U.S. Hotel Industry to Have Modest Growth in 2018

Despite the prevailing challenges such as unfavorable governmental policies, uncertainty in specific markets and RevPAR pressure, economic fundamentals appear strong enough to support modest growth in the hotel space in the short-to-medium term, and without any additional stimulus.

GDP grew at a seasonally adjusted annual rate of 2.6% in the fourth quarter of 2017, following gains of more than 3% in the previous two quarters, per the "advance" estimate released by the Bureau of Economic Analysis. This marked the economy's strongest stretch of growth since the expansion started in mid-2009.

Consumer spending grew 3.8% in the fourth quarter after a 2.2% gain in the third. The trend is expected to continue through 2018, raising optimism for companies in the leisure and recreation space.

Again, there was a marked improvement in the Consumer Confidence Index in January, after a setback in December. Consumer Confidence rose 2.3 points to 125.4 in January. The momentum is expected to continue through 2018. Confident consumers bode well for hotels in spite of the surge in new inventory.

In fact, there are a number of reasons why the broader hotel space should continue doing well over both short and medium terms.

A strong economy, higher income and stepped-up consumer confidence has raised demand for both leisure and business travel. The supply-demand environment in the United States has been favorable since 2010, with growth in demand outpacing supply growth.

Though, of late, the gap between demand 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).

Given the positive economic outlook for the remainder of the year, which could result in the ninth successive year of occupancy growth for the U.S. lodging industry, PricewaterhouseCoopers (PwC) is projecting demand (2.1% rise) to outpace supply (increase of 1.9%) in 2018.

With the market becoming increasingly saturated, especially in the luxury space, hotels are firing on all cylinders to differentiate themselves. According to players in the hospitality sector, eco-awareness, wellness and brand distinctiveness are important themes that customers are currently looking for.

Moreover, U.S. hospitality companies are increasingly targeting millennials, who form a significant part of the population. Millennials are generally more concerned about health, convenience, service and ethical sourcing of food.

This is probably the reason why big hotel brands are launching more lifestyle hotels, which are mainly boutique brands benefiting from the parent companies' infrastructure. These include brands like Marriott International 's (MAR) Element, Aloft and Edition; InterContinental Hotels Group 's (IHG) Hotel Indigo and Andaz by Hyatt Hotels Corp. (H).

Major hoteliers are exploring growth opportunities abroad, especially in relatively untapped emerging markets and the outlying areas surrounding major cities.

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.

Notably, China is the largest source market for outbound travel now. In fact, Chinese outbound travel, according to Chinese authorities in the sector, is set to boom further with 700 million trips projected over the next five years.

In fact, Hyatt's major target markets include India and China. Apart from these, the company has also announced further expansion plans into diverse international markets including Australia, Brazil, Germany, United Kingdom, Indonesia, Japan, Mexico, Saudi Arabia, Singapore, Thailand and the Netherlands, among others.

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

Many of the hoteliers are also looking to leverage from Latin America's upsurge in accommodation demand. In this respect, Wyndham Hotel Group acquired Latin America's leading Fen Hotels. 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.

Loyalty programs have become one of the best ways to counter the tough operating environment and enhance guest experience and raise occupancy. 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.

Digital innovation and social media have started to play a key role in hotels' increased push to retain customers. Social media sites like Facebook, Inc. (FB), Twitter, Inc. (TWTR) and TripAdvisor Inc. (TRIP) are commonly used by travelers to select hotels and in this way they are enhance a brand's prospects by connecting directly with guests.

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. They are investing in mobile check-in, fast Wi-Fi, and digital room keys to enhance guest 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.

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.

Source: Nasdaq