Subscribing for growth

A trio of hospitality sector businesses are preparing to float on the buoyant US stock market, to fuel their growth. And two of the three are betting on subscription memberships, as a fundamental plank in their strategy.  

In recent weeks, luxury holiday and experience group Inspirato and apartment rental business Sonder have confirmed they are examining the SPAC route to market. Alongside them, Soho House has firmed up details of an IPO that could value the business at up to USD4bn. 

Ahead of the listing, Goldman Sachs is reported to have provided further growth capital for the business. The longterm debt facility has allowed Soho House to repay an existing GBP406m loan with Permira Debt Managers, reported Sky News.  

After much on-off debate, hotel and members club business Soho House has pressed the button on a full IPO, having filed papers with American authorities. Sky News reported the move triggers the formal registration process, leading to a New York float that will value the business at more than USD3bn.  

JP Morgan and Morgan Stanley have been hired to run the process, which will deliver a substantial return for founder Nick Jones. Soho House combines a network of members clubs with hotels, pitched at creative types. The portfolio includes restaurants, urban and rural hotels, entertainment spaces, club houses, and more recently flexible workspaces too.  

Starting in London 25 years ago, Soho House now has 29 hotel properties across the UK and US, and leading global cities, under its House and Cowshed brands. Pipeline openings include Tel Aviv, Israel and Austin, US.  

Soho House has more than 100,000 members paying an annual subscription, and the group has invested heavily in its app during the last year, to ensure it delivers added value for members.  

In mid2020, the company raised an additional USD100m of funding in an equity injection led by Ron Burkle, the US billionaire, who is the group’s leading stakeholder.  

Short term rental company Sonder is investigating a SPAC listing that would value the business at around USD2.5bn. It is in talks to reverse into Gores Metropoulos II, a blank check listing launched by Gores Group. That business is sitting on USD450m, raised in a January listing. 

The company takes leases on apartments, then manages and resells them for shorter term lets – a model that, through the pandemic, left it in a similar cashflow situation to hotel companies that lease their properties. Sonder will typically sign three to five year leases with landlords, often taking whole floors in developments; the company likes to add a recession clause, to reduce its rent if the market weakens. Legally, the apartments are zoned either for hotel use, or with permitted short term rental use.  

The company is stepping up to take on whole buildings. In Denver, US, it runs the Essex Hotel, following its conversion and upgrading by the landlord.  

Around 20% of guests are reckoned to book directly at Sonder’s own website, with platforms including Airbnb used to help drive business.  

Amongst the company’s advisors is Frits van Paasschen, former president of Starwood Hotels, who formally joined the Sonder board in early 2020. 

In late 2019, Sonder was reckoned to be worth around USD1bn, at which point it had 9,000 apartment listings. Its series D funding round that year pulled in USD225m.  

At that point, co-founder and CEO Francis Davidson said the business was doing surprisingly well in the midst of the pandemic:  “We pivoted our strategy toward temporary housing, took measures to get to a good financial place and a position to bounce back rapidly on the upswing.” 

In June 2020, Sonder raised USD170m in its series E round, led by investors Fidelity, Westcap Group and Inovia Capital, based on a valuation of USD1.3bn. At that point, listings had grown to 12,000 apartments across 28 cities in six countries.  

Outside of the US, Sonder has listings in Barcelona, Dubai, Dublin ,Edinburgh, London, Madrid, Mexico, Montreal, Rome, Toronto and Vancouver. 

And another travel subscription business, Inspirato, is also looking at the SPAC route to expansion. It is in talks to reverse into a SPAC already floated by Thayer Ventures, with USD172.5m raised.  

Inspirato has subscriptions including the top level Inspirato Pass, which includes unlimited accommodation in luxury home rentals and hotels including Ritz-Carlton from USD2,500 per month; and lowerlevel subscriptions at USD600 per month, with top-up fees dependant on bookings.  

The company says it has more than 18,000 members and lists 1,200 accommodation options in 395 destinations. Inspirato has already attracted backers including Kleiner Perkins, IVP and Revolution.  

Founder Brent Handler developed the idea of Inspirato to market inventory that normally sits unused. The company manages home rental properties, but also has relationships with more than 200 hotels, offering their unsold inventory behind the subscription model that means actual discounted rates offered to Inspirato are never revealed.  

HA Perspective [by Chris Bown]: It’s no coincidence that these businesses are all going public in the USA. All international businesses, they have chosen American listings not just as two of them are domiciled there. The US is where the money is, and where the investors are keen. And where the SPAC process has been allowed to gain traction – avoiding pesky regulatory complications and due diligence; perfect for businesses in a hurry, and for CEOs who like to retain control. 

Contrast this with the latest big IPO in London, where Deliveroo flopped as sceptics (not without grounds) pointed to the shortfalls of a supposed tech business, that actually relies on subcontracted bicycle riders.   

Subscriptions are all the rage – in experiences, as well as in hotels. For younger generations hooked from the start on mobile phone, broadband and Netflix subscriptions, it’s not a hard sell. Alongside Inspirato, we have Tripadvisor too pushing a subscription model to sell accommodation and experiences. For business rather than leisure travellers, CitizenM and Zoku are among those with a growing subscription offering of stay/work combinations.  

Additional comment [by Andrew Sangster]: The “rundle” or recurring revenue bundle is the hot new craze in business, most volubly promoted by Scott Galloway, a professor at NYU Stern Business School. 

The most successful rundles are in tech. Apple, for example, has launched its One which bundles together cloud storage, music, games, exercise, TV and news. The rundle also underpins the success of firms like NetflixSoftware giants such as Microsoft and Adobe now sell their products mainly through rundles. 

Amazon, meanwhile, has perhaps the most powerful rundle of them all with its Prime membership, offering delivery, film, music, books and more in one monthly (or annual) payment. It’s a massive barrier to entry for any competitor. 

It is no surprise to find a company like Soho House exploiting this new marketing trend. After all, it is already an effective subscription business. But for other hospitality businesses, subscriptions are a difficult way to sell.  

Most consumers make lumpy purchases of travel productThe majority of consumers only stay in hotels a few times a year. The more regular users are road warriors where their stay is usually part of a corporate rate agreement. 

Traditional loyalty schemes have focused on being a bribe to the end user, usually paid for indirectly by his or her employer who foots the billIt is great for the frequent traveller, but more irregular consumers see only modest benefits. Making points more compelling for such irregular users is too expensive. 

Memberships are a potential way of offering a subscription package to less frequent travellers. A modest monthly fee, say GBP50, would give customers the ability to redeem a few nights a year at a brand. More nights could be purchased at a “unique” discount. 

The initial net yield of such customers is likely to be lower (to make a compelling deal) but they are locked into the brand. Tripadvisor is sort of in this space with its Tripadvisor Plus but a hotel company is much better placed to do this properly through their loyalty scheme (rather than offer a marketing platform for hotels which Tripadvisor Plus is really about). 

With luxury brands, the case for subscriptions is even more compelling. By making certain aspects of the brand only available to subscribers, companies can further exploit the intangible benefit that luxury brands offer. Soho House has achieved this status. 

Whatever particular business model takes hold, there is the potential to take loyalty schemes to a new dimension by using the subscription approach. A plethora of initiatives can be expected. 

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