Seizing Advantage in Hospitality s New Frontier

Transcription

1 Executive Agenda Seizing Advantage in Hospitality s New Frontier The hospitality industry is on the cusp of a major market shift to Asia and Latin America where billions of new middle-class travelers business and leisure are looking for, well hospitality.

2 Change is coming to the hospitality industry. Although Western countries still drive the global hospitality business, it won t be long before emerging Asian and Latin American countries take the lead. Over the past three years, the number of available hotel rooms in the BRIC countries has jumped by almost 0 percent, compared to a 0. percent jump in the United States. This is the result of a major demand shift to emerging markets, which in turn is the result of a surge in the number of middle-class consumers a scenario we believe will reshape the industry. We project that by 0 there will be about billion new middle-class consumers, most of them in Asia, who travel both for business and leisure (see figure ). This will be a large new customer base, particularly for budget and mid-range hotel chains. Figure The world s middle class is expected to grow by more than billion people Middle-class consumers (millions) +0%,08,8 Asia Europe Americas Middle East and Africa, Sources: Organisation for Economic Co-operation and Development; A.T. Kearney analysis The major hotel chains are well aware of this trend, and virtually all have announced ambitious development plans targeting emerging markets. With the exception of InterContinental Hotels Group (IHG), however, those plans call for building upscale properties basically ignoring the great potential that budget and mid-range customer segments offer. Though less glamorous than upscale developments, these properties are profitable (when operated in strong local networks) and are far less cyclical over time. Thus the major chains face a significant risk: namely, that strong local players will snatch the lion s share of the high-profit mid-range customer segment. This is already happening in China, where local chains such as 7 Days Inn and Jin Jiang have seized solid positions ahead of the international chains. In other emerging countries, such as India and Indonesia, budget and mid-scale development opportunities still await the major chains. The BRIC countries are Brazil, Russia, India, and China.

3 Three-Pronged Strategy for Growth The major chains can seize those opportunities by applying a three-pronged strategy for growth: choose the right countries and timing for development, manage scale effects locally, and adapt global brands and concepts to the local clientele. Let s take a detailed look at each:. Choose the right countries and timing for development. Historically, hotel chains have based their development decisions on opportunity, searching for the best locations for building and the best financial partners to back their projects. Though this approach has worked well in the past, it is not ideal for today's industry. Rather, a new strategy is necessary to ensure that each decision is focused on opportunities that make the best business sense and are the most likely to deliver maximum return on investment. With this in mind, we developed our Hospitality Index to rank the best countries for hotel development (see sidebar: About A.T. Kearney's Hospitality Index). The higher a country scores in each About A.T. Kearney s Hospitality Index The annual A.T. Kearney Global Hospitality Development Index ranks 0 countries on a zero to 00-point scale the higher the ranking, the more urgency there is to enter a country. Countries are selected from a database of 00 nations. Hospitality Index scores are derived from an analysis of the following four variables: Market Attractiveness ( percent) Business readiness (0 percent): Based on a composite index that evaluates the quality of the environment for the hospitality business in terms of regulations for construction, quality of infrastructure, and education level, among other things. Scoring: zero indicates a poor business environment; 00 indicates a structured and mature business environment. Population ( percent): The larger the population (particularly in urban areas), the higher the score. Number of tourists ( percent): Number of incoming tourists, both in absolute terms and in proportion to total population. Scoring: zero indicates no incoming tourism; 00 indicates a high level of tourism compared to total population. Unemployment rate (0 percent): Scoring: zero indicates a high unemployment rate versus average; 00 indicates a low unemployment rate versus average. Country Risk ( percent) Country risk (80 percent): Monitors political risk, economic performance, debt indicators, debt in default or rescheduled, credit ratings, and access to bank financing. The higher the rating, the lower the risk of failure. Business risk (0 percent): The business cost of terrorism, crime, violence, and corruption. The higher the rating, the lower the risk of doing business. Market Saturation ( percent) Number of hotels per inhabitant (0 percent): A higher score indicates a lower level of hotel density compared to population. Carrying capacity (0 percent): A higher score indicates more capacity to transport incoming tourists. Time Pressure ( percent) The time factor is based on 00 to 0 data, measured by the compound annual growth rate of tourism receipts weighted by the general economic development of the country (CAGR of GDP) and CAGR (00 to 0). A score of 00 indicates a rapidly advancing tourism sector, thus representing a short-term opportunity. Data and analysis are based on the United Nations Population Division database, the World Economic Forum s Global Competitiveness Report 00-0, national statistics, Euromoney and World Bank reports, and Economist Intelligence Unit databases.

4 Figure Top 0 countries in the Hospitality Index Scale: 0 to 00 Rank Country Global score Market attractiveness Country risk Market saturation Time pressure United States China Singapore Germany United Kingdom India Brazil Russia Indonesia Switzerland Netherlands 9 8 Denmark Canada 9 7 Chile United Arab Emirates France Australia Mexico Poland Norway 0 99 Source: A.T. Kearney analysis criterion market attractiveness, risk, saturation, and time pressure the more attractive it is for development. Figure ranks the top 0 countries in this year s Index. Not surprisingly, China, India, Brazil, and Russia all land in the top 0. There is no question about their potential for hotel development, particularly in the budget and mid-range segments. Success depends on choosing the right locations within these large countries, and understanding the politics and regulations well enough to avoid bureaucratic red tape that can delay projects and eat into profitability. In India, for example, debates over proprietary rights and land ownership are a constant hurdle for new construction projects. In China, choosing the right regions and cities in which to develop can mean the difference between success and failure (see figure on page ). Some emerging markets are less visible on the radar screen than the BRIC countries but offer similar opportunities. Singapore, for example, is small but has so much potential that it lands third on our list. In ninth-ranked Indonesia with its population of 0 million, average political risk, and inadequate room supply the issue for hotel chains may be the pace of development. We consider Indonesia a country where forward-looking chains will establish a significant presence now to fully capitalize on its potential down the road.

5 Figure For large countries, analysis by region is necessary to make good decisions Chinese regional attractiveness (example analysis for a major hotel chain) Rank Province Population (millions) Guangdong Jiangsu Number of cities with more than one million inhabitants Market share versus top five competitors 7.%.% 7 9 Shandong Shanghai Not applicable.8%.8% 0 Zhejiang.8.% 7 8 Tianjin Beijing Fujian. 7.. Not applicable Not applicable.%.%.% Liaoning Henan %.0% Rank of province Sources: National Bureau of Statistics of China, hotel websites, IMF, World Gazeteer; A.T. Kearney analysis Some of the traditional mature markets Europe and the United States, for example still have room for development and remain attractive markets. Europe in particular shows strong potential for budget hotels, with eight European countries ranking among our top 0, with hotel chains that represent just percent of Europe s room inventory. Fourth-ranked Germany, for example, has many economic centers with excellent infrastructures, perfect for building strong networks of budget and mid-range hotels. Although some hospitality leaders have a strong presence in Germany, there is still room for well-thought-out development projects. In the case of budget and mid-scale hotels, attention to local tastes and cultures will be crucial to success. As an aside, of the countries in our Index, South Africa, at number 0, is the highest-ranked African country, followed closely by the only other African country, Egypt, at number. At first glance, it appears too early to consider Africa a market with any kind of development potential. Yes, the long-term demographics are promising, with one in every three people on earth expected to be African by 00. But at the same time, of the 9 least-developed countries in the world are in Africa. For now, the potential for chains is to set up a network of hotels in the key cities that attract business travelers upscale as well as mid-range and budget. In a hotel development assessment of 8 African cities, we find that half ( cities) are wholly attractive for hotel

6 development, seven of them even showing significant capacity gaps, projected to continue to 08 (see figure ).. Manage scale effects locally. It goes without saying that smart hotel development is focused on select locales, capturing all the top-line benefits of a strategic brand network while avoiding the additional costs of supporting isolated properties. This is particularly true for budget and mid-range hotels for which a strong local network offers a distinct market-visibility advantage and triggers a premium both in occupancy and rate when a brand becomes well-known. We call this the virtuous development circle when a powerful value proposition is built on no frills construction and lean staffing to reach critical mass at a national level and results in more visibility and customer loyalty. The vastness of countries such as China, India, and Brazil requires capturing scale effects locally or regionally. To help define and prioritize a geographic focus, we recommend a detailed analysis to determine the attractiveness of a target region and the potential to reach critical mass, and ultimately build a leadership position.. Adapt global brands and concepts to the local clientele. The most powerful global brands and concepts reflect a product s true essence. In the case of budget and mid-scale hotels, however, native tastes and cultures cannot be ignored and in fact are crucial to achieving success locally. Figure Seven African cities have the most hospitality potential Green zone 7 cities Yellow zone 7 cities Red zone cities Cities lacking one or more businessfocused hotels to handle the increased business traffic by 08 Cities nearing hotel saturation by 08 (meeting more than 70 percent of demand) but with needs in specific categories Cities with capacity to handle the increased business traffic but with needs in specific categories City Rooms gap Indicator* City Rooms gap Indicator City Rooms gap Indicator Nairobi,8 8% Casablanca,7 7% Cairo 0,0 % Lagos,0 % Luanda,00 78% Tunis 7,9 % Abuja 8 0% Alexandria 9% Tangier,9 % Port Harcourt 7 % Libreville 9% Mombasa,97 % Addis Ababa % Malabo 9 87% Tripoli, 7% Accra 0 0% Lusaka 8 9% Dar es Salaam,9 % Maputo 8 0% Juba 9% Kampala,80 0% Khartoum,798 7% Potential for two to nine more hotels Potential for one to two more hotels Algiers Dakar Kinshasa,8,7,7 % % 9% Douala,7 8% Abidjan,0 % Kumasi 97 7% * Indicator is the projected occupancy rate in 08, taking into account new capacity currently in the pipeline. A rate greater than 70% indicates potential for further room capacity; a rate greater than 00% indicates that demand will exceed projected total room capacity. Sources: Sagaci Research; A.T. Kearney analysis

7 On one hand, this means developing global concepts that guarantee good standards of design, quality, and customer experience, but that also emphasize cost-effectiveness through economies of scale. On the other hand, it means being flexible enough to make global concepts fully relevant in the local context, which can necessitate some specific adaptations. Hotel rooms in the Middle East, for example, are usually larger than in Europe. In China, insulation is not as stringent a requirement as it is in Western countries. And in Morocco, even a budget hotel is expected to have a swimming pool. While the subject of adapting brand standards to local needs often spurs heated debates, it is crucial to successful development. And, importantly, localization requires close monitoring to guarantee that brand standards are adapted at the most economically favorable conditions for the company. Location, Focus, and Network Hotel chains seeking to establish a foothold in promising new markets focus on attractive opportunities for timely development. But attractive opportunities are only one part of the equation. The other is finding the right fit given a particular market s current situation and future potential, as in the ability to build critical mass and obtain market leadership. Legendary American hotelier Conrad Hilton famously said there are three factors necessary to succeed in the hotel business: location, location, location. We would add focus and network as two more factors that will help deliver a lasting competitive advantage in the hospitality industry s new frontier. Authors Thomas Sutter, partner, Paris thomas.sutter@atkearney.com Eric Sauvage, partner, Paris eric.sauvage@atkearney.com Charles-Etienne Bost, principal, Paris charles-etienne.bost@atkearney.com Olivier Laroche, principal, Paris olivier.laroche@atkearney.com 7

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