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By Francis J. Nardozza, Partner - National Hospitality Industry Director

Summer, 1998 - Consolidation is rapidly reshaping the lodging industry. Companies large and small are currently plotting their courses through the current indus-try consolidation in an attempt to maximize future opportunities and, at the same time, capitalize on the euphoria resonating throughout the industry. However, consolidation by itself is not the single road map to future success in the lodging industry. Effectively integrating businesses, developing customer-focused business strategies, and deploying enabling technologies for competitive market advantage appear to be the right blueprint for success.

Consolidation

Over the next year or two, a handful of global giants will emerge. There will always be opportunities for
smaller niche players to carve out attractive and profitable industry roles for themselves. but the big players will likely have a stronger hand in shaping the industry's future. It is not yet clear which companies will emerge as the strongest and most dominant,  although Starwood, Patriot American, Promus, Granada, Bass PLC, Meristar, and Marriott International are possible candidates. Industry convergence may also play a hand in shaping the future. with the potential for non-lodging companies to further buy their way into the lodging business. It could also be within the realm of possibility that multifaceted consumer-based financial services companies and consumer products companies could also venture into the lodging business.

Successfully Integrating the Businesses After Consolidation

Generally speaking. there are three major stages to the integration process:
 

Value preservation is the preservation of value erosion: value realization is the achievement of cost savings: value creation is the design of a new entity which differentiates itself from the competition.

While doing the deal to combine two hotel companies is a daunting challenge, it is overshadowed by the more difficult task of integrating the two companies. Those organizations which successfully integrate the businesses and execute appropriate business strategies to create enhanced shareholder value will be the winners in this arena.

Internet and Technology Influenced Business Transformation

Technological innovation through Internet and electronic commerce solutions is one way in which the lodging business is changing rapidly. By becoming the primary platform for linking systems and data from within
 
 

the company as well as externally linking customers, suppliers. and other stakeholders, the Internet will impact every element of the lodging business. Electronic commerce on the Internet is already proceeding at a rapid pace. Rapidly expanding uses will include paperless electronic transaction processing, electronic storefronts, on-line guest services and information publishing. in-room entertainment and virtual training for employees.

Customer Centric Management (CCM™)

After consolidation, differentiating one large hotel company from another will become much more difficult. Customer Centric Management (CCM™) will become the means by which innovative hotel companies break away from the pack. CCM™is a highly integrated management approach which involves improving virtually every interaction with cus-tomers. Companies which actively pursue ways of enhancing the level of service will find themselves realizing not only greater customer retention, but greater profits as well.

Significant New Construction and the Threat of Overbuilding

New construction activity is at an all-time high in the industry. Until recently. most new construction has been focused on the budget, economy. and mid-priced segments. That's changed now with new, full - service deluxe and luxury hotels either planned or under construction in nearly every major travel destination in the United States. In the short term, overbuilding is a potential threat to the lower-priced segments as national occupancies show signs of flattening and room rates continue to grow at slower rates than in 1997.

A Look Forward

As consolidation continues to gain momentum, companies which leverage technology. focus on their customers, and effectively integrate business strategies will be the key players in the future. Although over-building and the involvement of non-industry players pose a threat, the current robust economy and the proliferation of strategic transactions should ensure profitability all around. To that end, the lodging industry should remain healthy and vibrant for the balance of this decade.
 

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1998 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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