All-inclusive: when cash is scarce, value becomes king

The past few years have been strange for the hotel industry. First, COVID-19 created a level of disruption never seen before. Then, leisure travel and resorts in locations like Mexico and the Caribbean recovered incredibly quickly, at a time when business travel levels remained depressed. Now, we face a looming recession that can reverse the course of the industry. So, where can investors weather the storm?

Contributed by David Camhi, Greenspoon Marder, Fort Lauderdale, Florida

All-inclusive has been around for a long time, but until very recently, it has been largely ignored by U.S. travelers. It began in the early 1950s and spread during the ‘70s and ‘80s throughout the Caribbean. Since most of these destinations did not have sufficient properties to sustain regularly scheduled flights, reliance on charter flights were necessary. This allowed tour operators offering packaged deals to control distribution. Also, the all-inclusive segment initially catered to travelers that were looking for a budget-friendly family vacation, emphasizing location and activities over accommodations and F&B. That resulted in the segment being perceived as catering only to budget-minded travelers. As the industry developed and pursued different groups of travelers (such as honeymooners), and destinations became less “remote,” new resorts with better accommodations and F&B appeared.

In the last 30 years, major all-inclusive destinations like Cancun, Mexico, have grown to a point where airlines can sustain hundreds of daily, regularly scheduled flights from major cities around the world, which can be booked directly by travelers directly online, taking distribution away from tour operators. In addition, a truly upper-upscale all-inclusive concept, including adult-only properties, has been developed and is well established. However, even though high-quality upscale and upper-upscale properties abounded, the adverse perception, in particular among U.S. consumers, did not immediately change.

When cash is scarce, value becomes king

It took the 2007-2009 Great Recession for U.S. travelers to begin to take the all-inclusive segment seriously. Many consumers who were able to travel to luxury resorts during the real estate boom were suddenly forced to look for more affordable options. The newly developed upper-upscale class of all-inclusive resorts was able to meet these travelers’ quality requirements while avoiding the “sticker shock” that came at checkout time. Once all F&B and incidentals were included, travelers could truly enjoy their vacation without thinking about the cost. The concept of “value” became reassessed and no longer associated with low quality.

All-Inclusive by Marriott Bonvoy in September welcomed the 30th all-inclusive property in its Caribbean and Latin America portfolio with the opening of Sanctuary Cap Cana, a Luxury Collection all-inclusive resort in the Dominican Republic.

Even though American travelers were beginning to appreciate all-inclusive travel, the segment continued to be comprised of large European family-owned brands that were largely unknown in the U.S. American travelers tended to select properties based on the property’s attributes and recommendations from fellow travelers or travel professionals, and not on brand affinity, loyalty or trust.

As demand grew, the major U.S. brands started to notice the trend, and timidly at first, but now in full swing, entered the all-inclusive segment. Some brands bet on having dedicated all-inclusive brands like Hyatt (with the launch of the Ziva and Zilara brands in 2013 and the recent US$2.7 billion acquisition of Apple Leisure Group, which owns a large portfolio of dedicated all-inclusive brands) and Wyndham (with the newly-launched Alltra brand), while others have created subsets of their existing brands (like Hilton and Marriott “all-inclusive”) or soft-branded dedicated third-party brands (like Royalton – owned and operated by Blue Diamond/Sunwing – and included within Marriott’s Autograph Collection).

The rate compression effect

In a recession, as available disposable income is reduced and demand shrinks, luxury properties reduce rates to maintain their share of the demand pool. This rate reduction puts downward rate pressure on the next tier down, which is forced to reduce rates as well to remain competitive, and so on throughout all tiers down.

The higher the operational margin a property has, the easier it can absorb this rate compression without having to reduce costs or service levels. Economy properties operating on low margins have a harder time coping with recession periods. In addition, the more services and amenities a property offers, the more it can reduce costs by limiting the services and amenities available to guests to absorb the rate compression. This has a multiplying effect on a property that offers accommodation, F&B, entertainment, and even tips, all at a single, all-included rate. Following this logic, it would seem upper-tier all-inclusive properties are the best equipped to weather a recessionary period.

All-inclusive in a class of its own

It is not yet clear whether the U.S. brands intend to create a full set of all-inclusive brands with a precise tier and rate segmentation. So far, none of the brands seem interested in covering all the all-inclusive tiers with distinct brands as they do in other segments.

For example, a Hilton guest staying at an EP property in a major destination would have a large selection of Hilton brands in different tiers to choose from. A Hilton guest looking for an all-inclusive property could only stay at a “Hilton all-inclusive” branded property – with no other brands or tiers to choose from. Hyatt has a larger set of brands following its acquisition of Apple Leisure Group, but historically, brand consistency at Apple Leisure Group has not been as high as it is the standard with the large U.S. brands. Also, it remains unclear if the U.S. brands are willing to commit their luxury brands to the all-inclusive segment as Marriott at some point suggested it would do.

Owners, operators and investors thinking about all-inclusive need to understand how it differs from EP properties. Some of the most relevant differences include:

  • A material percentage of the occupancy is still controlled by wholesalers/tour operators, So, third-party managers need the right relationships or scale to successfully work with these tour operators.
  • All-inclusive properties rely on vacation clubs to drive cash-flow and occupancy, and the availability of one may play a significant role in brand selection by property owners. Many major U.S. brands have licensed their vacation club/timeshare operations. So, it remains unclear if they will be able to offer this feature.
  • In all-inclusive properties, F&B outlets are mostly cost and not revenue centers. That requires a different operational mindset.
  • Rates are charged per person, with children enjoying discounts or staying for free, which requires the ability to track each guest individually at reservation and check-in, and to budget and yield-manage appropriately.
  • Booking windows tend to be longer and stays booked through tour operators are normally prepaid.
  • All-inclusive destinations operate year-round, with marked high and low seasons, meaning the hotel never closes (think renovations, etc.); costs need to be managed during low occupancy periods to maintain F&B and amenities offerings.
  • Most all-inclusive destinations are in jurisdictions where there is no at-will employment. So, the effective management of employees (and staffing levels between high and low occupancy seasons) is key.
  • Operating in a foreign country means dealing with local taxes, including tax withholdings on fees to franchisor and operator, exchange rates (and in some cases exchange controls), not only on payments related to the operation of the property but also on the investments and their repatriation.

As a final point, it remains to be seen if the attention all-inclusive has recently received is sufficient to generate the opening of more all-inclusive properties in the U.S. There are structural reasons why all-inclusive has not yet taken root in the U.S., including the high cost of labor (as compared to Caribbean destinations) and the lack of a true year-round season. It may be that once it becomes fully mainstream at the hands of the major U.S. brands, more investors are willing to bet on the model, if not within the continental U.S., at least in places like Hawaii, Puerto Rico, or even Florida.