Hotel Valuation Journal

Segmenting Latin America

Latin America, which is generally defined as the Spanish-speaking countries of the Western Hemisphere, is separated by political, religious and economic boundaries. With the formation of the European Community, Latin American nations now need a regional market to allow them to compete effectively in a global economy. As countries such as Mexico, Venezuela, Guatemala, Cuba and Puerto Rico begin to seek the removal of trade barriers that have kept them economically fragmented from each other, we believe that the Latin American hospitality industry needs to increase its segmentation.

Travel to any U.S. city, resort area, suburban commercial district or highway intersection, and you are likely to encounter a variety of lodging facilities representing many tiers of product segmentation. The dominance of full-service hotels and resorts in the United States has given way to the all-suite, extended-stay, economy, budget and micro-budget facilities that proliferated during the 1980s. However, throughout much of Latin America, luxury hotels are the only option for travelers looking for good quality lodging facilities. Although chains such as Posadas de Mexico, Camino Real, Melia Hotels, Sandals and Club Mediterranee have developed a strong market presence in many parts of the region, these full-service hotels primarily operate in the first-class and luxury segments. We believe that many Latin American nations have a strong market to support the development of (or conversion to) identifiable, niche-oriented lodging facilities.

Urban Centers

Examine a major U.S. city such as Chicago, and you will find high-rise versions of limited-service, all-suite and extended-stay properties. But in Mexico City - the largest city in the world - only a very limited choice of identifiable, high-quality, chain-affiliated lodging facilities exist. As illustrated by Table I above, this is not to say that overnight visitors do not have a choice of differing tiers of accommodations in Mexico City

It should be noted that the hotel rating system used by the Mexican government does not correspond to that of AAA or Mobil. The Grand Tourismo category is roughly equivalent to a luxury designation in the U.S., while Five-Star properties would be considered only first-class. Thus, most of the economy and budget hotels that comprise nearly two-thirds of the hotel supply in Mexico City are not affiliated with a recognizable chain and often do not meet the standards set by those chains. As Table 2 shows, the major hotel chains operating in Mexico City are almost exclusively limited to the luxury and first-class categories.

Mexico City, perhaps more than any other major metropolitan area in the world, needs an extended-stay hotel. As the financial and government center of a rapidly developing country, Mexico City attracts several hundred thousand commercial visitors, many of whom stay for long periods as a result of consulting or training assignments. Because of Mexico City's severe pollution problem, many visitors prefer to stay indoors, and less intrepid travelers may prefer to use purified water and packaged foods or food which they prepare themselves, rather than sampling the local cuisine. Of course, an extended-stay hotel should be located near a variety of complementary support services such as a good-quality supermarket.

Mexico City supermarkets do sell familiar, brand-name American products such as Rice Krispies, Chicken of the Sea tuna, and Stove Top Stuffing. What they do not offer are American products such as Residence Inns, Homewood Suites, or Woodfin Suite hotels. Like their successful counterparts in the states, these properties do not require prime locations such as Chapultepec Park or Zona Rosa, but might easily succeed in attractive residential areas such as the Polanco District.

Resort Destinations

Resort destinations such as Belize, Costa Rica and Cancun could benefit from the development of all-suite hotels. These types of properties abound in most United States markets, and often outperform their full-service counterparts. Many resort destinations in Latin America offer luxury and first-class rooms in full-service hotels; however, guests who wish to stay in a suite are often forced to pay for the hotel's premier room or find accommodations in condominiums or timeshare units. Hotel chains such as Comfort Inn or Motel 6 would provide a familiar and economical lodging alternative for American tourists, who comprise a large portion of the market. The development of chain-affiliated hotels is also likely to benefit United States properties, because roughly 20 percent of all foreign visitors in the United States are residents of Latin America.

Commercial Centers

San Juan, Puerto Rico is emerging as the commercial hub of the Caribbean, and as a result of significantly expanded service offered by American Airlines, the city is rapidly becoming the gateway to Latin America. Puerto Rico's commonwealth status creates a market that is closely tied to the U.S. economy, and American products are readily available there. However, commercial guests have little choice but to stay in luxury beachfront resorts or small facilities that lack chain affiliations, and often do not meet the standards required by major lodging chains. According to information provided by the Tourism Company of Puerto Rico, less than 20 percent of the lodging facilities in San Juan are categorized as commercial hotels; the remaining 80 percent are classified as tourist hotels. Lodging chains such as Hampton Inns or Courtyards by Marriott, which are extremely popular with commerdal travelers in the United States, would provide guests with a consistent product and an economical lodging alternative.

Other regions of Central America

Central American countries such as Guatemala, Panama, and Nicaragua are witnessing moderate growth in tourism following the introduction of democratic elections. Many Central American nations are hoping to capitalize on tourism as a method of reviving weak econorines, and are marketing their unspoiled beauty to both sun-worshipers and ecotourists. This trend is particularly evident in Costa Rica, which offers a wide expanse of protected forest and parklands. Unlike many Central American nations, Costa Rica benefits from a stable democratic government, which makes it particularly attractive for hotel development.

Some South American countries such as Brazil and Peru are still undergoing political upheavals that significantly reduce the priority of reform in the local hospitality industry. Chile, Columbia and Venezuela are now stable enough to take steps to direct their economic growth and encourage tourism. Venezuela has initiated privatization of many government-owned hotels, and we believe that the benefits of segmented lodging products should be considered. The 70-room Hotel Humboldt in Caracas, Venezuela, for instance, could be converted to an Embassy Suites or Guest Quarters Hotel. This type of segmentation would target these facilities toward a more specific market and provide a more recognizable name to the traveling public.

Direction of the Major Franchisers

A similar situation exists throughout much of Europe; this has been recognized by the Marriott Corporation, which is considering the development of several Courtyards and one Residence Inn. Marriott officials indicate that Latin America will not become a target for segmented expansion until full-service hotels and resorts are developed, thus building recognition of the Marriott name in the region. Conversely, the Promus Company is actively developing Embassy Suites and Hampton Inn properties in Mexico, Chili, Argentina and Venezuela. Corporate officials expect this expansion to succeed as a result of the strong name recognition these chains enjoy in the southern United States.

Radisson and the Carlson Company intend to construct all-suite hotels in gateway cities in Latin America in conjunction with the more rapid development of full-service properties. In addition, a number of threestar properties (primarily in Mexico) are being targeted for conversion to limited-service products such as Country Suites. Posadas de Mexico, which successfully introduced the Fiesta Americana concept in many Mexican cities and resort areas, is now developing courtyard-style Fiesta Inns that will be marketed to business travelers.

Choice Hotels is actively pursuing the development of Comfort Inns, Comfort Suites and Sleep Inns with several master franchise agreements throughout Latin America. Site selection criteria for Mexican franchises are similar to those employed for Comfort Inns and Sleep Inns in the United States, and preference is given to highway locations near commercial areas. Conversion opportunities are also being sought in Venezuela and Costa Rica.

With 100 properties situated along the southern border of the United States, officials of La Quinta Motor Inns believe that the name recognition of the chain in Mexico is quite high. This conclusion has fueled their plans to expand into Mexico's mid-rate, limited-service lodging market in 1994. Although our discussions with some major franchise and management companies suggest that Europe is now the primary focus of extended-stay and all-suite hotel development, similar development in Latin American countries is certain to follow.

Conclusion

Ratification of the North American Free Trade Act (NAFTA) will undoubtedly accelerate hotel development in Mexico, and the development of chain-affiliated lodging facilities that offer a familiar, consistent product is certain to be welcomed by weary motorists, touring families, budget-conscious tourists and extended-stay business travelers. In Mexico and other Latin American countries, a broader, more open trade market will induce capital and industry to the region; however, a narrower, more segmented lodging market is needed to accommodate the travelers who will build these industries.

The Hotel Valuation Journal