How to seize the ‘Mexico moment’ in 3 steps
11 DECEMBER 2013 9:56 AM
Mexico has rebounded as a land of opportunity, but hoteliers should heed these guidelines before jumping in head first.
A rising middle class, improved economic and political stability, and a robust market are beckoning hotel investors to Mexico. Eager to seize the “Mexican moment,” many hotel companies are expanding their operations throughout this land of opportunity.
But, as they say in Mexico, “Hay que sentir el agua antes de meterse.” (Translation: Look before you leap).
Several hurdles still exist, often making investment in Mexico’s hotel sector challenging. The power of Mexican hotel companies cannot be underestimated. To succeed in Mexico, hotel investors should follow some important guidelines before they join la fiesta.
1. Become familiar with the market and key players
The market is domestically oriented and dominated by Mexican hotel companies.
Mexico has fierce local competition in a domestic-oriented market, according to the Mexican Ministry of Tourism, or Sectur. The country’s hotel marketplace exhibits very high domestic demand (about 85% in total). In secondary and tertiary cities, domestic demand can reach up to 100%. As a result, Mexican domestic travel generates $120 billion per year (representing more than 90% of tourism receipts) and is about nine times larger than the global market. Yet, domestic demand is comparatively more price-sensitive, which results in more predictable pricing due to frequently fixed room rates.
Consequently, a “home court advantage” has emerged for the main Mexican hotel companies, such as Grupo Posadas, Hoteles City, Grupo Real Turismo and Hoteles Mision. They have established a strong market foothold that can be difficult to penetrate. Collectively, their properties dominate the business-oriented primary, secondary and tertiary markets, accounting for roughly 7% of the total room supply and about 25% of the total branded room supply in the country, according to STR, parent company of Hotel News Now, and Sion Capital.
In Mexico, most domestic hotel companies are operationally integrated and have multiple roles across the hotel value chain as investors, developers, licensors, operators and owners. This setup provides them with an advantage over that of new competitors.
Mexican hotel companies’ integration provides efficiencies across ancillary businesses. As most of these local—and even regional—enterprises are family-owned or controlled, and often also form part of larger diversified business conglomerates, they can leverage their mutual customer bases and access to capital and real estate more effectively.
For example, Mexico’s Vazquez-Raña family owns Grupo Real Turismo, a Mexican hotel company—with the Quinta Real, Camino Real and Real Inn brands—which is a subsidiary of Grupo Empresarial Angeles. Besides hospitality and tourism, Grupo Empresarial Angeles also has sizeable interests in Mexico’s medical, financial and communications sectors.
This integrated infrastructure can create competitive barriers to others, as these companies often benefit from significant “know-who” and “know-how” across industries. Additionally, Mexican hotel companies provide effective national and regional distribution platforms via seasoned sales forces, local corporate and key intermediary relationships, and established loyalty programs.
Ultimately, knowing the key players and competitive landscape proves critical before entering the Mexican market.
2. Understand Mexico’s segmentation and culture
After becoming familiar with market fundamentals, hotel investors should assess other unique marketplace characteristics. More specifically, Mexico’s hotel sector is segmented and positioned differently than that of other countries due to a lack of brands, compressed room rates and distinctive cultural dynamics.
Similar to Brazil, the Mexican hotel sector is mostly unbranded. Only about 30% of rooms are branded in Mexico compared to the United States, where roughly 30% of the rooms are unbranded, according to research gleaned from STR, Sion Capital and HVS. Additionally, tired and dated hotel real estate products and fragmented family-run operations make many of these largely independent hotels non-brandable, at least by global industry standards, because of their smaller property sizes, physical limitations and the potential level of investment required to meet quality and safety requirements. Compounded, these conditions are often too great to surmount for hotel investors looking to acquire and brand these properties. Ultimately, the deals are not economically feasible, have limited exit opportunities and do not move forward.
As a result of this lack of branding, the Mexican hotel sector does not have clear segmentation. Star-ranking classifications are voluntary. This situation results in some hotels and brands being elevated by one or two stars, especially in the 1- to 3-star categories, where nearly 45% of Mexico’s room supply is classified, according to Sectur. Overlap across segments occurs frequently, causing hotels and brands to offer inconsistent products and services and lower pricing, especially when compared to hotels in other countries.
Using STR’s “2013 global chain scale” definitions as a guide, Mexican hotel room rates across “somewhat comparable” segments average about 25% less than their U.S. counterparts.
In addition to unique market segmentation, Mexico possesses a rich, high-touch culture that requires special operational and investment considerations. Mexican hotel companies understand their domestic customers better, culturally, than several global brands. However, global hotel companies have worked to improve their local and regional cultural understanding and recently have started to “tropicalize” their offerings in a push to compete with local brands and effectively cater to Mexican and Latin American tastes.
For example, InterContinental Hotels Group has global standards for its brands but localizes certain practices to fulfill its guests’ needs. One example is its Holiday Inn Express brand in Mexico. The brand has expanded its breakfast offerings to include chilaquiles and other authentic delicacies. Today, IHG has the largest brand coverage in Mexico, with 123 hotels (19,163 rooms) and a strong pipeline, largely due to its strong franchisor base, multi-brand portfolio, and long history and successful acclimation to Mexico and Latin America.
Hotel investors should keep in mind, however, that more uniform products and rigorous global standards often result in higher investment costs, demanding investors in Mexico to closely analyze projects’ cost-benefit equations. Ultimately, flexibility and adaptability prove essential in cross-border developments, especially in Latin America.
3. Acknowledge the institutionalization of the industry
As Mexico’s hotel supply becomes more branded, liquidity is generated by local capital markets and the domestic and foreign investor appetite for lodging real estate increases, the Mexican hotel sector is becoming institutionalized. This transformation should benefit Mexico as well as investors who are experiencing difficulties penetrating the market.
With institutionalization in Mexico comes an increase in investors who like to partner with reputable service providers, proven third-party managers and well-recognized licensors who closely adhere to compliance, reporting and professional business practices. These providers offer “globalocal” reach, standardized systems and sophisticated processes, which will raise competitiveness levels in Mexico.
The first step for new hotel investors, however, must include understanding the intricacies of the Mexican market and the strength of its local stakeholders. Next, newcomers should consider seeking acquisitions or joint-venture opportunities with well-established entities, deploying capital via “asset-right” investments, creating strong value-engineered products and “tropicalized” services, and adapting to local operational and cultural practices. Only then will these new market entrants be able to successfully seize the “Mexican moment.”
Jonathan Kracer is Managing Principal of Sion Capital LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions, with offices in Miami and Mexico City. Mr. Kracer is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. Mr. Kracer’s columns primarily cover hotel asset-related subjects, with a particular emphasis on cross-border topics related to the U.S. and Latin America. He can be reached via email at email@example.com. More information about Sion Capital LLC can be found at www.sioncapitalco.com.
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