Marriott's admission of slowing international demand foreboding13 Jul, 2012 By: David Eisen
For years now, the hotel industry has had a yen for development overseas, particularly in China and India, countries, it assumed, had burgeoning middle classes with few quality hotels to stay in. Conversely, these countries were steadily doing more business with their western counterparts, so business travelers needed quality hotels to stay in when they traveled to these countries.
It sounded all well and good: supply was lagging demand, so the logical step would be to build more hotels to meet demand. And so the hotel brand companies looked to up their presence, signing management agreements by the bushel, for hotels in such destinations as Shenzhen in China and Bangalore in India. No longer was it enough to be represented in major cities—Mumbai, Beijing—secondary and tertiary markets would be money makers.
It sounded all well and good—and still may be. However, Marriott International's second-quarter earnings announced yesterday, while on the surface healthy—increased revenue per available room, revenue that bested the year prior—were also worrisome: demand growth, Marriott said, was slowing in the Middle East and in Asia, where economic growth is weakening.
Marriott's admission dovetails overall economic data coming out of China. The country said its gross domestic product expanded 7.6 percent in the April-to-June period from a year earlier, the lowest since 2009, The Associated Press reports. China also said that retail sales and factory output growth slowed in June. In tandem, the price of oil declined to $87 a barrel.
Reuters writes that China's implied oil demand fell 0.4 percent in June from a year earlier to the lowest in 20 months. According to the same article, China is the world's second-biggest oil user and accounts for nearly half of global incremental demand, but an economic slowdown is shrinking its need for fuel.
All of this amounts to not-so-good news for the hotel industry. If people have cut back on filling their gas tanks, and companies have cut back on consumption, chances are they aren't spending big at hotels.
Marriott has an eye to have 4,000 hotels in 90 countries across its 14 brands within two years. Much of this growth will be in China, where the company expects to have 100 hotels by 2014, doubling its current number.
Marriott isn't the only one with international exposure. Starwood Hotels & Resorts Worldwide will also look to double its presence in China, as is Hilton Hotels Corp., and just about every other hotel company, which saw potential in overseas markets.
However, overbuilding has its consequences; namely, when you build too much inventory too quickly and find that rooms are going empty. A Bloomberg item points to Marriott's Q2 conference call wherein the hotel operator, whose brands include JW Marriott and Courtyard by Marriott, said that some areas in China and India are hurting because there are too many hotel rooms with too little demand. This is the kind of language that batters stock prices.
And it did. In the aftermath of Marriott's second-quarter reveal, its stock price tumbled 6 percent. Meanwhile, other hotel operators were not immune. Starwood shares lost 5.6 percent, while shares of Hyatt Hotels Corp. dropped 4.5 percent.
Could Marriott's data just be the start of more disappointing news? We still haven't heard second-quarter reports from the other large hotel operators, namely Hilton, Starwood, Hyatt and InterContinental Hotels Group. But they are coming. Gird your loins.
External Source : Bloomberg, Reuters, The Associated Press