Why Marriott's Expansion in Africa Could Mean Long-Term Gains

A Protea hotel in Africa now owned by Marriott International. Image source: Marriott.

Marriott International (MAR -1.06%) announced in 2014 that it was acquiring a relatively small hotel company in Africa, called Protea Group, taking over its 116 properties in seven countries. The move made Marriott the largest hotel company on the continent, and it would turn out to be just the start of Marriott's vision for how the hotel behemoth would serve travelers across Africa. Here's why Marriott's expansion in the region could mean long-term gains. 

Marriott doubles down on expansion in Africa

Marriott opened its first property in sub-Saharan Africa, the 254-room Kigali Marriott in Rwanda, in early October. The Protea acquisition was one of a few recently announced deals that will increase Marriott's expansion across multiple countries in the African continent with new hotels from various brands. The deals include new properties in South Africa, Kenya, Egypt, and Mauritius.

After completing its merger with Starwood Hotels in recent months, making it the largest hotel company in the world, Marriott is now using both its original brands and those acquired from Starwood in this expansion across Africa. This new round of deals will bring Marriott's total count in Africa to over 200 properties and around 37,000 rooms once they are all completed in the next few years. 

"The past couple of weeks have seen an incredible transformation for our company, and I am proud to say that we are continuing the momentum with our expansion and development plans across the African continent," said Alex Kyriakidis, Marriott's president overseeing operations in the Middle East and Africa. 

A Marriott Hotel in South Africa. Image source: Marriott.

Africa remains a global "bright spot"

Marriott CEO Arne Sorenson said in a release about the new deals that "Africa is particularly important to Marriott International's expansion strategy because of the continent's rapid economic growth, expanding middle class and youth population, as well as the increase of international flights into the continent. With over 850 million people in sub-Saharan Africa alone, there are enormous opportunities." 

Other than its large landmass including nearly every type of climate and wide array of vacation destinations, Africa has rapidly growing economies and middle-class populations in many of its more than 50 countries. There's been much debate recently as to the size of the continent's middle class, with the African Development Bank in 2011 saying it numbers 300 million, while recent reports cite a figure as low as 18 million depending on what parameters are used to define middle class. This is an important distinction since the investing thesis for the hotel industry in other regions has been that larger middle classes lead to more domestic travel and need for lodging such as provided by Marriott.  

However, Africa's middle class as a whole is certainly still growing by nearly every estimation, even if it's smaller than originally thought. Africa's nations each have individual opportunities and challenges, many economies in the region are continuing to develop rapidly, and the need for travel both domestically and from international travelers in those areas should support continued growth in hotels. Megainvestor George Soros has said recently that Africa still remains one of the few economic-growth bright spots worldwide. 

The prospects in the tourism and lodging industry, in particular, are good: An estimated 36 million tourists visited the continent in 2015, and the number is expected to grow. More domestic travel could support hotel growth in coming years. According to analysts at the firm Jones Lang LaSalle, the hotel room supply in the most important African cities is still meager compared with the growing demand.  

Marriott continues to look like a top hotel stock 

Cape Town. Image source: Hilton.

Marriott will have competition -- not only from local hotels but increasingly from big-name global brands as well. Hilton Worldwide (HLT -0.33%) is also investing more resources into its development pipeline in Africa. The company currently has around 40 hotels in Africa, and plans to double its footprint there in the next few years. Airbnb is another company dedicated to growing its presence in on the continent. 

While impressive in their own right, Hilton and Airbnb's inroads in Africa are still less significant than Marriott's, and the Protea acquisition has given Marriott a sizable head start. 

Already running over 5,500 properties worldwide after its recent Starwood acquisition, and with many more properties under construction, Marriott is increasingly becoming the most important company to watch in the hotel industry. This increased investment in Africa makes it even more interesting.

There will certainly be economic risks ahead, but 200 properties is a small slice of Marriott's total, which means that the potential risk to Marriott of this expansion not paying off is relatively small. However, the upside is large: By becoming the established hotel leader in the region, Marriott is best-suited for large gains if the travel industry around Africa continues to grow in the years to come.