New brand provides the spark Hilton was looking for

Hilton’s new “premium economy” Spark brand is just the flash the lodging company needs to spur future development and customer stays. That was the case laid out by Hilton CEO Chris Nassetta speaking on the company’s fourth-quarter earnings call, putting the brand in a space all its own.

“There aren’t real competitors,” Nassetta, who became CEO of Hilton in 2007, said, adding that he had been thinking about an economy space brand since he joined the company. “We made this space up,” he said, referring to premium economy, where he said Spark would price above traditional economy products.

Hilton launched Spark by Hilton in January with the assumption it could be a category killer, putting other economy brands on notice. Hilton, for its part, had never before come that downscale; Tru by Hilton was launched in 2016 as a midscale product, a level below Hilton’s legacy Hampton brand, which has been a category killer all its own, but has also been around for 40 years now and some of the properties are showing their maturation.

“It’s a huge opportunity to better serve our existing customers, but also an important opportunity to acquire new customers,” Nassetta said. The Spark brand, which Nassetta playfully called less sexy than lifestyle or luxury brands, is geared toward travelers with lighter wallet spend, typically younger travelers who aren’t going to be filling up Waldorfs and Conrads on the regular. For Hilton, like other lodging companies, it’s about getting travelers introduced to Hilton and its myriad brands. “More than half of that customer base are customers that are early in their travel lives and the sooner you get them into the system and building loyalty with them, the better off you are,” Nassetta said.

Nassetta said the brand had been in discussion and development for the past three years and the difficult part was engineering something at a price point “that really works for customers,” he said.

From a commercial standpoint, Hilton needed to build a digestible brand for the ownership community and one that would shift market share. “Time will tell,” Nassetta said, “but this will be the most disruptive thing we’ve done in terms of brand space because it is very ripe for disruption. If you look at hotels at this price point in this segment, you will find a very high beta situation in terms of the physical attributes. And it’s very hard to fix when you have a big system that’s already out there.”

Nassetta said Spark has an opportunity to be a value contributor in the billions of dollars for Hilton and its shareholders.

Spark by Hilton, as Nassetta described it, is a “value-driven product, simple consistency and providing a comfortable stay with practical amenities.”

A model Spark by Hilton guestroom.

The brand is a 100% conversion product and, with it, Hilton will look to lure other franchisees with existing product to convert. Additionally, in the current interest rate environment, with debt for new development more expensive, franchisors are entering the conversion wars as the vehicle to boost net unit growth. Hilton said that there are 200 deals in various stages of negotiation and Nassetta touted the predominance of “conversions from third parties.” At one point, Nassetta noted that there are around 100 U.S. locations without a Hilton-branded product, which Spark could likely slide into.

Hilton said there won’t be a “ton introduced” this year, with most being delivered toward the end of 2024. Ultimately, Spark by Hilton will, according to Nassetta, be Hilton’s largest growth engine, accounting for as much as 30% of development.

What the numbers say

Hilton is the first bellwether lodging company to report Q4 numbers. Global RevPAR for the full year was approximately 1% shy of 2019 levels. For full year, RevPAR was up over 40% YOY, the large increase attributed to a favorable comp off 2021. System-wide occupancy reached 67%, up versus the third quarter and three percentage points below 2019 levels. Nassetta touted continued growth in all segments of the industry, “aided by meaningful recovery in Asia and urban locations in the U.S. as group business recovers.”

On the development front, net unit growth, a metric that Wall Street focuses on to gauge the health of a lodging company, reached 4.7% in 2022. Hilton forecasts that net unit growth will reach between 5% and 5.5% for full-year 2023. The company said its pipeline stood at a record 416,000 rooms, with half under construction. It opened 355 new hotels in 2022.

Development has not been easy, especially opening hotels in China, which was next to impossible, Nassetta said, “because, literally, the offices that gave you your certificate of occupancy were closed.” Nassetta ascribed some of the company’s “softness” in net unit growth to this.

Hilton touted the growth in group business, which long suffered during the throes of the pandemic. “There is a rising demand for company meetings,” Nassetta said.

At the end of 2022, Hilton Honors, the company’s loyalty program, stood at more than 150 million members, who account for 65% of all occupancy.