David Camhi Partner, Berger Singerman
We live in a time when branded hotels, and in particular those operating under the major international brands, are ubiquitous. Marriott boasts having a presence in 131 countries, Hilton in 119, Accor in 110, and IHG in 100 - that is almost every country in the world.
These brands also have a presence in almost every segment, from luxury to extended stay, timeshare to hostel-inspired brands, and mixed-use to managed vacation rentals.
What is left then, for these major brands (and the institutional owners and operators that follow them) to attack in earnest? The very fragmented, highly-profitable all-inclusive segment.
In the past few years, major international brands began participating in the all-inclusive segment in a more deliberate and aggressive manner, from the creation of dedicated brands by Hyatt to the latest round of announcements made by Marriott. What has changed to prompt this, and is owning, operating, branding or franchising an all-inclusive resort different from doing the same with an EP or timeshare property?
What's Changed, and What Hasn't?
In the last decade or so, a few things have changed in the all-inclusive space, that have made it the right time for the major brands to enter the space. The all-inclusive model began in the early 1950s with the opening of the first Club Mediterrane in Majorca, Spain, and moved quickly to the Caribbean (some people claim all-inclusive properties already existed at that time in The Bahamas).
It spread during the '70s and '80s, but since most of the Caribbean destinations did not have sufficient properties and traffic to sustain a large number of regularly-scheduled flights, reliance on charter flights was a must. This resulted in the distribution being dominated by tour operators who were able to offer packaged deals directly or through travel agents. Also, and true to its origins, the all-inclusive segment initially catered to travelers that were looking for a budget-friendly family vacation.
Since then, several things have changed, including (1) the growth of the major all-inclusive destinations, to the point where airlines can sustain hundreds of daily, regularly scheduled flights from major cities around the world; (2) the ability of travelers to book flights directly with the airlines or using OTAs; (3) the development of an upper-upscale all-inclusive concept that caters to a different demographic, including adults-only properties; and (4) a change in the perception that the travelers have of the all-inclusive segment, in general, but also of what "value" means as it relates to leisure travel.
Several things remain the same - although some of them have started to change, and that change may accelerate in the coming years: (1) The segment is mostly comprised of large family-owned brands with self-owned-and-operated resorts, and of self-operated unbranded properties, both with long-term (in many cases, multi-generational) property-holding mindsets; (2) there is little presence of large institutional owners or investors (particularly U.S. institutional owner or investors); (3) there is only a handful of all-inclusive brands by the major international hotel brands (with Hyatt being the only major brand with dedicated and distinct all-inclusive brands); (4) with very few exceptions, there are no institutional third-party management companies that are dedicated to the all-inclusive segment and operate third-party brands; (5) there is no real presence of the all-inclusive model (in terms of properties) in the United States; and (6) operating an all-inclusive resort is not the same as operating other types of hotel properties.
Location, Location, Loc…Distribution?
In years past, major Caribbean all-inclusive destinations did not have too many hotels. Over the years, as the destinations developed (currently, there are close to 100,000 rooms in Cancun/Riviera Maya served by the Cancun airport), airports were developed and improved, airlines increased regularly scheduled flights, the use of OTAs over travel agents and wholesalers became more prevalent, airlift in general grew to the point where charter flights ceased to have the monopoly to these destinations.
In recent times, travelers can choose their lodging and airfare separately, even when traveling from locations as far away as Moscow. As airlift increased, the supply of rooms in such destinations multiplied as well, in some cases at a pace faster than the pace of the demand (to the point, for example, that RevPAR levels saw some softening in 2018 and 2019 in part due to the large number of new projects coming online in some of these markets).
Today, in every destination served by a particular airport, there may be several locations (such as Cancun/Riviera Maya, Punta Cana/Bavaro or Montego Bay/Negril/Ocho Rios) with slight differences in the types of beaches, vibes, or atmospheres (for example, Cancun vs. Puerto Morelos vs. Playa del Carmen). But in each particular location, multiple properties compete for the limited number of travelers that arrive every day to that destination on regularly scheduled and charter flights.
Although specific location still has some impact, at the major Mexican and Caribbean all-inclusive destinations, any particular location is generally shared with dozens (and in some cases even hundreds) of properties that feature the same type of beach, vibe, and quality of accommodations, F&B offerings, and service.
So, even though destinations still compete among them to capture the largest number of travelers (although that number would be capped by the amount of airlift to the particular airport serving the destination), it would seem that location itself may not be sufficient to allow a particular property to secure a higher share of the limited number of travelers that arrive at that destination. What then, are the strategies that owners and operators use to capture much higher share, and how they have changed?
In the early years, when distribution was dominated by tour operators, having relationships with these companies was essential for achieving consistent levels of occupancy at sustainable rates. Many operators (and owner/operators) in the space understood they could achieve a higher level of profitability by going through the actual vertical integration with the tour operators, with some examples in the past decade or so being Apple Leisure Group launching AMResorts (and later acquiring several other US tour operators), and Sunwing launching Blue Diamond, its hotel division.
Later, as distribution relied less on the need to operate charter flights, many participants in the space launched vacation clubs (which continue to be prevalent). These vacation clubs seek to create "captive" wholesalers that pass on the distribution margins to guests in the form of lower rates, in exchange for the purchase of a long-term membership in the club that not only provides cash flow but also achieves high levels of guest loyalty.
Recently, others have tried to capture a larger piece of the U.S. traveler market, where brand loyalty is a big factor, by partnering with the major U.S. brands. Even as some of these strategies have been combined in the past (AMResorts was one of the pioneers in the vacation club arena), the announcement of the signing of Blue Diamond's resorts (which has a vacation club) under Marriott's Autograph Collection brand, can be seen as the ultimate strategy consolidation; but it also seems to suggest that, given the expansion in supply, these strategies by themselves are no longer sufficient to achieve the desired levels of market share, which may result in further consolidation within the all-inclusive segment.
Can Value and Luxury Be Compatible?
In its early stages, and lead by the Club Med model, all-inclusive properties emphasized location and activities over accommodations and F&B offerings. That resulted in the segment being perceived by many as catering only to budget-minded travelers. However, as the industry began pursuing different groups of travelers, and destinations became less "remote," new resorts with better accommodations and F&B quality began to appear and develop, to the point that today a large portion of the properties in some destinations are in the upscale and upper-upscale classes. Nevertheless, the increase in the quality, the perception, and in particular among the U.S. consumer, did not immediately change.
Then the world changed. The Great Recession affected many industries and consumer behaviors around the world. One of the great beneficiaries was the all-inclusive segment. Many consumers who used to travel to resorts within the higher classes, were suddenly in need to look for more affordable options. The all-inclusive segment offered these travelers the ability to go to a resort that met (or came close to meeting) their quality requirements, while at the same time avoiding any uncertainty as to cost – with the added bonus that, since most stays were prepaid at the time of booking (oftentimes several months in advance), travelers could experience their vacation without even opening their wallet. For many travelers, this resulted in their reassessment of their concept of "value," which is what the all-inclusive industry is all about.
One important issue to consider is that, although many owners and operators label their all-inclusive properties and brands as "luxury," they are really upscale or upper-upscale properties. One development to be on the lookout for is Marriott's announcement of its intent to commit some of its luxury brands (such as Ritz Carlton) to the all-inclusive segment.
Whether this is in fact implemented, and it results in the development of true luxury all-inclusive standards that blend luxury and value, or in the bastardization of the luxury brands to accommodate the existing all-inclusive standards, remains to be seen. But in any event, the result of this will have a great impact on the leisure travel industry, its perception by travelers, and on whether other major players follow suit and risk affecting the reputation of their luxury brands.
Are You a Cat or a Dog Person?
There are significant differences between an all-inclusive and a comparable EP property from an investment, ownership, and operational perspective. It is almost as the difference between owning a dog and a cat. Below are just a few of the most relevant differences:
A material percentage of the occupancy comes from wholesalers/tour operators, so a management company with the right relationships (or sufficient muscle or marketing dollars – i.e., properties under management in the all-inclusive space), is critical.
Most properties have a captive distribution channel (called a "marketing entity"), which needs to be managed carefully.
An important strategy to generate cash and occupancy is to have a Vacation Club (whether operated by the owner, the operator or a third party) – but the operation of a Vacation Club on property touches many aspects that require careful consideration and balance – cash flow generation and use, reputation, guest experience, rates and amenities offered to members, etc., to the point that many Vacation Clubs are cash-flow negative– and if you think a Vacation Club is similar to a timeshare operation, think again (a vacation club is as similar to a timeshare as a dog is similar to a fish!)
In an all-inclusive property, F&B outlets are cost centers, not revenue generators (with some exceptions due to upsell opportunities like premium wines and spirits or dishes, private dinners, etc.). That requires a completely different mindset and attitude towards the guest and the daily operation of the property and each F&B outlet.
Rates are charged per person, with children enjoying varying discounts or sometimes even staying for free, which requires the ability to track each guest individually during the reservation and check-in process, and the ability to budget and yield-manage appropriately.
Most all-inclusive properties have several types of rooms, and sometimes entire sections or buildings that have different attributes, which require the appropriate mindset to exploit room categories, and a comprehensive yield management strategy.
The offered rates are all-inclusive (no pun intended), and they include not only lodging, F&B, basic entertainment, but also all taxes, charges fees, resort fees, and even gratuities, so all these charges have an impact on the rate without the ability to change them at the time of check-in.
Booking windows tend to be very long, and stays are usually prepaid, especially guests that rely on packages – as mentioned, this is changing rapidly with the increased participation of the U.S. brands, where guests pay at the time they check-in.
All-inclusive destinations operate year-round, with marked high and low seasons during the year (more in some destinations than others) meaning the hotel never closes (think renovations, etc.); costs need to be managed during low occupancy periods (including F&B and regular amenities, which still need to be offered by the resort to its guests).
All hotel employees (in many cases, even the GM!) are employed by the owner, not the management company, and most all-inclusive destinations are in jurisdictions where there is no at-will employment, so the effective management of employees (and staffing levels between high and low occupancy seasons) is key.
Operating in a foreign country means dealing with local taxes - including withholdings on fees and payments to third parties such as a franchisor and management company, and even on inter-company cost allocations- and with exchange rates (and in some cases exchange controls), not only on payments related to the operation of the property, but also on the investment and the repatriation of investments.
One interesting development to be on the lookout is whether the major brands are willing, or will be able, to tackle all the above issues in a meaningful way in order to offer management services within the segment, as opposed to only franchising the resorts to be managed by the owner or third-party managers.
It seems that some of the major brands are getting ready to offer management services, but the reality is that to effectively address some of above issues, the brands may be required to adopt deep changes in their processes, attitudes and philosophies, which may be hard for some of them to accomplish. An interesting subproduct of this may be the creation of more uniform operating standards that apply to the all-inclusive industry, something that would accelerate the entry of the institutional third-party management companies into the space.
All-Inclusive = All-International
Another unique characteristic of the all-inclusive segment is that it does not really have a presence in the U.S. mainland in terms of properties (yes there is the Club Med Sandpiper Bay, but one swallow does not make a summer- and other small wellness oriented and mountain resorts are different from the beach/tropical properties that make up the majority of the segment).
There are structural reasons for that, as two critical elements of a successful all-inclusive destination are having a year-round season and a lower cost of labor, so it is unlikely that the lack of meaningful all-inclusive presence in the U.S. will change any time soon. This means that the all-inclusive segment will continue to offer yet another barrier to entry for U.S. third-party management companies that do not have major foreign experience, and for U.S. institutional investors with no appetite to take foreign risk, or who are not willing to invest in a property for which they don't have a lot of options in terms of third-party managers (and where the market for management services has not reached the level of commoditization that exists in the U.S.).
The Last Frontier
Regardless of the changes it has gone through, the all-inclusive industry still remains fragmented. Most of the existing brands in the space are large family-owned owners/operators or unbranded properties, and the major international brands do not have a meaningful presence in it. The lack of all-inclusive operating standards by these major international brands, and of property standards for all-inclusive properties to participate in their soft brands, coupled with the particularities of the segment, may keep institutional third-party managers away for a while.
In addition, since there is little official (and credible) public historical data on the performance of most of these properties, and the brands lack meaningful historical operating data as to how their brands perform in the space (and whether their use has a meaningful impact on RevPAR), institutional investors and owners may have a hard time deciding to enter the space in earnest.
COVID-19 has obviously had an impact on the performance of the all-inclusive segment. Prior to the pandemic, there was little deal activity as the costs of properties were overinflated, even though their performance had begun to see some softening as a result of oversupply in some destinations. Many analysts agree that the post-COVID recovery of the travel industry will occur faster at the leisure level, and that leisure travel will suffer less of a lasting impact once things go back to normal (as opposed to business travel, which may see some changes now that people realize the can do videoconference meetings instead of going in person.)
This means we may see some increase in deal activity very soon – especially with respect to distressed properties or construction projects, and that may create opportunities for institutional investors not previously willing to enter the space, to be willing to take a risk on bargain-priced properties. Already some of the Mexican REITs and other Mexican institutional money is becoming quite active in the segment, and as big brands make announcements related to the all-inclusive space, and it gains more sophistication, the changes will come more rapidly.
These are interesting times for the all-inclusive industry, and we may see it transformed in ways we have not seen before. Hopefully, the entry of the major brands into the space will not take away market share from the existing brands and from non-branded properties, but instead will have the effect of making the all-inclusive industry – and its concept of value- better known and more prevalent among a larger segment of the U.S. population, resulting in more travelers flocking to the space.