Hoteliers look to limited service for large-scale growth
Edgy décor, gourmet restaurants and upscale amenities may draw accolades and a well-heeled clientele to Latin America’s posh hotels, yet the most powerful hospitality brands are turning their sights on less luxurious lodgings.
From Marriott International’s plans to build 50 Fairfield Inns in Brazil to Accor’s rapid expansion of its Ibis portfolio around the region, hotel investors in Latin America are seeing stars, if only two or three, atop each property.
Over the past decade, international chains have successfully used their higher-end hotels to plant their flags in the region and build brand-name recognition, leveraging what one termed “the halo effect.” Even as major players add more upscale hotels and unveil their latest concepts in major metropolitan centers, demand is broader and deeper for their mid- and lower-tier offerings, industry executives say.
Fueling the demand for the moderately priced lodgings are national and regional business travelers and Latin America’s burgeoning middle classes with their increasingly attractive domestic travel patterns. Both groups want value, hotel executives report, and are increasingly brand-conscious, looking for consistent standards and conveniences like reward programs that the larger chains offer.
In many cases, limited-service brands are opening where five-star properties are not feasible, said Danny Hughes, senior vice president for the Caribbean, Mexico and Latin America at Hilton Worldwide.
“There are so many secondary cities where building a full-service Hilton is, A, prohibitively expensive and, B, the city doesn’t necessarily need one,” Hughes said. “We’ve got a lot of growth opportunities both in the Hampton Inn brand and the Hilton Garden Inn brand,” he said, adding that Hilton Worldwide plans to open four new Hampton Inns in Mexico by the end of 2013.
Businesses across the board are opening up to opportunities in secondary cities.
Countries like Colombia, Argentina and Brazil have major agribusiness centers, for example, that are home to significant wealth, said Tom Potter, Hilton’s area vice president for South America and Panama, in a separate interview. As an example, Potter cited São José dos Campos, the Brazilian industrial and research city located between São Paulo and Rio. São Jose dos Campos “has a gross domestic product greater than that of Paraguay,” he said.
The lower construction and other costs associated with limited-service brands attract a broader pool of potential developers.
“More investors are seeing that they can get a high return for their investment” on limited-service properties, according to Salo Smaletz, regional vice president of development — Latin America, InterContinental Hotels Group. “The formula for the investor is an interesting one, because limited service means limited staff. You’re saving on work force, you’re saving on payroll,” Smaletz said. “That, for the investor, means higher returns. It’s quite simple to make the math for them.”
IHG’s newest hotels in the region included Holiday Inn Express in Rosario, Argentina and in Cuiabá, Brazil; Holiday Inns in Manaus and Sño José. A separate division of IHG handles Mexico, which saw the debuts of both a Crowne Plaza and a Staybridge Suites in the central city of Queretero, an important industrial and manufacturing center with corporate residents like Canada’s aerospace company, Bombardier, among other openings last year.
Limited service usually also means smaller hotels, which require a smaller investment in real estate, said Roland Mouly, vice president of development for the Caribbean, Mexico and Latin America at Carlson Hotels, whose biggest brand in Latin America is the business-oriented Radisson. “Land prices are shooting up dramatically,” he told Latin Trade. “And when that happens you’ve got a problem because to do a large property with a lot of public space is very expensive.”
Some mid-scale hotels, like Accor’s Mercure or Starwood’s Four Points by Sheraton, may have a restaurant and bar, but less space is devoted to these services. Others, like IHG’s Holiday Inn Express, are even more streamlined, forgoing such amenities in favor of limited breakfast service and lower operating expenses.
“Where you can focus more on rooms … it becomes more feasible to play in that segment,” Mouly said. “And that’s what they’ve told me in Brazil: They can’t afford to go too upscale.”
Carlson’s Ambition 2015 plan, intended to expand the company’s global hotel portfolio by at least 50 percent within the next five years, has resulted in three senior-level appointments in Latin America, effective in January. Carlson’s former managing director for Asia Pacific, Jean-Marc Basuto, has been tapped for the Mexico City-based position of area vice president, Latin America. Busato will relocate to Mexico in the first quarter and will work closely with subsidiary Radisson and with Atlantica Hotels International, a master franchisor that owns and operates some 60 hotels in Brazil.
Carlson has targeted the two biggest markets for its mid-level brands: In Mexico this means Country Inns & Suites and Park Inn for Brazil. Limited-service brands are more flexible for the region, Mouly said.
“Park Inn is a brand that we can adapt very easily for conversion,” he said. “That helps us because we can go in to older properties and reposition them to give them a contemporary style and look.”
However, for most international chains, converting an existing property is complex, even as they regularly field queries. Interested owners often operate older facilities that fall short of contemporary safety standards that the international operators require. Retrofitting a building with the likes of hard-wired smoke detectors, sprinkler systems, self-closing doors with peep holes and a second staircase can necessitate a significant outlay on top of the expense of furnishings and cosmetic changes associated with a reflagging. Often the high costs scuttle potential deals.
And unlike other regions, individual and family owners dominate Latin America’s hotel industry. Financing options are severely limited. Given the lack of deep-pocketed corporate and investor groups or other sources of capital, the pace of regional development of hotels has fallen short of the demand.
Even in a country like Brazil, whose economy is booming, few banks are lending, said Roland de Bonadona, Accor’s CEO for South and Central America.
“In Brazil the only source of financing is BNDES [the Brazilian development bank],” said the São Paulo-based de Bonadona at the South American Hotel and Investment Conference, in Cartagena, Colombia, in late September.
The Paris-headquartered Accor operates 142 hotels in Brazil alone and has another 72 in the pipeline. “Brazil is the country that offers the best opportunities” in the region, said Gilles Gonzalez, development director for Accor Latin America, which includes all of the region except Mexico.
With brands like the luxury Sofitel, mid-tier Novotel and Mercure and the budget-friendly Ibis, the company aims to reach 300 hotels in South and Central America by 2015. Of the planned openings, 62 percent will be in what Gonzalez terms the “eco and budget” category, about one-third in mid-scale and only 7 percent in the upscale category.
The French company is the leading hotelier in Latin America by number of hotels. Key to that distinction is Accor’s willingness and ability to partner with other investors in its properties. Virtually all the other international competitors seek management contracts for their branded hotels, but they do not hold equity stakes.
“Hilton is prepared to invest some money but not like Accor,” said Ted Middleton, Hilton Worldwide’s senior vice president of hotel development and finance for the Americas, at the Cartagena conference.
Brazil is just too big for any international chain to ignore.
“There are 200 million people in Brazil, and 350 million in the U.S.,” said Hilton’s Hughes. “If you compare that to the number of hotels that we have—or anyone else has—in Brazil, there is just enormous potential.”
The rise of the middle class in Brazil is creating consumers with disposable income and leisure time. “If you’ve taken 20 million people out of poverty in the last four years and you’re going to take 20 million more out of poverty, you can see how much [hotel product] needs to be manufactured,” said Andrew Houghton, area vice president of operations for the Caribbean, Argentina, Chile and Brazil at Marriott International. The Marriott group announced a partnership agreement with PDG Realty, based in Rio de Janeiro, to develop 50 Fairfield by Marriott hotels.
Marriott is adapting its format to local needs. Guest rooms at the planned Fairfield hotels in Brazil, for example, will measure about 200 square feet, versus the standard 300-square-foot size in North America. In addition, Marriott will furnish a larger percentage of the rooms with two beds, since companies in Brazil often require their business travelers to share rooms.
Demand for new hotel rooms is huge because of two massive sporting events—the 2014 World Cup and the 2016 Summer Olympics in Rio. The industry has announced 9,000 new hotel rooms since the city won the bid to host the Olympic games.
Brazil’s fast-growing discount airlines, Azul and Gol, are also playing an important role in tourism and hotel development, according to industry executives.
“The trigger point for a lot of these new markets is airlift, access and improved infrastructure,” said Ricardo Suarez, vice president for acquisitions and development in the Latin American division at Starwood Hotels & Resorts. “Once those things begin to take shape in certain markets, we see places that you probably wouldn’t think of today that we think will have great potential and great demand for hotel product.”
Starwood is looking at projects in cities like Manaus and Fortaleza, as well as for opportunities to complement its existing properties in Rio and São Paulo.
But Brazil is not the only focus. Coming off years of political instability, Bogota is playing catch-up on the hotel front. The capital and other Colombian cities are reaping the benefits of expanded air service, including new flights by low-cost U.S. carriers like Jet Blue.
In mid-2010, the Wyndham Hotel Group finalized its acquisition of the mid-priced, limited-service chain TRYP from Sol Meliá Hotels & Resorts, the Spanish operator. With hotels already up and running in Buenos Aires, São Paulo and Montevideo, a TRYP in Medellin is in the works.
Accor anticipates opening at least 10 ibis over the next few years in Colombia alone. It has introduced the brand to Chile and is targeting Lima, Peru, where the company already operates both a Sofitel and a Novotel.
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