Luxury Hotels Look to Expand in Emerging Markets

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At a recent hospitality investment conference held at New York University, hotel owners and investors discussed the importance of developing nations and their role in future expansion. Countries beyond North America and Europe are attracting the attention of the luxury hotel market, which has rebounded nicely from the recession. Travel Weekly reports that demand increased “4.4% in the Americas, 3.7% in Europe, and 4.9% in Asia-Pacific and 11.1% in the Middle East.”

Some of the countries mentioned as “hot spots” are Maldives, Turkey, Africa – specifically Morocco, Tunisia, and Algeria – Colombia, India, and areas in western China. Latin America is also considered a fast-growing area. Cities viewed as good investment opportunities in these countries or regions all have one thing in common – they are relatively unknown and have large populations.

Homi Vazifdar, managing director at luxury resort operator Canyon Equity, thinks it’s critical that the locales chosen “create demographics.” I interpret this to mean that cities should attract a specific type of traveler that hotel properties can cater to. One negative aspect noted by conference attendees is difficulty in finding the necessary financing for projects involving ground-up development, a lingering problem since the recession ended.

Here’s how hoteliers Mandarin Oriental International (NASDAQOTH: MNOIY), Hyatt Hotels (NYSE: H), and Starwood Hotels and Resorts Worldwide (NYSE: HOT) are managing their luxury brands in emerging markets.

The Mandarin Oriental finds strength in Asia

The Mandarin Oriental Hotel Group had the following 2012/2011 revenues per geographical area:

<table> <thead> <tr><th> <p><strong>Revenues by geographical </strong><strong>area</strong></p> </th><th> <p>2012 (US$m)</p> </th><th> <p>2011 (US$m)</p> </th><th> </th></tr> </thead> <tbody> <tr> <td> <p>Hong Kong</p> </td> <td> <p>       $ 238.8</p> </td> <td> <p>           $ 231.2</p> </td> <td> </td> </tr> <tr> <td> <p>Other Asia</p> </td> <td> <p>          140.9</p> </td> <td> <p>              127.5</p> </td> <td> </td> </tr> <tr> <td> <p>Europe</p> </td> <td> <p>          208.8</p> </td> <td> <p>              194.7</p> </td> <td> </td> </tr> <tr> <td> <p>The Americas</p> </td> <td> <p>            59.8</p> </td> <td> <p>                60.8</p> </td> <td> </td> </tr> <tr> <td> </td> <td> <p>       $ 648.3</p> </td> <td> <p>           $ 614.2</p> </td> <td> </td> </tr> </tbody> </table>

The Group had combined total revenues for 2012 of $1.28 billion, an increase of 7% over 2011 revenues of $1.19 billion. The Asian market had a strong performance during 2012, especially properties in Hong Kong, Jakarta, Bangkok, and Tokyo. The Group’s strong presence in top cities such as, Paris, London, and New York plays a critical role in its success, but growth also comes from successful development in new markets.

In 2012, the Group announced three new contracts for hotels under development in Bodrum, Turkey, in Marrakech, Morocco, and in Chengdu, China. In January of this year, the Group launched Mandarin Oriental, Guangzhou, located in the largest city in southern China. Other Chinese properties set to open this year are Mandarin Oriental, Pudong Shanghai, and Mandarin Oriental, Taipei.

Hyatt’s long-term strategy includes emerging markets

Part of Hyatt’s growth strategy is to increase their presence in attractive markets, and expanding in emerging markets such as China and India is central to its international growth. As of the end of 2012, the company had about 50 hotels open or under construction in China in cities such as, Beijing, Hong Kong, Macau, Shanghai, and Shenzhen. In India, there are approximately 50 hotels currently under development. Hyatt is also considering expanding to other key markets, such as Chile and Colombia. Segment revenue for 2012 and 2011 was as follows:

<table> <thead> <tr><th> <p><strong>Revenue information per segment (in millions)</strong></p> </th><th> <p>2012</p> </th><th> <p>2011</p> </th></tr> </thead> <tbody> <tr> <td> <p>Americas Management and Franchising [United States, Latin America, Canada and the Caribbean]</p> </td> <td> <p>$1,712</p> </td> <td> <p>$1,615</p> </td> </tr> <tr> <td> <p>ASPAC Management and Franchising [Southeast Asia, China, Australia, South Korea and Japan.]</p> </td> <td> <p>129</p> </td> <td> <p>113</p> </td> </tr> <tr> <td> <p>EAME/SW Asia Management [Europe, Africa, the Middle East and India, countries along the Persian Gulf and the Arabian Sea]</p> </td> <td> <p>92</p> </td> <td> <p>92</p> </td> </tr> <tr> <td> </td> <td> <p>$1,933</p> </td> <td> <p>$1,820</p> </td> </tr> </tbody> </table>

Net income attributable to Hyatt for fiscal year 2012 was $88 million and for 2011 was $113 million, a decrease of about 22%. From 2010 to 2012, Hyatt relied heavily on its U.S. properties, which earned more than 78% of revenues for the year. Over the next five years, the company is expected to grow by 11%.

Starwood Hotels expanding global reach

In Starwood’s first-quarter 2013 earnings summary, CEO Frits van Paasschen stated that “growth in lodging demand is being fueled by the rising wealth around the world, the creation of new cities in fast growing economies, and the expanding reach of global businesses.”

The company’s had the following revenues by segment for 2012/2011:

<table> <thead> <tr><th> <p><strong>Segment Revenues (millions)</strong></p> </th><th> <p>2012</p> </th><th> <p>2011</p> </th></tr> </thead> <tbody> <tr> <td> <p>Americas</p> </td> <td> <p>              $1,627</p> </td> <td> <p>                  $1,630</p> </td> </tr> <tr> <td> <p>EAME [Europe, Africa, Middle East]</p> </td> <td> <p>                   550</p> </td> <td> <p>                        592</p> </td> </tr> <tr> <td> <p>Asia Pacific</p> </td> <td> <p>                   337</p> </td> <td> <p>                        303</p> </td> </tr> <tr> <td> </td> <td> <p>              $2,514</p> </td> <td> <p>                   $2,525</p> </td> </tr> </tbody> </table>

Total revenues for 2012 were $6.3 billion, 12.5% higher than 2011 revenues of $5.6 billion. In its 2012 annual report, the company stated it was bullish on the long-term outlook of its high-end brands and expects to benefit from increasing hotel rates in North America and Europe, where demand is growing amid a limited supply. The report also adds, “more importantly, the dramatic economic growth in Asia, Latin America, Middle East and Africa is fueling demand for our brands worldwide.”

Conclusion

For investors interested in the hospitality industry, look for hoteliers that are looking to emerging markets to grow their business. The three companies mentioned in this post are pursing this type of expansion as part of their long-term strategy, so expect their future growth to be partly driven by how successful they can be in these regions. Success in these markets will in part depend on choosing the right cities to create a presence in and obtaining sufficient capital or financing to build properties from the ground up or purchase existing properties in the area.

Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically under-saving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. Learn about The Shocking Can't-Miss Truth About Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.


Eileen Rojas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus