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Internal Environmental Analysis and Strategic Explanations: Hilton Worldwide

Asa Wayne Wilke

Daren Swenson

Gabrielle Hager

Greg Howe

Jeffrey Miller

Kate Pospyhalla

Texas A&M University – Commerce

MGT 527 – Spring 2019

March 08, 2019

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Table of Contents

I. Introduction 1

Hilton History 1

Hilton Worldwide: The Three Way Spin-Off 5

II. Industry Overview 5

Hotel Industry 5

REIT Industry 8

Timeshare Industry 9

III. External Environment 11

Political 11

Economic Environmental Impacts 15

Socio-Cultural 18

Technology 24

IV. Porter’s Five Forces 28

Competition in the Hotel and Lodging Industry 30

Threat of New Entrants 36

Bargaining Power of Customers 41

Purchasing Power of Consumers 41

Threat of Substitute Products 44

V. SWOT Analysis 45

VI. Internal Environmental Analysis 48

Strengths 48

Weaknesses 52

VII. Environmental and Industry Analysis 54

Opportunities 54

Threats 56

VIII. Environmental and Industry Conclusion 60

References: 63

Appendix A 72

Appendix B 75

Appendix C 78

Appendix D 81

Appendix E 82

Appendix F 89

Running Head: Assignment 1: Tapestry Inc.

I. Introduction

Hilton Worldwide specializes in the ownership, management, franchising, leasing, and development of hotels, resorts and timeshare properties all over the globe. Hilton Worldwide is one of the premier, major and fastest growing hospitality organizations in the world with over 5,000 hotels, resorts and timeshare properties comprising of more than 678,000 rooms in 91 countries and territories worldwide (OUR BRANDS, 2019).

This research will provide an in-depth quantitative and qualitative analysis behind Hilton Worldwide’s strategic move to spin off Park Hotels & Resorts and Hilton Grand Vacations resulting in three independent, publicly traded companies: Hilton Worldwide (HLT), Park Hotels & Resorts (PK), and Hilton Grand Vacations (HGV). This spin off will expand Hilton’s footprint by sectoring the company into the REIT and Timeshare segments of the hospitality industry. Analyses will consist of a Broad External Environment examination, Porters Five Forces, Internal Environmental examination, SWOT comparison, and a concluding summary explanation of why we believe Hilton executed the spin-offs to three separate companies.

Hilton History

Conrad N. Hilton purchased The Mobley hotel in Cisco, Texas, in 1919, and thus Hilton Hotels was founded. Conrad soon after purchased Hotel Melba in Fort Worth, Texas and numerous other properties around the country. Hilton implemented the management slogan “minimax” (minimum cost, maximum hospitality) strategy to entice customers by providing them with amenities never been offered by hotels such as air conditioning, elevators, and cold running water. Hilton Hotels Incorporated was born when Conrad consolidated his properties, in 1929 (Lach, 2000).

Hilton established his corporate headquarters in Beverly Hills, California in 1942, and formed Hilton Hotels Corporation in 1946, when the company formally went public. Thereafter, Hilton Hotels Corporation was formed as the first hotel company to be listed on the New York Stock Exchange (NYSE: HLT) (Kleiner, 2010).

In 1948, continuing with the company’s minimax philosophy and to implement innovative strategies, Hilton was the first hotel chain to introduce into its facilities a multi-hotel reservation system named the Inter-Hilton Hotel Reservation System, which revolutionized the hotel industry by employing a modern-day reservation system that linked its company hotels (Hilton 2019). Hilton continued to lead in the adaptation of business and industrial methods of hotel operations when they initiated the first food and beverage pre-costing system that revolutionized both the hotel and restaurant industries. (Hilton 2019).

Continuing with successful acquisitions, Hilton International was born when Caribe Hilton in Puerto Rico, the first Hilton built hotel outside the United States opened. (Hilton, 2019). Expanding its inventory of hotels, Hilton took his company out of the overseas hotel business in 1964, by spinning off Hilton International, and began franchising the following year to capitalize on the well-known Hilton brand. As a result of the Hilton Hotel brand splitting apart, the hotel chain was controlled by two distinct groups - Hilton Hotel Corporation (HHC), which held rights to the brand in the United States, and Hilton International Company (HIC), which owned the brand abroad (Stanfel, 2007).

Hilton Hotels entered the gaming business in 1970, by expanding its inventory and procuring two Las Vegas hotels, the Las Vegas Hilton and the Flamingo Hilton, launching its gaming division, becoming the first NYSE- listed company to enter the domestic gaming business (Jacob, Schuyler & Nassetta, 2018). Hilton took advantage of entering this industry as average revenue from Las Vegas hotels in 1970 comprised of 59.5% revenues generated from the hotel casinos and 25.2% from food and beverages whilst only 13% revenues was derived from room rates (UNLV Stats, 2018).

The company returned to the international hotel business with the founding of Conrad International Hotels in 1982, with the goal of operating its luxury hotels and resorts in the world’s foremost business and tourism capitals. Additional international hotels were opened in Australia, Turkey, Egypt, Hong Kong, Uruguay, and New Zealand in the decade that followed, augmenting the "Minimax" slogan with "Across the Nation," "Around the World," and "So Nice to Come Home To."

By the late 1980’s, over 270 U.S. hotels were operated under the Hilton brand when they launched their tier based HHonors program offering customers a customer-centric loyalty program for the Hilton portfolio granting member’s access to discounts, point-based awards for free nights, free Wi-Fi, and special offers and promotions exclusively for members (Member Benefits, 2019). Hilton’s information services approach, called OnQ, enabled the company to implement and manage its’ customer-centric strategic approach. Due to these innovations, Hilton was able to grow its share of repeat guests, from 40–60% to 65–84%, with revenue per room across Hilton brands, more than 7% above the industry competitors (Verhoef, & Lemon, 2013).

In the 1990’s Hilton expanded its gaming operations by procuring Bally's Casino Resort and Bally Entertainment, making it the largest gaming company in the world. Hilton established the Hilton Grand Vacations Company in 1991, a national system of vacation ownership resorts, and acquired the O'Hare Hilton, the only hotel located in O'Hare International Airport (Kleiner, 2010). Hilton made a massive acquisition in 1999 with the $3.7 billion purchase of Promus Hotel Corp. and acquired its portfolio of Doubletree, Embassy Suites, Hampton Inn, Homewood Suites and Red Lion hotels (Rosen, 1999).

Hilton Worldwide Resorts, a vacation-ownership subsidiary, was launched in 2002, providing its members with the first collection of premium resorts and exotic vacation experiences (Hilton, 2019). Hilton Hotels acquired Hilton International from Hilton Group for $5.7 billion in 2006. The deal re-unified the Hilton brand globally and added nearly 400 new locations to the company's portfolio (O'Connor, 2017).

Hilton Hotels changed its name and logo to Hilton Worldwide relocating its headquarters from Beverly Hills, California to McLean, Virginia in 2009. Hilton went public again on December 11, 2013, as the world’s largest hotel IPO in history with an initial stock price of $20 per share (Rawlings, 2013).

Hilton has spent over $500 million on information technology, people, and processes to gain a deeper understanding of its customers and customer segments (Verhoef, & Lemon, 2013). Hilton’s chain-specific smartphone apps make it simple for travelers to search for hotels nearby, alter a hotel reservation, check in online, check program status, and redeem points. Hilton specializes through the Internet by their Hilton Reservations & Customer Care (HRCC) systems in finding alternative Hilton lodging options when a customer’s first Hilton choice is not available. This strategy generates more than $600 million per year that would have otherwise been captured by competitors (Verhoef, & Lemon, 2013).

In 2010, Hilton marked a social media milestone when it became the first major hotelier to reach 50,000 fans on Facebook—considered the most popular social networking site in the world (Hilton, 2019). Hilton Hotels & Resorts launched the ‘Travel with Purpose’ program in 2011, serving as a guiding principle behind Hilton Corporate social responsibility (CSR) programs and initiatives strategy placing emphasis on employees, the impact of Hilton on the environment and local communities, and responsible sourcing out by year 2030 (Hilton, 2019).

Hilton Worldwide: The Three Way Spin-Off

Hilton Worldwide Holdings Inc. announced on January 4, 2017, the completion of the spin-offs of Park Hotels & Resorts Inc. and Hilton Grand Vacations Inc. resulting in three independent, publicly traded companies on the NYSE (Hilton, 2019).

Hilton (NYSE: HLT) is a leading global hospitality company, comprising of more than 4,800 owned and franchised, leased, and managed hotels with nearly 789,000 rooms located in 104 countries and territories (Hilton, 2019). Park Hotels & Resorts Inc. (NYSE: PK) is one of the largest publicly traded lodging real estate investment trusts (REIT) with an assorted portfolio of market-leading hotels and resorts with substantial real estate value. The Company's portfolio consists of 67 premium-branded hotels and resorts with over 35,000 rooms located U.S. and international markets (Hilton, 2019). Hilton Grand Vacations Inc. (NYSE: HGV) is a leading global timeshare company. Headquartered in Orlando, FL, Hilton Grand Vacations develops, markets, and operates brand name, high-quality vacation ownership resorts in select vacation destinations. (Hilton, 2019).

II. Industry Overview

Hotel Industry

There are five main sectors of the Hospitality industry: Lodging (Accommodation), Food and Beverage, Travel and Tourism, Entertainment (Cruise, Casino, Gaming), and Timeshares. The hotel industry is the main part of the hospitality industry, which constitutes over 30% of the hospitality industry value. From 2009 to 2017, U.S. hotel gross bookings grew from $116 billion to $185 billion with expectations for bookings to rise 5-6% in 2018 and 2019. Global industry's retail value was reported $570.18 billion in 2017 (Deloitte, 2019).

There are over 300 hotel chains consisting of over 17 million available rooms around the world, which contributed $8.27 trillion to the global economy in 2017. The top 10 hotel chains for 2018 consist of over 5 million rooms on over 41,000 properties and control 75% of the largest hotels across the globe. (Questex, 2018).

The emergence of increasing demand for hospitality services within new markets enthused hotel groups to focus on business growth by expanding their global market share (Questex. 2018). The driving forces that impacted the growth and complexity of global markets steered hotel companies to implement territorial ownership, leasing, management, and franchising strategies. The ownership model advocates that the owner hotels accept all the costs and benefits. The leasing model is comparable, except that the hotel owner does not have absolute ownership of the hotel but has signed lease agreements. The management model implies that the owner uses the company to operate the hotel on their behalf and pay brand licensing and management fees when the hotel operates under a third-party brand (Brondoni, 2009).

The hotel industry consists of three main types of hotel and accommodation services: Lodging, Suites, and Resorts. Lodging is for people to travel from one place to the other and need a place to sleep. Suites are for those who require a more apartment style accommodation, which generally includes, a kitchenette and living room, with one or more separate bedrooms. Normally, suites are suitable for formal sorts of staying and are much expensive compared to regular room services. Lastly, resorts are popular among travelers because they bring them close to nature and give a necessary break from their normal routines.

In the hotel industry branding influences consumer attitudes and over time the brand logo and name offer symbolic representations of a company. A company’s Brand impacts on positive and desired attributes of which can add value to the reputation of an organization. Wide geographic dispersion and territorial expansion strategies entailing closer relations with third parties require maintaining superior and dependable quality standards, training and distributing a common ethical culture throughout the chain (Foroudi, 2019). Brand equity has a primary authority role for hotel chains and constitutes a key success factor (Salvioni, 2016). Branded hotel chains consist of over 53% of the hotel industry. (Industry and market trends, 2019).

Revenue per available room (RevPAR) is a hotel industry metric used to measure the hotel room’s average daily rate (ADR) multiplied by the number of rooms used; it is calculated by taking the period’s total revenue and dividing by the number of rooms rented over that same period. In 2018, the US posted a national third quarter RevPAR of $85.96, and in the fourth quarter RevPAR increased 2.4% to $79.21 (Hoisington, 2018). As the US hotel industry heads into 2019, PwC forecasts the average-daily-rate growth to remain steady, continued supply growth of 1.9%, and RevPAR growth is expected to increase 2.8% (Hoisington, 2018).

Long-term macroeconomic trends significantly benefit the industry such as 2.6 % GDP growth per year over the past ten years, increasing consumer’s disposable income. (US GDP, 2019). The increase of an aging population with the desire and means to travel is a favorable industry driver for those over 60. A shift to multi-purpose travel has become dependent on cost efficiencies and has led to upticks in consumer spending. International travel is also becoming increasingly viable for more people as international tourist travel is projected to increase from 1.2 billion to 1.9 billion-tourist arrivals by 2026 (Industry and market trends, 2019).

REIT Industry

Hilton’s new REIT spin-off, Park Hotels & Resorts Inc., is the second largest lodging REIT in the industry. Over 80 million Americans are invested in REITs directly or indirectly from REIT mutual funds or exchange-traded fund investments (REIT, 2019). More than 226 REITs are publicly traded on the major stock exchanges and have a collective equity market capitalization of more than $1 trillion. Listed REITs paid out over $53.2 billion, and non-listed REITs paid out approximately $4.3 billion in dividends during 2017 (Gaille, 2018).

Per the IRS (2019), REITs must invest at least 75% of their assets in real estate and distribute 90% or more of annual taxable profits, as dividends to shareholders. REIT corporate structure is a tax status defined by the Internal Revenue Code. Qualified REITs avoid corporate-level taxation provided they meet regulatory requirements set forth by the IRS regarding their organization, operation, and distribution of income (IRS 26 U.S. Code § 856, 2019)

Currently, over 80 % of publicly traded REITs are equity REITs (Feng, Price, & Sirmans, 2011). The U.S. based REIT approach has been implemented in over 35 countries by offering investors access to income-producing property portfolios from around the world. Approximately 73% of the listed REITs account for the total market capitalization of the FTSE EPRA/Nareit Global Real Estate Development Market index which represents the general trends in eligible real estate parties worldwide (Feng, Price, & Sirmans, 2011).

REITs benefit from the 20% deduction on pass-through income and are excluded from wage restrictions. REIT dividend growth has surpassed inflation (as measured by the CPI) in 18 of the past 20 years (CPI, 2019).

Timeshare Industry

The timeshare industry is the smallest developed aspect of hotel accommodation and a novelty in the tourism market. In today’s hospitality industry, timeshare represents the time to use a hotel facility divided into units or intervals for timesharing (Ristova, Koteski, Dimitrov, & Jakovlev, 2018). The timeshare industry is inclusive of multiple business units and recurring revenue streams, which makes it an attractive business model for consumers.

In 2018, the U.S timeshare industry was valued at over $9.6 billion contributing $79.5 billion to the US economy, employing over 511,000 full and part-time jobs, more than $28.1 billion in income and wages, and approximately $10.2 billion in tax revenues. In the US alone, 1,570 timeshare resorts averaged 100 units – 131 units per resort and average $22,180 per timeshare interval (ARDA International Foundation, 2019.).

According to the ARDA 2018 US Shared Vacation Ownership Consolidated Owners Report, approximately 9.6 million (7.1%) of U.S. households own one or more timeshare ownership product including timeshare weeks, points, fractional, or Private Residence Clubs. Timeshare ownership generally increases with household income peaking among owners with $100k or more (11.0 %) (Gaille, 2018).

Although the global timeshare industry is relatively concentrated in the US, there is a growing market for timeshares located throughout the world. The three leading timeshare companies have 44.57% of the revenue market share. Wyndham, the industry leader, has 17.40% market share trailed by Marriott Vacations Worldwide (14.48%), and Hilton Grand Vacations (12.69%). The timeshare market size is expected to reach over $23.7 billion by the end of 2025.

There are currently more than 226 publicly traded REITs registered with the SEC that trade on one of the major stock exchanges with 186 traded on the NYSE. These REITs have a collective equity market capitalization of more than $1 trillion. Listed REITs paid out over $53.2 billion, and non-listed REITs paid out approximately $4.3 billion in dividends during 2017, Of these, 76% qualify as regular taxable income and 14% of the annual dividends qualify as a long-term capital gain, while the remaining percentage qualify as a return of capital (Gaille, 2018).

Per the IRS (2019), REITs must invest at least 75% of their assets in real estate and distribute 90% or more of annual taxable profits, as dividends, to shareholders. These investments serve as positive investment income to consumers given their high yields and stable share prices. REIT corporate structure is fundamentally a tax status defined by the Internal Revenue Code. Qualified REITs can avoid corporate-level taxation provided they meet regulatory requirements set forth by the IRS regarding their organization, operation, and distribution of income (IRS 26 U.S. Code § 856, 2019)

Firms that once dominated the industry invested in either debt assets (mortgage REITs) or a combination of debt and equity assets (hybrid REITs) for many years and have declined in numbers in recent decades. Currently, over 80% of publicly traded REITs are equity REITs (Feng, Price, & Sirmans, 2011). One advantage of REITs is that anyone can invest in portfolios of real estate assets. The most common vehicles are mutual funds and exchange-traded funds. REIT Shareholders can earn a share of the income being produced by the real estate investments without needing to own actual real estate.

The U.S. based REIT approach has been implemented in over 35 countries by offering investors access to income-producing property portfolios from around the world. The simplest and most efficient method for investors to add global listed real estate allocations to their portfolios is by investing in REIT based Mutual funds and exchange-traded funds. Approximately 73 % of the listed REITs account for the total market capitalization of the FTSE EPRA/Nareit Global Real Estate Development Market index which represents the general trends in eligible real estate parties worldwide (Feng, Price, & Sirmans, 2011).

The 2017 Tax Cuts and Jobs Act instituted several new benefits to REITs which made the industry even stronger. They will benefit from the 20 % deduction on pass-through entity income and have been excluded from wage restrictions. REIT’s reduced their exposure to interest rate hikes and used the low-rate environment to make financials more malleable, which is favorable for future operational yields. REITs have completed fixed rate borrowings and extended the average maturity of their debt outstanding, which resulted in locking in low rates for extended periods. In addition, REIT dividend growth has surpassed inflation (as measured by the Consumer Price Index) in 18 of the past 20 years (CPI, 2019).

One of the major factors that influence a consumer’s overall purchasing power is the economic environment, including the state of the economy, structure of employment and level of unemployment, the rate of inflation, and the exchange rate. These factors coalesce to influence business confidence, consumers’ disposable income and consumer confidence (Bowie, Buttle, Brookes, & Mariussen, 2016).

III. External Environment

With Hilton’s strategic decision to separate its hotel business from its other ventures, there were many external forces at work. The following PEST analysis helps identify those external forces.

Political

The legal and political environment was favorable concerning Hilton’s strategic decision specifically through the tax breaks they would incur and the government spending which provided a set up for all three ventures to succeed.

Taxes: The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate from 35% to 21% (IRS, 2018). It also reduced personal taxes by increasing the personal standard deduction, reducing the highest income tax bracket from 39.6% to 37.0%, and increasing the highest bracket’s qualifying income from $470,700 to $600,000 (IRS, 2018).

With the more favorable tax conditions, the hotel industry’s RevPAR improved as well. This is evidenced by the regression analysis in Appendix A.1. The r-squared is 0.7576 when comparing the US’ highest income bracket and annual RevPAR over the past decade. This correlation shows the favoring tax environment made Hilton’s decision to split from one to three companies easier.

Figure 1. Highest US income Tax Bracket

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Refer to Appendix A.1 for Data Chart and Regression Analysis

When Hilton decided to spin off its hotel properties, it received IRS approval to be a tax-free spin-off transaction. This allowed Hilton’s spin off into three different entities to give out 90% of its taxable income to shareholders as dividends. In return, they were exempted from paying income tax (Cornell, 2015). This exemption assisted in making the strategic decision much more profitable to Hilton and its shareholders.

The Social and Political Climate: The social and political climate also impacted Hilton’s strategic decisions. To analyze the impact of political unrest on tourism, we looked at two political topics: gun violence and gun control.

Gun homicides have increased from 3.7 per 100,000 people in the US in 2010 to 4.5 per 100,000 people in 2018 (CDC, 2018). With an r-square of 0.574 when comparing gun homicides to RevPAR, there is a very weak correlation between these two variables and shows it has little impact on tourism in the U.S.

Figure 2. Rate of Gun Homicides per 100,000 U.S. Population

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Refer to Appendix A.2 for Data Chart and Regression Analysis

Failed background checks have decreased from 0.87% failing the criminal background check when purchasing firearms in 2010, to just 0.41% in 2017 (NICBS, 2018). This would indicate the gun control laws have relaxed significantly over the past four years. Even with the loosening gun control laws, this changing political climate has had little impact on the tourism industries profitability (see Appendix A.3) with an r-square correlation of just 0.449. Even with an increasingly politically chaotic environment in the U.S., based on gun control laws and gun homicides, it has yet to impact the tourism industry meaningfully and played a minimal factor in Hilton’s strategic decision to divest its businesses.

Figure 3. Percent Failed Background When Purchasing a Firearm

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Refer to Appendix A.3 for Data Chart and Regression Analysis

Immigration policies: Immigration has been another major political issue over the past decade. The industry can compare immigrant visas over the past nine years versus the number of non-immigrant visas, which are issued to those that are briefly visiting the US (US Dept. of State, 2018). Except for an increase from 2014 to 2016, the number of non-immigrant visas has remained relatively flat over the last decade (see Figure 4 below). With an r-square of 0.5262, there appears to be a minimal correlation between the visa policy and the revenue of the hotel industry. As such, Hilton was not likely concerned over the potential changes in immigration policies in the coming years when making their strategic decision.

Figure 4. Non-immigrant Visa Issued

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Refer to Appendix A.4 for Data Chart and Regression Analysis

Government Spending: The government has increased its spending from $3.5 trillion in 2014 to $4.2 trillion in 2018 (Historical Tables, 2018). When correlating this to RevPAR, the r-square is a solid 0.647. With the government increasing spending, this created a more favorable atmosphere for Hilton making its decision and improved its chances of the spin-offs succeeding as separate entities.

Figure 5. Government Spending (Billion $)

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Refer to Appendix A.5 for Data Chart and Regression Analysis

Economic Environmental Impacts

The economic environment had many factors that impacted Hilton’s decision to divest. Specific variables that were favorable for Hilton’s spin-off decision were the decreasing unemployment rate, the increase in average wages, and both the increasing GDP and the rising Dow Jones Industrial Average.

U.S. Unemployment Rate: Since 2009, the unemployment rate has reduced from 9.9% to 3.9% (as of December 2018) (Amadeo, 2019). The decreasing unemployment rate is directly related to the travel and tourism industry. According to the June 2017 report by the World Travel & Tourism Council, Travel and Tourism is one of the highest employment sectors in the world supporting twice as many jobs as the financial sector and five times as many jobs as the chemicals manufacturing sector (The Global Hotel Report, 2017).

As unemployment has decreased, RevPAR has increased at a very similar rate. The r-square of this regression analysis was an astounding 0.9925 (see Appendix B.1). Knowing that the unemployment rate was decreasing, which would cause the tourism industry to strengthen further, made this a favorable time for Hilton to make the strategic spin-off decision.

Figure 6. U.S. Unemployment Rate

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Refer to Appendix B.1 for Data Chart and Regression Analysis

Wages: The average annual wage in the U.S. has increased over the past decade. It has gone from $40,711/year in 2009 to $52,278/year in 2018 (BLS, 2018). This wage increase has allowed households to have more disposable income and have more means to travel. This is evidenced via the regression analysis showing an r-square correlation of 0.939 between wages and RevPAR (See Appendix B.2). Hilton saw a vibrant tourism industry making its decision to divest its businesses into three entities more likely to succeed.

Figure 7. Annual U.S. Wage

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Refer to Appendix B.2 for Data Chart and Regression Analysis

Federal Funds Rate: The Federal Reserve kept interest rates as low as possible after the recession from 2009-2014. Since then, they have steadily increased the rates (Open Market Operations, 2018). The rate increases have had no real impact on the Tourism industry with an r-square of only 0.5298 as you can see in Appendix B.3. Knowing the Federal Reserve would raise rates over the next years played a minimal role in Hilton’s decision to spin off its businesses.

Figure 8. Fed Funds Rate

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Refer to Appendix B.3 for Data Chart and Regression Analysis

GDP: In 2016, Travel and Tourism made up a total of 10.2% of the world’s Gross Domestic Product (GDP) (The Global Hotel Report, 2017). The US GDP has increased from $14.4 Trillion in 2009 to $20.7 Trillion in 2018 (U.S. GDP, 2018). This increase strongly correlates to the rise of RevPAR in the tourism industry with an r-square of 0.9668. This increasing GDP environment made the success of Hilton’s strategic decision stronger. Hilton followed a strategy of reducing its capital investments and financial leverage, which allowed the company to remain agile (The Global Hotel Report, 2017).

Figure 9. GDP (Billion $)

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Refer to Appendix B.4 for Data Chart and Regression Analysis

Dow Jones Industrial Average: The Dow Jones Industrial Average (DJIA) is a market index that reflects the value of 30 large US-based companies including Apple, Home Depot, and Wal-Mart. While none of these companies directly related to Hilton’s industry, their collective financial health directly impacts the tourism industry. This is reflected in the regression analysis (See Appendix B.5) of the DJIA and RevPAR, which has an r-square of 0.8616. The increasing DJIA made the likelihood of success of Hilton’s strategic decision much stronger.

Figure 10. Dow Jones Industrial Average

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Refer to Appendix B.5 for Data Chart and Regression Analysis

Socio-Cultural

The Socio-Cultural environment had many factors that affected Hilton’s decision to divest their interests in spin-offs. The following had the most impact this decision: emerging population demographics, attitudes towards spending, disposable income and disruptive forces.

Negative Timeshare Perceptions: Within the spin-off SEC filings, Hilton Grand Vacations included negative consumer perceptions of the timeshare industry as a risk (Hilton Grand Vacations Inc.- HGV FORM10-12B/A, 2016). The timeshare model has gained an unfavorable reputation due to aggressive, high-pressure sales techniques and long-term contracts (Arlotta, 2017).

Research by a professor at the University of Central Florida’s Rosen College of Hospitality Management found that 85% of consumers who purchased a timeshare regret their decision (Garcia, 2018). Due to these negative perceptions of the timeshare industry, Hilton would want to spin off Hilton Grand Vacations as a separate company to prevent any reputational harm to its main hotel business.

Timeshare Secondary Market: Timeshares can be re-sold on a secondary market where the new buyer reaps the same benefits as a “new” timeshare at a much lower cost, which presents a threat to the timeshare industry. Marketing costs account for at least 40% of most timeshare prices according to the American Resort Development Association. Prior to the market crash, resale timeshares sold for about half their original price, while a 60-70% decrease in cost has been more common after 2008 (Butler, 2018). The secondary market makes it difficult for timeshare companies, like Hilton Grand Vacations, to justify the high upfront cost of their product and reduces the overall value.

Figure 11. Timeshare ABS Annualized Gross Default Index

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Source: Fitch Ratings

Emerging Demographics (Millennial’s and Travel): The millennial generation (ages 23-27) are taking over as the top consumers of travel services. Millennials tend to be more frugal than past generations and consider value over price when making purchase decisions. They also tend to allocate their money more towards experiences, like travel, over material possessions (Passport, 2018). Millennial consumer behavior will impact the demand in the travel industry as they are the most significant generational segment (at 24%), followed closely by baby boomers (at 22%) (Mintel Academic, 2018).

Figure 12. Projected Population by Generation 2018

_____________________________________________________________________ Image result for millennial population over time

Source: Fry

Long-term timeshare contracts, often between 15 years and a lifetime, are not appealing to the millennial generation as they provide little flexibility or control in vacation planning. The timeshare industry has not successfully convinced this highly informed and skeptical generation that their products offer cost-savings over other travel options (Geerts, 2015). Most timeshare owners fall into the baby boomer generation, which is declining. Although the timeshare industry has grown year every year since the 2008 recession, a large portion of the growth is from annual fee revenue from existing owners according to SEC filings (Shaw, 2016). The increase of the millennial population presents a risk to the timeshare industry, which explains why Hilton chose to spin it off as a separate company to mitigate the risk, but also allow Hilton Grand Vacations to be more agile in shifting their product to consumer preferences.

Attitudes Towards Spending: Travel demand is directly correlated to consumer spending levels (Hyland, 2018). According to a study by Mintel Academic (2018), American consumers attitudes about their financial situation have also improved over the past six years. As seen in Appendix C.1 the r-square is an astounding 0.9044 meaning consumer spending is a strong variable for Hilton’s RevPAR.

Figure 13. Consumer Spending vs. Hotel Industry RevPAR

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Refer to Appendix C.1 for Summary Output

The consumer confidence index also has a direct correlation where travel spending increases with consumer confidence in the economy (Hyland, 2018).

Figure 14. Consumer Confidence Index vs. US Hotel Industry RevPAR by Year

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Refer to Appendix C.2 for Summary Output

Consumer confidence has been steadily increasing since the 2008 market crash, with notable dips in 2011 and 2014. The consumer confidence index is typically impacted by employment rate and other economic factors. (Mintel Academic, 2018).

The r-square value for consumer confidence index on hotel industry RevPAR was only 0.0039, whereas the r-square value for timeshare industry sales was 0.5397 meaning the consumer confidence index has a larger impact on the timeshare industry than the hotel industry which explains Hilton’s decision to spin off the timeshare business. By spinning off Hilton Grand Vacations, Hilton has reduced their risk of additional revenue decline.

Figure 15. Consumer Sentiment Index vs. U.S. Hotel Industry RevPAR

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Refer to Appendix C.3 for Summary Output

Disposable Income: Disposable income also has a direct relationship with travel industry performance with an r-square of 0.9028 (See Appendix C.4) (Mintel Academic, 2018). Timeshare demand is especially sensitive to changes in discretionary income, as it requires a large upfront investment

Figure 16. Disposable Income vs. U.S. Hotel Industry RevPAR

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Refer to Appendix C.4 for Summary Output

In addition, the recovery period after a recession or decrease in discretionary income tends to lag longer for the timeshare market. This is reflected when comparing disposable income to timeshare sales (See Appendix C.5). The expenses associated with the timeshare industry are also relatively fixed, which presents a problem when revenues decrease during times of discretionary income decline (Hilton Grand Vacations Inc.- HGV FORM10-12B/A, 2016).

Disruptive Forces: Sharing Economy: Because of a shift in consumer values and priorities over time, the emerging sharing has begun to disrupt the travel and lodging industry with the introduction of short-term rental companies like Airbnb and HomeAway. The sharing economy aligns well with the millennial generations’ preference for value, flexibility, and authenticity in experiences over possessions (Geerts, 2016).

Figure 17. Short-Term Rentals Booming Online

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Source: Geerts

Short-term rental market growth has exceeded the hotel industry since 2011 and is expected to continue to outgrow the hotel industry through 2010. As of 2017, Airbnb had over 4 million listings worldwide with 660,000 in the US, which exceeds the total number of rooms of the top five hotel companies combined (Hartmans, 2017).

Figure 18. Top Hotels and Short-Term Rentals 2015 and Performance 2010-2015

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Source: Geerts

According to Hotel Analysts and Colliers International Hotel School, Airbnb started to negatively affect hotel average daily rates in London . The average daily rate for hotels was USD 220 compared to USD 142 for Airbnb. In 2016, the hotel industry experienced a 2% year over year decline in demand, a 9% decline in revenue and a 5% decline in occupancy while Airbnb experienced a 206% increase in year over year demand and 126% increase in occupancy. Airbnb sales alone will exceed the entire timeshare industry sales by 2028 (See Appendix C.6).

Technology

The technological environment plays a critical role in the industry. Specific variables such as the Internet, online booking, and social media, online reviews, and reputations are both important and favorable factors that Hilton considered within their three-way spin-off.

Rise of the Internet: The rise of the Internet has transformed the way the hotel industry manages its operations by making them more efficient and lowering costs. Reservation management has been automated with technology and Internet access. Marketing increases efficiencies through digital platforms with greater access to targeting data. The Internet also facilitates faster communications with guests and provides hotels with a platform for on-going customer relationship management and reward programs via email, text message, and social media websites (Hyland, 2018).

Figure 19. Internet Users vs. Hotel Industry RevPAR

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Refer to Appendix D.1 for Summary Output

Net Neutrality: Internet users should be able to access any website of their choice without any limitations. Net neutrality was protected under the FCC since 2015, but its protections were removed in 2017. Without the protection of net neutrality, hotel websites, online travel agencies, metasearch sites and, other booking sources risk potential limitations (Mintel Academic, June 2018).

Online Booking: Online booking has become the top method for consumers to book travel. Online booking allows for a more convenience, flexible, and streamlined booking experience than over the phone (Mintel Academic, 2018). Online booking presents a threat to the industry as it provides consumers with more flexibility and options for booking travel.

Online Travel Agencies: Online Travel Agencies (OTA’s) have changed the hotel booking experience for consumers by providing a selection of accessible travel options. OTA’s also disrupted the hotel industry as hotels relied on acquiring bookings through offline travel agencies as well as their hotel call centers (Kane, 2017). Owning over 80% share combined, Expedia Group and Booking Holdings companies currently dominate the OTA Market. As of 2016, travel booking through OTA’s surpassed direct hotel bookings. Hotels must pay commissions which range anywhere between 15%-30% on each booking, which cuts into profit margins (Deflorian, 2018). Hotels have started to fight back by offering rewards and incentives for consumers to book directly. OTA’s typically drive between 10% to 50% of chain hotels bookings (Mintel Academic, 2018).

In order to steal market share away from OTA’s, Hilton Worldwide launched an ad campaign in 2016 called “Stop Clicking Around” encouraging consumers to book direct and take advantage of loyalty program amenities not offered through OTA bookings, like free Wi-Fi (Mintel Academic, 2018).

Figure 22 shows that the revenue of the top two OTA holding companies, Expedia, Inc. and Booking Holdings, Inc. will exceed the revenue of the entire timeshare industry by 2022. Hilton’s decision to spin off Hilton Grand Vacations as a separate company is supported by the threat of the OTA industry.

Figure 20. Base percentage of 1,667 Internet users aged 18+ who have booked any vacation-travel related activities in the last 12 months

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Source: Mintel Academic

Metasearch: Websites like Google, TripAdvisor and Trivago provide travel metasearch listings where hotels can include a direct booking link in the listing and pay per click. This allows hotels to capture a direct booking that would normally go to an OTA and save the hefty commission. Most metasearch campaigns typically generate double-digit returns on investment and hotels get the opportunity to opt for new users into their loyalty programs (Deflorian, 2018).

Social Media, Online Reviews, and Reputation: According to Pew Research Center (2018), 69% of adults in the United States use at least one social media site. Social media has had an increasing impact on influencing consumer choice in hotel accommodations. Aside from personal recommendations, consumers place their trust in online reviews from travel and social media sites (Mintel Academic, 2018). TripAdvisor is the most popular source for hotel reviews online with 13.4% market share of visits for travel websites as of 2016 (Statista, 2016).

Figure 21. Social Media Use vs. U.S. Hotel Industry RevPAR

_____________________________________________________________________

Refer to Appendix D.2 for Summary Output

A Cornel School of Hospitality study (2012) compared the impact of social media on hotel consumer purchase decisions and ultimately hotel rates, occupancy, and revenue. Based on the analysis of data submitted by comScore, TripAdvisor, STR and ReviewPRO, Anderson (2012) found that a one-point increase in a hotel’s online review score (on a 5-point scale) resulted in the ability for the hotel to increase their average daily rate (ADR) by 11.2% and maintain the same occupancy level. Further, Anderson (2012) performed a regression analysis comparing ReviewPro’s Global Review Index (GRI) to hotel revenue data from STR and found that a 1% increase in a hotel’s online reputation score increased ADR by 0.89%, occupancy rate by 0.54%, and RevPAR by 1.42%. These findings demonstrate the importance and impact of positive online reviews on hotel revenue and performance.

Figure 22. Market Share of Visits of the Top Travel Websites in the U.S. in 2016

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Source: Statista

While the rise of social media can help increase revenue for quality hotels, it can also be a risk. Hilton Grand Vacations included the rise of social media as a risk in their SEC filings as part of the spin-off as it can cause reputational harm (Hilton Grand Vacations Inc.- HGV FORM10-12B/A, 2016). This is likely heightened by the negative perceptions of the timeshare industry in general, which explains Hilton’s decision to spin off Hilton Grand Vacations as a separate company to mitigate risk.

IV. Porter’s Five Forces

This section will examine Porter’s forces with respect to the hotel industry. In Porter’s article in the Harvard Business Review (2008), he states that hotels face intense market forces that limit attractive returns for all competitors and, therefore, would dissuade possible entrants to the market. His data showed in 2008, the average return on invested capital (ROIC) for the hotel industry was 10.4% with an average in the U.S. coming in at 14.9% (Porter, 2008).

When analyzing current (January 2019) data, the hotel industry has increased its ROIC to 14.23% but only places 53rd out of 96 in industries with an average ROIC of all 96 industries coming in at 16.19% (Damodaran, 2019). Hilton’s ROIC as of 3rd quarter (2018) was 14.9%, which was its peak over the previous four years (Finbox, 2019). From 2010 to 2017, the Hotel industry increased its added value to GDP approximately 0.09% with a total contribution to GDP of 0.8% as derived from data provided by the Bureau of Economic Analysis (2019).  This rate has been relatively constant since 2010 with it ranging from 0.7% to 0.9%. While the industry fails to look overly attractive initially, it has reached approximately 21 billion dollars in growth over the seven-year span (U.S. BAE, 2019).   

Figure 23. Forces Affecting Hotel Industry

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Source: Damodaran, Finbox

Overall the hotel industry has high barriers of entry related to capital costs and fixed costs with relatively low profit margins, which act as a deterrent to new entrants (Cheng, 2013). Until recently there was very little threat to the hotel industry due to substitute products, but with the emergence of the companies like Airbnb, HomeAway, and VRBO they are beginning to erode at the low and high ends of the market (Zervas, 2017). This emerging competition may be part of the reason that Hilton has elected to split off its timeshare business that is in direct competition with the leisure travel market of targeted by these firms. The impact on the total accommodations market is minimal (but rising) (GoogleTrends, 2019).

The bargaining power of suppliers has little impact in the hotel industry, as the only substantial supplier is the labor force required to maintain operations. The majority of labor in the hotel industry is low skilled, with a rising, but the average rate of $36,510 between the 2010 and 4th quarter of 2017, which is substantially lower than the average of $68,007 over the same period of the top 73 national industries tracked by the Bureau of Economic Analysis.   

Tour groups, holiday travelers, corporate business travels and convention attendees all have varying amounts of power with respect to their group and the hotel’s principle marketing group (Cheng, 2013). Rivalry in the hotel industry is high due to low differentiation in product and low switching costs for consumers. Additionally, due to high fixed cost, strong pressures can exist to lower pricing in attempts to sell unused capacity to cover fixed costs (Cheng, 2013).   

Competition in the Hotel and Lodging Industry

Figure 24. Ranking Forces: Competitive Rivalry, Threat of New Entrants, Bargaining Power of Buyers

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A high degree of competition exists within the hotel and lodging industry. Hilton must vie for market share with big names like Marriott International, Wyndham, Choice, and Intercontinental Hotel Group. As global hotel brands continue to expand their reach, selecting the next attractive destination that will offer the best return on investment is one of the most highly debated and contentious issues facing hotel providers today (Assaf, Josiassen, Woo, Agbola, & Tsionas, 2017).

Companies participating in the hotel and lodging industry do so through three primary industry activities: ownership, franchising, and management. Ownership requires substantial capital investment and is the riskiest of the three industry activities, but it provides the highest returns due to the owner’s ability to influence margins by driving RevPAR, financial leverage, and keeping management expenses under control.

Franchisors license their brands to a hotel owner, granting that owner the right to use the brand name, logo, reservation system, and operating practices. A typical hotel franchise agreement has the owner pay the franchisor an initial fee, a royalty fee as a percentage-of-revenue, and marketing and/or reservation fees. The largest earnings include RevPAR increases, unit growth, and effective royalty rate improvement (Choice Hotels International, 2017).

Finally, management companies operate hotels for owners that do not wish to self-manage their properties. These types of companies collect fees based on revenues earned. Similar to the aforementioned activities, key drivers of revenue for management companies are RevPAR, hotel profit margins, and unit growth (Choice Hotels International, 2017).

In 2016-2017, in tandem with the strategic split, Hilton experienced a negative sales growth of -32.08%, only to rebound with a positive sales growth of 23.81% in 2017-2018. Marriott experienced a sales growth of 17.85% 2016-2017, and another year of growth in 2017-2018, with a 34.1% increase from 2016. From 2016-2017, Wyndham Hotels and Resorts experienced a sales boost of 0.85% and from 2017-2018; they experienced another growth of 2.67%. From 2016-2017, Intercontinental Hotels Group experienced a sales decline of 2.21% and from 2017-2018, experienced a sales growth of 12.5% (Macrotrends.com, 2019).

Marriott: Marriott, Hilton’s most formidable competitor, is a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare properties, operating under many different brand names at different prices and service points. Marriott currently accounts for 7% of the worldwide room supply and, in 2017, 22% of hotels under construction. They receive royalties from Marriott Vacations Worldwide and Vistana Signature Experiences, Inc. At the end of 2017, Marriott possessed 1,959 company-owned properties with a total of 554,642 rooms and 4,432 franchised and licensed properties, adding another 685,365 rooms and 129 unconsolidated joint venture properties with an additional 17,659 rooms (Marriott Inc., 2017).

Marriott also uses or licenses its trademarks for the sale of residential real estate. Additionally, Marriott acquired Starwood Hotels and Resorts Worldwide in September of 2016, after which Starwood became an indirect, wholly owned subsidiary of Marriott. Following this merger, Marriott’s shareholders experienced a gain of 44% in returns between November 2015 and June 2017. In order to meet the needs of different market segments, Marriott classifies its brand portfolio into three main tranches: luxury, premium, and select, which can be further broken down into individual categories (Marriott, Inc., 2017).

Between the years 2012-2017, Marriott’s total revenue increased from 12.32B to 29.29B, an increase of 237% (YCharts, 2019).

Figure 25. Hilton Worldwide Holdings Inc. Revenue (Annual) & Marriott International Inc. Revenue (Annual) ___________________________________________________________

https://lh5.googleusercontent.com/xoBrA9fzbQJeHURFEsnWNX44zDvJk-1bot4pdOu0V-UrykJh0fXS7n2vDwj_76EviZl_MYcgHmmY5jH8ouROt41jfeAQP5HKe5KtUe_0ZuE2CMmzHBNxeaqLKl3yH0RG6kCcWwUIK3_2jZYNIQ

Source: YCharts

In 2017, worldwide system-wide RevPAR increased by 3% and occupancy for the chain reached 73%. Also in 2017, Marriott signed upwards of 750 management and franchise agreements for new hotels, representing 125,000 rooms. Of those signings, nearly 80% were in the hotel and lodging industry’s highest quality tiers driving the most significant RevPAR and fee revenue. In 2018, Marriott planned that the number of open hotel rooms would increase 7% gross, while room exits were expected to hover around 1.5% (Marriott Inc., 2017).

Wyndham Worldwide: Wyndham Worldwide emerged as an independent entity in the hospitality industry in 2006. Wyndham currently operates in 77 countries with more than 8,000 hotels and 697,600 rooms. Wyndham has 18 hotel brands that cover most segments of the hotel and lodging industry, ranging from motels and business properties to extended stays and upscale resorts. Their hotel portfolio currently boasts 7,727 franchised properties, 83 managed properties, and two owned properties (Ronzoni, Torres, & Kang, 2018).

Wyndham’s operations are classified into three segments: The Wyndham Hotel Group, The Wyndham Destination Network, and Wyndham Vacation ownership. The Wyndham Destination network currently operates the world’s largest vacation exchange network, hosting approximately 3.9 million members. The vacation exchange business has relationships with over 4,300 vacation ownership resorts in 110 countries and territories. The Wyndham Vacation ownership is the world’s largest timeshare business with 221 resorts and 878,000 owners. They develop and market Vacation Ownership Interests (VOIs) to consumers, provide consumer-financing information, and provide property management services (Wyndham Inc., 2017).

Wyndham Worldwide’s long-term strategy to continue their profitability and create long-term shareholder value is by improving upon the “economy” experience, attracting, developing, and retaining franchises, while expanding their presence and growing the Wyndham footprint in both new and existing global markets (Wyndham, 2017).

Figure 26. Wyndham Hotels & Resorts Inc. Revenue (Annual) & Hilton Worldwide Holdings Inc. Revenue (Annual) ___________________________________________________________________________

https://lh3.googleusercontent.com/9-ZTK8qOt5FA-q9x421whkdjgqplnYZk1pQdbnWXKrwNPYnxptZ75egbwcOIwLixPzvX4NIs6V2Pdi4g-vNFQ8Lb_rCgldl_QI0skuCXx8Vx5-hfZdkCT6b1c85n4lgLiGInCOTMYO7XWmAc8g

                         Source: YCharts

Choice Hotels International: Choice Hotels International is one of the largest hotel franchisors in the world, boasting 6,627 existing hotels and 923 hotels under construction as of 2017. As of December 31, 2017, Choice Hotels International owned 525,573 guest rooms and an additional 72,917 room under construction. They currently are approved for operation, in all 50 states in the United States in addition to the District of Columbia and over 40 countries and territories around the world (Choice Hotels International, 2017).

Choice Hotels International’s primary market segment is hotel franchising, which accounts for approximately 99% of the company’s total revenue. Since franchising makes up the bulk of Choice Hotels International’s business, they are able to benefit from economies of scale (Choice Hotels International, 2017). Their portfolio of brands has typically benefitted from periods of supply growth as well as favorable capital availability and pricing. Historically, Choice Hotels operates primarily as a hotel franchisor offering twelve brands, with each brand designed to compete at various hotel consumer and developer price points (Choice Hotels International, 2017).

Figure 27. Hilton Worldwide Holdings Inc. Revenue (Annual) & Choice Hotels International Revenue (Annual)

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Source: YCharts

Intercontinental Hotels Group: IHG’s focus is to build preferred brands and robust revenue delivery systems. As of the end of 2017, IHG had a total of 5,348 hotels and 798,075 rooms operating within the company system. As for franchised hotels, IHG had 4,433 properties with a total of 552,834 rooms at the end of 2017 (IHG Inc., 2017).

Intercontinental Hotel Group targets the most attractive markets and market segments to maximize the growth of the company. Through their strategic model, IHG focuses on value-creation by building preferred brands, delivering a superior experience for their hotel owners/operators, leveraging scale, enhancing their rewards program, and generating revenue through the lowest cost and most direct channels. In 2017, IHG launched its new U.S. based mainstream brand, Avid hotels. The new brand was created to target over 14 million travelers who account for an estimated $20 billion-dollar segment.

IHG’s focus is on strengthening their loyalty program, prioritizing technological and digital innovation, expanding their franchise propositions, strengthening their existing portfolio, and adding new brands where there is the most significant potential for growth. In 2017, IHG established a new regional operating structure, which breaks their regional pull into three areas instead of the previous four: Americas, Greater China, and EMEAA (Europe, Middle East, Asia, and Africa). They also created one global marketing function, focusing on fulfilling, integrating brand, marketing, and loyalty activities (IHG Inc., 2017).

Figure 28. Hilton Worldwide Holdings Inc. Revenue (Annual) & Intercontinental Hotels Group PLC. Revenue (Annual) __________________________________________________________________________

https://lh5.googleusercontent.com/4Yd76oNyrO1euPs_MHI1sXvW94BcnLEEa-kI7MwP5UIYDmmVa9J8U-486DOMFdECIhoWX5UFCgpeTTkoQgjKSDz4IWnhq7dUJWKMrQW2ozxfXavbxKplN7Npii2inDTYgh-20DA7o3tfpD5LnA

Source: YCharts

Threat of New Entrants

Figure 29. Competitor Market Share in the Hotel and Lodging Industry

https://lh5.googleusercontent.com/F7IiYDhgZRw02IoA2S89hk46ipuJQj7sFafrT30VAZ7CQJS4jUnbLU9Mbqfc-MHxaeX2ULHQV0Mvzlg32kCLNj8UghZC6yoqRgTnDVHsC-qsC2qqLbNU5gWEbfBqwZReO9SRyC0oR0gmZVbsNQ

Data derived from Marriott, Wyndham, Choice, and Intercontinental 10-K reports (2017)

Figure 29 evaluates the market share held between Hilton Worldwide’s primary competitors. The analysis shows that Marriott has increased its market share considerably within a two year span, moving from a market share of 65.76% in 2015 to a market share of 74.57% in 2017. After the acquisition of Starwood, Marriott was able to obtain a larger market share than in previous years. While the profits of Wyndham Worldwide and Choice Hotels International increased from 2015-2017, they still lost a portion of their previous market share. Choice Hotels International possessed a market share of 3.9% in 2015 and decreased to 3.28% in 2017, and Wyndham Worldwide possessed a market share of 22.15% in 2015 and decreased its market share to 16.34% in 2017. However, Intercontinental Hotel Group fell below, reporting 2015 revenue of $1,803 (million) and 2017 revenue of $1,784 (million) with a market share decrease from 8.19% to 5.81% (K-10, 2017). Data analysis reveals that that Marriott is showing an increase in market share. Data analysis reveals that there is a general trend of positive correlation between Hilton’s revenues and its competitors’ revenues, denoting a positive correlation (See Appendix E.1) (YCharts, 2019).

Industry Growth Rates

In 2008, the UN World Tourism Organization (UNWTO) estimated that there were 20.1 million rooms in hotels and similar establishments and had grown 2.2% over the previous five years. In 2012, STR Global estimated that the worldwide hotel industry had around 13.4 million rooms. In 2017, hotel groups acted as the main growth engine in the worldwide hotel and lodging industry. Emerging markets are key growth feeders for the industry, with the Asia-Pacific sector at the vanguard with positive 11.5% growth in its chain supply, and the Middle East and Africa sector experiencing a positive 7.2% growth in its chain supply (The Global Hotel Report, 2017). However, the symbiosis between supply and demand affects hotel performance on a global scale. To maintain strong performance, hotels must ensure that they are located in areas with high lodging demands and strong market performance to meet challenges (Assaf, Josiassen, Woo, Agbola, & Tsionas, 2017).

Capital Requirements

According to one study, the minimum initial investment in creating a franchised hotel is $1,367,800, with the average initial investment totaling $14,462,795 (Stanković, 2017). In 2017, Hilton Worldwide’s total operating expenses totaled $7.768 billion while in 2016 and 2015, these expenses totaled $6.438 billion and $6.396 billion (Hilton Inc., 2017). To become a contender of Hilton and its competitors, any entrant into the market would most likely be under constant threat of buyout and offers of franchising and brand licensing (Ivanova & Ivanov, 2015). Although the hotel and lodging industry has high entry barriers, a threat exists for investing in hotels by companies or people with no experience in the industry. Hotel firms, such as Hilton and its competitors, use their entry barriers through proprietary or patented methods, restricted distribution channels, or brand switching (Yong Kim & Oh, 2004). Unlike other businesses, hotel operations provide few opportunities for economies of scale, perhaps providing a small advantage to those looking to enter the market (Whitla, Walters, & Davies, 2007).

Brand Equity

In order to create value for the stakeholders, a company should strive to create a competitive advantage over its rivals by adapting itself to the uncertain industry environment, fully understanding the needs of its customers, and responding to new market entries (Yong, Kim, & Oh, 2004). However, according to statistical analysis, there is not a strong correlation, only 0.1477, between Hilton’s RevPAR (see Figure 31) and their yearly rating by J.D. Power & Associates’ Hotel Loyalty Program Satisfaction Studies (Hilton: RevPAR, 2017) (See Appendix E.2). Additionally, the correlation between Hilton’s RevPAR and their American Consumer Satisfaction Index rating has shown itself to be very weak at only 0.000215 (See Appendix E.3) (ACSI, 2019).

Figure 30. Hilton Worldwide RevPAR

Source: Hilton: RevPAR

A brand with positive consumer-based brand equity might cause consumers to return, spread favorable word-of-mouth, and be less sensitive to price increases (Huang & Cai, 2015). One of the main ways for companies to invest in their brand equity is through marketing. The analysis shows that additional spending on marketing is positively correlated at an r-square of 0.8458 with higher RevPAR figures (Hilton: RevPAR 2017) (Powell, 2017) (See Appendix E.4). Additionally, brand equity has a positive effect on mid-priced hotel guests’ intentions to reuse the hotel chain in the future (Ko, 2017).

There are several facets to brand equity when considering the threat of new entrants into the hotel and lodging industry: brand awareness, perceived quality, and brand attitude (Liu, Wong, Tseng, Chang, & Phau, 2017). Hotel chains are service industry enterprises, which presumes primarily intangible product elements that are not easy to nurture or transfer, and causes challenges in maintaining coherent services at each hotel (Ivanova & Ivanov, 2015).

New Rental Platforms

A growing body of research suggests that companies like Airbnb and HomeAway have a quantifiable negative impact on local hotel revenues and can be defined by crowd-based capitalism (Frenken & Schor, 2017). In one such study, researchers were able to observe substitution patterns by incorporating business hotels and high-end hotels as control groups, finding that Airbnb often provides a viable alternative for certain types of traditional overnight accommodation (Zervas, Prospiero, & Byers, 2017). In the third quarter of 2015, Airbnb’s revenue exceeded that of Choice Hotels International, growing its revenue by 113% in 2015 alone (See Appendix E.5).

In terms of posing a threat to large chains like Hilton and its competitors, P2P accommodations tend to draw consumers away from lower-end hotels, which have proven the most vulnerable to increased competition from rentals enabled firms like Airbnb (Zervas, Prospiero, & Byers, 2017). Companies like Marriott and Hilton have lost some of their lower-end customers to Airbnb and other comparable home-sharing services, while most luxury and business guests have tended to remain loyal customers to large hotel chains (David, 2017).

Switching Costs

Perceived value comes from equity theory, which considers the ratio of the consumer’s outcome/input to that of the service provider’s outcome/input (Yang & Peterson, 2004). However, in the hotel and lodging industry, switching costs are low to consumers and do not reliably provide a good incentive for customers to remain loyal to one hotel chain.

According to Loyalty Traveler (2018), Hilton Honors loyalty points were rated as average in terms of value when compared to other hotel loyalty programs, with other companies’ loyalty points such as Marriott Rewards and Wyndham rewards going much farther in terms of customer value (See Appendix E.6). In order to secure customer loyalty, Hilton Worldwide would have to focus its energies on customer’s perceptions regarding hotel brand quality dimensions such as reliability, empathy, and tangibles in order to keep the siren’s song of low switching costs at bay (Malik, Naeem, & Nasir, 2011).

Bargaining Power of Customers

The size and concentration of consumers in the hotel and lodging industry are the determining factors of their power in this sense (Tavitiyamana, Qub, and Zhangc, 2011).

Number of Customers: The bargaining power of customers depends on the number of buyers and how much they are willing to pay for a product; they will switch hotel providers based upon their own needs and demands (Akhtar, 2017). 2016 was the seventh consecutive year of sustained grown following the 2009 global financial and economic crisis.

As a result, 300 million more international tourists and travelers ventured to all corners of the globe in 2016, in comparison to the pre-crisis record in 2008 (The Global Hotel Report, 2017). Hilton welcomed upwards of 160 million guests worldwide that year, and their loyalty program expanded to include over 71 million individuals (Hilton Inc., 2017). This consumer base within the hotel and lodging industry lends them wielding bargaining power with hotel chains.

Purchasing Power of Consumers

Changes in personal income, which come as a result of changes in wages, strongly influence consumer spending during normal periods when economic uncertainty is not compelling consumers to save their money. Statistical analysis demonstrates that there is a high degree of correlation between consumer spending and average RevPAR within the hotel industry with an r-square of 0.9737 (see Appendix E.7). Additionally, there is a strong positive correlation between the US Unemployment Rate and the US Hotel Industry Average Daily Rate. This suggests that when consumers are employed and therefore wield more purchasing power, hotel chains are more apt to raise their prices.

National consumption growth was forecasted to peak around 6% in 2017, while growth in wages was forecast to peak shortly thereafter (See Appendix E.8). As a result of those economic forces, steady and modest economic growth will likely cause real room rates to increase, cause wages and other expenses to rise, and test the idea that nominal room rates can once again be a hedge for inflation (See Appendix E.9). One outcome of these conditions is an improvement in nominal and real hotel financial performance (Corgel, 2017).

Differences Between Competitors

Due to the fact that there are low switching costs between large hotel chains, customers tend to wield a large amount of power when it comes to their selection of choices among these chains (Xie, Xiong, Chen, & Hu, 2015). Companies within the hotel and lodging industry rely on the development of their brand personalities to differentiate themselves from their competitors.

Traits such as sophistication and competence were the strongest indicators of upmarket hotel brands (Bechter, Farinelli, Daniel, & Frey, 2016). Brand personality is critical for differentiation in hotel branding where functional product differentiation is difficult to build and sustain, evident in trends that have been observed in both the upscale and economy segments of the hotel and lodging industry (Richard & Cleveland, 2016). Additionally, the bargaining power of consumers is increasing because of new technologies that allow travelers to compare and reserve rooms from anywhere in the world (Yong Kim & Oh, 2004).

Price Sensitivity

Consumers tend to wield a great deal of power when it comes to price sensitivity within the hotel and lodging industry. Since loyalty programs serve to mitigate consumer’s novelty-seeking behavior and encourage repeat visits to incumbent hotel chains, price sensitivity and competition erode these small advantages (Singal, 2015).

In order to mitigate the risk of price sensitivity negatively affecting Hilton Worldwide, studies have found that non-monetary promotional tools can have a positive impact in this regard. In contrast, scholars have also argued that sales promotions can result in decreased brand loyalty, increased brand switching, increased price sensitivity, and decreased quality perceptions among consumers (Ma & Mohsen, 2016). These findings imply that companies like Hilton must use price changes and promotional tools strategically and deliberately to avoid inadvertently harming their business.

Bargaining Supplier Power

Overall, the bargaining power of suppliers is fairly weak with respect to the inputs required on the industry. Fixed costs are the construction and real estate costs associated with property development, which have a high degree of differentiation in the industries that supply these products and services.  The only impact with marginal influence on the accommodation industry is labor. When looking at cost outlays for inputs in the industry, labor accounts for $82.5 billion, followed by management services at $19.3 billion, and food, beverage, and tobacco at $10 billion (U.S. B.A.E., 2019).  

In the accommodation industry, the workforce majority is low skilled, hourly employees that exert little power over the buyer (IBISWorld, 2018). Therefore, many of the regular concerns with supplier power such as switching costs, differentiation, and vertical integration by suppliers is not a concern to the industry. There are some concerns with the presence of labor unions in the industry but unions exert relatively low power over the industry. Some exceptions are locations like New York, San Francisco, and Chicago that have high union participation and the ability to garner political support to influence employers (Mitchell, 2017).

When examining the significances of the rise in quarterly profits of the accommodation industry ($118.2 billion in Q1 of 2011 to $167.6 billion at Q3 of 2018) approximately 65% can be accounted for with respect to national increases in GDP and increasing personal income with a significance of 1.25E-07 (See Appendix E.10).  Over this same period ,we can see a strong correlation, 99.5%, to growth in wages in the accommodation industry and the national growth in personal income (See Appendix E.11). Additionally, wage growth and FTE count in the accommodation industry are highly correlation (98%) to the value the accommodation industry contributes to GDP (See Appendix E.12).  This demonstrates that even though wages in the accommodation industry are relatively low, averaging under $40k for the last ten years; labor is strongly linked to profits in this industry (U.S. B.A.E., 2019).

The other inputs into the accommodation industry are relatively small in comparison with labor and have minimal if no power to affect the buyer, as they are mostly highly substitutable commodities (Cheng, 2013). The second item of significance is managerial services with an outlay of $19.3 billion in 2017 for the accommodation industry (U.S. B.A.E., 2019). Managerial services are often fees required under franchise agreements which represent a fair amount of choice for the individual hotel owner (IBISWorld, 2018). 

While there have been some advancements is using technology to offset management and labor cost this remains minimal. Technological development may impact the industry over the long run, but for now, the service nature of the industry limits this to office automation and increased efficiencies in manual tasks.

Threat of Substitute Products

        Before five years ago, the hotel industry faced no perceived threat of substitute products (Cheng, 2013). Competition in the industry, such as low-cost hotels, motels, and even hostels, are not seen as substitutes in the market. These firms operate in the same market but focus on the price-sensitive market. Competition in the Hotel industry is high as offerings are poorly differentiated and switching costs are low, but the threat of a substitute product is a new occurrence that may be a severe economic threat to the industry (Akbar, 2018).

While there is high level of competition in the hotel industry, direct competitors focus on growing the same market space and are not a threat to the industry. However, this is no longer true for the leisure travel segment. The short-term rentals market is starting to make an impact into the hotel sector with the largest player being Airbnb with an estimated value, as of May 2018, at $38 billion, which exceeds longtime leaders such as Hyatt, Wyndham, and Hilton (Passport, 2018). Airbnb’s revenues tend to track more closely to the change in GDP, and personal income with a 75% correlation then does the hotel industry (See Appendix E.13).

The threat to the industry is currently greatest to the low-cost segment and impact decreases in the mid-cost segment and again the high-cost segment (Akbar, 2018). The short-term rental industry has been able to differentiate itself from the hotel industry in items that are more frequently associated with higher-end hotels such as the stay experience and room features and location characteristics (Akbar, 2018). Akbar and Tarcogna (2018) also indicate that this demonstrates that hotel services and amenities have come to be commoditized. While Hilton states that the reason for splitting off the real-estate segment was due to the tax advantages of a change in the law, the splitting of the timeshare business may be more forward leaning to compete directly with the emergence of the short-term rental segment in the accommodations market.

V. SWOT Analysis

Hilton Worldwide is a controlling player in the hotel and lodging industry, boasting several strengths that directly feed this power including a healthy horizontal diversification with its multi-brand portfolio. These strengths include tangible assets and intangible assets. Hilton operates 5,685 hotel and resort properties in 113 counties, encompassing 912,960 rooms under 14 distinct brands. This number is set to grow continuously due to Hilton’s new assets in the pipeline development stage.

Within the past five years, Hilton’s global revenue has grown 10% annually to $10 billion and the company’s global operations have grown approximately 42.7% to $1.8 billion. Hilton’s intangible assets and strengths include strong brand equity, brand recognition, and being ranked first in brand value. Furthermore, Hilton Worldwide concentrates a great deal of effort in providing excellent customer service through the Hilton Reservations & Customer Care (HRCC) System, providing an advantage over competitors who might not offer such strong customer support. A final strength is Hilton’s ceaseless dedication to technological innovation, a vital component in today’s global market.

Hilton Worldwide’s weaknesses include its limited liquidity ratio, which has been on the decline since 2011. The exception to this downward trend came when Hilton announced its spin-off into the real estate and timeshare sectors. Hilton had a liquidity ratio of 0.7583 in 2017, indicating that the company could be at risk for defaulting on obligations in the short-term. Hilton’s current assets have also declined over the past two reporting periods, most notably from 2016-2017 by approximately 43% and again in 2018 by about 1%. Global weakness results as a majority of Hilton’s revenue is generated inside the United States, with only 31% being from international operations. Hilton is currently in a position of weakness that demands less dependency on the US dollar and further diversification into the international market to remain competitive.

Opportunities for Hilton Worldwide include the leveraging of additional tax incentives, expansion of global market share, investment in and development of new technologies, and an increased level of marketing towards millennial consumers. Hilton was able to form the second largest REIT with its Park Hotels & Resorts brand. This move allowed Hilton to shed many of its corporate-level taxation obligations. Another opportunity for Hilton is to expand its global market share due to auspicious market conditions. Hilton’s investment in research and development of new technology has also proved to be a gambit that will continue to pay off. Mobile bookings are forecasted to increase 40% by 2020. One final opportunity for Hilton is to leverage more of its marketing towards millennial consumers. This demographic places a high value on meaningful experiences and use of new technologies, an angle that Hilton can certainly exploit to a higher degree.

Threats to Hilton Worldwide are numerous due to the competitive nature of the hotel and lodging industry. Hilton currently faces threats from its competition, the short-term rental market, an emerging sharing economy, environmental regulation, purchasing power of millennials, and the timeshare market. The top three companies in the hotel and lodging industry vie for customers based on brand equity, property location, amenities, price, and timeshare point exchange policies. Additionally, millennial consumers have demonstrated a preference for short-term shared accommodations, through companies such as Airbnb and HomeAway, contributing to their preference for more authentic experiences.

Negative perceptions of the timeshare industry pose a significant threat to the health of the industry, with one study finding that 85% of consumers who purchased a timeshare ended up regretting the decision and another finding that only 17% of millennial consumers would prefer a timeshare to any other type of accommodation. Strict regulations also pose a threat to Hilton, with timeshares facing a high level of regulation in their marketing, financing, and loan servicing practices. Economic downturns can pose a threat to Hilton, seeing as most consumers would have less disposable income to spend on things like hotel stays and timeshares.

VI. Internal Environmental Analysis

Strengths

Brand Equity and Recognition: Hilton’s brand recognition possesses a positive reaction from customers in relation to the company’s brand equity. Hilton is ranked number-one around the world in brand value and continues to grow its share of repeat customers.

Figure 31. Leading Hotel Brands Based on Brand Value Worldwide (2018)

Source: Statista

Hilton’s Brand is considered its most important intangible asset and principal ability to attract and maintain customers. The success of their brand is due in part of customer’s awareness and brand perception, perceived quality in its facilities and guests, and overall customer satisfaction accompanied by their worldwide reputation. This is reflected by a 3.0% companywide RevPAR (Hilton, 2018 10-K) and 14% global RevPAR premium largely driven by improved ADR and that represents customer loyalty and drives strong financial returns to the company (Hilton Prospectus, 2017).

Horizontal Diversification (Multi-brand Portfolio): Hilton has implemented a multiple branding strategy, which empowers the company to pursue multiple market segments in the hospitality sector. Hilton operates 5,685 hotel and resort properties in 113 countries and territories comprising of 912,960 rooms under a 14 premier brand portfolio of Luxury, Upper Upscale, Upscale, Midscale, and Timeshare segments (Hilton 10-K, 2018). Multiple brands allow Hilton to compete across different price segments by providing integrated services to attract consumers. This provides the company risk mitigation strategies through the diversification of its portfolio allowing for increased sector penetration and market share.

Hilton’s pipeline development is a core strategy providing a strong worldwide footprint. Hilton recognized its third consecutive year in 2017 of unit growth (6.5%) and 21% share of rooms under construction, leading the industry. Hilton, in regards to large hotel chains, is the fourth hotel company by the number of worldwide properties, third in brand index ranking, second in the number of guest rooms, and first in brand value. Hilton has a clear strength in regards to economies of scale in relation to nearly all of its competitors (Hilton Worldwide Statista, 2018).

Figure 32. Hilton Brand Portfolio (2018)

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Source: Hilton 2017 Annual Report

Hilton Honors Loyalty Program: The Hilton Honors loyalty program is an essential marketing and benefit based rewards platform that yields repeat business from over 85 million loyalty awards members increasing 20% from 2017. Hilton recently launched an unprecedented industry first that allows members to redeem Points at Amazon.com, family members and friends to combine loyalty points at no additional cost, and a partnership with American Express to be the exclusive issuer of Hilton Honors credit cards in the U.S. (Rouhani, 2017). In 2017, loyalty member generated revenues of over $19 billion (Hilton 2017 Annual Report) booked 57% of Hilton’s portfolio-wide occupancy. The Honors loyalty program ranks third among industry competitors and is an essential strength that provides a global advantage to brand equity (J.D. Power, 2017). The success of Hilton Honors and the member base are strong franchise incentives for prospective investors.

As a valued intangible asset, the Honors program has over 1 million followers on Facebook, over 168,000 followers on Twitter, and over 7.3 million monthly views on Pinterest, providing an immediate medium for the company to reach out to its global Honors members with program updates, current and upcoming reward specials, and allows for members to share their experiences with the public which indirectly targets nonmembers to join the program. Hilton’s social media strategy has provided the company with a means to reach current and potential customers in real-time reinforcing this strategy as core strength.

Innovation/Customer Satisfaction: Hilton’s Hilton Reservations & Customer Care (HRCC) systems is a global customer support systems that allow for Hilton guests speak with one of over 3,000 HRCC representatives to assist in booking rooms and servicing customer needs. Hilton has implemented an HRCC program 24/7 chat capability ensuring that those who book directly on the company's website receive support and guidance from a real person expediting guests booking process and allowing for the HRCC representative to locate alternative Hilton lodging options when a customer’s first Hilton choice is not available. This corporate strategy has generated over $600 million per year in sales that could have been captured by competitors due to guest booking frustrations in not locating a booking that would fit their needs via internet booking sites (Verhoef, & Lemon, 2013).

Hilton’s OnQ is the central system that integrates the company’s infrastructure to support property-level operations in their properties. OnQ is utilized in their expansion strategies enabling the company to open new facilities more efficiently. The OnQ application consolidates customer data and produces comprehensive arrival reports that allow for managers to employ efficient and effective customer service to their guests by accessing the over 4TB database of precision customer resources (Applegate, Piccoli & Dev, 2008). This proprietary system enables Hilton to have a completive advantage over their rivals by enhancing customer service, value, revenue generation, and knowledge retention.

Hilton continues to lead the industry with innovations such as the Hilton Honors Smartphone App appealing to tech-savvy travelers, allowing guests to control in-room television, temperature, and lights as well as implementing the Digital Key, which permits guests to use their Smartphone to enter rooms in lieu of a key card. This beta program is currently instituted in over 350,000 rooms in 2,000 of its chain portfolio with future expectation for implementation into a majority of its facilities in the coming years. Members have made use of the digital check in more than 5 million times resulting over 2 million App downloads and 93% of guests responding with a positive experience in using the smartphone features (Rouhani, 2015). Although other hotel chains have integrated similar capabilities, Hilton continues to lead the industry by being the first to institute successful innovations.

Operational Performance: Over the past five years, Hilton's global revenue has grown an annualized 10.0% to $10 billion and operating profit earned by the company's global operations was estimated to have increased at an annualized rate of 42.7% to $1.8 billion. The company added more than 626,000 rooms between 2013 and 2018 and expanded their global reach by expanding into ten new countries in 2018, further increasing its global footprint over major competitors (Hilton worldwide holdings Inc., 2019).

Hilton’s operational performance continuously grew from 2015-2018. At the end of FY 2018, operating margin for the company increased to 16.08% in comparison to operating margins of 12.62%, 13.2%, and 13.9% in the three previous years. The company’s gross margin increased from 80.18% in 2015 to 84.0% in 2018. The company’s operating cash flow per share increased from 2.6 in 2017 to 4.1 in 2018 indicating a strong financial position. This shows consistent cost management efficiency and a key indicator of the company’s strong focus on profitability (Hilton worldwide holdings Inc., 2019).

Weaknesses

Limited Liquidity Position: One of the key weaknesses presented by Hilton Worldwide holdings is there financial liquidity position. Hilton’s current ratio has been trending downward since 2011. In 2018, it recorded a current ratio of 0.7583, a reduction from the previous year of 0.8152 (Macrotrends, 2019). Both of these figures are below the previous five years that had an average rating of 1.1968. The exception to the downward trend is a spike in 2016, which is likely related to the announcement and initiation of the spin-off of the real-estate sector, Park Hotel & Resorts, and the timeshare sector Hilton Grand Vacations. The industry ratios for 2018 and 2017 are well above Hilton’s posting with the upper quartile current ratio more than a full point above Hilton’s recorded value. Even when only looking at firms with revenues exceeding $50M the 2017 upper ratio is 1.8 compared to Hiltons 0.7583. Hilton’s current ratio of less than one may indicate that Hilton could be at risk of defaulting on obligations over the short term.

Figure 33. Hilton vs Industry Current Ratio

Source: Macrotrends

According to NASDAQ reporting, Hilton’s current assets have decreased over the last two reporting periods most significantly from 2016 to 2017 by about 43%, and in the 2017 to 2018 period at about 1%. Again, according to NASDAQ data, total current liabilities decreased during the 2016 to 2017 period by 8.2% but offset those improvements with an increase of 18.4% in the 2017 and 2018 period.

Global Concentration of Revenue: Hilton’s geographic concentration of revenue presents another weakness to their position. As of 2018 Hilton owns, manages, or franchises 5,634 properties globally of which 4,562, 80.97%, are in the United States (Hilton Worldwide Holdings Inc., 2019). Hilton’s system-wide RevPAR is 111.61, slightly lower than their US RevPAR of 113.68, with a system-wide occupancy rate of 75.8%. Percentages of rooms are also highly tilted in favor of the US market with 72.79% of all available rooms located in the US This indicates that the US market makes up the share of the Hilton’s revenues with only 31% of Hilton’s revenues being derived from their international operations (Hilton, 2018).

Findings show that international diversification in the hotel industry with relation to firm value is a U shaped curve wherein an effort up to a certain point does not result in additional value but higher levels of diversification benefits to diversification can be obtained. (Tang, 2010). International diversification in the hotel industry is also highly linked to intangible assets such as management and reservation systems (Tang, 2010). Hilton’s latest split between the real-estate sector and the heavy emphasis on franchise operations puts them in a position to push further into international markets as they increase intangible asset revenue generation (Hilton, 2018).

Additionally, Hilton faces increased currency and economic risk due to lack of global diversification. Several risks may be mitigated through a transition to a global firm from a US firm. Hilton states in there 2018 annual report that foreign regulatory, political, and economic instability is a risk to the firm’s profits with only 31% of the firms revenue generated internationally and that 31% is diversified between 99 countries, but they fail to address the risk of having 69% of revenues derived from one country, the US (Hilton, 2019). Being heavily dependent on the US dollar ties the firm’s performance closely to the US economy and poor performance within the US economy will severely impact the firm.

VII. Environmental and Industry Analysis

Opportunities

Tax Incentive Advantages: One of the main tax advantages with the divestiture was Hilton’s ability to form a real estate investment trust with the Park Hotels & Resorts business. This REIT became the 2nd largest REIT in the world and allowed Hilton to avoid corporate-level taxation with its timeshare business while allowing the company to give out 90% of its taxable income to shareholders as dividends (Cornell, 2015).

During this divestiture, the Tax and Jobs Act was implemented allowing all REITs to receive a 20% tax deduction due to it being a pass-through entity. This helped their timeshare business significantly capitalize on this tax code change (CPI, 2019). Park Hotels & Resorts saw an increase of 1.1% in RevPAR from 2017 to 2018 and was able to issue a $90 million special cash dividend (Moneyshow, 2018).

Global Market Share Expansion: The global hotel industry was valued at $570B at the time of Hilton’s divestiture and was expected to grow between 5-6% in both 2018 and 2019. (Deloitte, 2019) Global tourism spending increased 4% from 2017 to 2018 (Questex, 2018) and the timeshare industry is expected to continue to grow, up to a $23.7B industry, through 2025 (Norah, 2018).

The favorable market conditions including low inflation, favorable interest rates, low unemployment, decreased corporate taxes, and increased government spending led to increased consumer spending levels which led to increased travel demand. (Hyland, 2018).This healthy market afforded Hilton a significant opportunity to make a significant strategic decision at a time where it could still grow each of its businesses.

Development of Technology: Mobile bookings are projected to increase by 40% by 2020, which is another opportunity Hilton wanted to take advantage of (Industry and Market Trends, 2019). In 2017, 20% of Hilton’s bookings came from its mobile app. Hilton has invested heavily into its technology—spending $100 million to develop and install a digital key on its smartphone app and then another $550 million on to ensure this technology is fully integrated into the entire hotel management system (Liffreing, 2017).

This investment has led to Hilton’s app to be one of only two hotel apps to be ranked in the top 30 in the travel category of the Apple App Store. Further developments in Hilton’s technology are expected to continue, such as billpay via the smartphone app, as Hilton invests 40 percent of its marketing budget into its digital applications (Liffreing, 2017).

Marketing Targeted at Millennials: The millennial segment is now the largest generational segment in the world making up 24% of the world population (Mintel Academic, 2018). The millennial generation tends to place more value towards experiences like travel and restaurants over owning possessions (Passport, 2018). This attractive market segment presented a great opportunity for Hilton as they made their strategic decision.

Being heavy users of technology and mobile devices (Passport, 2018), Hilton’s investment into its technological advances presented a great opportunity to exploit. Its investment in technology has allowed the company to have a firm online social presence. It is ranked as the #1 Hotel Instagram account with over 240,000 followers and actively engages its customers by having their customers post travel images and share the benefits of staying at a Hilton establishment (Top Social Media Accounts, 2018).

Threats

Competition: The markets for both Hilton Worldwide and Hilton Grand Vacations are very competitive. Within the timeshare market, Hilton Grand Vacations comes in third with 12.69% market share, behind Wyndam Vacations and Marriott Vacations Worldwide with 17.40% and 14.48% market share, respectfully. These top three companies compete on brand recognition and reputation as well as property locations, price, amenities, and timeshare point exchange policies. (The Global Timeshare Industry, 2018).

Hilton’s top competitors within the hotel industry are Marriott, Wyndham, and InterContinental Hotels Group. Marriott became the largest hotel company globally with 7.5% market share and $22.3 billion in annual revenue, compared to Hilton’s 3.8% market share and $9.1 billion in annual revenue (Forbes, n.d.). Approximately 73% of Hilton’s hotel inventory is located within the U.S., compared to just 62% for Marriott. Therefore, Marriott’s existing global dominance presents a threat to Hilton as it expands globally (Hyland, 2018). Marriott’s financial leverage is also much stronger than Hilton’s as its 2017 Debt to Equity Ratio was 2.208 (Macrotrends, 2018-b) while Hilton’s was 3.9042 (Macrotrends, 2018-a).

Figure 35. Sales Revenue of Selected Leading Hotel Companies Worldwide (2017) (Bil US dollars)

Source: Forbes

Millennial Preferences, Short Term Rental Market and Emerging Sharing Economy: The Short-Term Rental market presents a threat to the hotel and timeshare markets as the millennial generation has embraced the emerging sharing economy (Geerts, 2016). Furthermore, according to research by Resonance Consultancy (n.d.), 53% of millennials surveyed preferred to stay in full-service hotels while only 17% preferred to stay in timeshares.

Figure 36. US Millennial Travelers Preferred Accommodation Type (Jan 2018)

Source: Resonance Consultancy

Airbnb is the largest player in the short-term rental space and, as of 2017, it had over 4 million listings worldwide and 660,000 in the US, which exceeds the total number of rooms of the top five hotel companies combined (Hartmans, 2017). The number of Airbnb users is expected to grow from 34 million in 2017 to almost 46 million by 2022 (eMarketer, n.d.).

Figure 37. Number of Airbnb Users in the US from 2016 to 2022 (in Mil.)

Source: eMarketer

This threat of a highly differentiated substitute product is a new occurrence in the hotel industry (Akbar, 2018). Hilton has responded to developing millennial preferences by launching a new brand, Tru, which offers simple and stylish aesthetics at hostel level rates. However, the timeshare side of the business has not been able to follow suit (Hyland, 2018).

Negative Timeshare perceptions: As noted in Hilton Grand Vacations spin-off SEC filings, negative consumer perceptions timeshares present a threat to the industry (Hilton Grand Vacations Inc.- HGV FORM10-12B/A, 2016). Research by a professor at the University of Central Florida’s Rosen College of Hospitality Management found that 85% of consumers who purchased a timeshare regret their decision (Garcia, 2018).

Environmental regulation: Timeshares face extensive regulation of their marketing, financing, and loan servicing practices at the federal and state level. Failure to comply with regulations could result in the timeshare company not being able to offer timeshare products in certain areas, thus resulting in a decline of revenue (Hilton Worldwide Holdings Inc. SWOT Analysis, 2014).

Timeshare real estate regulations include the Fair Housing Act, Americans with Disabilities Act while marketing and sales activities are regulated by the federal Telephone Consumer Protection Act. The Federal Trade Commission, The Consumer Financial Protection Bureau, the Financial Crimes Enforcement Network regulate timeshare lending (Marriott Vacations Worldwide Corporation SWOT Analysis, 2017).

Secondary Timeshare Market: A secondary market for timeshares has emerged where timeshares are resold at a much lower cost, typically 60-70% lower than buying directly from the timeshare company. In addition, timeshare exit companies have emerged, which help timeshare owners get out of their contracts and stop paying maintenance fees and loan payments. This results in loan defaults and lost revenue for timeshare companies (Garcia, 2018).

Tough economic conditions – Recessions: Recessions present a greater threat to the timeshare industries sales than hotel industry RevPAR. Timeshare industry sales are more directly related to US Employment Rate, one of several economic indicators, with an R-squared value of 0.8530 (See Appendix F.2), verses hotel industry RevPAR with an R-squared value of 0.1375 (See Appendix F.1), (Bureau of Labor Statistics, n.d).

Figure 38. US Unemployment Rate vs Timeshare Sales

Source: Bureau of Labor Statistics

With an R-squared value of 0.5322 (See Appendix F.3), Debt Securities in Real Estate Investment Trusts are somewhat correlated to economic indicators, such as unemployment rate, but not to the extent of the timeshare industry (Proquest, n.d.).

Figure 39. US Unemployment Rate vs Debt Securities of US Real Estate Investment Trusts

Source: Proquest

VIII. Industry and Environmental Conclusion

Hilton Worldwide specializes in the ownership, management, franchising, leasing, and development of hotels, resorts and timeshare properties all over the globe. According to Hilton (2019), they hold over 5,000 hotels, resorts and timeshare properties to consist in excess of 678,000 rooms in 91 countries and territories worldwide. Over the past five years, Hilton's global revenue has grown an annualized 10.0% to $10B and global operations profit was estimated to have increased at an annualized rate of 42.7% to $1.8B (Hilton Worldwide Holdings Inc, 2019)

Hilton Worldwide made the strategic decision to spin off their brands of Park Hotels & Resorts and Hilton Grand Vacations. This decision resulted in Hilton Worldwide (HLT), Park Hotels & Resorts (PK), and Hilton Grand Vacations (HGV). Through Hilton’s 2017 spin-off they have been able to enter into both the REIT and Timeshare segments of the hospitality industry. Hilton’s decision to join the REIT industry came as an advantage to the 2017 Tax Cuts and Jobs Act. Furthermore, their venture into the timeshare industry came as an attractive new business model as there was a growing international demand. While Hilton maintains a large global presence the majority of their locations are within the US market. For example, 72.79% of all available rooms located in the US and only 31% of Hilton’s revenues being derived from their international operations (Hilton, 2018). It was evident that Hilton made the correct strategic decision to expand its global reach through the spin-off of their timeshare industry.

In the 2016 to 2017 timeframe, in tandem with the strategic split, Hilton experienced a negative sales growth of -32.08%, only to rebound with a positive sales growth of 23.81% in 2017-2018 (Macrotrends.com, 2019). This can directly correlate with the factors that were favorable for the spin-offs. The industry ratios for 2017 and 2018 were well above Hilton’s posting with the upper quartile current ratio of more than a full point above Hilton’s recorded value. This again indicates that Hilton’s spin-offs were a positive strategic decision.

Within the internal environment, it was identified that on the political from tax exemptions and government spending were favorable variables. Other favorable variables consisted of a lower unemployment rate and increasing wages among the population, which allowed for more disposable income and higher consumer spending amounts. This created consumer confidence. The rising Internet also presented favorable variables such as increasing social media, reviews, and metasearch which all allow for more confidence in booking.

Hilton’s holds a 3.8% market share as opposed to Marriott’s 7.5% globally (Forbes, n.d). Again, approximately 73% of Hilton’s hotel inventory is located within the US compared to only 62% for Marriott. Therefore, Marriott’s existing global dominance presents a threat to Hilton as it expands globally; however, Hilton needs to continue pursuing its global divestitures (Hyland, 2018).

The external environment presents high barriers of entry related to capital costs and fixed costs with relatively low-profit margins. This factor acts as a deterrent to new entrants (Cheng, 2013). Until recently, there was very little threat to the hotel industry due to substitute products. However, with the recent emergence of companies like Airbnb and HomeAway, the market is beginning to feel effects at the low and high ends (Zervas, 2017). However, there has been little effect from substitution within the market as the hotel industry present with a prominent, widespread product.

Hilton appears to have made a positive strategic decision through their three-way spin-off. The strategic decision came at a favorable time within the global economy and has presented many positive variables for why they chose to expand into the REIT and timeshare markets. They have continued on an upward growth trend; however, if the economy shifts or they fail within a new market, it was a smart, strategic decision to make the distinct separations of their company. References:

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Appendix A

Figure A.1 Highest US Income Tax Bracket

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Figure A.2 Rate of Gun Homicides per 100,000 U.S. Population

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Figure A.3 Percent Failed Background When Purchasing a Firearm

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Figure A. 4 Non-immigrant Visa Issued

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Figure A.5 Government Spending (Billion $)

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Appendix B

Figure B.1 U.S. Unemployment Rate

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Figure B.2 Annual U.S. Wage Macintosh HD:Users:Gabrielle:Desktop:Screen Shot 2019-02-14 at 2.37.34 PM.png

Figure B.3 Fed Funds Rate

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Figure B.4 GDP (Billion $)

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Figure B.5 Dow Jones Industrial Average

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Appendix C

Figure C.1 Consumer Spending vs. Hotel Industry RevPAR

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Figure C.2 Consumer Confidence Index vs. US Hotel Industry RevPAR by Year

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Figure C.3 Consumer Sentiment Index vs. U.S. Hotel Industry RevPAR

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Figure C.4 Disposable Income vs. US Hotel Industry RevPar by Year

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Figure C.5 Disposable Income vs. U.S. Timeshare Sales (Billions of Dollars)

Figure C.6 Projection of Timeshare Industry Sales vs. Airbnb Sales

Appendix D

Figure D.1 Internet Users vs. Hotel Industry RevPAR

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Figure D.2 Social Media Use vs. U.S. Hotel Industry RevPAR

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Appendix E

Figure E.1 General trend of positive correlation between Hilton’s revenues and its competitors’ revenues

https://lh5.googleusercontent.com/Dt92MLk3B64N8dP-seSxBKKeTpkNXfQeEALseuv5lguRKVjrqQFjvFlWiIhklIZQv16wVFTnaZv5lzpXMpUj69ve4-j_jcuBgvt8VTlW3-x3bGfA5m9PmOT6sh8ifWaIHIIUmckEQGsftAxEmg

Figure E.2: Hilton WorldWide’s RevPAR and J.D. Power & Associates Hotel Loyalty Program Satisfaction Score for Hilton

Figure E.3: American Consumer Satisfaction Index for Hilton Worldwide, 1995-2018

Figure E.4: Hilton RevPAR vs. Hotel Industry Spending on Mixed Media Advertising 2012-2015

Figure E.5 Airbnb vs. Hotels by Revenue (Q3 2015)

https://lh5.googleusercontent.com/Atf-NS97jiuJwBLKJX2vqwr-j1OL1-b5sfUokaM_xUSJbtl_nMdUVL8XGNSeCNrYj9_d0VXNOCBiTfjGrU_czn3-Nwc2EdM9kNNZ3q_6xQdVxRTsvVwO05NZS3IZIb2j4oYc1m4KRsC5Ob-kcA

Figure E.6 Hotel Loyalty Programs (Estimate Values)

https://lh6.googleusercontent.com/QWEnduFv_SGjtV75FiFu3vQjB_FLqezIAeusW8lvw8Qlu803T53UlEegzDcOpIPisH_O6UyIYl-lpiBhrHNuVB295FIp8J8vGb4TD-Jq7jRWvItGSzutQnq5qiyFwFZ1Qnl2sE2Vm-QmVoL3-g

Figure E.7 RevPAR to Consumer Spending

Figure E.8 Wages and Unemployment Rates

https://lh5.googleusercontent.com/dvxNYwoVwrKSyALIhQlhcOk3cq6BoQAy8KcWj0YXMqZhLAxldEjTI-BBdADrK_LZwsFdUZz3f4_Sl19MQYr1m28FrSbMShMKDCZk_QdTbZnsOudBxZGfkNCs7GXQgwbR6KtUkQb36hfxxEUOKQ

Figure E.9 Changes in personal consumption and wages and salaries

https://lh4.googleusercontent.com/65Ig4y8u1P6F--xqZp0s9ehoWzEJ6eT3IgK7lp5LmxKmlnXDZ3_YPSzf_b1BeOFkzubHSsWoR9s505mqY_h8d0CzjkEVbVumZf8dkS4EKqeaS_Be3AKas3WLZ9jVV9R1yfD8IakJ83e1_mBrFA

Figure E.10 National increases in GDP and increasing personal income

Figure E.11 Growth in wages in the accommodation industry and the national growth in personal income

Figure E.12 Wage growth and FTE count in the accommodation industry

Figure E.13 Airbnb’s revenues track more closely to the change in GDP and personal income

Appendix F

Figure F.1 U.S. Unemployment Rate vs. Hotel Industry RevPAR (USD)Macintosh HD:private:var:folders:5r:dh_gnyjx1617r6576bf37r780000gn:T:TemporaryItems:Screen Shot 2019-03-04 at 4.25.06 PM.png

Figure F.2 U.S. Unemployment Rate vs. Timeshare Industry Sales (USD Billions)Macintosh HD:private:var:folders:5r:dh_gnyjx1617r6576bf37r780000gn:T:TemporaryItems:Screen Shot 2019-03-04 at 4.25.43 PM.png

Figure F.3 U.S. Unemployment Rate vs. Timeshare Industry Sales (USD Billions)Macintosh HD:private:var:folders:5r:dh_gnyjx1617r6576bf37r780000gn:T:TemporaryItems:Screen Shot 2019-03-04 at 4.26.10 PM.png

Disposable Income vs. Timeshare Sales

Disposable Income 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 113754.1 116881.8 120416.3 123617.7 127750.2 129739.8 134904.79999999999 138005.79999999999 139330 139103.70000000001 141864.6 145198.70000000001 150010 148069.49999999991 154057.4 160398.5 Timeshare Sales 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 4.0999999999999996 4.8 5.5 6.5 7.9 8.6 10 10.6 9.7000000000000011 6.3 6.4 6.5 6.9 7.6 7.9 8.6

Projection of Timeshare Industry Sales vs. Airbnb Sales

Airbnb Value Sales (Millions of USD) 2009 2010 2011 2012 2013 2014 2015 6.9 105.29 692.35999999999922 1837.11 3576.02 6448.95 9640.5400000000009 Timeshares Sales (Millions of USD) 2009 2010 2011 2012 2013 2014 2015 6300 6400 6500 6900 7600 7900 8600

Consumer spending (Billions $) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10615.3 10592.8 10460 10643 10843.8 11006.8 11166.9 11494.3 11921.9 12248.2 12558.7 Industry RevPAR (US) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 53.585749152799274 64.302898983359029 53.628617752121549 56.524563110736104 61.159577285816368 65.257268963966197 68.650646950092408 74.28 78.669999999999973 81.19 83.57

Industry RevPAR (US) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 53.585749152799274 64.302898983359029 53.628617752121549 56.524563110736104 61.159577285816368 65.257268963966197 68.650646950092408 74.28 78.669999999999973 81.19 83.57 Consumer Confidence Index 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 103.36 57.85 45.44 54.48 58.09 67.05 73.64 87.08 97.1 99.09 120.48

Industry RevPAR (US) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 53.585749152799274 64.302898983359029 53.628617752121549 56.524563110736104 61.159577285816368 65.257268963966197 68.650646950092408 74.28 78.669999999999973 81.19 83.57 Consumer Sentiment Index 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 85 .583333333333215 63.75 66.258333333333198 71.841666666666697 67.349999999999994 76.5416666666667 79.208333333333215 84.124999999999986 92.941666666666706 91.841666666666697 96.766666666666666

Disposable Income 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 138005.79999999999 139330 139103.70000000001 141864.6 145198.70000000001 150010 148069.49999999991 154057.4 160398.5 163146 167392.1 Industry RevPAR (US) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 53.585749152799274 64.302898983359029 53.628617752121549 56.524563110736104 61.159577285816368 65.257268963966197 68.650646950092408 74.28 78.669999999999973 81.19 83.57

Internet Users (000) 2010 2011 2012 2013 2014 2015 2016 2017 207291.3 203275 219627.8 211614.3 218081.1 224496.5 231167.2 240540.1 Industry RevPAR (US) 2010 2011 2012 2013 2014 2015 2016 2017 56.524563110736104 61.159577285816368 65.257268963966197 68.650646950092408 74.28 78.669999999999973 81.19 83.57

Industry RevPAR (US) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 64.302898983359029 53.628617752121549 56.524563110736104 61.159577285816368 65.257268963966197 68.650646950092408 74.28 78.669999999999973 81.19 83.57 % of U.S. adults who use at least one social media site 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.25 0.38 0.46 0.5 0.55000000000000004 0.61 0.62 0.65 0.69 0.69

Percentage of visits

TripAdvisor Hotels.com Marriott International Booking.com AirBnB Vacation Rentals by Owner Hilton Hotels Online Travel Channel IHG National Park Service 0.13400000000000001 3.9E-2 3.6999999999999998E-2 3.5999999999999997E-2 3.5000000000000003E-2 2.4E-2 2.1999999999999999E-2 2.1000000000000001E-2 0.02 1.7999999999999999E-2

Value in billion U.S. dollars

Hilton Hotels & Resorts Marriott Hyatt Holiday Inn Courtyard Marriott Shangri-La Hotels and Resorts Wyndham Sheraton Ramada Worldwide Hampton by Hilton 6.33 5.46 3.51 3.29 3.02 2.2200000000000002 1.98 1.9 1.89 1.78

Most Valuable hotel Brands Worldwide 2018, by Brand Value

Value in billion U.S. dollars

Sales revenue of selected leading hotel companies worldwide in 2017 (in billion U.S. dollars)

Marriott International (US) Hilton Worldwide (US) Wyndham Hotel Group (US) Host Hotels & Resorts (US) Hyatt Hotels (US) Oriental Land (Japan) Accor (France) InterContinental Hotels Group (UK) 22.3 9.1 5.5 5.4 4.4000000000000004 4.3 2.2000000000000002 1.8

Millennial travelers, from the United States, prefered accommodation type as of January 2018

Other Hostel Timeshare condo / home Boutique hotel Own vacation home Limited service / economy hotel / resort B & B / small inn Apartment / condominium rental Cruise ship House / villa rental Camping Upscale / luxury hotel / resort All inclusive resort Stay with friends or family Full service hotel / resort 0.01 0.15 0.17 0.2 0.2 0.21 0.23 0.23 0.28999999999999998 0.32 0.33 0.35 0.41 0.42 0.53

Number of Airbnb users in the United States from 2016 to 2022 (in millions)

2016 2017 2018* 2019* 2020* 2021* 2022* 29 33.9 38.4 41.1 43.3 44.5 45.6

US Unemployment Rate

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 5.0999999999999997E-2 4.5999999999999999E-2 4.5999999999999999E-2 5.8000000000000003E-2 9.2999999999999999E-2 9.6000000000000002E-2 8.8999999999999996E-2 8.1000000000000003E-2 7.3999999999999996E-2 6.2E-2 5.2999999999999999E-2 4.9000000000000002E-2 4.3999999999999997E-2 3.9E-2 Timeshare Industry Sales ($US Billions)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 8.6 10 10.6 9.7000000000000011 6.3 6.4 6.5 6.9 7.6 7.9 8.6 8.8264000000000387 9.2193000000000858 9.6122000000000281

Debt Securities of US Real Estate Investment Trusts (in billion U.S. dollars)

2005 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 217 171 144 145 153 179 355 403 396 417 439 US Unemployment Rate

2005 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5.0999999999999997E-2 5.8000000000000003E-2 9.2999999999999999E-2 9.6000000000000002E-2 8.8999999999999996E-2 8.1000000000000003E-2 7.3999999999999996E-2 6.2E-2 5.2999999999999999E-2 4.9000000000000002E-2 4.3999999999999997E-2

SUMMARY OUTPUT

Regression Statistics

Multiple R0.823775596

R Square0.678606232

Adjusted R Square0.655649534

Standard Error6.491758624

Observations31

ANOVA

dfSSMSFSignificance F

Regression22491.5129591245.7564829.560272121.25466E-07

Residual281180.00204142.14293003

Total303671.515

CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%

Intercept-42.2965154516.93021385-2.4982859540.018624052-76.9764864-7.616544494-76.9764864-7.616544494

GDP (B)0.0183750240.0091542382.0072697030.054461411-0.0003765820.037126631-0.0003765820.037126631

Personal Income (B)-0.0274929630.019946321-1.3783475550.1790109-0.0683511490.013365224-0.0683511490.013365224

SUMMARY OUTPUT

Regression Statistics

Multiple R0.989127207

R Square0.978372632

Adjusted R Square0.97754081

Standard Error69.22327866

Observations28

ANOVA

dfSSMSFSignificance F

Regression15636095.0095636095.0091176.18053.54594E-23

Residual26124588.424791.862309

Total275760683.429

CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%

Intercept3768.555053159.707415723.596619084.38897E-193440.2717594096.8383483440.2717594096.838348

Personal Income (B)0.7274459840.02121112834.295488053.54594E-230.6838458870.7710460820.6838458870.771046082

SUMMARY OUTPUT

Regression Statistics

Multiple R0.99717874

R Square0.99436544

Adjusted R Square0.992111616

Standard Error140.1681959

Observations8

ANOVA

dfSSMSFSignificance F

Regression217336241.948668121441.19032.38314E-06

Residual598235.6156819647.12

Total717434477.56

CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%

Intercept-12099.896661226.257062-9.867340.000182-15252.09079-8947.7-15252.1-8947.7

FTEs (t)22.745829611.87044190812.160676.65E-0517.9377056227.5539517.9377127.55395

% of Value added to GDP-1135903.414447094.2342-2.540640.051854-2285195.73213388.9-228519613388.9

SUMMARY OUTPUT

Regression Statistics

Multiple R0.907210934

R Square0.823031679

Adjusted R Square0.752244351

Standard Error453.8013676

Observations8

ANOVA

dfSSMSFSignificance F

Regression24788755.094239437811.626820.013174642

Residual51029678.406205935.7

Total75818433.5

CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%

Intercept-8555.6264952433.087098-3.516370.016985-14810.07599-2301.18-14810.1-2301.18

GDP (B)0.7631223831.2715126750.6001690.574556-2.5054050034.03165-2.505414.03165

Personal Income (B)-0.2595984111.373550977-0.1890.857527-3.7904236033.271227-3.790423.271227

BrandChain Scale

Conutries

Territories

PropertiesRooms% of Total Rooms

Waldorf AstoriaLuxury12279,5791.1%

ConradLuxury243410,7091.3%

CanopyUpper Midscale22287<0.01%

Hilton

Hotels and ResortsUpper Midscale88578211,42324.7%

Embassy SuitesUpper Midscale624557,2166.7%

CurioUpper Midscale154810,5481.2%

HamptonUpper Midscale212338237,33427.7%

Home 2Upper Midscale220421,0152.5%

DoubleTreeUpscale4152012,77314.5%

Tapesrty CollectionUpscale144670.1%

Hilton Garden InnUpscale37771111,43813.0%

Homewood SuitesUpscale345151,3056.0%

TruMidscale199910.1%

Hilton Grand VacationsTimeshare3488,1010.9%

Hilton Brand Portfolio as of January 1, 2018