19-The Brand is Worth More than the Land

Posted 5/8/08

The modern hotel industry is really two separate businesses. The first business includes companies that have the hotel brand names. These companies manage and operate hotels. These companies include InterContinental Hotels Group, Starwood, Wyndham and Marriott. The second group are companies that are owners of the hotel properties. Most of these are REITs.

In a deteriorating market, the hotel operators, the first group of companies, perform better than the hotel owners because they have far lower capital employed and higher margins. These operating companies maintain higher operating margins over an extended period of time.

At one time, the operators both owned and operated hotels. Most of them concluded, in the late 80s and early 90s, that they made far more money managing a brand than they did owning the land. They sold off the ownership of the hotels to people who would add a great deal of leverage in order to get an attractive return.

In any normal market, it is better to be the brand owner with the customer than to be the holder of other assets. The company closest to the consumer’s mind usually makes the best return on investment.

 

Update 2022:

Through several acquisitions at different Price Points and organic growth, Marriott has become the world’s largest hotel company in 2021, with 1.4 million rooms. Other brands familiar to western consumers include Hilton, at number three, IHC at number four and Wyndham at number five. All of these companies now follow the same cost approach of managing a brand while letting other people own most of the assets.  A successful cost management approach in an industry is copied wherever possible by all industry leaders over time. The only really sustainable cost advantage in an industry usually comes from superior Economies of Scale and a locked in relationship with the customer.

We have found that the leaders in many industries fail to create economies of scale. HERE are some thoughts on creation of sustainable economies of scale.

Short audio thoughts:  HERE and HERE

 

Update 8/25

The top leaders in the Western hotel market have been wildly successful in serving their larger customers with unique benefits of scale and low unit costs. Returns are high and Volatility is low in that market. The Asian market offers quite a contrast where Volatility is high and competition is more chaotic. The comparison of the two markets illustrates how industries evolve from periods of high Volatility driven by Function benefit wins to a period of low Volatility with customers moving primarily due to failures on Reliability.

Below is a ranking of major hotel companies by number of rooms.  There are a number of familiar names and a few you might not know.  Jin Jiang and H World are major Chinese companies. OYO is an Indian company. The Asian competitors are growing rapidly as they introduce their upgraded products to their markets. The Volatility of those Asian markets appears high, especially in contrast to the lower Volatility levels of the Western headquartered hotel companies. The Asian market is really a separate business from that of the Western market.

Worldwide Rank (by number of rooms):

Rank	Group	Hotels	Rooms	Growth (2024-2025)
1	Marriott International	9,266	1,683,204	+6.9%
2	Jin Jiang	14,311	1,439,756	+7.7%
3	Hilton Worldwide	8,342	1,249,814	+7.1%
4	H World Group	10,580	1,017,225	+20.3%
5	IHG (InterContinental)	6,599	977,257	+4.3%
6	Wyndham Hotels & Resorts	9,286	902,987	+3.6%
7	Accor	5,682	850,285	+3.5%
8	Choice Hotels International	7,586	653,810	+3.3%
9	OYO	20,667	597,873	+38.7%
10	BTH Hotels	6,910	518,031	+7.6%

 

In the Western market, the top competitors have created large moats around their businesses, making it difficult for others to take share from them. Volatility in the Western industry appears relatively low while Volatile customers are likely to move on Reliability. The leading hotel companies have used their size to their advantage.

– They have covered a wide range of Price Points used by Large and Very Large customers, the commercial markets, home of the industry’s major room purchasers. By covering these many price points, employees of Large and Very Large companies can use these leading hotel companies in their leisure time, adding to their loyalty points.

– They have expanded globally wherever their larger customers needed geographic coverage.

– They have invested in technology to improve revenues from pricing and increase customer retention, using AI. The leaders have developed real-time pricing capability, which adjusts daily pricing according to expected demand. This technology also enables these larger hotel companies to offer personalized packages to their best customers. These technology investments have advanced the digital experience of tech savvy customers and have supported sophisticated loyalty programs across all Product Price Point lines.

– They have created and exploited Economies of Scale. The smaller hotel competitors cannot afford to match these economies to keep major investments low on a per room basis. The larger hotel companies use their superior scale to offer direct booking incentives to their customers, thereby reducing the costs they incur for their middleman distributors. The industry’s return on equity is impressive, exceeding 20%. These high returns reflect low industry costs, enabling the largest competitors to continue investing in their Economies of Scale and implying a threat of a punishing price war against anyone who would discount against them.

Volatility in the Western market appears low. The industry’s modest growth rates suggest limited organic growth accompanied by the industry’s ability to raise prices with real-time pricing.

It is likely that whatever Volatility occurs in the Western market centers on Reliability on the Customer Buying Hierarchy. The top few competitors offer nearly identical Function and Convenience benefits. Price competition does not seem to be creating Volatility. Instead, it is likely that a hotel competitor must fail a customer in some way in order to initiate an instance of Volatility.

The Asian markets offer quite a contrast. The growth of the Asian competitors implies substantial Volatility, likely in excess of 10% per year. These high Volatility levels imply a market where Function benefits attract both new customers entering the market as well as some customers of competitors. The leading Asian hotel companies are creating wins as they expand in their markets. In such a Volatile situation, we would expect to see some Price competition from hotel companies losing market share to the market share leaders.

A hotel competitor would follow completely different strategy in the Asian market than they would in the Western market.

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