consistently providing the expected quality. This is one of the major advantages of the international hotel chains. Research conducted by The Futures Company on behalf of IHG, shows that 71% of the respondents perceive international hotel brands as more consistent than local hotel brands. (IHG, 2013) One last distinct characteristic of the hotel industry is its cyclical relationship with the state of the global economy. This relationship will be described more in detail in the next section.

4.5.1.2 Hotel Demand

Demand for hotel services is primarily influenced by macroeconomic factors, such as the economic growth of a country or a region. High domestic economic growth often implies that its companies are performing well compared to its international competitors. High relative competitiveness fosters business travels, as more foreign companies have reason to come to the country to do business. Foreign economic development is also favourable for the domestic hotel industry, especially when neighbouring countries are becoming more prosperous. Such circumstances induce a higher willingness to pay for vacation abroad. Other macroeconomic drivers of demand for hotel services include population growth, growth of the disposable

37

income, and the development of currency and interest rates. (Scandic, 2015b) Non-economic factors that affect demand for hotel services include demographics, access to airports and other means of transportation, cost of transportation and ultimately the freedom to travel.

Global demand for hotel accommodation was seriously affected by the crisis in 2009, which led to dropping occupancy rates and average room rates. As a result, total industry revenues declined by 12% from 447 billion dollars in 2008 to 395 million dollars in 2009. However, the industry was fairly quick to recover. In 2010, revenues were up with 6 billion and already in 2011; industry revenues surpassed the levels from before the crisis, amounting to 457 billion dollars. (Statista, 2015) Much of the recovery was achieved thanks to the growing number of tourists from emerging countries and their improved purchasing power. Another explanatory factor was naturally GDP growth and the return of business confidence that affected business travel positively. The last five years have been favorable for the international hotel industry.

Total industry revenue has been growing at a steady rate with a compounded annual growth rate of 3.1%, driven by a growing number of tourist arrivals. (Statista, 2015)

4.5.1.3 Hotel Supply

The supply of new hotels is primarily affected by the prevailing levels of demand and responds accordingly. However, supply cannot change as fast as demand, because the addition of a new hotel requires a large investment and a several years of construction. Consequently, supply has therefore a time lag, which is determined by the time it takes to build new hotels, which is on average four years. (Runyan, 2004)

The supply of new hotels was particularly strong in the years before the financial crisis in 2009.

This supply chock was driven by four years of strong demand between 2003 and 2007, which led to high occupancy rates and average daily room rates. As a result of the financial crisis, travel budgets were cut both among companies and individuals, which caused a steep decline in hotel demand. Simultaneously, hotel companies had invested in the development of new hotels and the market was suddenly facing a situation of oversupply and a slowdown of new investments followed. The number of hotels under development in 2009 and 2010 was significantly smaller than just two years before. GDP growth has returned to key economies in the last six years, leading to a rise in disposable income and an increase in demand for hotel rooms (IMF, 2016). This has in turn propelled more investments in new hotels, however the growth in supply is still lower than before the crisis and below the long-term average of 2.1% of annual growth (IHG, 2013)

38 4.5.1.4 Performance Measures

There are a number of industry performance measures that are commonly used by industry players to benchmark and monitor their operating performance. These include the occupancy rate (OCC), the average daily room rate (ADR) and the revenue per available room (RevPAR).

OCC measures the utilization of a hotel’s available capacity. It is computed by dividing the number of rooms in a property that have been rented with the total number of rooms in the building. ADR is room revenues divided by the number of rooms sold. It shows the average revenues per occupied room in a given time period. RevPAR measures the period-over-period change in room revenues for comparable properties. It is calculated by multiplying OCC and ADR.