Hospitality Industry insights on current market forces and leadership challenges
123 North Wacker Drive Chicago, IL 60606 Phone (312) 368 0569 fpladvisorygroup.com Dear Colleague: As you will see from this research, changing and unpredictable market forces, combined with competitive threats, present broad challenges for hospitality leaders. Harnessing the best human capital to manage consolidation, macroeconomic and consumer influences, and asset performance is key to survival and achieving returns. Warm regards, Mark Momongan Senior Director Global Hospitality Practice Leader Ferguson Partners mmomongan@fergusonpartners.com +1 (312) 893 2336 Radhika Papandreou Senior Director Restaurants & Leisure Practice Leader Ferguson Partners rpapandreou@fergusonpartners.com +1 (312) 893 2364 Michelle Rutledge Vice President, Global Hospitality Practice Ferguson Partners Canada mrutledge@fergusonpartners.com +1 (416) 865 3387 Peter Rackowe President and Senior Managing Director Ferguson Partners Japan prackowe@fergusonpartners.com +81 (3) 3436 6171 2 FERGUSON PARTNERS
Hospitality Notwithstanding steady improvement in growth and performance metrics over the past five years, the global hospitality industry looks forward with a degree of caution and uncertainty. Marriott CEO Arne Sorensen nicely summed up the prevailing mood at a recent lodging conference, characterizing his outlook as steady-state guarded optimism. Knowing that drop in RevPAR is on the horizon due to supply concerns, hotel brands and owners are going on the defensive and are preparing for some form of market correction. While credit markets have stabilized, and RevPAR growth has flattened, looking forward for 2017, RevPAR is expected to grow at 1.7 percent, the smallest increase since the end of the recession, according to STR. In November, STR released its final projections for 2016, which showed significant weakening compared to forecasts from the beginning of the year. That report says 2016 occupancy will be flat at 65.4%, while ADR will rise 3.1% for a 3.1% increase in RevPAR. The good news is the industry has, at least through November, continued its string of consecutive months of RevPAR growth since 2010 following the conclusion of the recession. Through November, the streak is at 81 consecutive months. Surprisingly, REIT stocks rebounded significantly coming off of 52-week lows heading into the election. But through November, the Baird/STR Hotel Stock Index had increased 12.3% for the year, with an 11.8% surge in November. Analysts credited, in part, the results of the presidential election for the uptick. Hotel REITs also outperformed many stock classes in 2016. According to Canaccord Genuity, hotel REITs have been the second best performing sector of REIT stocks, up 16% versus the RMZ index, which is up 1% year to date. Business leaders and Board members are assessing this environment to identify opportunities as well as risks in order to think strategically about positioning for the future. 600 Global Revenue Growth 2008 2016 2008-20 Revenue in billion US dollars 500 400 300 200 100 0 2008 2009 2010 2011 Source: Statista 2016 2016 80 Worldwide Hotel M&A 2006-2015 700 Deal Value ($bn) 60 40 20 600 500 400 300 Number of Deals 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 200 Deal Value ($bn) Number of Deals Source: Dealogic HOSPITALITY 3
Trends and Challenges In this SnapShot we highlight three broad arenas where hospitality industry leaders are focusing strategic attention: consolidation and M&A; the evolving competitive map, online travel agents (OTAs) and temporary accommodations; brand management and customer experience. Strategic Investments & Spinoffs Implications for human capital are comparable across the lodging, restaurant, and gaming sectors. While 2017 is expected to represent a moderately strong economy, hiring will be improved but is not expected to flourish. Consolidation has increased the availability of talent, in particular within brand development. Strategic acquisitions (such as HNA investing in Hilton and Carlson) have also solved a number of hiring challenges, in particular within growth markets. Spinouts of real estate into REIT structures will drive hiring across lodging, restaurant and gaming. This is perhaps the biggest hiring trend into 2017 as evidenced by a number of propco/opco transactions in the pipeline. Caesars and Extended Stay, for instance, are following the Hilton/Park Hotels & Resorts trend with the goal of separating real estate from a brand driven, asset-light business model. Marketing executives will be in higher demand, relative to other functional areas, as marketing is key to driving revenue growth. Relevant marketing and operating skills will also be critically important at the property/unit level. Evolving Competitive Landscape A closely related global hospitality trend, and one that contributes to the velocity of M&A, is the growth of online disrupters OTAs and temporary rental room alternatives. Airbnb, the best known alternative accommodation provider, accounted for 5.4% of US room supply in 2015 according to a Goldman Sachs study. Only 5 hotel operators have over 5% market share. These competitors may not immediately downgrade overall occupancy in a major lodging market, but they can impact average daily rates. Additionally, their presence may impede new hotel development. On the positive side, OTAs may actually enhance the competitiveness of luxury boutique hotels. Industry consolidation is blurring the lines between hospitality-related business platforms, with Expedia purchasing HomeAway and Accor acquiring Onefinestay, a UK start-up. Interestingly, Hyatt is an investor in Onefinestay. Understanding the landscape, and mapping a strategy to either compete or join forces, requires board and senior management cooperation as these multi-party initiatives are increasingly complex and costly. Delivering the Brand Promise Consolidation, with all its attendant integration and communication issues, raises questions about brand 4 FERGUSON PARTNERS
management. Delivering the promise across multiple channels and regions is a complicated undertaking. The uncertainty of relationships between new asset owners, particularly inexperienced Asian investors, and operators is also challenging. Reaching new traveler segments especially millennials, who are driven less by brand awareness and more by a hightech, high-touch experience is increasingly important. Newly prominent guest segments also require new positioning strategies. Outbound Chinese travelers, for example, are forecast to be the largest global market by 2025, outpacing US, German and UK guests. Technology also plays a role in sustaining brands as business platforms evolve. The challenge for management is not just to collect data, but to effectively use the information to deliver personalized experiences, as well as maintain the traditional uses of IT to cut costs and enhance productivity. Business leaders will increasingly deal with these issues as social media and other communication channels impact the industry. Leadership Challenges Going Forward As the global hospitality industry nears the top of the postglobal financial crisis upcycle these three trends will only intensify. This means opportunities for business leaders to profit. Consolidation and M&A are favored strategies when organic growth begins to decelerate. However, portfolio and entity acquisitions are tricky and often fail to achieve hoped for synergies, operating leverage and market share. Additionally, effectively managing brand development and delivery in a competitive environment is no easy task. Critical success factors relate largely, although not exclusively, to adding or reallocating talent to the demanding roles that are emerging. Planning for the Future At Ferguson Partners we find that as organizations address these challenges they benefit from leadership that can clearly define their strategy and communicate it across business platforms and cultures. For senior positions, Boards will need professionals who can fill broader leadership roles that focus on mid- to longterm strategic initiatives rather than deal flow. At the mid-level, firms are focusing on identifying professionals with more than one background strength, typically experience in both operations and brand management or development. There is no surplus of this talent, so in some cases the search will look outside the hospitality industry. As role definitions blur and blend we are seeing more attention on creating robust regional teams where various skill sets can be integrated and a cohesive approach to brand management, operations and technology can be realized. In the C-suite, consolidation and competition across borders and business platforms means that transactions and integration are more complex. As a result, at Ferguson Partners we see demand for leaders who can use the balance sheet effectively and have strong capital relationships for strategic investments at the corporate level or for signature deals. Again, professionals who couple financial expertise with a brand development background are highly sought after, but remain scarce in most regions. Business leaders and Boards are also coping with slower overall growth prospects by doubling down on property fundamentals. Owners and operators are trending towards recruiting general managers with stronger sales, marketing and yield management skills over the more traditional food and beverage and operational rooms division experience. So are asset managers who can execute repositioning and renovation programs. Sources for this paper include: Hotel Industry Trends and Predictions, HVS, 2015; 2015 Hotel Lender Survey, STR, 2015; Hotel Horizons, PKF Hospitality Research, 2015; Global Hospitality Insights, E&Y, 2015; Hotel Horizons, CBRE, various HOSPITALITY 5
Clients We ve Served Ferguson Partners is experienced at helping Boards find and secure top talent for mid, senior and C-suite positions. For examples of executives we ve placed, see the list below. DiamondRock Hospitality: Board Member Chief Investment Officer Executive Vice President, Asset Management Accor/Fairmont: Executive Vice President, Global Development Senior Vice President, Operations (Canada) Vice President, Development (US) FelCor Lodging Trust: Board Members InnVest Real Estate: Chief Executive Officer General Counsel Senior Vice President, Asset Management Vice President, Asset Management & Strategy Vice President, Asset Management Senior Director, Asset Management, Limited Service Director, Asset Management, Limited Service Analyst, Asset Management Analyst, Corporate Finance & Strategy Project Management Coordinator Four Seasons Hotels and Resorts: Chief Executive Officer President, Asia Executive Vice President, Worldwide Development Park Hotels & Resorts: Board Members Chief Executive Officer Senior Vice President, Design & Construction Hilton Worldwide: Senior Vice President, Corporate Strategy Senior Vice President, Luxury, Lifestyle, Resorts & Corporate Development (US) Vice President, Capital Markets & M&A (US) Steigenberger Hotel Group: Area General Manager, Asia Walton Street Capital: Vice President, Asset Management Host Hotels & Resorts: Board Members Head of Design, Development & Construction Xenia Hotels: Board Members Chief Financial Officer 6 FERGUSON PARTNERS
About FPL Advisory Group FPL Advisory Group is a global professional services firm that specializes in providing executive search and leadership, compensation, and management consulting solutions to the real estate and a select group of related industries. Our committed senior professionals bring a wealth of expertise and category-specific knowledge to leaders across the real estate, infrastructure, hospitality and leisure, and healthcare services sectors. Comprised of three businesses that work together, FPL Advisory Group offers solutions and services across the entire business life cycle: Ferguson Partners With an emphasis on the right executive fit, Ferguson Partners offers services in executive recruitment, as well as leadership consulting. FPL Associates Focusing on compensation, FPL Associates assists with the assessment, design and implementation of compensation programs. FPL Consulting Covering a wide array of business needs, FPL Consulting partners with clients to develop strategies and structures to drive competitive performance. our service offerings FERGUSON PARTNERS FPL ASSOCIATES FPL CONSULTING EXECUTIVE SEARCH LEADERSHIP CONSULTING COMPENSATION CONSULTING MANAGEMENT CONSULTING Board/Trustee Recruitment Board Assessment Chairmen/CEOs/ Presidents Senior Management/ Corporate Officers Succession Planning Assessment for Selection or Development Executive Coaching Team Effectiveness Benchmarking Program Design Contractual & Policy Arrangements Surveys Strategic Planning Organziational Design Corporate Finance Specialized Research 0ur industry practices Real Estate Private Equity/Real Estate Investment Managers, Public (REITs) & Private Owners/ Developers, Property Services (Brokerage) Firms, Commercial Mortgage Investment/ Finance, Residential Mortgage Investment/ Finance, Homebuilders, Corporate Real Estate Hospitality & Leisure Lodging (Brands/Owners), Gaming Resorts & Casinos, Restaurants, Sports & Recreation, Amusement Parks & Attractions Healthcare Owners/Investors/ Operators/Financiers of Seniors Housing, Hospitals, Health Care Service Providers Infrastructure, Engineering & Construction Infrastructure Investing: Transport, Energy, Social Infrastructure; Construction & Engineering 0ur Office Locations CHICAGO HONG KONG LONDON NEW YORK SAN FRANCISCO SINGAPORE TOKYO TORONTO 2017 FPL Advisory Group. The Ferguson Partners recruitment practice consists of five affiliated entities serving FPL s clients around the world: Ferguson Partners Ltd. headquartered in Chicago with other locations in New York and San Francisco, Ferguson Partners Canada Co. in Toronto, Ferguson Partners Europe Ltd. headquartered in London with a Japan branch located in Tokyo, Ferguson Partners Hong Kong Ltd. in Hong Kong, and Ferguson Partners Singapore Pte. Ltd. in Singapore. Ferguson Partners Europe Ltd. is registered in England and Wales, No. 4232444, Registered Office: 100 New Bridge Street, London, EC4V 6JA. Ferguson Partners Singapore Pte. Ltd. is registered in Singapore, Business Registration No. (UEN) 201215619H, Employment Agency License No. 12S6233. FPL Associates L.P., the entity which provides consulting services to FPL s clients, is headquartered in Chicago. HOSPITALITY 7
2016 FPL Advisory Group. The Ferguson Partners recruitment practice consists of five affiliated entities serving FPL s clients around the world: Ferguson Partners Ltd. headquartered in Chicago with other locations in New York and San Francisco, Ferguson Partners Canada Co. in Toronto, Ferguson Partners Europe Ltd. headquartered in London with a Japan branch located in Tokyo, Ferguson Partners Hong Kong Ltd. in Hong Kong, and Ferguson Partners Singapore Pte. Ltd. in Singapore. Ferguson Partners Europe Ltd. is registered in England and Wales, No. 4232444, Registered Office: 100 New Bridge Street, London, EC4V 6JA. Ferguson Partners Singapore Pte. Ltd. is registered in Singapore, Business Registration No. (UEN) 201215619H, Employment Agency License No. 12S6233. FPL Associates L.P., the entity which provides consulting services to FPL s clients, is headquartered in Chicago. www.fpladvisorygroup.com