Hyatt shareholders were effectively put on notice earlier this month when the company notified its hotel owners of an impending exodus from Expedia if no agreement is reached come July 31. For Expedia, the risk is minimal. The loss would amount to less than 2 percent of Expedia’s 246 million hotel room nights, according to a June Guggenheim Securities report "Expedia: The Relevance of Hyatt." The report further found that only .4 to .7 percent of Guggenheim’s 2017 revenue estimate for Expedia could be affected from lost Hyatt business combined with the estimated $25 to $50 million commission cutback that resulted from Starwood’s shift to Marriott’s more advantageous terms in March. Hyatt, however, has substantially more at stake if they walk.
“Larger brands have less volume coming from OTAs, but the channel is especially important for a company like Hyatt with just under 200,000 total rooms,” Dan Wasiolek, senior equity analyst at Morningstar, told HOTEL MANAGEMENT. In his June 26 stock update "Will Hyatt Really Leave Expedia," Wasiolek estimates that Morningstar's $48 fair value estimate on Hyatt would decrease by $2 "in a scenario where we reduce room growth forecast by one percentage point each year starting 2020 and going through 2026." In the same report, he also references Similarweb.com data in which visitation to Expedia.com on both desktop and mobile platforms was 59.4 million in May. That excludes visitation to other Expedia Inc. sites: Hotels.com; Orbitz, Travelocity; and Hotwire. Hyatt platforms achieved 7.1 million that month.
Setting Up for Loss
Guggenheim’s prospects for Hyatt in its June 14 report—"Hyatt – The Fight with Expedia"—are more ominous, estimating Hyatt’s exposure to Expedia at 11 to 13 percent of total rooms nights and citing that Expedia’s brand agnostic customers have a wide scope of alternatives should Hyatt delist its inventory. The firm further referred to an estimated total potential savings of $23 million as “a relatively small as a percentage of revenue,” but which would nevertheless require Hyatt to recoup a minimum 75 percent of the Expedia volume directly to avoid EBITDA dilution.
A June 14 report by Cowen Group Equity Research puts the tech firm’s exposure to Hyatt at less than 1 percent, estimating Hyatt’s exposure to Expedia at 8 to 10 percent. The financial consequences for Hyatt shares are portentous, if Choice Hotels’ three-month departure from Expedia in 2009 is any indication. In a 10-Q filing with the Securities and Exchange Commission (SEC) that November, Choice reported:
“In the three months ended September 30, 2009, royalty fees revenue totaled $66.4 million, a 13% decrease from the same period in 2008. Operating income totaled $48.1 million for the three months ended September 30, 2009, a $13.7 million or 22% decline from the same period in 2008. Net income decreased $3.1 million or 9% from the same period of the prior year to $32.8 million.”
For Hyatt, some loss could potentially be offset by a mandatory 7-percent increase to contracted fees to take effect July 1 for full-service hotels in North America and global select-service hotels, but the business lost from the OTA could be a potential bloodbath. Hyatt already informed owners that they should expect a decrease in bookings, particularly in U.S. hotels with strong international demand, as well as properties in highly competitive markets. Wasiolek explained that “the risk in this strategy is that it’s not logical because third-party owners are paying more for less shelf space and the fee increases make Hyatt less competitive than other brands, which could impact future signings.” Proven Hyatt franchises are indispensable to the ongoing growth of the brand.
The Myth of Membership, Poor Timing
With just eight million World of Hyatt members reported in Hyatt’s December 2016 SEC filing, the loyalty program relaunched in March lacks the scale of its competitors. But the brand told its owners that the revamped platform is expected to strengthen guest relations through improved benefits and engagement, a view that Morningstar counters is ineffective in the long term. In its September report, "Book Shares of Priceline & Expedia: Hotel Direct Risk Overblown," direct-booking traction is expected to remain limited due to the magnitude of the OTAs’ scale, marketing programs and technology, in addition to a fragmented hotel industry and the discounting involved in hotel loyalty programs. “To sign members up, these book-direct campaigns offer promotions and that defeats the economics of direct bookings and it’s not sustainable,” said Wasiolek. “Promotions can hurt room rate integrity and the brand by conditioning people to expect discounts.”
Future growth prospects for World of Hyatt aside, the timing of this negotiating tactic presents further risk, as Wasiolek pointed out the cycle may not be far from downward trends in occupancy and RevPAR. “That’s probably when you need distribution channels like Expedia even more because once the cycle turns down, that’s when things get tough,” he said.
Moreover, in Hyatt’s fourth-quarter 2016 earnings call, CEO Mark Hoplamazian described 2017 group business already on the books as “up, but in the low single digits compared to 2016,” which would theoretically cast transient business from all distribution channels as that much more detrimental to revenue, especially as the cycle heads to a finish and this, Wasiolek noted, is when confidence starts to solidify and increase among the business and corporate segments. “Group isn’t on fire, but it’s doing ok in general,” he said, adding: “Hoplamazian’s language isn’t as strong as that of other hotel companies.”
It’s also conceivable that the issue of Hyatt’s management and ownership structure is at play in the current negotiation with Expedia. In Wasiolek’s May report on Hyatt, he rates the brand’s management stewardship as poor because Hyatt’s founders, the Pritzker family, own 60.5 percent of the common stock and 80.4 percent of total voting powering, giving minority shareholders little sway in driving the direction of the company. Hoplamazian’s position as VP of the family’s advisory firm, the Pritzker Organization, also depreciates the integrity of distinct chairman and CEO roles, resulting in Morningstar’s view that the two are effectively one entity. “There’s risk in the ownership and control that the family have and that certainly might be impacting the strategic decisions that management is making,” Wasiolek explained. “I have questions over whether this is the right strategy to be taking because there are some pieces needed to inspire confidence in it.”
Guggenheim’s June 14 report questions the decision to push marketing costs to owners while Hyatt ran at a 77-percent EBITDA margin in 2016, suggesting that “Hyatt and chain peers reinvest some of that rich margin to close the advertising gap relative to OTAs.”