Editor’s note: To operate hotels effectively, it’s helpful to understand the perspective of owners and investors. The following is an excerpt from The Fort podcast episode #128, where @FortWorthChris interviews @SomeHotelGuy – a hotel owner/operator who has been involved in more than $1 billion in hotel deals over the past 10 years.
The hotel brand landscape
There are four big hotel brand families within the United States: the Marriott brand family, the Hilton brand family, the Hyatt brand family, and the IHG brand family.
There’s a whole bunch more – Choice, Best Western, Wyndham – all of which are quite large and well-respected. But I tend to think of those four first, and they are primarily licensors or franchisors of brands to groups like us who own and operate the hotels under those brands.
What are hotel chain scales?
In the hotel industry we talk about what are called chain scales. There’s a third party data company called STR that does a whole bunch of data collection and analysis. They tier hotels and hotel brands and these tiers called chain scales. That goes from economy to midscale to upper midscale to upscale to upper upscale and luxury. Whether you’re a branded hotel or an independent hotel, you typically fall within some segment of that.
The easiest way to describe chain scales is to associate them with brands. For upper midscale, think Hampton Inn. Upscale, think Courtyard by Marriott or Residence Inn or Homewood Suites. For Upper Upscale think something like a Hyatt Regency or a Westin or a Marriott. Four Seasons is considered Luxury.
The way STR defines the chain scales is really on the basis of average daily rate and how much you charge over the course of a year. Brand chain scales are set on an aggregate basis across all their hotels across the entire country.
The other way to think about hotels is more on service levels. You might have a limited service hotel that basically just offers guest rooms. You might have a select service hotel that offers guest rooms, a little bit of meeting space and probably a bar or a grab and go that has a little bit of food associated with it. You might have a full service hotel and that full service hotel is going to have a three-meal restaurant and some substantial meeting space. And then you might have a luxury hotel that’s going to have a whole lot of other services and amenities.
How hotel brands approve owners and operators
You need to be approved by a hotel brand before you can operate under their flag. The only way to get approved is to have a deal, so it tends to be an ongoing conversation. If you are a first-time hotel owner and you’re in the process of buying a Courtyard by Marriott, you’re probably going to start talking to the Marriott team early on about what your plans are, what you’re hoping to accomplish, and how you’re hoping to do it.
As an example, if you’ve never operated a hotel before, the Marriott teams might tell you that based on your financial situation they can approve you as an owner of a Courtyard, but given your experience, they cannot approve you as an operator. You’re going to need to hire a third-party operator from our list of pre-approved existing Courtyard operators in order to get the deal done.
If you’re an existing hotel owner and operator looking to break into a new brand family, what typically happens is when you go for that approval, you’ll sit down and you’ll present a whole lot of information about your existing portfolio, what brands they are, how large the hotels are, how they perform on a relative revenue basis, how their guest satisfaction scores perform.
Essentially what you’re doing is you’re selling your skills to Marriott or Hilton or Hyatt as a steward of their property. When 99% of the country stays in a Hilton Garden Inn, they don’t know or care that someone else owns it and someone else operates it. So your role is to be a steward of their brand, as much as it is to make money as an owner and an operator.
If you’re an overwhelmingly Hilton owner and Marriott were to get you for a new hotel, they would consider it a coup, and vice versa, given how widely distributed and fragmented the industry is. Anytime that a brand company can work with a consolidated owner or consolidated operator – someone who has control of a large number of assets – it’s just easier for them.
What role hotel brands play in new hotel development
Hotel brands have a huge amount of influence over what you can build as an owner. How many guest rooms is maybe a little bit more determined on the basis of what your zoning allows and what your available developable square footage is, but the brand is going to drive decisions in a lot of other areas.
For example, the brand is going to determine going to drive how much meeting space you have, how many or what type of food and beverage outlets you need, how large a fitness center you need, how big a lobby you need, how much circulation space, how many elevators, how much parking do you have.
A lot of this process determines whether you get approved to ultimately become a Marriott franchisee and build that hotel.
Fees hotel owners pay hotel brands
If you were an individual owner of hotels, you don’t operate your hotels, and you’re not using a brand of your own creation – then you’re really paying several different groups.
Owners pay the hotel brand a franchise fee as well as brand marketing fees and loyalty program fees associated with the reservation system and the sales teams, all of which are going to be driving business.
And then you’re paying associated vendors for things like the property management system, the sales and catering tracking system, the revenue management system, the housekeeping system, and so on.
On top of that you’re paying the operator a management fee, as well as likely some associated fees for accounting services, revenue management services, and other things like that that could potentially be done by people on property, but are more cost-effectively done in a centralized way.
Hotel brand requirements today (and in the future)
Non-staffing operating expenses have gone up considerably during the pandemic for PPE and cleaning supplies. In my opinion much of this is performative cleaning. I don’t think it’s truly adding safety to COVID, but it’s what the brands want to see quite frankly, I think it’s what the public expects to see. So you have to do it.
I think there’s going to be cost pressure in the short and medium-term. I think once we’re on the other side of this, a lot of that performative cleaning can go by the wayside.
Marriott is running a pilot program right now for a guest check-in via kiosk to hopefully save some costs on the labor side related to the front desk. In my mind, it’s more important to repurpose the front desk from a purely transactional experience where you’re handing the front desk agent your credit card and ID, and they’re handing you a guest folio for you to sign to something a little bit more interactive and helpful – something that can ideally leave a little bit more of a long-term impression on your guests.
The other place the brands have been very flexible, and certainly the hotel ownership community is grateful for, is renovation requirements. When you acquire a hotel that is a branded hotel – let’s say you’re buying a Hilton Garden – here’s typically a renovation requirement associated with that change of ownership that comes in the form of a property improvement plan – or a PIP. Brands have been much more flexible on the PIP requirements with changes of ownership. In addition, brands built into their license agreements have PIP requirements at certain time periods, typically like a 7 year and a 12 year. After 7 years, you replace your upholstered goods. After 12 years, you replaced your case goods. So a lot of hotels are hitting the cycle and brands have been very flexible in postponing those capital requirements, until hopefully a post COVID world.
What is an independent hotel?
It’s simply a hotel without a brand affiliation. An example here in Manhattan might be The Mark on the Upper East Side. It’s a high-end luxury hotel. It’s not affiliated with any brand at all. And it can succeed because it’s in a high-demand location with a recognizable name and high-quality product. And that allows it to drive considerable bookings. And they can define the whole brand and experience.
In many cases, guests prefer independent hotels for this reason. However, as independent hotels have become more popular and sort of this boutique hotel movement has picked up, you’ve seen considerable institutional investment in the boutique hotel space and the independent hotels.
You’ll find, for example, I can think of a half dozen, truly independent hotels in San Francisco that are owned by a publicly-traded real estate investment trust. And they’ve hired a third-party operator to run them on their behalf.
Power dynamics in hospitality: online travel agencies, brands, and independent hotels
Booking sources are really, really tightly controlled. And the two groups that have the most control over them are 1) the brands and 2) the online travel agents.
If you’re a branded hotel, your relationship with the online travel agency is really through the brand. So Marriott has a relationship with Expedia. And if you are operating a Courtyard by Marriott, your deal with Expedia is through Marriott.
If you’re an independent, you’re doing a deal directly with Expedia and you have much less pricing power or buying balance. So the commission you pay to Expedia as an independent is probably going to be double the commission you would pay to Expedia as a branded hotel. On the other hand, in certain select areas where demand is high and inbound traffic always exists you can be successful as an independent because the brand costs that get layered on can be fairly considerable and it’s not just fees.
So brand service requirements may not make any sense for the hotel you’re building or buying, but they’re required. Nonetheless, an example might be working on a hotel in Midtown Manhattan. If you’re going to be a branded hotel, there’s a reasonable chance you’d be required to have some combination of a restaurant, room service, and a minibar. If you’re building an upper upscale quality hotel, well you’re in Midtown Manhattan – what do you need a restaurant for? And room service? Well, everybody here has Seamless or GrubHub. They can order from hundreds of restaurants. What do you need room service for? And a minibar? That’s just going to be something people steal.
Another good example might be a requirement for a certain amount of bell staff where, instead of paying folks to open the doors and take luggage into cars everybody’s getting their own luggage because they’re coming in and out for a day or two, and everybody’s got small bags.
You can start to lower your overall cost of operation enough to offset the higher cost of customer acquisition that you would have as an independent. And if you’re in a place like Manhattan or Oahu or San Francisco, you’ll have people looking to find you, if you have a nice enough hotel.
So you’ll be able to drive more direct bookings through your own website than you would as an independent in a secondary or tertiary market where your real source of demand would be an online travel agency.
The role of independent boutique hotels in the industry
I love independent boutique hotels. We’ve got a handful of them, and it’s a space we’re looking to grow.
I think independent boutique hotels in the right locations can be absolutely successful and they can do something differently. They can be venues for experimentation in a way that branded hotels cannot. Because of that, independent boutique hotels have historically driven a lot of guest service innovations. A lot of the amenity creation that we’ve seen in branded hotels has been copies of independent hotels. I think that’ll continue to be the case.
The brands will be followers and the independents will be leaders.
@SomeHotelGuy is an anonymous Twitter account of someone who is an owner/operator of hotels around the country. They also operate hotels on behalf of other owners. Over the past 10 years, they have been involved in more than $1 billion in hotel real estate deals.