ATLANTA—It's the gift that keeps on giving. Six months after Marriott International acquired Starwood Hotels & Resorts, the collective hotel industry is still talking about the ramifications and fallout, and discussion doesn't appear to be waning. At least at the Hunter Hotel Conference, here at the Marriott Marquis.
To be sure, it will be some time before we know what the true impact will be from the mega-deal, but executives here are unafraid to speculate.
"It will take three to five years to sort it out and the challenge will be maintaining consistency during the integration," said Lance Shaner, CEO of Shaner Hotels, a Florida-based owner/operator with a slew of Marriott brands in its portfolio.
And while Arne Sorenson, CEO of Marriott International, has stated that Marriott doesn't intend to jettison any of its now 30 brands, Shaner doesn't believe it so. "I suspect some brands will go away," he said. "But size will make them more powerful, especially in negotiating with OTAs. The combined company is like its own OTA. But integration will be tough; there is so much new supply. What’s the impact on owners?"
Before the merger, Marriott-branded and Starwood-branded hotels occupied the same street corners and competed against each other. Not anymore; they are all part of the same family. What that impact will be is too early to tell, but with a now combined loyalty program encompassing some 100 million members, there will be ramifications that could either be beneficial or, maybe, pernicious.
Even Liam Brown, Marriott's president of franchising owner services in North America, understands to enormity of the merger and the window of time it will take to iron things out. "We are digesting an elephant and only halfway through the left ear," he said. "We are getting our arms around the business, but the idea is, and what we believe, is that there are tremendous revenue and cost synergies. The OTAs, Google—everyone wants a piece and you have to be big to counteract that.
Brown, too, acknowledged the glut of brands Marriott now controls. "It's a lot of brands and swim lanes and we need to fine tune," he said, jokingly calling it an Olympic-size pool. "But, we are keeping all the brands," he continued, not ruling out the notion that even more could be added.
No matter the conjecture, all agree that scale, today, matters. "Scale is really important in a complex operating environment," said David Kong, CEO of Best Western Hotels & Resorts. "It's OTA leverage. OTAs need hotels more than we need them."
Kong believes more M&A will come because growing organically is difficult.
And he's not the only one. Dave Johnson, CEO of Aimbridge Hospitality, is in the same camp. "Consolidation will rapidly continue. Scale is a fantastic edge in our space," he said.
With 30 brands, Marriott now by far has the biggest brand stable. Does it matter? "There are lots of brands out there, and at the end of the day, it’s about relevancy and a consistent promise," said Keith Cline, CEO of La Quinta Inns & Suites.
This is how investors view brands. A strong brand is something that connects with the consumer and has a strong point of view," said Jim Merkel, CEO of Rockbridge. "But sometimes there is brand blur, not enough differentiation. Brands keep finding white space for something new."
Shaner was more blunt. "There are too many brands," he said. "No CEO could even differentiate them all. Brands allow them to license more properties and get more fees. We are confusing the public."
With all the brand choices, what is an owner to do? "Choosing brands comes to a ROI decision," Johnson said. "What are the fees related to the revenues? It comes down to ROI."
Johnson cited New York City as a down market, acknowledging independent hotels there getting hammered and filling rooms via OTAs. It's a market like New York City, now, that tests the mettle of a brand. "The best measure of a brand is when the industry is in a trough," he said.
And while the vast majority of the hotels Aimbridge operates are branded, he still questions the value of brands as it relates to distribution fees. "Why do I have to pay an OTA and you?" he asked. "The owner has to pay twice."
One thing is sure: a whole lot of new supply is coming into the market. There are currently 190,000 rooms under construction in the U.S., and most prognosticators say that 2017 will be a year when supply growth exceeds demand growth.
This, according to executives, is a concern.
"It's not a problem until the next recession, and then it's a problem," Shaner said. "Properties will foreclose."
But don't expect hotels to stop being built. "Developers develop. When they can do it, they do it," said Rockbridge's Merkel. "Some markets are getting a lot of supply; it's tough for absorption.
"Are we oversupplied or under-demolished," Merkel added, quoting hotel luminary Mike Leven.
In Johnson's estimation, the hotel industry is in a rather odd time. "I've never seen a time like this," he said. "Demand is good and we have to keep the machine rolling. And we will build until the money dries up."
Johnson is not worried that we are headed for a bubble, citing lending institutions that are more constrained than in yesteryear. "We aren’t as overleveraged as were were back in 2008," he said.
But he admitted that equity is skittish and more deals involve some kind of mezzanine piece, so the cap stack is oftentimes 80 percent debt. "If you are that leveraged, that’s a problem," he said. "At 65-percent leverage, you can weather a storm. Little to no equity in a property is bad, but we are seeing tighter lending."
What, then, is the answer? Again, oversupplied or under-demolished? "There’s a level of obsolescence," said Greg Mount, CEO of Red Lion Hotels Corporation. "Some assets have seen better days and need to move on."