The major hotel groups are suffering with the COVID crisis and there is more talk of room or property closures than growth. But for some, the COVID crisis is an opportunity to pursue a growth strategy with little effort.
Unless you regularly travel to the United States or South America, you have probably never heard of Sonesta. And we won’t blame you because if in the 90s I hadn’t stayed a few times at the Sonesta in Key Biscayne, Florida (which doesn’t exist anymore), this name would be totally foreign to me today.
Sonesta, a minor player in the hotel industry
Sonesta is a high-end North American hotel group whose playground is the American continent and which currently has about 80 properties. Not impressive (regardless of the quality of the properties).
For a hotel group to grow is not such a simple matter, especially when you have a rather premium positioning. Opening a hotel already requires finding the right city and the right location in town, corresponding to the property’s standing. And usually the good locations are already taken by the competition and you have to wait until they decide to part with a hotel or its operator decides to change its brand.
Or there is the possibility of creating something ex-nihilo, which is still the case in rapidly developing areas where construction is ongoing. In this case, it is necessary to be backed by an operator who will generally build and operate the hotel itself or let the investor operate the hotel under one of the group’s brands. This takes time and usually an operator prefers to partner with a brand or group that has a large footprint and therefore attracts a large customer base simply on their name/loyalty program. This works to the disadvantage of small players like Sonesta.
The game of musical chairs for hotel brands
This is why large hotel groups are less and less owners of their real estate and are content to operate hotels or have them operated by partners, while smaller ones have to manage on their own.
This nuance is very important to understand: most chain hotels are “operated” by a local business under a brand name of a large group gives the franchise or sometimes by the group itself, but most often the franchising group does not own the real estate of the hotel.
The contract provides for an end date at the end of which it may or may not be renewed (in which case the operator has the right to change the brand name) or for clauses allowing it to be terminated if one party or the other does not meet its obligations.
When IHG fails to meet its obligations
These operating agreements include a number of reciprocal obligations that we will detail in another article. These often include a revenue obligation to the hotel operator.
Indeed, an operator will choose a franchisor according to the attractiveness of its brand to the public, which is the basis of commercial success. And it pays a lot of money to have a brand with strong appeal. And what happens if a certain income level is not reached? Well, the franchisor compensates because he is considered to have oversold his brand.
In 2020 revenues were not there for many hoteliers and it is well known that the brand is not at fault. But it doesn’t matter.
Thus, a real estate operator/developer (SVC) reported that IHG (Intecontinental, Holiday Inn, Crowne Plaza…) owed him $8 million for the month of July alone and that if it was not paid on time, the contract between the two businesses (for 103 hotels) would be terminated and the hotels in question would either be resold or “rebranded” to a competing brand.
For what we know today they should pass under the Sonesta brand which inherits at a lower cost a portfolio of hotels more important than the one it has today!
And so a large part of these 103 hotels will leave IHG and Sonesta will see the number of hotels it operates increase from 80 to over 160
SVC also drops Marriott
But an investor like SVC does not put all its eggs in one basket. The investor is also in business with Marriott, the world’s largest hotel group.
Similarly, SVC has announced that by January 31, 2021, 122 Marriott-branded hotels owned by SVC will also be transferred to Sonesta, again for failure to pay certain guarantees.
This is how Sonesta will almost triple in size without much effort.
IHG and Marriott are fine thank you
If the signals are positive on the Sonesta side, one can wonder if the payment defaults blamed on Marriott and IHG are a negative signal with regard to their health. On this side there doesn’t seem to be too much to worry about: IHG and Marriott are doing well, or more realistically as less poorly as one can go in these complicated times. But unlike Accor, whose backbone is still mainly European and has suffered a lot, they are very present in the USA where the travel industry has suffered less and has been able to survive on what remains of the domestic market.
But we can think that it is a good opportunity for these groups to get rid of a few properties (100 hotels for Marriott is a drop in the bucket compared to its 7,000 properties) that they no longer believe in in this context and at a lower cost.
SVC’s double game
And you will ask “why Sonesta?”. It turns out that in addition to investing in hotels that it offers to operate to hotel groups, it also invests in some of these groups. In this case, SVC owns 34% of Sonesta...an opportunity to double the value of its investments.
What future for Sonesta?
Finally, the year 2020 will not have been so bad for Sonesta, which will more than triple in size by recovering more than 200 hotels from its competitors thanks to a joint investor.
But this is not to say that Sonesta will change dimension: with less than 300 properties, Sonesta is and will remain a niche player. But an actor who has decided to exploit his niche well, no matter how small it is.
Image : Sonesta hotels byccpixx photography via Shutterstock
Articles similaires
