The hotel industry has bounced back since the sales plunge during the global financial crisis. In spite of some economic and political blotches all over the world, sales have risen overall and are rather robust in the U.S.
There are plenty of reasons to be optimistic about the broader hotel industry over the short and medium term. Below, we discuss what investors can look forward to in the coming months and quarters:
Demand Exceeds Supply: The gradual recovery in the broader economy is a boon for the hotel industry as it has perked up leisure and transient business travel demand. With limited supply and strong demand, room rates are seeing an uptrend.
According to Hyatt Hotels Corporation Hyatt Hotels Corporation (NYSE:H) and Hilton Worldwide (NYSE:HLT), the supply-demand environment in the U.S. is favorable as demand growth is better than supply, which is still below the long-term average. This would lead to rate increases, and thereby drive revenue per available room (RevPAR). In fact, despite the large pipeline of hotels, Smith Travel Research (STR) expects the sector’s demand growth in 2015 to be 2.4% in the U.S. with only 1.3% increase in supply.
The North American Recovery: System-wide occupancies in North America appear pretty steady and are above the prior peak achieved in 2006 following the gradual economic recovery.
Easier lending standards, and an improving travel and tourism industry, have also poised hotel companies for growth. For Starwood Hotels & Resorts Worldwide (NYSE:HOT), North America is still the largest market where it plans to open most of its hotels. The company expects 2015 to be yet another year of robust growth in this region.
International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and in the outlying areas surrounding major cities. These markets offer greater potential due to the higher pace of economic growth, and the outlying mature markets that enjoy proximity to the city centER.
A number of U.S.-based hoteliers are targeting the unsaturated markets of the Asia-Pacific, Brazil, Russia and Africa. Within Asia, despite its economic slowdown, China promises lucrative growth opportunities with visits expected to increase substantially in 2015. In fact, China is a major revenue contributor to both Starwood Hotels and Marriot International (NASDAQ:MAR).
The improvement in the Chinese tourism industry, propelled by increased discretionary income and relaxed visa restrictions from popular tourist destinations, is anticipated to be alarming in 2015 and beyond.
Apart from China, India is becoming a hot spot for western hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, India has great long-term growth potential as a tourism market. Major players in the industry are also eying high-potential countries such as Turkey, United Arab Emirates (UAE) and South Korea which offer strong infrastructure.
Growth in Brazil and Argentina continue to be sluggish, despite the impact of the FIFA World Cup held in mid 2014. Brazil is scheduled to host another mega sporting event — 2016 Summer Olympics — which should boost tourism.
The European market is also improving. In fact, select markets in Southern Europe that were hit hard by the recession, are witnessing growth. The bullish trend can be validated by Starwood’s system-wide occupancy data in 2014, which was an impressive 69.2% in Europe. Other major players like Hilton Worldwide, Choice Hotels International (NYSE:CHH) and Wyndham Worldwide (NYSE:WYN) are also targeting the European market.
Brand Renovation to Boost Growth: Hotel companies are diligently working on guest satisfaction via brand conversion and re-modeling to strengthen their positions amid tough competition. In fact, brand perception is likely to have a growing influence on the large mass-market segment. With the market becoming increasingly saturated, hotels will need to increasingly differentiate themselves.
Brands that can offer something uniquely compelling are likely to grab market share and the ability to innovate will be a key driver of success. Therefore, many leading hoteliers like Starwood Hotels, Marriott International, Belmond Ltd. (BEL), Hyatt Hotels and Marcus Corporation (NYSE:MCS) are firing on all engines to make their brands more relevant in today’s environment.
Building Loyalty through Social Media and the Smartphone Technology: Digital innovation and social media are starting to play an increasingly important role in the hotel industry. Social media can enhance a brand’s prospect by connecting directly with guests, especially the millennials, and can in turn lead to increased loyalty and market share. Social media sites like Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and TripAdvisor (NASDAQ:TRIP) are increasingly playing an important role in helping travelers select a hotel.
Moreover, a higher number of hoteliers are using apps to help guests manage their bookings, interactive maps/GPS as well as reward programs. Being tech savvy is no longer an option but a necessity for the hotel industry.
Many companies are 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. Loyalty programs are the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.
Currently, Marriot Vacations Worldwide (NYSE:VAC) and Intercontinental Hotels Group (LONDON:IHG) Intercontinental Hotels Group (LONDON:IHG) sport a Zacks Rank #2 (Buy).
Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Starwood, Hyatt Hotels, Marriott, Hilton Worldwide, and Choice Hotels, given the momentum in their underlying businesses and based on the optimistic outlook for 2015.
Bottom Line
We firmly believe that the dark days have passed for lodging sector which is now on a path to recovery. This makes it a worthy investment proposition for 2015 provided the economic recovery continues and the industry’s the low supply-high demand scenario stays. Although risks have continued to ease out, near-term risks related to a slowdown in the emerging markets might remain an overhang.
As you can see, there are plenty of reasons to be optimistic about the hotel industry for the long haul. But what about investing in the space right now?
Check out our latest Hotel Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.