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2017 Set to Bring Modest Growth for U.S. Hotel Industry

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Despite economic and political uncertainty in parts of the world, overall demand for travel and hospitality services continues to rise. Consumers are looking for unique experiences at all price points and hoteliers believe that their diverse portfolio of travel offerings can continue to deliver on that growing demand. The improving outlook for the U.S. and global economies is helping push the business travel segment as well.

Confident consumers bode well for hotels despite the surge of new inventory in the marketplace. Thus, we see no reason why the U.S. hotel industry should not continue to enjoy gains on both the top and the bottom lines, in the near term, albeit at a more modest pace compared with the past two or three years.

As such, we see plenty of reasons to be optimistic about the broader hotel industry over both the short and the long terms. Below, we discuss what investors can look forward to:

Demand-Supply Gap Favorable: Improving economic indicators is a boon for the hotel industry as it has perked up leisure and business travel demand. The supply-demand environment in the U.S. has been favorable since 2010, with growth in demand outpacing supply growth. Though, of late, the gap between demand growth and supply growth has narrowed considerably and occupancy growth has slowed, higher average daily rates (ADRs) are expected to keep driving revenue per available room (RevPAR).

We realize that favorable prior-year comparisons contributed to strong demand growth in first-quarter 2017, and that pace cannot be sustained through the rest of 2017, with demand expected to moderate. Nevertheless, in spite of the large pipeline of hotels, both CBRE Hotels' Americas Research and PricewaterhouseCoopers (PwC) are projecting demand (2.1% rise) to outpace supply (increase of 2%) once again in 2017, given the positive economic outlook for the remainder of the year, thereby resulting in the eighth successive year of occupancy growth for the U.S. lodging industry.

International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and the outlying areas surrounding major cities. Hoteliers are forging ahead with expansion plans in emerging markets with great long-term potential despite looming macroeconomic concerns.

A number of U.S.-based hoteliers are targeting the unsaturated markets in Asia-Pacific, the Middle East, Brazil, Russia and Africa. Within Asia, China promises significant growth, despite an economic slowdown, with visits expected to increase substantially ahead. In fact, China is the fastest growing lodging market in the world. Interestingly, the country is a major revenue contributor for Marriott International, Inc. (MAR - Free Report) .

Apart from China, India is becoming a hot spot for U.S.-based hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, the country has great long-term growth potential as a tourism market. Notably, Hyatt Hotels Corporation (H - Free Report) is also continuously looking to expand its brand presence and enter under-penetrated markets such as India and China. Among others, Japan, Indonesia, Australia, Singapore and Thailand continue to attract travelers.

The key players in the industry are also targeting the high-potential Middle East countries such as Turkey and United Arab Emirates (UAE) that offer strong infrastructure.

Many of the hoteliers are also looking to leverage from Latin America’s upsurge in accommodation demand. In this regard, Wyndham Worldwide Corporation’s WYN Hotel Group announced the acquisition of Latin America's leading Fen Hotels in Dec 2016. Meanwhile, with an increasing number of managed and franchised limited service hotels in Mexico, Colombia and Brazil, Marriott expects its distribution in the Caribbean and Latin American region to increase 75% by 2018.

Meanwhile, Europe remains an attractive market for hoteliers despite repeated terror attacks and Brexit-induced uncertainties. Major players like Marriott, Hilton Worldwide Holdings Inc. (HLT - Free Report) , Choice Hotels International Inc. (CHH - Free Report) and Wyndhamhave a strong foothold in this region.

In fact, Marriott has increased its full-year 2017 RevPAR expectations following stronger-than-expected RevPAR performance in North America in the first quarter and improving demand trends in the Europe and Asia-Pacific regions.

Expansion in these lucrative markets would help the companies gain market share in the hospitality industry, thereby boosting their business. Also, with global travel estimated to increase at a 7% compounded rate over the next 10 years and international trips expected to top 1.8 billion by 2030, such rapid expansion plans by hoteliers’ bodes well.

Brand Renovation to Boost Growth: Hotel chains are meticulously working on guest satisfaction via brand conversion and re-modeling to gain competitive advantage. In fact, brand perception is likely to have a growing influence on the mass market as well as luxury space. With the market becoming increasingly saturated, especially the luxury segment, hotels will have to differentiate themselves.

Brands that can offer something uniquely compelling are likely to grab market share and thus their ability to innovate will hold the key to success. Therefore, ace hoteliers like Marriott, Belmond Ltd. (BEL - Free Report) and Hyatt are firing on all cylinders to sync their brands to the order of the day.

Moreover, in recent times, brand development is being shaped not only by economic trends, but also by millennials’ tastes. It is Gen Y that constitutes a major portion of the current tourism market and their tastes and expectations are widely different from their preceding generations.

According to players in the hospitality sector, eco-awareness, wellness and brand distinctiveness are important themes for this generation. Big hotel brands are thus launching more lifestyle hotels, which are mainly boutique brands that benefit from the parent companies’ infrastructure. These include brands like Marriott’s Element, Aloft and Edition; Andaz by Hyatt; and InterContinental Hotels Group’s (IHG - Free Report) Hotel Indigo.

Loyalty Programs: In order to survive in a tough economic environment, hoteliers are continuously devising ways to enhance guest experience and raise occupancy. Of these, offering loyalty programs is one of the best ways. Given the fact that rewards’ members stay longer than nonmembers and generate more revenues for their franchisees, hoteliers have been increasingly focusing on their loyalty programs.

Notably, Wyndham Rewards offers one of the most generous reward program payouts in the industry. Recently, Wyndham became the first hospitality company to globally expand its loyalty program across vacation ownership and vacation rental properties. In Mar 2017, the Wyndham Rewards program surpassed 50 million member enrollments, a major achievement. In fact, the company expects Wyndham Rewards to generate nearly a third of the incremental tours needed to hit its new owner growth target of 23%.

Meanwhile, following its acquisition of Starwood, Marriott has linked industry-leading guest loyalty programs – Marriott Rewards, Ritz-Carlton Rewards and Starwood Preferred Guest – and announced the matching of member status between the programs, thereby leading to an even larger loyalty community. Loyalty programs are Marriott's most powerful marketing platform and it continues to invest in marketing partnerships and innovations designed to provide a more rewarding experience to guests.

Meanwhile, in first-quarter 2017, Hyatt launched a new loyalty program, World of Hyatt, which replaced its Gold Passport loyalty program. Notably, World of Hyatt is a platform for guest engagement. Given these enhancements, the company expects the program to build even higher levels of guest preference and help in sustaining market share gains.

Loyalty programs are thus the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.

Embracing Social Media and Smartphone Technology to Build Loyalty: In today’s world of price comparison and shared economy, hotels have to constantly push their boundaries to retain customers. In this regard, digital innovation and social media have started to play a key role. Social media can enhance a brand’s prospects by connecting directly with guests, especially millennials and can, in turn, increase loyalty and market share. Social media sites like Facebook, Inc. (FB - Free Report) , Twitter, Inc. (TWTR - Free Report) and TripAdvisor Inc. (TRIP - Free Report) are commonly used by travelers to select hotels. Moreover, hoteliers are using apps to help guests manage bookings and offering interactive maps/GPS to increase occupancy and offer a faster and seamless experience.

In fact, mobile check-ins and check-outs have increased substantially over the past few years and so has the enthusiasm for chat-based messaging apps, like chatbots, among potential hotel customers. Being tech savvy is thus no longer an option but a necessity to survive in the intensely competitive hotel industry. Thus, the majority of hoteliers are investing in mobile check-in, fast Wi-Fi, and digital room keys to enhance guest experience.

However, with basic functionalities such as hotel check-ins, and shopping and booking capability becoming the norm, hoteliers will have to leverage the power of mobile phones to take on-property experience to the next level. A confluence of technologies, including faster processing power, cloud computing and Internet of Things (IoT), is set to bundle up to enhance the mobile channel. Hotels should seriously consider the implications of falling behind during this wave of mobile transformation.

Many hoteliers are also 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.

Key Picks

Top-ranked stocks in the industry include Choice Hotels, Hilton and Extended Stay America, Inc. (STAY - Free Report) . While Choice Hotels sports a Zacks Rank #1 (Strong Buy), Hilton and Extended Stay carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Hyatt, Wyndham and China Lodging Group, Limited (HTHT - Free Report) , given their positive outlook for 2017.

Bottom Line

The lodging sector will prove to be a worthy investment proposition in the near-to-medium term provided the economy continues to shows signs of recovery. This in turn will keep investor confidence high and lead to greater demand, thereby boosting hoteliers’ profitability.

Particularly, hoteliers with experience, solid equity, strong brands and unique ideas in great markets, and those that are solid borrowers and considered trustworthy will be able to expand and surely convert some of the challenges into opportunities in 2017.

Also, hoteliers will have to be smart enough to capitalize on the shifting trends and adapt as per changing consumer expectations in 2017. Instead of offering intricate programs and schemes to gain customer loyalty, hotel companies must now focus on re-imagined technology strategy, and differentiated offerings to provide unmatched travel experiences. Loyalty will follow automatically.

Check out our latest Hotel Industry Outlook” here for more on the current state of affairs from an earnings and valuation perspective as well as the trend for this important sector.

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