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Branded All-Inclusive; Hotel Asset Management

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Once considered primarily a hospitality segment catering to budget-conscious travelers, today’s major all-inclusive companies offer a sophisticated guest experience and a wide array of amenities and services at various price points. These customized and high-end products and services help create lasting memories among a more demanding clientele.

History of All-Inclusive (AI)
“Branded All-Inclusive” found its roots in Club Med during the early 1950s in Alcùdia, a tiny fishing village in the Balearic Islands off the coast of Spain. Gérard Blitz and Gilbert Trigano had the pioneering idea of setting up a tented village for sporty holidays in an outdoor setting where guests were supported by G.Os (Gentils Organisateurs). In 1957, the bead necklace was introduced and became a currency to purchase goods around the resort. In 1967, “buffets” were introduced. Club Med had invented the "all-inclusive."
 
Fifty years later, groups in Europe, Mexico, and the Caribbean aggressively entered the arena and have grown rapidly. Given that the popularity of all-inclusive resorts directly correlates to the value proposition for guests, Spanish operators entered first by owning, developing, and operating large properties. Names like Riu, Barcelo, and Iberostar are now renowned and respected for the products and services they deliver to an ever-growing base. Over time, new groups joined the segment and focused on operation and distribution with the likes of AM Resorts, Karisma, and others. Their model offered flexibility and the ability to grow faster and further by focusing on an asset-light strategy.
 
Once considered primarily a hospitality segment catering to budget-conscious travelers, today’s major all-inclusive companies offer a sophisticated guest experience and a wide array of amenities and services at various price points. These customized and high-end products and services help create lasting memories among a more demanding clientele.
 
Big-Brands enter AI
From our firm’s perception as asset managers, advisors, and industry professionals, it is obvious that the model itself has become much more complex for most stakeholders:
  • From an operational perspective, All-Inclusive has grown from a regional model to an international one.
    - Operators are now required to offer different levels of services, from basic to luxury.
    - Technology is impacting eCommerce, distribution channels, and other selling decisions.
    - Competition is dramatically increasing with large, publicly traded players aggressively seeking to make up for lost time.
  • For investors it is no longer a decision to opt for a business model defined by high occupancy/volume offering attractive value to the customers. They will now have to consider several important factors critical for the future profitability of their investment.
Recently, Marriott, Hilton, Accor, Hyatt, and Wyndham committed to the segment, and many others are offering a hybrid model which includes some form of All-Inclusive for loyal clients across their brand scope.
 
So, with large brands now in the game, how is the All-Inclusive concept changing from an investor’s viewpoint?
 
While AM Resorts expertly leveraged the strength of distribution by growing its platform with wholesalers, tour operators, and other intermediaries, they were an anomaly in a crowd of operators focused on regional expansion to maximize the efficiency of their operational delivery. Vertical integration, mostly achieved by AM Resorts through its parent company, Apple Leisure Group (ALG), has been a competitive advantage allowing it to grow exponentially over the last 10+ years.
 
Another emerging concept, Vacation Club, has allowed many of the original players in the All-Inclusive model to generate guest loyalty and produce substantial cash flow through memberships and packages marketed directly at their existing clientele.
 
The power of distribution channels, loyalty programs, and marketing is undeniable. Large, established hotel brands deliver more business at higher rates and a lower cost to a huge number of repeat customers. This has been their “modus operandi” for a long time, and they are now bringing it to the All-Inclusive segment. Overall, this is a more efficient approach directed at a much larger customer base through hotels’ unique loyalty programs. Membership numbers for these programs have grown exponentially and are now an important source of business. Current membership numbers by brands: Marriott @ 157 million, Hilton @ 122 million, Accor
@ 68 million, Wyndham @ 89 million, and Hyatt @ 16 million prior to the ALG acquisition.
 
Intricacies & Complexities of the AI model
For owners and investors approaching these large hotel brands, the intent is to leverage the strength and image of the companies to deliver larger EBITDA to their stakeholders. Brand recognition, large loyalty programs, and well-established infrastructure will increase profits for owners and investors by benefitting from economies of scale other smaller All-Inclusive competitors could not capitalize on given their size and lack of distribution and infrastructure.
 
In this ideal model, what could go wrong for investors? To begin, let’s review where and how some complexities may arise that are unique to branded AI:
1) The focus needs to be total revenue per customer
2) Loyalty program redemptions need to be modified to reimburse ownership for rooms, food, beverages, and other amenities.
3) PMS will require adjustments for multi-guest and child-pricing strategies, an essential component of the AI model.
4) The All-Inclusive concept needs different upselling strategies and tactics and competitive data indicates a potential to significantly grow top line beyond the base rate and this should represent an additional 20% of revenues.
5) Vacation Clubs and VIP Lounges can be a cash cow for brands and owners depending on their value sharing strategy.
6) Loyalty member upgrade policies of large brands can impact the essential upselling opportunity for the AI model and customer satisfaction.
7) Customized or regional brand operation’s support/staffing is necessary to optimize resort efficiencies.
8) Executing and pricing group & wedding functions, a crucial segment for the AI concept, will need to be a focus for large brands.
9) All-Inclusive models will require booking engines to offer bundled packages for Air and Hotel.
10) Channel distribution complexities are increasing and will require weekly
monitoring.
11) ROI of advertisement and promotion through brand proprietary channels versus third parties will need oversight.
12) The operating cost structure (particularly as it pertains to F&B), staffing levels, and service delivery are different.
 
Some parting thoughts
With all Big-Brands now entering the AI playing field in a dynamic and committed way (including large financial commitment and key money), the process to evaluate, choose, and implement a sound investment strategy for owners and investors is getting more complex. Affinity with a specific brand will dramatically cut through the decision process but won’t reduce the amount of data and analysis needed to ensure all stakeholders are on a successful long-term journey. The AI landscape will be increasingly competitive and many unforeseen obstacles can still affect ROI expectations. It is clear the all-inclusive model is proven, viable, and in full expansion in the hospitality industry. Now more than ever, a careful and detailed approach to underwrite the investment decision combined with a strong support team will be a necessity to mitigate the intrinsic risk of this exciting investment option!
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