On a quiet Monday afternoon in November came the announcement: “Marriott to buy Starwood”. It’s one of those headlines you never expect to read – although we’ve been known to say it a few times, usually when confronted with a mundane press release (“it’s hardly Marriott buys Starwood, is it!”).

The US$12.2 billion dollar deal saw the two hotel giants embark on negotiations for a merger that would create the world’s largest hotel operator with 1.1 million rooms across 5,500 hotels in more than 100 countries. At this stage, the stock-and-cash deal is a letter of intent and not rubber stamped, but assuming regulatory hurdles are cleared, the transaction should close in the middle of 2016.

One month after the Marriott-Starwood revelation, another major partnership was announced, with Accorhotels acquiring FRHI Hotels & Resorts for US$2.9 billion (though this, too, is not as yet a done deal). The 155 hotels being absorbed into the French group’s 3,800-strong portfolio comprise three key brands: Fairmont, Raffles and Swissotel. These three names have a strong presence in the luxury sector, with significant properties such as Raffles Singapore, The Savoy in London, Shanghai’s Fairmont Peace Hotel and The Plaza Hotel in New York adding gravitas to the deal.

Another super-deal announced last year was the merging of Chinese hospitality firms Jin Jiang International and Plateno Group to become the undisputed heavyweight in the Middle Kingdom – and the fifth largest provider worldwide.

The implications of these major deals on the rest of the industry look likely to encourage even more consolidation. All eyes will be on the likes of IHG, Hilton and Hyatt to see how they will respond – all of whom were considered in the running for the Starwood deal.

United they stand, divided they fall?

So why now? The recent trend for consolidation is a telling indication of the shifting business landscape that has forced hotel chains to adapt their game plans. A driving factor in the industry has been the rise of online travel agents (OTAs) such as Expedia and Booking.com. Commissions can typically cost hotels between 15 and 25 per cent – not such a problem in the early days when they drove modest traffic through the doors, but with increasing popularity their share of business has jumped to the 40 per cent mark, making them uneasy bedfellows for the hotels. Other online companies such as Google and Trip Advisor have also launched competitive platforms, while the rise of social economies like Airbnb are also carving themselves a healthy market share.

The past decade has seen many hotel groups switch to an “asset-lite” model, meaning the actual bricks and mortar are owned by financial investors, leaving hoteliers free to earn most of their money through franchising or managing properties on behalf of their owners. So from a hotel point of view, size really does matter – the more properties under their belt, the larger the revenue streams.

All-access pass

Entry to new markets is another boon for the merger mentality. For example, Starwood has a far stronger presence in Asia than Marriott – a quick search reveals 536 properties versus 238. This deal would therefore instantly provide Marriott with a strong presence in the region.

Brands are also a key part of the puzzle. The Marriott-Starwood merger would give Marriott a greater presence in the lifestyle arena, while Starwood stands to gain a foothold in the luxury and self-service tiers where Marriott is strong. Combined, both have significantly stronger footholds in the upscale tiers. Bruce Duncan, chairman of Starwood Hotels & Resorts, said combining Marriott and Starwood had an “undeniable logic” that would create long-term value for both operators.

Similarly, before the takeover of FRHI, Accor operated 15 brands, but only one of those – Sofitel – was positioned in the luxury market. By adding three major quality brands, this merger immediately boosts its presence in the higher-tier segment.

There’s been much discussion about the increasing range of hotel brands, and whether they truly resonate with consumers or confuse them. For Marriott and Starwood, conveying the merits of each brand has been challenging enough, so merging raises questions about how the combined portfolio will be positioned, and how former competitors will co-exist in the new environment.

Speaking in a conference call on the day of the announcement, Arne Sorenson, president and CEO of Marriott International, appeared to rule out brand consolidation, at least in the immediate future. Marriott says its focus is on the accelerated growth of Starwood brands. “All the entrants we intend to keep and intend to grow,” he said, adding that where brands such as Ritz-Carlton and St Regis compete directly it will work hard to align them, and acknowledging that challenges may arise with brands such as Le Méridien and Renaissance, which are in “a fairly near place… so we’ll have to see what the right approach is”.

Alex Kyriakidis, president and managing director of Marriott International in the Middle East and Africa, said: “We believe that Ritz-Carlton and St Regis can both live in the same segment quite successfully. Having another luxury brand in our portfolio fits our strategic priorities.”

Another question is integrating corporate culture and company philosophy. At an open seminar at the 5th Thailand Tourism Forum in January, Tim Hansing, CEO of Red Planet Hotels, said: “I understand why the transactions took place, there’s great economies you can achieve by head office costs, and create billions on a yield, but I wonder if perhaps these guys are getting too big and it’s going to become too difficult to manage.

“To get the corporate culture all the way through the new company I think is going to take years and years … how do you get the Accor culture through into Fairmont? I’m not sure that’s going to work well, and if so, it’s going to take a lot of time. How long did it take the Intercontinental culture to go through Crowne Plaza?”

Red Planet has itself looked at some smaller hotel groups for acquisition, “but at the moment we have been focusing on organic growth,” says Hansing. “We’ve also been approached by others… but at the moment that isn’t going to happen. We are really trying to be true to our brand standards, so to go and buy a chain of hotels in Korea, or wherever, that aren’t true to those brand standards, would dilute the brand very quickly.”

Blessing or curse?

On the surface, the consolidation of hotel chains is being touted as great for customers. Adam Aron, Starwood Hotels & Resorts Worldwide chief executive, said: “Our guests and customers will benefit from so many more options across 30 hotel brands, while our hotel owners and franchisees will derive value from our combined global platform and efficiencies.”

Arguably, the real crux of whether these super mergers will be good or bad news for the consumer will be played out on the loyalty programme front. How the relationship between Marriott Rewards (54 million members) and SPG (Starwood Preferred Guest, 21 million) pans out will be one that business travellers watch with particular interest.

SPG was quick to send out a reassuring alert, from Chris Holdren, SVP SPG, that “for now, we remain separate, and there is no change to your SPG programme status, your Starpoints or existing reservations”. Nevertheless, top-tier travellers have expressed concern. “I’m livid,” said Hugo Espinoza, quoted in The New York Times. “I dread to think what the merger will do to my platinum-for-life status.”

Some commentators already foresee a scenario in which more Marriott loyalists cash in at Starwood hotels than vice versa. Others question whether Marriott will be able to match SPG’s personalised nature, where those travelling at least 100 nights a year are assigned a travel ambassador, with perks including late checkout.

SPG has been very active in the last year, securing deals with major brands such as Emirates and Uber, and it’s unclear whether new and existing loyalty contracts within the full gamut of partners, from airlines to car hire companies, will be absorbed or closed. “We will be undertaking a thorough review of all partners and contracts to determine what is in the best interest of our members and hotels consistent with our agreements with those partners,” said Kyriakidis.

Of course, a combined programme of 75 million members could offer unrivalled distribution power and potentially better perks.

Bandwagon buyouts

Merger mania is spreading amongst the smaller players in the industry too, with a host of announcements such as Minor Hotel Group’s purchasing of Tivoli Hotels & Resorts for Euro292 million (US$327.9 million) and Wyndham Hotel Group acquiring Dolce Hotels and Resorts for US$57 million – both announced in February this year.

Serviced-residence provider Frasers Hospitality has also jumped on the bandwagon, recently purchasing the Malmaison Hotel du Vin (MHDV) group of boutique lifestyle hotels based in the UK for £363.4 million (US$506 million). CEO Choe Peng Sum revealed the reasoning behind this acquisition followed the same pattern as the larger groups: geographic location and brand diversification. “The time was right to expand in the UK… [it] is a key gateway to Europe and this acquisition adds to our portfolio 29 boutique lifestyle hotels with over 2,000 keys across 25 cities in the UK, which doubles our offerings in Europe and propels us to a leading position in this market.”

Choe expects more mergers and acquisitions to take place, as part of a practical growth strategy for companies seeking to boost their market share. “The merger between Marriott and Starwood was a real game changer for the hospitality industry as they forced other chains to re-evaluate their offerings and assess the need to join arms with other players, to better equip themselves for this increasingly competitive landscape. They realised that if they don’t have scale, they’re going to end up on the short end in distribution.”

Others think the creation of giant hotel corporations may actually prove beneficial to smaller groups. Red Planet’s Hansing said: “Big is always beautiful, but one issue is the computer legacy systems. Starwood and Marriott have many legacy systems anyway, so how are they going to react to technical changes without a uniform platform? I think the smaller, more nimble guys that have a uniform platform and good technology are potentially going to be snapping at their heels.”

Greg Dogan, president and CEO of Shangri-La Hotels and Resorts, thinks similarly, stating that the company has no acquisition plans: “We still see an opportunity within the smaller groups [of] less than 120 hotels. We’ve gone to great lengths to work on our Golden Circle loyalty programmes and believe with our footprint in China we have an advantage over multinational brands.

“The ability to move quickly and proactively in a timely manner is the key to survival. With the speed of the internet, we need to adapt to what’s happening in business now. We’re pouring a lot of resources into that – digital, direct bookings, knowing your customers.”

It’s also important to remember that even with these mergers and the seemingly insatiable appetite for major chains to add properties to their portfolios, they still represent only a small percentage of overall rooms available. A report by Morgan Stanley found that the top ten chains combined represent 17.5 million hotel rooms – or a third of the total. The Marriott-Starwood merger only represents a 7.5 per cent slice of the global market.

Ultimately, most industry commentators are in agreement that the revolution is just beginning and more mergers are likely to occur. But as yet, the full effect of these mammoth deals is unknown… watch this space.