7 hotel, OTA takeaways from two Wall Street analysts
 
7 hotel, OTA takeaways from two Wall Street analysts
20 JULY 2018 8:47 AM

More uncertainty is in order as the hotel and online travel agency sectors continue to try to outmaneuver each other, according to Wall Street investment gurus speaking at last week’s 2018 Revenue Strategy Summit.

WASHINGTON—The intersection of Wall Street and Revenue Management Road is usually not on the map at industry conferences, but the recent Revenue Strategy Summit put the conversation front and center.

A discussion involving two Wall Street analysts—lodging analyst Rachael Rothman of Susquehanna Financial Group and OTA observer Lloyd Walmsley of Deutsche Bank—engaged in a 40-minute discussion that shed much light on how the two industries overlap.

Following are seven key takeaways (in no particular order) from the conversation, which was led by moderator Patrick Bosworth of Duetto (comments have been edited for clarity and brevity).

1. Hotel revenue strategies do impact stock prices.
Rothman: “From a lodging stock perspective … over 80% of the correlation and how a lodging stock moves is (revenue per available room), basically. So it’s all top-line-traded. As much as any of the brands, the big brands—Hilton, Marriott for example—would like to talk about unit growth as a key driver of top line, truly what moves the stock prices is RevPAR. … So for those of you here focused on driving the revenue—that is really what is going to drive the share prices and ultimately the cost of capital for these companies as well.”

Walmsley: “This is a topic that for most internet (sector) investors is a little below the radar, but it’s clearly critical to what is going on at the OTAs and, more broadly, distribution … media outlets like Google and Facebook. Revenue strategy is integral to distribution and channel management, so anything that affects that will affect those businesses. But as far as direct impact … it’s something that I like to geek out on by learning from folks like you, but most investors are up at a higher level looking at the trends more strategically.”

2. It’s no surprise that hotel company CEOs lack revenue-management backgrounds.
Rothman: When you talk about the companies being well-positioned for growth, it comes down to emanating and it comes down to unit growth. And the only way you get unit growth is to have a premium RevPAR index. So it’s there, it’s a critical piece, right? You’re not going to convince anybody to pay you 12% or 10% fees, all included, if you can’t generate a premium RevPAR. But it’s just one piece of how a big conglomerate views the whole line.”

3. Hotel marketing campaigns, such as Hilton’s ‘Stop Clicking Around’ campaign, are indeed helping the companies shift market share.
Rothman: “My perception is—of course I talk to the hotel companies that are going to have to tell me this—my perception is that it did work. That it helped them regain some share that they had lost or at least kept it more a parity. For a number of years they’ve been using share to the OTAs and now it’s either at parity or they’ve regained some share. … It’s critically important. Getting as many people in your hamster wheel as possible is really the name of the game, and then keeping them there for as long as possible.”

Walmsley: “From an OTA perspective, they have, of course, protested that it’s had no impact on their business. … OTAs continue to gain share—not quite as quickly—so some of that share that hotels are getting directly seems to be coming from other channels. … In aggregated, manageable percent of the business.”

4. It’s not a stretch to think Amazon will enter the travel space sooner than later.
Walmsley: “I have to shy away if I’m making too much M&A speculation, but I do think there are assets (available) out there if they wanted to get in a space. They are now a huge company so they can use stock and … even their size wouldn’t really be a limitation, although they haven’t historically done very large deals. Before Whole Foods they really never spent more than a billion dollars on an acquisition. Whole Foods was a new level of a 10X of that size. So they’ve now done some new things. So it’s clearly possible, but it seems like they’ve got a lot on their plate right now. So … hard to say.”

5. This isn’t a shock—more consolidation is coming.
Rothman: “(Consolidation is) going to be the name of the game, getting a scale, driving commissions down, getting more customers in your hamster wheel, keeping them moving around, getting them to trade up and trade down — depending on what the need state is. From your kid’s soccer game in suburban Maryland to your luxury vacation or taking a Ritz-Carlton cruise, which is obviously not owned by Ritz, but using your Marriott points to go on the Ritz cruise, I think there’s going to be continued consolidation.”

Walmsley: “It’s been a clear advantage to the hotels to consolidate—similar to how we’ve seen it’s some advantage to Expedia consolidating in the U.S. It’s something that they would love, as fragmented a universe as they’re in. But, of course, again, both of them are pretty internationally focused where there’s just less exposure to chains. So it’s something that investors watch and care about.”

6. The OTA segment can be considered a mature market.
Walmsley: “Yeah, I think in my mind, no doubt we’ve seen the glory days have come and gone for the OTA space. It’s still a great category as it is—travel broadly is growing faster than GDP, there’s still an online shift. And then, there’s somewhat of a deal from within channels to the OTAs online at the expense of (traditional) marketing. Clearly this top of mind with investors is this notion of maturation.”

7. The hotel space is too data-rich for Google to ignore forever.
Walmsley: “It’s fascinating. They’re definitely pushing further and further down the funnel, slowly and steadily they’re adding product; now testing vacation rental, testing packages. And, you know, the core asset Google has is a massive amount of user data with six apps to go for millions of users. … They know a lot about you. They’re in a great position to really do hyper-personalized targeting of the right hotel at the right time. You still don’t see it on their site, but there’s a lot of promise there. They’re also integrating AI and voice into a product. But there’s a lot of promise there and, you know, they already extract a lot of economics into the space, too.”

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