Sandals Dunn River Brands heat up battle for all-inclusive sectorBy John Jesitus | January 19, 2023Share Revenue, rate potential, pent-up demand and a buffet of government incentives make this sector one of the hottest destinations for brands and investors. For the hotel world’s global giants as well as regional powerhouses, the forecast for all-inclusive resorts is about to get even brighter as growing demand drives rate. Stressed out, cashed-up travelers seek a pampering no-pressure escape and governments are rushing to offer incentives to keep the pipeline flowing freely. With this buffet of upside on the menu, it’s no wonder global hotel brands and high-profile sector specialists are jockeying for position through development, management and mergers and acquisitions. Adam StewartBring on the brands The all-inclusive landscape offers resort experiences and the power of strong brands across a broad range of segmentation, said Adam Stewart, Sandals Resorts International executive chairman. But these are still murky waters for buyers and developers as well as consumers. Strategically, he added, brands such as Marriott, Hilton and Hyatt have done a “brilliant job” over the years segmenting their various brands. “If there's an opportunity within the all-inclusive market,” he said, “it's to truly start to segment product.” The established all-inclusive players, said Stewart, are well-known: Sandals, Club Med, AMresorts (now owned by Hyatt), Playa Hotels & Resorts, Karisma Hotels & Resorts, and Palace Resorts. “If you look at all of us together, other than labeling ourselves all-inclusive, it’s a huge separation in terms of what we do and how we do it—a wide mix of quality, size and density.” As an owner, developer, and operator, Playa has relationships with Hyatt, Hilton, Wyndham Hotels & Resorts, Marriott and Intercontinental Hotels Group (IHG). This year, Playa will open the first all-inclusive properties for both the Luxury Collection and Kimpton Hotels & Restaurants. “Bringing those new brands into a segment where they have not been represented—that’s the critical change in the dynamics of the market,” said Fernando Mulet, Playa’s executive vice president and chief investment officer. Operating Playa’s hotels under highly recognizable U.S. brands has proven very successful, Mulet added. “We've been able to differentiate a product offering through quality and branding,” he said. “And we've been able to diversify in distribution channels.” Having access to brands’ proprietary distribution platforms is helping Playa reach consumers more directly, Mulet said. Presently, the company generates 45% of its business through direct channels. Playa’s relationship with major hotel brands also delivers a different customer—one who has never experienced an all-inclusive resort. “They’re giving all-inclusive an opportunity because now it’s a Hyatt, Hilton, or Marriott resort. Before, the offerings of different resorts were managed under brands that were not that recognized,” Mulet said. Although the 5-star system intended to signal quality levels has been manipulated over the years, Stewart said, people generally understand it. However, Mulet said that stars carry less relevance today because global brands spend time and money to educate customers about their quality levels. “Americans understand what a W Hotel, a Hilton, or a Hyatt Ziva is,” he said. Fernando MuletStill, Stewart countered, segmentation is “a question we’ve not been able to solve. But as the all-inclusive space grows and becomes more mainstream, it's something that I myself and the leaders of the industry are going to have to take upon ourselves to find a way forward.” Taking the long viewThe Sandals model begins with buying the best beach real estate available, even if the company has no immediate plans for it. Some of the resorts the company is beginning to develop this year were acquired 20 years ago. “We’ve always played the long game, acquiring assets, sitting on them, spending more per key by far than the industry, including more inclusions, features, and amenities, and pacing the industry at large. Then ultimately making sure that we get an above-average ROI. And that's what's enabled us to continue our model.” Funded by traditional commercial bank loans, Sandals’ strategy involves paying debt quickly, staying very lowly leveraged, and reinvesting. Including this year’s openings, Stewart said, Sandals will have around 7,000 rooms in two dozen resorts located on 10 islands throughout the Caribbean. Private-equity and venture capital exist for some of the segment’s players, Stewart added, but owning its own assets allows Sandals to steer its own destiny. “As a private business, we outperform the space in terms of investment in innovation.” With 23 resorts ,including some 8,600 rooms throughout Mexico, Jamaica, and the Dominican Republic, Playa approaches growth through repositioning, acquisitions, and ground-up development. Because Playa’s business model emerged from the pandemic stronger, Mulet said, it has recently landed many deals to reposition existing hotels. The company sees many conversion opportunities, he added, because it has access to a broad brand portfolio and doesn’t push any single brand. “We can adapt and be a great advisor to a hotel owner,” he said. Merger and acquisition opportunities are limited in Playa’s markets, Mulet said. “But they exist if you know how to find them and run them.” Distressed inventory is rare, he said, because 2022 was an excellent year for Playa and its local rivals. Regarding new builds, Mulet said, certain Mexican locations remain attractive, and the Dominican Republic is very active with new development happening over the next year. Cap Cana, for example, has a St. Regis Resort & Residences under construction. The first W Hotel in Punta Cana is expected to open in 2024. From Sandals’ viewpoint, Stewart sees much distressed Caribbean real estate available from highly leveraged companies that lacked the financial horsepower to survive the pandemic. Most failures were in the 2- to 2.5-star space, with discount-based business models, he said, whereas quality properties more likely survived. Over the years, Stewart said, some companies have entered the all-inclusive space without a vision and failed. “They looked from the outside and misunderstood the model,” he said. Accordingly, he characterized lenders’ appetite for all-inclusive at-large as hit-and-miss. “For Sandals, we’ve never had an issue borrowing at any level. So, for the blue chips, it’s very strong in terms of lending and appetite to lend.” Presently, Sandals’ new-build opportunities include the last pieces of undeveloped land in Rodney Bay, St. Lucia; Grace Bay Beach in Turks and Caicos; and Bloody Bay in Negril, Jamaica. “We own easily the most beautiful site in Portland, Jamaica, on the east coast of Jamaica,” Stewart added. “The list goes on.” Spending upRegarding luxury, Stewart said it is absolutely the time to keep raising the bar. “Because that’s our space, we feel it's our duty to continue to evolve the product,” he said. “We're seeing huge shifts in technology and how technology enables you to get to the beach faster, or to execute service faster.” Luxury means more than facilities design and bedding, he added. “Its technology. It’s experiential, on and off the resort. It’s wellness. It’s doing things that you can't do in your everyday life in a way that blows consumers’ minds.”For Sandals, Stewart said, bigger is not necessarily better for ROI. Although all-inclusive resorts commonly boast thousands of rooms, Sandals’ sweet spot is 250 to 300 rooms on sites measuring from 50 to 200 acres. Sandals’ Beaches St. Vincent and the Grenadines property under construction sits on 50 acres that include a West-facing beach, with a natural river nearby. “As far as the eye can see, you cannot see a man-made structure,” Stewart said. The property’s 300 rooms average nearly 1,000 square feet. Half are in stand-alone structures. High-end design features include overwater bars and bungalows. The project also includes 15 restaurants. “It’s a very premium destination in terms of the brands currently represented,” Stewart said. And the island’s government was very particular about keeping it that way. At Playa Hotels & Resorts, they try to maximize ROI and EBITDA per room. “It’s how you position all the different hotel components within that complex. That allows you to differentiate product and increase rates,” Mulet said. Rather than running 3,000 rooms under the same brand, Mulet explained, Playa runs its new Cap Cana location with all the efficiencies of 750 rooms. “But it’s positioned and sold as two different 375-room hotels.” The Hyatt Zilara caters to adults only, while the Hyatt Ziva appeals to all ages, offering family activities including a massive waterpark. “We’re able to deliver a different experience but run the hotels very efficiently because both are sharing back-of-the-house,” Mulet added. Differentiation has allowed Playa to charge the highest rates in its markets, with increases of approximately 40% during each of the last 2 years. The company expects cash-on-cash ROI in the high teens from everything but new-builds, which aim for the high teens to mid 20s. Ramp-up typically requires three to five years, Mulet said. Tracking trends With all-inclusive having gone mainstream, Stewart said, the biggest news is that it will be the fastest-growing segment in leisure and entertainment hospitality for the next decade. During that time, he added, Sandals will double its Caribbean footprint. Major hospitality brands—and Wall Street private equity—have arrived, Stewart added, and consumers are starting to see that not all all-inclusive operators are the same. “A brand is predetermined quality,” he said. Customers know at a glance what they can expect from that company or property, Stewart explained. “As you move further up the ladder in terms of quality, you have a deeper obligation to explain to potential consumers why they should choose you.” The all-inclusive marketplace will continue to evolve, added Mulet, particularly by adding upscale and luxury offerings. “That’s where we’re heading.” The adults-only versus all-ages split is here to stay, he added, and more companies will try to appeal to single travelers seeking other singles.