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The Hyatt Loop Chicago is set to open in 2015. It is a franchised hotel, which is a key to Hyatt Hotel Corp's growth strategy.

Expanding the franchise: Hyatt looking to grow

by Tim Marcin
Mar 6, 2014

The Hyatt Loop Chicago has boarded up windows. It’s a ghost of a building occupied only by construction workers wearing neon vests. A construction elevator whirs up a bright red track that runs the entire span of the 22-story former office building.

This is a good sign for Hyatt Hotels Corp.

The Hyatt Loop Chicago, scheduled to open in 2015, is a franchised hotel and will be run by Chicago-based Integrated Clark Monroe LLC, the hotel arm of John T. Murphy’s development company.

“The franchised model is all about the confidence owners have in brands,” said Chad Beynon, an analyst at Macquarie Securities.

When an owner chooses a brand for a hotel it indicates trust. The owner is choosing the hotel company that affords the greatest opportunity for success, industry experts say.

Hyatt’s plan for future growth hinge on opening more franchised hotels. It plans to open approximately 40 of them this year alone.

While investors like to see growth, that amount of expansion presents challenges for the Chicago-based hotelier.

“If I am not mistaken they opened over 50 in 2013,” said Mark Eble, vice president in charge of the Midwest offices of PKF Consulting, which specializes in the hospitality and tourism industries. “I am sure each one is difficult but they certainly have the resources.”

Franchising and building brands is something Hyatt has struggled with in the past, Beynon noted. “It really just takes a while to build brands. Hilton is 100 years old,” he said.

In the past, Hyatt built its empire on being a destination for convention goers and travelers heading to major cities. It did not focus on franchising its hotel brand.

“They’re paying somewhat of the price of waiting too long,” Eble said.

Hyatt is no longer waiting. It opened 14 hotels in the fourth quarter: seven franchised, five company-managed and two company-owned.

Marriott and Hilton are the industry leaders in franchising, according to Eble. Only 448 hotels, or 41.6 percent of Hyatt’s 1,076 hotels, were franchised, according to the company’s annual report.

For context, InterContinental Hotels Group PLC, which owns the Holiday Inn and Crowne Plaza brands, owned just 9.9 percent of its hotels in 2009, according to the Gulliver blog in the Economist magazine. A staggering 4,170 of its 4,186 hotels were franchised.

Franchising is considered a safer strategy during economic downturns. But the relatively small size of Hyatt’s franchise profile also can be seen as advantage, some experts say.

“The good news is, there are a whole lot of markets that don’t have Hyatt in them,” Eble said. “If you want to put another Marriott in Louisville Kentucky, you have to worry.”

Franchising is the main avenue for growth for hotel companies, according to Eble. Loyalty programs and frequent guests drive business and franchised hotels allow fast expansion into new markets.

Although it has historically has been cautious about franchising and growth, Hyatt has shifted gears in the past five years, Eble said. The hotelier reported positive earnings in mid-February, beating analyst expectations and sending a sign that its new business plan is working.

“It was a great year,” said Hyatt Chief Executive Officer Mark Hoplamazian in a conference call with investors. “And as we executed upon our strategy of expanding our presence and enhancing the value of existing hotels to deliver superior shareholder value over time.”

Hyatt’s stock shot up almost 8 percent to $52.85, near its 52-week high of $53.63.

“Hyatt has been the best performer out of the group,” Beynon said, speaking about the large hotel chains such as InterContinental, Marriott International Inc. and Starwood Hotels and Resorts Worldwide Inc.

The company’s strong showing was due largely to increased corporate spending, high occupancy rates and high room rates, according to Beynon.

Next year is looking promising for Hyatt as well because the convention and group travel business is picking up as the economy recovery, industry experts say. Seventy to 75 percent of group business has already been booked for 2014, said Hoplamazian in the conference call.

Hyatt’s upscale reputation, which helps its popularity with groups and business travelers, is partly rooted in its distinctive interiors.

“I think Hyatt is, from my perspective, known for clever design,” Eble said. “I think that Hyatt still has an affinity for design and for fittings and finish selection to make a more attractive product.”

Hyatt’s Executive Chairman, Tom Pritzker is known for being particularly interested in design. Travel and Leisure magazine named Pritzker its “design champion” for 2013 for his focus on architecture and attractive design.

The magazine specifically mentioned Hyatt’s Andaz Papagayo in Costa Rica, which features a free-flowing design inspired by the local terrain and shell-shaped buildings designed to blend in with the natural world.

As Hyatt grows, Eble does not see the company losing this interest in providing an attractive product.

“Hyatt sees the opportunity to be a mid-market hotel and still have interesting and evocative design that contributes to competitive position,” he said.

But the company’s vision and reputation for luxury may be this year as Hyatt opens 40 hotels.

So far, Hyatt has seen mixed results with its ramped-up expansion efforts.

“I think it has been—they’ve had wins and losses,” Eble said about Hyatt’s new hotels. But he adds that franchising has to be part of the company’s strategy going forward. The key issue, he says, is “How do they persuade other people’s money to choose their brand?”