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Starwood Hotels and Resorts’s future is still uncertain, and while possible acquisition suitors have come and gone, the industry still believes that eventually some M&A developments will happen. In May I discussed what a takeover by Wyndham Worldwide would look like, but concluded that neither company would gain strategically in terms of geographical coverage from a takeover.

Some new developments have now put a possible merger between Starwood and Intercontinental Hotels Group on the cards. Intercontinental recently sold its Hong Kong flagship to a consortium for £604 million, rumoured to be an effort to bring in the cash needed for a merger. This briefing discusses how this scenario differs from the Wyndham case, and highlights again that the global hotel chains might be better off considering their options with local players.

How do Starwood and Intercontinental complement one another?

Starwood owns almost exclusively luxury brands, which means that the company has been unable to respond to the down-trading trend of consumers during the global economic crisis. Whereas Wyndham’s portfolio is fundamentally different from Starwood, Intercontinental offers an extension of the mid-priced segment, but Intercontinental’s portfolio is also blighted by the absence of any economy brands. However, the focus on the absence of economy brands might be slightly misleading.

Portfolio of Starwood and Intercontinental Based on Brand Price Platform in 2014

Starwood-1

Source: Euromonitor International

Note: Portfolio based on value sales. Full circle is 100%. Categorisation of brands is based on local hotel landscape, and therefore might differ between countries.

Intercontinental’s extensive mid-priced segment includes, amongst others, upscale brand Crowne Plaza which caters specifically for business travellers and MICE tourism, boutique brand Hotel Indigo, extended-stay brand Staybridge, mid-market brand Holiday Inn, and limited service brand Holiday Inn Express. Recently, Kimpton Hotels was added to this mix, with the “soft branded” boutique hotels seen as a strong addition in a time when consumers are looking for uniqueness and individuality in hotels. This portfolio means that Intercontinental is in a good position to appeal to a broad range of tourist demands.

Comparing the companies’ geographical coverage shows that both are heavily focused on the North American market, which again should be seen as an obstacle for a potential merger. Both brands are underdeveloped in the Western European market, and particularly lack the capacity to benefit from growing demand in Latin America and Asia Pacific.

Portfolio of Starwood and Intercontinental based on Geographical Spread in 2014

Starwood-2

Source: Euromonitor International

Note: Portfolio based on value sales. Full circle is 100%.

Missing out on emerging markets growth

If the two companies were to merge, the value share of the combined company remains low in Western Europe, Eastern Europe, Asia Pacific and Latin America (all around 4%). In contrast, the company would have a relatively strong position in the more consolidated regions of North America (15%), Australasia (13%) and the Middle East and Africa (11%).

International Positioning of a Starwood and Intercontinental Merger

Starwood-3

Source: Euromonitor International

Note: Size of bubble indicates total hotel market size, with Asia Pacific largest at US$143 billion and Australasia smallest at US$7 billion.

With strongest growth in value sales for hotels forecast for Asia Pacific (5%) and Latin America (7%), and Asia Pacific being the largest hotel market globally, it is important for any global hotel company to focus on expanding in these regions. A merger between Starwood and Intercontinental would make it far more competitive on a global scale, but a lot of work will still need to be done to ensure that the potential of the emerging markets is tapped into.

The problem, then, might lie in the size of Starwood and its main competitors. The global hotel landscape is dominated by US companies like Marriott, Hilton, and Wyndham, and these are the companies which have the capacity to acquire or merge with a company the size of Starwood. These companies, however, also have a very similar geographical coverage to Starwood. To reap the benefits of emerging markets in Asia Pacific and Latin America, companies might therefore be better off waiting and considering their options with local players, like one of the fast-growing Chinese players.

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