With the term "staycation" gaining traction following the Great Recession and consumer spending levels remaining challenged, you might be under the impression that hotels have struggled to grow. The reality couldn't be further from the truth.
What we've learned as investors is that one of the few things Americans are unwilling to give up is their ability to take a vacation. According to statistics from the Bureau of Labor Statistics on travel and leisure, in 2008 the average American household spent $1,415 a year, about 3% of the median household expenditures on travel related expenses, including transportation, food, and lodging.
The bread and butter of the hotel industry
Expanding that a bit further into income brackets and you discover that the top 20% of households based on income spent more on travel-related expenses per year ($3,718) than the other 80% of American households combined. This was especially true for lodging where the highest 20% of household incomes spent an average of $932 per year compared to just $331 and $189 per year for the second and third-highest income brackets.
The translation of this data is that while advertising to a diverse leisure market is important, the bread and butter of the hotel industry is the middle and upper-income American household.
Furthermore, the lodging industry is expected to grow strongly over the coming years. The same BLS travel study projected that there would be a 13.7% increase in total hotel, motel, and resort desk clerk hiring between 2008 and 2018 for a cumulative gain of 31,500 jobs.
The point being that there's obviously profits to be made in upscale hotels, but it's often difficult to figure out which one has the edge over its peers. Thankfully, Brand Keys did that hard work for us by conducted its annual survey and utilizing its proprietary Customer Loyalty Engagement Index to decipher which hotel chain has the most loyal customers. Today, we're going to examine which surprising upscale hotel chain is the top dog when it comes to bringing consumers back over and over.
But, first let's examine why customer engagement and loyalty matter for hotel operators in the first place.
Why customer loyalty matters to hotel operators
Repeat business means everything for hotel operators because luring new guests with promotional activity can be costly over the long run and detrimental to margins if hotels can't turn those guests into long-term customers.
Loyal customers serve three primary purposes for upscale hotel chains. First, they are free advertisers for a chain. Advertising and marketing is expensive, but loyal customers tend to recommend businesses to friends and family when they've had a positive experience or good service. Second, loyal customers provide the steady cash flow and higher margins needed for upscale hotel chains to expand their business and renovate existing hotels. Finally, loyal guests provide stability when the U.S. economy is in a recession. This is especially important for upscale hotel operators who could find themselves heavily exposed to downside if upper-income individuals simply stopped going on vacation during an economic downturn.
This upscale hotel is tops in customer loyalty
Now that we have a better bead on why customer loyalty matters, let's have a closer look at which one of the three major upscale hotel operators – Marriott International (NASDAQ:MAR), Hilton Worldwide (NYSE:HLT), and Hyatt Hotels (NYSE:H) – leads the pack in customer loyalty.
Before we do the great reveal, however, I'd like you to put on your thinking cap, or guessing cap in this case, on and give me your best assessment of which hotel operator has the most loyal customers.
Got your answer?
Did you say Marriott International? If so you'd be close, but no cigar. In the luxury hotel category, which we're not specifically looking at here, Marriott's Ritz-Carlton took the top honor, but for upscale hotels Marriott only tied with Hilton's Embassy Suites for third place.
Did I hear you say Hilton Worldwide? A good guess, but wrong again. Despite having its Hilton and Embassy Suites brands rank second and third in upscale hotels, its Doubletree brand ranked dead last in customer loyalty out of the nine upscale hotel chains considered for the category. That overall ranking pretty much precluded Hilton from cumulatively taking the overall honors.
The hotel chain most adept at bringing back loyal customers according to Brand Keys is Hyatt.
The Hyatt advantage
Although most hotel chains offer their loyal customer some sort of perks and/or reward card, the Hyatt Gold Passport is among one of the best rewards cards around. According to BigDoor.com, which ranked Hyatt's perks card second on its list of the best loyalty programs, members can use their Hyatt Gold Passport points at more than 500 worldwide locations and can obtain room upgrades for minimal costs. It also allows members to use accumulated points toward dining credits and spa treatments, with members earning five points for every dollar they spend. Free nights can be redeemed for as little as 5,000 points (i.e., $1,000 spent). In short, once Hyatt lures members into joining its rewards program it appears to be very successful at keeping them tied to its expansive network of hotels.
Consistently meeting or exceeding customer expectations is another driving point of Hyatt's success. Although you'll find that there's some degree of overlap between upscale and upscale-luxury hotels, J.D. Power awarded upscale chain Hyatt Place top honors in its 2013 customer satisfaction index survey. A number of factors, including check-in/check-out, hotel services, hotel facilities, and overall cost and fees played into its survey with the general consensus being that consumer perception of the hotel sector is improving across the board, especially when it comes to costs. This is especially important for upscale operators like Hyatt where consumers tend to be even less cost-sensitive.
What we're beginning to see is all of Hyatt's investments in a larger staff and more conveniences in its hotels are paying off. Just last week Hyatt reported a 31.3% increase in adjusted EBITDA to $172 million in the first-quarter as net income soared to $56 million from just $8 million in the prior year period. Most importantly, comparable RevPAR (revenue per available room – consider it the ultimate measure of hotel operator margins) increased 6% on a companywide basis in the first-quarter.
Having the most loyal customers could mean Hyatt holds a comparative advantage when it comes to pricing power and eventually RevPAR growth over the long-term. Hyatt's advantage in retaining quality customers certainly could make it worth a look for investors looking to add a leisure stock to their portfolio.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends Hyatt Hotels. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.