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Will 2017 Bring Growth for the U.S. Hotel Industry?

Zacks Equity Research

The moderating but positive outlook for lodging demand growth indicates that people are steadfast on spending time with loved ones, despite economic or political upheaval in certain pockets worldwide. They're looking for unique experiences at all price points and hoteliers believe that their diverse portfolio of travel offerings can continue to deliver on that growing demand. Also, we see no reason why the economy cannot stay afloat and thrive in 2017. And new supply is not likely to stop the continuation of positive RevPAR growth.

Thus, there are plenty of reasons to be optimistic about the broader hotel industry over both the short and long terms. Below, we discuss what investors can look forward to in the coming period:

International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and the outlying areas surrounding major cities. Hoteliers are forging ahead with expansion plans in emerging markets with great long-term potential despite looming macroeconomic concerns.

A number of U.S.-based hoteliers are targeting the unsaturated markets in Asia-Pacific, the Middle East, Brazil, Russia and Africa. Within Asia, China promises significant growth, despite an economic slowdown, with visits expected to increase substantially, moving ahead. In fact, China is the fastest growing lodging market in the world. Interestingly, the country is a major revenue contributor for Marriott International, Inc. (MAR).

Apart from China, India is becoming a hot spot for U.S.-based hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, the country has great long-term growth potential as a tourism market. Among others, Japan, Indonesia, Australia, Singapore and Thailand continue to attract travelers.

The key players in the industry are also targeting the high-potential Middle East countries such as Turkey and United Arab Emirates (UAE) that offer strong infrastructure.

Many of the hoteliers are also looking to leverage from Latin America’s upsurge in accommodation demand. In this regard, Wyndham Worldwide Corporation’s (WYN) Hotel Group recently announced the acquisition of Latin America's leading Fen Hotels. Meanwhile, with an increasing number of managed and franchised limited service hotels in Mexico, Colombia and Brazil, Marriott expects its distribution in the Caribbean and Latin American region to increase 75% by 2018.

Meanwhile, Europe remains an attractive market for hoteliers despite repeated terror attacks and Brexit-induced uncertainties. Major players like Marriott, Hilton, Choice Hotels International Inc. (CHH) and Wyndhamhave a strong foothold in this region.

Expansion in these lucrative markets would help the companies gain market share in the hospitality industry, thereby boosting their businesses.

Brand Renovation to Boost Growth: Hotel chains are meticulously working on guest satisfaction via brand conversion and re-modeling to gain a competitive advantage. Remodeling mostly involves restoration of lobbies and other public spaces, preservation of decorative features if possible, and guestroom upgrades to make the brand more prominent. In fact, brand perception is likely to have a growing influence on the mass market as well as luxury space. With the market becoming increasingly saturated, especially the luxury segment, hotels will have to differentiate themselves.

Brands that can offer something uniquely compelling are likely to grab market share and thus the ability to innovate will be their key to success. Therefore, ace hoteliers like Marriott, Belmond Ltd. (BEL) and Hyatt are firing on all cylinders to sync their brands to the order of the day.

Moreover, in recent times, brand development is being shaped not only by economic trends, but also by millennials’ tastes. It is Gen Y that constitutes a major portion of the current tourism market and their tastes and expectations are widely different from their preceding generations. According to players in the hospitality sector, eco-awareness, wellness and brand distinctiveness are important themes for this generation. Big hotel brands are thus launching more lifestyle hotels, which are mainly boutique brands that benefit from parent companies’ infrastructure. These include brands like Marriott’s Element, Aloft and Edition; Andaz by Hyatt; and InterContinental Hotels Group’s (IHG) Hotel Indigo.

Loyalty Programs: In order to survive in a tough economic environment, hoteliers are continuously devising ways to enhance guest experience and raise occupancy. Of these, offering loyalty programs is one of the best. Given the fact that rewards members stay longer than nonmembers and generate more revenues for their franchisees, hoteliers have been increasingly focusing on their loyalty programs.

Notably, Wyndham Rewards offers one of the most generous reward program payouts in the industry. Recently, Wyndham became the first hospitality company to globally expand its loyalty program across vacation ownership and vacation rental properties. Meanwhile, post its acquisition of Starwood, Marriott linked industry-leading guest loyalty programs – Marriott Rewards, Ritz-Carlton Rewards and Starwood Preferred Guest – and announced the matching of member status between the programs. The company believes that the linking of the three loyalty programs would lead to an even larger loyalty community.

Loyalty programs are thus the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.

Embracing Social Media and Smartphone Technology to Build Loyalty: In today’s world of price comparison and shared economy, hotels have to constantly push their boundaries to retain customers. In this regard, digital innovation and social media have started to play a key role. Social media can enhance a brand’s prospects by connecting directly with guests, especially millennials and can, in turn, increase loyalty and market share. Social media sites like Facebook, Inc. (FB), Twitter, Inc. (TWTR) and TripAdvisor Inc. (TRIP) are commonly used by travelers to select hotels. Moreover, hoteliers are using apps to help guests manage bookings and offering interactive maps/GPS to increase occupancy.

In fact, mobile check-ins and check-outs have increased substantially over the past two years as the service is helping guests to use their smart devices to connect with the hotel for faster and seamless check in/check out. Hoteliers are therefore looking to introduce responsive designs in their apps, one-click booking, customized travel content and location technology to improve operating efficiencies and enhance guest services. Being tech savvy is thus no longer an option but a necessity to survive in the intensely competitive hotel industry.

As per an eMarketer's report, a Dec 2016 study from OpenMarket highlights the growing enthusiasm for chat-based messaging apps, like chatbots, among potential hotel customers. Travelers like these text interfaces as they can then avoid calling the front desk and easily access confirmation details. Thus, we can expect hospitality companies to embrace this technology, going forward, in order to appeal to their guests.

Many hotel companies are also setting up analytics tools to understand consumer preferences — and deliver a differentiated experience — which could eventually motivate customers to visit frequently, stay longer and spend more.

Key Picks

Currently, InterContinental Hotels and Hilton Grand Vacations Inc. (HGV) sport a Zacks Rank #1 (Strong Buy), while Intrawest Resorts Holdings, Inc. (SNOW) and Choice Hotels carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Marriott, Wyndham, and China Lodging Group, Ltd. (HTHT), given their positive outlook for 2017.

Bottom Line

The lodging sector will prove to be a worthy investment proposition in the near-to-medium term provided the economy continues to shows signs of recovery. This in turn will perk up investor confidence and lead to greater demand, thereby boosting hoteliers’ profitability.

Particularly, hoteliers with experience, solid equity, strong brands and unique ideas in great markets, and those that are solid borrowers and considered trustworthy will be able to expand and surely convert the challenges into opportunities.

Check out our latest “Hotel Industry Outlook” here for more on the current state of affairs from an earnings and valuation perspective as well as the trend for this important sector.

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