It’s been one of the hotel storylines we’ve been paying closest attention to since the Covid crisis at the beginning of the decade: the big hotel brands relying more on conversions to maintain their net unit growth.
The double whammy of rising interest rates and increasing building costs, hobbled ground-up construction in many countries but according to Hilton CEO Chris Nassetta things are changing.
Hilton’s current forecasts have conversions in the high thirties, according to the latest mix.
“I mean there's a lot of moving parts in the year for the year, but we think it's going to be up modestly,” Nassetta said on Hilton’s Q1 earnings call.
He added: “I think the math of it is such that on an absolute basis, I don't think you're going to see a big drop-off in conversions.”
What will change the equation slightly is that the construction environment is improving.
“As a percentage of NUG, I do think you will see it [conversions] moderate over time, but that's because you've been in a world where construction starts haven't really gotten back to pre-COVID levels, and that will happen and is happening. It probably happens this year. And as you start to have that happen over the next 2 or 3 years and new construction growth in an absolute sense, I think the percentage will decline.” he said
The conversion percentage tends to increase and decrease depending on the wider economic climate so, like today it was higher during the GFC.
“It went as low as the high 10s [percentage]. I don't think we're going to be in a world where it's high 10s,” Nassetta said.
The big difference? Hotel brand companies are now stacked with conversion flags, across all chain scales. Before they didn’t necessarily have the capability to churn them out, now they do.
“Now we've got [...] a dozen or more brands that are really good candidates for conversions. And so I think you're probably sort of permanently in the 30 per cent to 40 per cent range. I'm making that up. But I mean, directionally, if you did the math on new starts, I think you're sort of permanently in that range," he said
Q1 highlights
In Q1, Hilton saw system-wide performance growth of 3.6 per cent, driven by strength across brands at all price points. Business travel was up 2.7 percent. Further, Nassetta highlighted sequential monthly improvement throughout the quarter.
The company is still forecasting cautious optimism for the year: 2 per cent to 3 per cent performance growth system-wide, with group business expected to lead. For net unit growth, Hilton is forecasting 6 per cent to 7 per cent — a pace Nassetta suggested could sustain for years given the size of underpenetrated markets like India (where Hilton just signed a 125-property Hampton deal), Southeast Asia, Latin America, and Africa.
"How long can you grow 6 per cent or 7 per cent?" Nassetta posed the question himself. "My view is a long, long time, simply because the world is a big place. Populations all over the world need to be served."
The luxury boom of the last five years, concentrated among the cosmopolitan set and the ultra-wealthy, is about to have company. The global middle class is ready to check in, and Hilton is positioning itself to be there when it does.