Hospitality Directions Europe Edition* Issue 14 September 2006
As hotel groups look to BRICs & Mortar for future growth: how can companies check-in to Emerging Markets successfully?
Emerging Markets account for over half the world’s population. Some of the fastest global economic growth rates are driving expanding domestic markets including demand for travel and hotels. China will be the number one global tourist destination and the fourth largest tourist generating country by 2020.
As Emerging Markets turn into the growth engines of the 21st century, slower growth at home has led investors and hotel companies are to pursue aggressive expansion abroad as they look to capture new customers and grow winning global brands. China in particular has become one such battleground for operating system power. InterContinental Hotels have announced a goal of 125 hotels in China by 2008.
But the scale and pace of change brings unfamiliar risks for profitability, brand equity and corporate reputations. Do companies really understand these new markets? Do they have an exit strategy? Can they adequately monitor overseas operations and the performance of local partners? How will they ensure high standards of ethics and integrity? Could the land of opportunity become a minefield for the ill-prepared?
*connectedthinking The need for positive action
Doing business, or even just thinking about doing business, in Emerging Markets has become an integral Long haul ahead? Visits abroad by Chinese citizens part of life for many organisations, including hotel owners and operators. However, whether you are already an m visits established player in one or more of these markets, or 25 contemplating dipping your toe in the water (or a different 20 pool) for the first time, there is much to consider and 15 many new lessons to be learned. 10 5 Exciting opportunities abound but the lure of new 0 domestic markets, low labour costs or a vision of less red 2000 2001 2002 2003 2004 2005 tape, for example, are often accompanied by risks, many Private and leisure official and business of which may not have been encountered before – cultural differences, supply chain issues, unfamiliar or uncertain legal systems, political instability and unreliable Source: The Economist May 2006 infrastructure, to name but a few. To gain competitive advantage or simply to obtain a profitable business Markets will also see huge growth in outbound travel against this backdrop, it is essential for companies to be markets. Official figures suggest that by 2004 China had confident of their strategy, knowledgeable about their already become the biggest source of travellers within chosen markets and clear as to how to leverage all that Asia and that within 15 years annual visits abroad (for these economies have to offer. business and leisure) are expected, with the continuing removal of travel restrictions, to rise to 100m (compared Traditionally, Emerging Markets have been seen largely as to 10m today). The owners of globally recognised brands a source of low cost labour, services and natural resources hope familiarity with these brands within Emerging but increasingly for many, including the travel and hotel Markets will, in turn, allow them to leverage the brands’ sectors, they also represent a new, untapped opportunity strength and drive business as these new travellers come to develop products for expanding domestic markets. to the more mature markets of Europe and the US. China for example, has a burgeoning domestic market and a record number of Chinese tourists travelled within And why wouldn’t Emerging Markets offer growth their own country during the seven day “golden week” opportunities? Emerging Markets now account for over holiday in May this year, making a total of 146m excursions. half the world’s population and have achieved an average economic growth rate of some seven per cent, with some 1 What do we mean by Emerging Markets? economies spectacularly higher. In this article we have used the term Emerging Markets to describe countries that are showing a steady growth By the year 2050 the ‘E7’ economies (China, in GNP per capita and those that are implementing India, Brazil, Russia, Indonesia, Turkey and economic or political reform programmes to increase Mexico) will have outstripped the current G7 their attractiveness to foreign markets. However, the principles apply to investment in any new geographical (United States, Japan, Germany, UK, France, market. The term includes the fastest growing Italy and Canada) by between 25%, when countries Brazil, Russia, India and China (the BRIC comparing Gross Domestic Product and countries) but also the “Mortar” such as Turkey, South 75% when using purchasing power parity. Africa and the Asian, South American and Central Eastern European countries which are also PricewaterhouseCoopers’ Macroeconomic Forecast demonstrating high growth. In some cases “emerging” is hardly appropriate, indeed, China in particular, has Companies can be at quite different positions in relation to already clearly “emerged” and is one of the largest their presence and intention regarding Emerging Markets. economies in the world. However, its growth They may also be at quite different positions with regard to characteristics present a number of issues that are also their brand portfolios. InterContinental Hotel Group (IHG) prevalent in other markets that are truly “emerging”. only recently introduced the Crowne Plaza brand into Russia but already has over 50 Holiday Inn properties in China. In addition there is increased demand from inbound Franchising may be the preferred route in some markets international business and leisure visitors in many markets whereas management contracts or joint ventures will work and, as discretionary income levels rise, many Emerging best in others. The continuum below illustrates some of the key stages of the journey into Emerging Markets.
1 BRICs & Mortar A practical guide to building success in high growth markets. PricewaterhouseCoopers 2006
Issue 14 September 2006 Hospitality Directions – Europe Edition Where are you in Emerging Markets?
Where are you in Emerging Markets?
Limited Some Significant
No overseas Started to think Overseas Overseas Overseas Substantial presence/ and about overseas presence/ presence/ presence/ overseas presence/relationships not considering it expansion relationships relationships relationships through direct investment and through local through transfer through joint strategic alliances and continuing or foreign of expertise or ventures, shared to look for further expansion intermediaries ideas i.e. ownership deals opportunities licensing, franchising.
Source: PricewaterhouseCoopers 2006
century. Many are opening up to inward investors. At the “Of the 200,000 rooms we’re planning to same time slower growth in many developed economies, open between now and 2010… two-thirds intense global competition and pressures on operating will be in emerging markets, primarily in margins has forced organisations to look to new markets for new customers and profitable growth. four high-potential countries in which we currently have only 150 hotels: China, Brazil, Russia and India” Message from the Chief Executive Officer, 78% of CEOs in developed Gilles Pelisson, Accor Annual Report 2005 economies say their companies are going global to find new customers, compared At the “limited” end of the continuum, risks can be with 48% who are looking to reduce costs amplified due to lack of familiarity and awareness of the PricewaterhouseCoopers’ 9th Annual CEO Survey, January 2006 new market, where organisations can face unique challenges and issues. Organisations can benefit from adopting more formalised and thorough processes for The need to avoid stagnation in domestic markets has evaluating and monitoring their investments that help become quite pressing for some hotel operators. In drive innovation, leverage off efficiencies, reduce costs addition, the widespread trend to the disposal of hotel and manage risks. As companies move up this continuum assets has meant that hotel operating companies need to and their investments overseas become larger and more manage or franchise many more hotels to make the same diverse, the risk profile does not necessarily reduce but level of profits they made when they were both owners changes, often as their organisation and the strategic and operators. For example a franchisor will typically relationships become more complex. receive less than five per cent of room revenue. Scale has become critical and the pressure to grow to find new customers and to deliver a higher return on capital Why focus on Emerging invested has raised the bar. Markets now? Triggers for overseas expansion Coming to an Emerging Hotel companies have had a presence overseas for Market near you… more than a hundred years. What has changed to make In many Emerging Markets there are also hotel supply Emerging Markets suddenly so relevant? The answer is shortfalls. Owners, developers and hotel operators are keen that many Emerging Markets have been developing rapidly to seize this opportunity. In India, for example, over a five in terms of political stability, education and technology year time horizon it is estimated that there is demand for a and, combined with their demographic advantages, these further 100,000 - 125,000 rooms. As new brands enter the countries are turning into the growth engines of the 21st
Hospitality Directions – Europe Edition Issue 14 September 2006 Hotel development…coming to an Emerging market near you…
E7 Emerging Market Economies: 15% of world's economic output 45% of global growth in purchasing power
Source: PricewaterhouseCoopers 2006 market, India is expected to move to become a 40 brand next three years in Russia with their Courtyard brand hotel market by 2010. Accor plan to open 200,000 hotel primarily, but also with Bulgari Hotels & Resorts and rooms by 2010 with two thirds of these new rooms to be Ritz Carlton brands. opened in Emerging Markets such as China, Turkey, Morocco and Algeria. Investment boutique Dawnay, Day Group Economy and budget push has announced plans to invest $200m to develop a chain But what sorts of products are likely to succeed in these of hotels in India. Below they tell us why India and why now. countries? What do hotel consumers in emerging markets Table 1 below shows clearly the scale of some top hotel want and crucially what will people be prepared to pay? chains expansion plans in Emerging Markets. Tastes clearly vary but outside of gateway cities and international resorts, where a range of international brands IHG and Marriott are planning to add almost 18,000 new may be present, domestic markets often cannot or will not rooms over the next few years in China alone. Accor has pay a premium room rate for luxury. announced plans to build up to 50 hotels in Turkey. Marriot plan to open around 1,000 rooms over the As the largest segment, the mid-scale hotel segment is generally considered the one that can generate the fastest Dawnay, Day’s US$200m niche hotel fund identifies return on investment and the best opportunities for opportunities in Indian cities growth. But with a rise in domestic purchasing power and “The Dawnay, Day Group has set aside US $200m to set up hotels in the first living standards together with strong demand for phase. This however, is just the minimum amount of investment that the affordable products, developers believe that there is now company intends to make. The proposed hotel chain will target corporate executives and foreign tourists with world standard conveniences at “wallet- also growing demand and opportunities for economy and friendly” rates. The company plans to engage international architects to design budget hotels in the Middle East, North Africa and Asia. its hotels. The idea is to fill the gap between luxury hotels and budget hotels Over half of Accor’s big push in Emerging Markets is set in the country and this will be a combination of luxury, comfort and economy. to be in the budget and economy sector. Whitbread plans The company is currently in discussions to acquire properties in metros and the mini metros of India. The hotels will focus on all major tourist and business to launch its Premier Travel Inn brand in the Gulf with destinations in the country and will have about 125-140 rooms each. We plan more than 880 rooms initially planned at three sites in to have 30 or more such properties across India in the next 3-5 years. Dubai. Expansion of the brand will be by way of a joint Dawnay Day decided to foray into this segment due to the acute shortage of hotel rooms in India. At present, there are 92,000 hotel rooms in India, venture agreement with Emirates Group. EasyGroup has compared with 135,000 rooms in Shanghai alone. The Indian Economy is announced that its hotels division, easyHotel, has signed growing at a tremendous rate and we are confident that the demand will far a US$407m (£219m, €320m) master franchise agreement outstrip the supply of quality hotel rooms for many years to come. with Istithmar Hotels to open a chain of 38 hotels across The 4 star segment has been identified for the business and leisure traveler who demands top quality service and hospitality at reasonable prices.” the Middle East, North Africa, India and Pakistan within Rudra Dalmia, Associate Director, Dawnay, Day Principal Investments the next five years.
Issue 14 September 2006 Hospitality Directions – Europe Edition Battleground China
Table 1 Rooms Pipeline for Selected Hotel Groups and Emerging Markets Brackets indicate existing rooms
Hotel Group Brazil Russia India China Mexico Turkey Notes
Wyndham n/a (180) n/a (0) n/a (760) n/a (9,465) n/a (2,624) n/a (565) as at May 31 2006 Hotels Group*
Hilton 200 (846) 0 (0) 1,692 (1,857) 2,678 (2,031) 855 (3,310) 0 (2,607) as at August 2006
IHG 171 (3,201) 1,577 (455) 1,535 (2,512) 12,874 (13,838) 3,815 (14,991) 220 (1,332) as at Dec 2005
Marriott None (1,620) 333 (1,780) 1,750 (1,800) 6,065 (12,000) 821 (2,454) 235 (1,200) as at June 2006
Source: PricewaterhouseCoopers 2006 * Wyndham Worldwide was spun-off from Cendant Corporation at end of July 2006
established in China for some time. At the end of last ”Brands not present in China and India will year the company had opened 26 hotels and 7,000 be in trouble in 15 years time” rooms. They now intend to raise the bar in terms of Jean Gabriel Perez, CEO Movenpick future strategy in China and have identified enormous potential for developing the group’s economy brands to the Chinese domestic market. The Ibis brand was the Battleground China: global first Accor brand to appear in China. The portfolio will have expanded to 17 by the end of next year and 100 hotel pipelines gear up for by the end of 2010. In total Accor has targeted for more major expansion drives in than 180 hotels to open in China by 2010. Emerging Markets • Since 1989 Marriott International has expanded from one hotel in Asia Pacific to over 80. In a development If we look at the largest market in more detail, China, the pipeline of 75,000 rooms worldwide, ten per cent will sheer size of the domestic market is extraordinary and China open in the Asia Pacific region. Both India and China are already has a much larger ‘middle class’ than other BRICs – considered to represent excellent opportunities for 147m people with an income of around $15,000 per annum further growth for Marriott. Including Hong Kong, they in 2004. This compares to 39m in India and 23m in Russia. currently have a total of 31 hotels in China, representing more than 40 per cent of the distribution in Asia-Pacific. For hotel companies, China is a hot global battleground Brands represented include Ritz-Carlton, JW Marriott, for building up operating system power. The world’s Marriott, Marriott Executive Apartments, Renaissance, largest hotel groups (IHG, Cendant, Marriott, Hilton and Courtyard by Marriott and New World. There are another Accor) are all, understandably, active in China. How are 16 hotels under construction, representing more than they getting on? IHG, Marriott, Hilton and Wyndham half of the signed-project pipeline, and will open over Hotels told us about their current pipelines and overpage the next three years. Marriott’s strategy in both markets three of these companies outline their views on expanding successfully in Emerging Markets. Tall growth orders? The • By the end of 2005, IHG had opened 51 hotels and InterContinental Nanjing 17,000 rooms in China. More recently a further 6,000 rooms have been added. Although the group do not, as a rule, publish future room targets, they have told us they are committed to having 125 hotels open in China by the end of 2008. The company’s pipeline in December 2005 was for 39 hotels and 12,874 rooms. Properties include the tallest hotel in the world, the InterContinental Nanjing, currently under construction (see picture). Holiday Inn already has market scale in China and together with the Crowne Plaza, these brands are to be used by IHG to drive business in Europe and America that arrives from the Far East.
• Accor opened its first hotel in Guangzhou in 1985 and the Sofitel and Novotel brands have now been
Hospitality Directions – Europe Edition Issue 14 September 2006 master franchise model for the Super 8, Days Inn and “Our infrastructure in China is the best Howard Johnson brands. In addition, they are seeking in the industry and the image of our growth in the number of managed hotels. Cendant also see enormous opportunity in China for the Super 8 brand brands is very good” in the two- to three-star hotel segments. Andrew Coslett, CEO IHG, End of Year Presentation 2005 Winning at all costs? is to expand through management agreements; however, they have said they will consider investing in hotel Avoiding the pitfalls properties in strategic locations such as key gateway cities. If the scale of opportunity from the Emerging Markets growth push is unprecedented, the risks are also • Cendant’s strategy for international growth is to significant. In the retail sector, where examples are more aggressively expand the business in Europe, the Asia- common, for every ten retailers entering Asia each year, Pacific region and Latin America through the Wyndham, seven are exiting. We asked some top hotel executives Ramada, Days Inn, Super 8 and Howard Johnson who have already pioneered growth in Emerging Markets brands. In the Asia-Pacific region, particularly China, what advice they would offer investors and developers Cendant are pursuing growth in the number of dipping their toes into new or different pools. Patrick franchised hotels through their direct franchise model Imbardelli of IHG, Reas Kondraschow of Cendant and for Ramada and Wyndham brands and through their Paul Foskey of Marriott offered us the following insights:
Three hotel leaders tell us...
“We have been in China for more “Hotel companies that are “It's important … to have the right than 20 years and have a clear expanding internationally face teams on the ground. We have understanding of the country and its several hurdles. One of the most Development Offices in both consumers. Over the years, we have significant challenges is developing Beijing and Delhi (supported by our learnt that long term commitment product standards that are global Asia-Pacific regional office in Hong and a clear vision of what you want in nature but that meet the needs Kong), and we have found that the to achieve are factors that will of the local market. In the day-to-day interaction of being contribute to success. Equally international market, standards closely involved in the markets is important is the ability to build must be fine-tuned to each critical to finding the right projects strong local partnerships and country. In addition, consumer and the right partners.” maintain positive government preferences and demands are ever- Paul Foskey, Executive Vice President, relations. Building capability in local changing and consumer research Hotel Development Asia-Pacific, Marriott talent is big on our agenda and the in the international sphere is way forward for us would be to limited. We need vision to continue to think as a local Chinese understand what consumers will be company would while bringing our looking for in the future.” global scale and knowledge to the Reas Kondraschow Senior VP and business environment.” Managing Director International Franchise A. Patrick Imbardelli, Chief Executive, Operation, Cendant Hotel Group InterContinental Hotels Group Asia Pacific
Source: PricewaterhouseCoopers 2006
Issue 14 September 2006 Hospitality Directions – Europe Edition Investment structuring How hard can it be to get it right? Ease of Doing Business World Rankings Do you have the right operating model to get the optimal post tax return? e.g. joint venture, alliance, • South Africa 28th • China 91st • India 116th start-up, acquisition of a local operation • Russia 31st • Turkey 93rd • Brazil 119th Have you considered outsourcing or restructuring Source: World Bank existing operations? Experience suggests that too often opportunities presented What is your exit strategy? by Emerging Markets are reduced or even negated by failure to recognise and adapt to the unusual and Layout and infrastructure additional risks not always found in more mature markets. Do you have the right support for IT and utilities On the World Bank’s Ease of Doing Business rankings, for instance, China is ranked 91st and Brazil 119th. Do you have the right contact? Do you have effective reporting and systems A systematic approach to key risks can allow companies integration to monitor overseas operations and to focus effectively on opportunities to drive growth and agent’s performance? profitability and also on innovation to create a sustainable competitive advantage. PricewaterhouseCoopers has Is your legal framework enforceable? developed the following checklist to help companies do Can you monitor the construction risks adequately? just this. (cost overruns, labour issues etc)
Check-list for successful Entity operations expansion in Emerging Markets Can you rigorously organise and monitor any entity’s local operations? Including: Strategic assessment – Businesses processes generally Are your growth decisions validated and aligned with – Physical security of people and assets your strategy? – Setting and maintaining the right standards for What is your risk appetite? ethics and integrity What are your internal capabilities and business – Accurate and reliable financial reporting and model options? local tax compliance Market assessment Do you really understand the new market Investment structuring war story: Quality of Do you have an accurate and up to date picture of JV partners: the market from a cultural, economic, technological, political legal and social perspective? • A leading multinational consumer goods company Do you understand the local labour market and do you found China a tough market to crack in its first have the ability to deliver consistent brand standards? attempt despite early market entry
• Why? Poor distribution and inefficient joint ventures Strategic assessment war story: Market Entry • Many JV companies are partly state-owned and • For every 10 retailers entering Asia each year, there require considerable investment are 7 exiting. • Why? Bad timing of entry, selection of wrong • Often management, marketing and distribution markets or bad market entry strategy functions overlap, resulting in cost inefficiences and slow decision making • Most have no exit strategy that could have facilitated a smooth exit, hence costs spiralled. Source: Brassington and Pettitt, Principles of Marketing. Source: AT Kearney and PricewaterhouseCoopers
Hospitality Directions – Europe Edition Issue 14 September 2006 Conclusion
Doing the right deal in any new market is clearly imperative but you don’t want to be first in, just to be first out when in the cool light of day the land of opportunity looks to be more of a minefield. The pace of change, which in many respects is a good thing, can be coupled with unfamiliar risks in many Emerging Markets, so it’s vital to keep tabs on what’s happening locally. If you can’t tick all the boxes above, your brand and corporate reputation may suffer along with your assets and equity. You need to ensure that you retain your people, obtain accurate data and crucially achieve the right return. Out of sight, out of mind simply will not be good enough!
As Paul Foskey of Marriott, Patrick Imbardelli of IHG and Reas Kondraschow of Cendant have emphasised, a clear vision and understanding of changing consumer demands; strong local partnerships; capability of local talent; fine tuning standards to local markets and the right teams on the ground are critical to finding and developing the right projects in the right markets.
Contacts: To discuss any of the issues in this article, please contact:
Robert Milburn Liz Hall Mustafa Erim UK Hospitality & Leisure Head of Research – Hospitality Senior Manager - Leader & Leisure Emerging Markets +44(0) 20 7212 4784 and Editor Hospitality Directions +44(0) 20 7212 1022 [email protected] +44(0) 20 7213 4995 [email protected] [email protected]
For further hospitality & leisure research and news visit www.pwc.com/hospitalitydirections
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