Should your hotel be managed by an operator of independent hotels?

2 March 2014

Hotel Lawyer with a guest column from an operator of independent hotels

A growing number of hotel owners are facing the question of whether and how to brand their hotels, and who should operate them. The New York Times recently estimated that more than 2,500 hotels were reflagged in a single year, and that does not count the growing wave of new hotels coming on line through the development pipeline.

The hotel lawyers of JMBM’s Global Hospitality Group® think the branding and management decisions faced by anyone reflagging a hotel or developing a new one are among the most important a hotel owner will ever make, and we have written a fair amount to share our experience gained over more than 1,000 hotel management agreements and many hundreds of franchise agreements. [See links at the end of this article.]

After some of our articles were published on this subject, our friends at Benchmark Hospitality International started a dialog with us about their views on this subject. After a robust exchange of emails and a telephone conversation or two with Alex Cabanas, CEO of Benchmark, I don’t know that we have any significantly different approaches, but Benchmark did have a different way of putting it, and some of their terminology may facilitate clearer thinking. In any event, we thought this “voice” should be heard, and accordingly, we offer this guest column for your consideration.

“Chain” versus “Independent”
A View from an Operator of Independent Hotels
by
Alex Cabanas, President & CEO, Benchmark Hospitality International

In recent years, the topic of “brand versus independent” has become increasingly popular. Every industry conference has a panel titled the same, numerous articles – and blogs – are being written on the topic by every publication, HotelNewsNow recently launched a newsletter dedicated to independent hotels, the inaugural Independent Lodging Congress took place in Philadelphia in late 2013 focused on gathering the owners and operators of independent hotels, and if that were not enough, numerous high profile “de-flagging” lawsuits have certainly highlighted the topic. While it is hard to attribute the peaking interest on this topic to only a few things, clearly owners are questioning the cost/benefit of a chain affiliation, internet distribution and marketing have dramatically leveled the playing field over the past 10 years, customer loyalty is not what it used to be and consumer preferences are certainly evolving.

Despite all of the hype and attention, very little has been written on this topic from the perspective of an independent operator. Clearly, independent operators are a little biased on the topic, but they are also overly discounted by many because of years of bias in the financing community and media in favor of chains. So, here’s some perspective to consider through the eyes of an operator of independent hotels.

First, a few points of clarity to set the right mind frame:

1. Let’s focus on upper-upscale and luxury segments. Based solely on the prevalence of independent brands in the two upper chain scales, it makes sense to think mostly about these types of properties.
2. Let’s use the word “chain” not “brand.” When describing the major hotel brands such as Marriott, Hyatt, Hilton, Starwood, Wyndham, Intercontinental, Ritz-Carlton, and Four Seasons. These are the major “chains” that are of a size and scale to warrant a term of their own. The reality is that every hotel name is a “brand”. Benchmark is also a brand – we just don’t put our name on the hotel like many other larger independent operators like Destination Hotels & Resorts and Noble House. And smaller name brands such as Kimpton, Loews, and Omni with a few dozen hotels and resorts don’t really qualify as a “chain” based on size, compared to the major hotel chains.
3. Let’s understand that the word “independent” is not really a fair representation in all cases. Because most publications use the word “independent” and seem to conjure up images of a single General Manager and his or her team trying to run a property all alone with no management company support. While that still happens in our industry the fact is that there are a number of very well-established independently branded management companies. Therefore, generic comparisons between “chain” and “independent” don’t really do justice to the capabilities offered by third-party managers specializing in smaller brands and independents.

Now that we are of right mind, some thoughts to share on various topics that are typically included in the “chain versus independent” debate – again, from the independent operator’s perspective.

Larger third-party operators have support systems and “standards” too, but we are willing and able to customize by property. Independent operators should not be discounted by a generic assumption that we don’t have support systems and standards. Now, do we all have specific product and design standards like a chain – no. But that can also be a liberating fact. We do have support systems, best practices, policies, and procedures across all disciplines. In fact, the flexibility and customized approach of an independent or smaller brand, with a system of procedures and policies are arguably more effective versus the chains that run everything by a manual and don’t customize by property. Especially given today’s growing consumer preference towards unique experiences and products where authenticity trumps “standardization”.

Location, Product, Service, Experience, Distribution and then “brand”, in that order! In any hotel market, a hotel is either stealing demand from the competition or inducing new demand – a simple way to look at it. So a hotel’s location, product, service, experience, distribution (sales & marketing) capabilities are all valuable in positioning the property for success. If you think of these factors agnostic to the hotel name, you get a true sense of the property’s inherent ability to succeed – regardless of the brand name on the building. At that point,  the appropriate question becomes what is the incremental benefit of the name compared to the incremental cost of that name. Since most chain affiliations are more expensive than independent, the hurdle of incremental performance is higher. That is not to suggest the benefits of a chain are not worth it sometimes – but the value add is not always worth it.

It’s not the size of your pipeline that matters, it’s how you use it. So many articles and comments are made about the “distribution” and “reservation systems” of the chains, and there is no question they have large distribution networks. Unfortunately, the question of distribution efficacy and incremental contribution is rarely asked. For example, Marriott may have very strong demand sources in the Atlanta market, but is that demand-driven specifically by the Marriott family of brands enough to fill the myriad of supply Marriott has in the Atlanta market. A hard question to answer and one that is usually never asked. The generic assumption is big pipeline must mean big impact. And what happens when Marriott introduces a new brand like Autograph or AC – does the demand for Marriott product grow enough to support it? Now, independent operators clearly can’t claim broader distribution compared to the chains – but we don’t really care or try to match them. We only care about the distribution we need to fill our one, may two or at most a handful of hotels in a given market. So do we need millions of loyalty program members – no! We only need and only market to what is needed for that hotel – and we only spend the owner’s money for that hotel. An independent hotel marketing budget is targeted and focused on impacting that one hotel, compared to a chain environment where substantial dollars are focused on promoting the chain. Lastly, in today’s world of electronic distribution, what do the words “reservation system” mean these days – surely not many are calling the 1-800 number for a room.

The value of loyalty and points is not what it used to be. The most influential part of the chain is the loyalty program and there is no denying its presence and influence. But the question that should be asked is…how much demand is truly driven by the consumer’s desire for points and/or chain loyalty? And is that incremental demand enough to justify the incremental cost of a flag? These are not easy questions to answer but here are some relevant quotes about the condition of loyalty programs today:

• “At least five major lodging groups have announced a devaluation of their respective frequent guest programs in January or February [2012]. And the cuts aren’t trivial. The value of many of our hotel points stashes have taken a significant blow”
• “The best-case scenario is that hotel loyalty programs as they are constituted today have either little or no impact on travelers’ purchase decisions, and, worst case, these programs drive undesirable brand-switching behavior.”
• “Hotel brands and owners that choose to instead build differentiated loyalty programs and a customer experience that anticipates and integrates priority customers’ personalized needs have the potential to capture incremental market share, as indicated by these facts:
  • Roughly 30 percent, on average, of hotel loyalty members are “at risk” of switching their preferred brand
  • Nearly 50 percent, on average, of hotel loyalty members’ annual hotel spend is not with their preferred brand

The above certainly brings into question just how much demand is truly driven by loyalty programs – especially as the very proprietors of those programs are devaluing them. And to the extent that they do drive incremental demand, independent operators now have several plug-and-play options such as Stash Hotel Rewards and iPrefer to evaluate at a lower cost.

Don’t be a lazy underwriter – give the independent brand model an equal chance. The fact is that many lenders and investors simply prefer chains. The old adage of “nobody gets fired for hiring IBM” drives a lot of decisions. For those willing to dig in a little deeper, the value proposition is worth it – lower management fees, more flexible contract terms, more nimble operations, typically unencumbered upon sale, and more flexible sale options. So for you lenders out there reading this blog post, give us a chance and give us the audience. You won’t be disappointed.

After all of this, you can easily assume that this blog post is an anti-chain rant. That is not the goal. The goal is to level the underwriting playing field and dissipate the clear bias towards chains based on generic statements about “distribution” and “loyalty programs” and “standards”, rather than digging into how the industry has evolved, how consumer preferences have dramatically changed, and how independent third party operators have grown and been able to compete – proof positive competition, not dreaming. Every professional independent operator can show numerous case studies that prove our ability to perform equal to or better than the chains. And at the end of the day, performance speaks for itself in all cases – “chain” and “independent”. And equally important is for any operator or brand or chain to act in the best interest of each owner every step of the way.

Alex Cabañas is President and Chief Executive Officer of Benchmark Hospitality International. He leads the company’s global growth initiatives, including the continued expansion of its portfolio of award-winning hotels, resorts, and conference centers. Alex was previously president of business development and finance for Benchmark. During his tenure in this role, the company added 20 properties to its management portfolio and expanded into the Caribbean. The company also acquired MTM Luxury Lodging, which led to the launch of the hospitality industry’s newest luxury brand, Personal Luxury Resorts & Hotels.Alex Cabañas joined Benchmark Hospitality International in January 2006. Prior to joining Benchmark, he worked for The Boston Consulting Group from 2000 through 2005. Alex earned his MBA at Harvard Business School and holds a BBA and MS in Finance from Texas A&M University.Benchmark Hospitality International is a leader in the management and marketing of independent resorts, conference centers, hotels The independent company, launched in 1980, is a founding member of the International Association of Conference Centers. Benchmark Hospitality is a worldwide organization operating properties in major metropolitan and resort destinations. Benchmark’s international headquarters is located in The Woodlands, Texas, near Houston. The company’s northeast regional office is in New Jersey, with international offices in Tokyo, Japan. For the location of Benchmark’s properties and additional information, visit www.benchmarkhospitality.com.

For more information on hotel franchise agreements and hotel management agreements

The right hotel brand and management agreement can be the difference between success and failure of a hotel. The Global Hospitality Group® at Jeffer Mangels Butler & Mitchell LLP has negotiated, renegotiated, litigated and advised on more than 1,000 hotel management and franchise agreements all over the world. To see how we help clients in this arena, please click here to see our brochure.

We also have a rich library of free resources available on most topics of interest to people dealing with hotels. These are all available at www.HotelLawyer.com. This is where you will find our free handbooks under the “Resource Center” tab.

For blog articles, scroll down any page of HotelLawyer.com and look on the right side for Topics that appear in red letters. For example, you can see all the blog articles on “Hotel Franchise & License Agreements” by clicking that link. The same goes for “Hotel Management Agreements” or any other subject you see listed down the right hand side of HotelLawyer.com.

The following are only a few of the relevant blog articles you will find there:

When should you choose a brand for your hotel? And when should the brand manage your hotel?

Dual-branded hotels — What every owner or developer should know

Hotel Lawyer on Repositioning: The New York Times reports 39 percent increase in reflagging

The 5 questions every owner should ask before selecting a hotel brand

The HMA Handbook (2nd edition), Hotel Management Agreements for Owners, Developers, Investors & Lenders

Checklist for negotiating Hotel Management Agreements/Hotel Operating Agreements – The HMA PRO™ Checklist

Hotel Lawyer with insights on “How to get a great hotel operator”

How to get the right hotel operator

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?

Our Perspective. We represent hotel owners, developers and investors. We have helped our clients find business and legal solutions for more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.