This Indonesian Hotel Chain has Lots of Suitors, Alas it’s no Damsel in Distress
Above, Aston Fiesta Cuba. Right, John Flood, president & CEO, Archipelago International: “We’re happy doing our own thing and we don’t waste any time thinking about [selling].” Photo: Archipelago International
By Raini Hamdi, 13 April 2022
It is pretty unlikely that Archipelago International has not caught the attention of suitors hoping to gain a significant presence overnight in South-east Asia’s biggest market, Indonesia.
The largest privately owned hotel management group in the region has 150 hotels and 20,000 rooms in operation under 10 brands, most of them in Indonesia. Another 50 hotels are opening in the next one to two years.
Just like any 25-year-old, Archipelago is at that point where dare and desire to venture further and farther is peak. Indonesia, with 275 million residents and thousands of unbranded hotels, still has lots to offer but Archipelago is opening hotels not only in South-east Asia but in unfamiliar places such as Saudi Arabia and Cuba. At home, it is even building its own hotels, not just managing other people’s. But its biggest leap is in becoming a technology company.
In February, the company launched Powered by Archipelago. It has also started a new firm called Sentinel Tech. The former, as the name suggests, helps independent hotels and small hotel groups to accelerate their online business with connectivity, distribution and yield management tools. In return, Archipelago takes a cut of the online revenue.
Sentinel Tech, meanwhile, is developing a property management system that helps hotels embrace technology by, say, integrating their front office functions into back-end finance. The software is expected to be completed by mid-2023.
John Flood, president & CEO of Archipelago International, targets 200 signings in South-east Asia, the Middle East and the Caribbean this year for Powered by Archipelago, rising to 4,000 within five years.
Approaches
All this could make Archipelago even more appealing to suitors, although some may see the chain as biting more than it chew in a world still beset by flashpoints such Covid-19 and the Ukraine war.
“I know folks that have approached them and imagine that they have regular approaches made to them by hotel groups, financial players and high net worth individuals,” said Eric Levy, managing director, Tourism Solutions International, a hospitality investment firm that does a lot of work in Indonesia.
“The leadership is relatively young and dynamic and while the offers now are probably quite tempting, the ramp-up in profitability and thus value will be steep in the next 10 years. That suggests to me that an exit in the short-term isn’t optimal for them.”
Possibly Archipelago could take on a new shareholder to allow current ones to reap some dividends in the short-term, and to gain capital to accelerate expansion, Levy said.
Venture Opportunists
When asked about approaches, Flood said venture capital firms are the most common suitors.
But Archipelago is no damsel in distress.
There were months during pandemic 2020 and 2021 when it chalked up losses but over the two years the company on average broke even, according to Flood.
“We keep about a year of working capital in the company anyway. So there was never a question that we didn’t have enough money to weather the storm,” he said.
Profits are reinvested in areas such as hiring development staff overseas or developing software. “So we don’t actually need any seed money or raise any capital. We’re happy doing our own thing and we don’t waste any time thinking about [selling],” said Flood.
“I entertain them [venture capitalists] if they come to Jakarta, try to tell them a bit about the hotel business and find out what their plans are for the future. I always get something out of the conversation.”
“Pragmatic”
It does seem Archipelago entered the pandemic in a strong financial position, and has emerged stronger from it.
Indonesia-based bedbank MG Group named Archipelago its Best Supplier Production 2021. Brett Henry, president director, said, “Archipelago was uniquely pragmatic in its approach; it kept all hotels open and became the best performer in a down market. In many locations, as competitors were closed, it was back to or exceeded pre-pandemic levels early. Anyer [a coastal town in West Java], for example, was sold out and achieved higher occupancy levels than before.
“They also used the crisis to accelerate their growth ambitions, adding properties at an impressive rate in both Indonesia as well in international markets.”
Levy concurred and also used the word pragmatic to describe Archipelago.
“They seem to have weathered the Covid storm quite well. They didn’t reduce staff although, like many groups, did require many staff to take time off or work fewer hours.
“They were rate aggressive during Covid – less sensitive about perceptions of low-rate flash sales — and said that their marketshare generally increased. Majority of their rooms are in Indonesia, serving mainly domestic business, so they have not been as impacted as groups with a higher percentage of international travelers,” said Levy.
Levy believes Archipelago’s biggest opportunity in the next few years is to expand its international portfolio. His experience with the group shows it usually is the first to get a response from those conducting an operator selection.
“From their first international project in Penang, it looks like in five years they will have at least a quarter of their rooms outside of Indonesia,” said Levy.
Far, far Away
Beyond Indonesia, Archipelago currently has only a handful of hotels opened, i.e., a couple of properties in the Philippines and Malaysia, one in Dubai and two in Cuba. But the pipeline looks promising. Five more hotels will open in Cuba in the next 12 months, and 15 in Saudi Arabia in the next 24 months, said Flood.
The foray into Saudi Arabia – Mecca, Jeddah and Medina – isn’t surprising. A predominantly Muslim country, thousands of Indonesian pilgrims visit Saudi Arabia for the hajj and umrah. Saudi’s shift to open the kingdom for tourism is another plus.
But the Caribbean, where Archipelago has a representative office in Havana and Santo Domingo in the Dominican Republic, is a curious move. Another is a representative office in Dublin, Ireland.
“We were approached by the Cuban ambassador in Indonesia, to see if we’re interested in managing their hotels [majority of hotels in Cuba are owned by the government or are joint ventures between government/foreign companies]. Traditionally, Cuba focuses on the Canadian and European markets, primarily Spain, but they want to diversify into Asian markets. So they ask operators such as us if we want to manage the hotels and bring over Chinese, Koreans and so forth.
“As we expanded into Cuba with staff there, it’s a natural expansion to look around the Caribbean for opportunities. We are looking at opportunities in the Dominican Republic for both management and Powered by Archipelago opportunities. Developing countries are something we enjoy. And in a lot of those places, there is a lack of expertise on e-commerce connectivity and distribution,” said Flood.
Full Circle
For Archipelago’s founder, Charles Brookfield, the journey has come to a full circle with the Cuba expansion. The American moved to Hawaii and rose to become executive vice president of Aston Hotels & Resorts. The company was seeking to expand outside the US and Brookfield targeted Indonesia and the Philippines. He met Flood when Flood was finishing his MBA, with a final thesis on developing a hotel company in Indonesia.
“When I finished my MBA, he invited me to work for him. Then, we decided to set up Archipelago. At the time, AirAsia was coming in and budget airlines were getting popular. So we thought it’d be good to have budget hotels as people who are paying $20 or $30 for a flight will want $20 to $30 for a room. So we created Fave [the second brand after Aston].
“It took a year to develop Fave. Afterwards, it served as a kind of template for developing the other brands and, by the time we got to the 10th brand, it took only a month to create it,” Flood said.
Where the Heart is
But home will always be where the heart is.
According to Flood, only six percent of hotels in Indonesia are managed, although in terms of rooms, it’s 36 percent as managed hotels are a lot bigger.
“But there’s still a lot of opportunities to manage small independent hotels or enable them with a distribution system such as Powered by Archipelago,” he said.
To grow further in Indonesia, Archipelago is building four owned hotels in West Java. One reason is that re-investments are tax-free; the other is it wants to develop the technology, design and new standard operating procedures “so we become better at the business [as owner-operator],” said Flood.
“Becoming better” is also what drives Archipelago to venture overseas.
“If we don’t grow overseas, eventually someone’s going to come in and eat us. We’re not really planning on selling the company. We’d like to keep going with the opportunities. Also, if you’re in Indonesia all the time, it’s great, but it’s the same thing all the time. Whereas being in other countries like Cuba or Saudi means you learn about regulations, manpower, etc. It challenges us to be better and to develop better systems that work in different countries.”
Looks like suitors will be heartbroken.