Recent news that Hilton is to put $50 million of their own capital into a fund to help owners convert their hotels to one of Hilton’s brands was something of a surprise. A hotel chain investing in hotels? That’s a bit far-fetched, isn’t it?!
All of those reports about how Hilton or Marriott (in fact virtually any chain you can think of) are “building so many hotels here, there and everywhere” are very, very wide of the mark. As a rule, the international hotel chains don’t own any of the hotels that they put their name to; they simply provide branding and management services to the owners of those hotels. And they certainly don’t build hotels from scratch.
That’s why Hilton’s move is so surprising, but extremely welcome, for a number of reasons.
Hotel owners can be quite critical of the international hotel chains, questioning the value that they bring compared to the fees that are paid out. In essence, the owner pays for everything, with the hotel chain taking zero financial risk, liability or responsibility – they are merely a provider of services.
This is why you sometimes hear of owners and chains parting company.
Although I don’t know the details, I was sorry to see that Radisson Blu is no longer involved in the Hôtel 2 Février in Lomé, and in the past Le Meridien, Novotel and others have lost hotels in various cities in West Africa. Carlson Rezidor, the owner of the Radisson Blu brand and manager of the Lomé hotel, has no investment in the hotel, and although any ‘divorce’ brings pain, it would have been a different story had they been part of the ownership group.
Now, Carlson Rezidor has been one of the fastest-growing chains in Africa, opening a hotel every 60 days according to a press release it issued last year. It is to be applauded for this, but note that the same press release stated that it was signing a new deal every 37 days – that means it needs to hurry up and get more hotels built and open to avoid a huge backlog of agreements sitting on the shelf. Except, there’s not an awful lot that it can do to hurry things along when they are not owners. And hotel development in many parts of Africa can be painfully slow – looking at a few deals here in Africa, and the average length of the delay in opening, measured from when the owners originally said they would open, was seven-and-a-half years.
At one time, Carlson Rezidor recognised that it could do more to make hotels ‘happen’, and alongside the governments of the four Nordic countries, set up a fund to lend to hotel owners. That fund (Afrinord) is now fully spent, and was successful in getting a number of hotels across the line, including the Radisson Blu in Bamako.
Further investments may be considered by Carlson Rezidor going forward, but on a case-by-case basis and not, as announced by Hilton, for up to 100 hotels.
Marriott made a very large investment in the African hotel industry in 2014, when it bought Protea for around $200 million. But Protea’s ownership in a small number of hotels was specifically excluded from the deal. What Marriott bought were the management and franchise agreements that Protea had with owners, including at that time around 10 such agreements in Nigeria, as well as some lease agreements.
Whilst Hilton’s investment could well be spread quite thinly, for some hotel owners the funds provided by the chain represent not just money to pay for the conversion to a Hilton brand, but also Hilton’s commitment.
I hasten to add that that’s in no way to say that chains that don’t invest aren’t fully committed to the African hotel industry. Far from it, but their business models are different, they invest their funds in building their brands, client retention and distribution systems, and not in the bricks and mortar of the hotels that they brand and operate.
Why is Hilton adopting this approach? It goes back to the point made earlier about how long it takes to get a hotel built in Africa, and the need for much faster growth than is occurring organically. Therefore Hilton is targeting existing hotels which can be converted to one of its brands, most probably DoubleTree by Hilton, in a relatively short time.
And of course it is opening hotels, and earning fees from managing them, that will make Hilton’s shareholders happy. Signing deals is all very well and good, and a necessary step in the development process, but money talks. No money, no project. And it seems that Hilton has found a way to make its money, and its brands, speak louder than others.