Hotel Industry Grows On Economic Recovery: Time To Invest?
The hotel industry has come a long way since the sales plunge witnessed during the global financial crisis. Outside of a few pockets of economic and political disturbances worldwide, sales have risen all over the world and are particularly robust in the U.S.
There are plenty of reasons to be optimistic about the hotel industry’s outlook. Below, we discuss five factors why the industry’s outlook remains favorable:
Demand Exceeds Supply: Leisure and transient business travel demand received a much needed boost from the gradual recovery in the broader economy, in turn aiding the hotel industry. With limited supply and strong demand, room rates are witnessing an uptrend.
According to Hyatt Hotels Corporation (H - Snapshot Report) 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 rate increases and thus drive revenue per available room (RevPAR). In fact, despite the large pipeline of hotels, Smith Travel Research expects the sector’s demand growth in 2015 to be 3.3% in the U.S. with only 1.3% increase in supply.
The North American Recovery: System-wide occupancies in North America appear pretty steady and are above the prior peak achieved in 2006, thanks to the economic recovery.
Easier lending standards, and an improving travel and tourism industry, have also poised hotel companies for growth. For Starwood Hotels & Resorts Worldwide Inc. (HOT - Analyst Report), North America is still the largest market where it plans to unveil most of its hotels. The company expects 2015 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 in the areas surrounding major cities. These markets offer greater potential due to the higher pace of economic growth, and the outlying mature markets that enjoy proximity to the city centre.
A number of U.S.-based hoteliers are targeting the unsaturated markets in the Asia-Pacific, Brazil, Russia and Africa. Within Asia, despite its economic slowdown, China promises lucrative growth opportunities with visits expected to increase substantially in 2015. In fact, the country is a major revenue contributor to both Starwood Hotels and Marriott International, Inc. (MAR - Analyst Report). The improvement in the Chinese tourism industry, propelled by increased discretionary income and relaxed visa restrictions from popular tourist destinations, is likely to be phenomenal in 2015 and beyond.
Apart from China, India is becoming a hot spot for western hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, India’s tourism market has great long-term growth potential. Major players in the industry are also eying 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, and is expected to continue in the second half of 2015. However, Brazil is scheduled to host another mega sporting event — 2016 Summer Olympics — which should boost tourism.
The European market is improving. In fact, select markets in Southern Europe that were hit hard by the recession, are gradually turning around. The bullish trend can be seen in Starwood’s system-wide occupancy data in 2014, which was has been impressive over the past few quarters in Europe. Other major players like Hilton, Choice Hotels International Inc. (CHH - Snapshot Report) and Wyndham Worldwide Corporation (WYN - Analyst Report) are also targeting the European market.
Brand Renovation to Boost Growth: Hotel companies are working to improve guest satisfaction via brand conversion and re-modeling to strengthen their positions and counter competition. In fact, brand perception has a major influence on the large mass-market segment. With the market becoming increasingly saturated, hotels will need to differentiate themselves more than ever.
Brands that can offer something uniquely compelling and have the ability to innovate are likely to grab market share. Therefore, leading hoteliers like Starwood Hotels, Marriott International, Belmond Ltd. (BEL - Snapshot Report), Hyatt and The Marcus Corporation (MCS - Snapshot Report) are firing on all engines to make their brands more relevant in today’s environment.
Building Loyalty Through Social Media and Smartphone Technology: Digital innovation and social media are playing an increasingly important role in the hotel industry. Social media can enhance a brand’s prospect by connecting directly with guests, especially the millennials, in turn leading to increased loyalty and market share. Travelers are now taking the help of social media sites like Facebook, Twitter and TripAdvisor Inc. (TRIP) for selecting a hotel and planning vacations.
Moreover, a higher number of hoteliers are using apps to help guests manage their bookings, interactive maps/GPS as well as reward programs. Being tech-savvy is no longer an option but a necessity for the hotel industry.
Many companies are setting up analytics tools to understand consumer preferences — and deliver a differentiated experience — to encourage 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, Marriott and Hyatt Hotels have a Zacks Rank #2 (Buy).
Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Vacations Worldwide Corp. (VAC - Snapshot Report), Starwood, La Quinta Holdings Inc. (LQ -Snapshot Report) and Wyndham Worldwide given the momentum in their underlying businesses and the optimistic outlook for 2015.
Bottom Line
We firmly believe that the lodging sector’s recovery is firmly in place. This makes it a worthy investment proposition for 2015 provided the economic recovery as well as the industry’s low supply-high demand scenario continue. Although risks have continued to ease out, near-term risks related to a slowdown in the emerging markets might remain an overhang.
As you can see, 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, and how the trend is looking for this important sector of the economy now.
Disclosure: None.