Fitch Ratings-New York/Chicago-1 September 2017: The growing power of the largest U.S. hotel brands is altering the hospitality industry competitive landscape and will likely drive more lodging consolidation, according to Fitch Ratings. Smaller lodging operators are taking more balance sheet risk to grow their rooms systems, as hotel owners and franchisees increasingly align themselves with industry leaders Marriott and Hilton.
Marriott and Hilton are well ahead of their peers in terms of system size and average daily room rates (ADR) and are taking development share away from smaller brand operators in the U.S. Scale-related competitive advantages, such as lower purchasing and rooms distribution costs and larger customer loyalty rewards programs, attract owners and franchisees. To compete effectively, smaller competitors such as Accor, InterContinental and Wyndham will need to boost system growth by adding more rooms across the price spectrum. However, these second-tier operators will be focused on greater exposure to the luxury and upper upscale segments that Marriott and Hilton dominate.
The accompanying chart illustrates the range of potential targets for further industry consolidation.
We believe Hyatt's higher ADR makes it a logical acquisition target for second-tier operators looking to close the system size gap with industry leader Marriott while also gaining a bigger foothold in luxury and upper upscale market segments. However, Hyatt's dual class structure could impede M&A, absent the willing participation of its controlling shareholder. La Quinta is also an attractive property for operators seeking greater limited service exposure.
Meanwhile, smaller operators are flexing their balance sheets to support more rapid system growth and brand diversity. This could weaken credit quality if smaller lodging C-Corp issuers materially increase leverage and/or the income contribution from volatile owned and leased assets. Relying on performance and loan guarantees to support systems growth could also weaken issuer liquidity profiles.
For additional insights into industry dynamics and answers to recent questions raised by investors, see the special report "U.S. Lodging: What Investors Want to Know," dated today, at www.fitchratings.com.
