Hospitality Lawyer: To Brand or Not to Brand

21 February 2024

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Click here for the latest articles on Hotel Management Agreements and Hotel Franchise & License Agreements.

To Brand or Not to Brand

by Robert Braun, Co-Chair, JMBM Cybersecurity and Privacy Group;
Senior Member, JMBM Global Hospitality Group

While some companies in some industries have a tendency to consolidate and eliminate brands, the hotel industry is different. Most of the leading hotel companies with brands, such as Marriott, Hilton, IHG, Hyatt, and Accor, regularly acquire or create new brands or flags. Today, Marriott has 30 flags, Hilton has 22, IHG has 14, Hyatt has 29, and Accor has 40, and that’s just the tip of the iceberg. With so many flags to choose from, it’s easy to overlook another choice – no brand at all. While picking a brand is an obvious choice, the possibility that operating a hotel without a brand may be the better choice.

Why Choose an Existing Brand?

The major brands provide a number of benefits to hotel owners. A few of them are:

Name Recognition.

Perhaps the biggest benefit of branding a hotel is name recognition, and brands work to maximize that benefit. Hotel companies spend time and effort to make sure the traveling public recognizes the flag, and this makes it easier to choose the hotel when others might be available. Their use of traditional advertising, social media, spokespersons and other techniques are well-honed and effective. Most importantly, a hotel guest that has a positive experience at one property will assume – not always correctly – that the experience will be the same at other properties.

Brand Standards

Brand recognition is part of brand standards, and brand standards can be a benefit to owners as well. Even as they represent costs of compliance, they help create uniformity among different flags, and reinforce the traveling public’s interest in specific hotel flags.

Reservation Systems.

Hotel companies invest in reservation systems that make booking a hotel simple, and are designed to maximize a traveler’s likelihood of actually booking a room, not just visiting a site.

Loyalty Programs.

While loyalty programs can be a financial burden for hotel owners, they are a draw for hotel guests and increase occupancy. Travelers are enticed by earning awards for travel, and even if the hotel does not recoup the advertised or actual daily rate, other expenditures – food and beverage, onsite services and the like – can provide additional financial benefits.

Support

When things go wrong, hotel brands can be a source of support. They can provide trouble-shooting expertise, and for brand manages, can provide a deep bench of experienced hotel workers.

Why not Brand?

While there are clearly benefits to the major brands, they can also present challenges and costs – some of which go hand in hand with their benefits. For example:

Fees

The development and maintenance of brands comes at a cost, and the cost is borne by hotel owners. Owners should recognize that it’s not only the franchise or management fee – although those can be high enough to tip a hotel into unprofitability – brands impose a dizzying array of fees on owners. These can include food and beverage fees, marketing fees, reservation fees, information technology fees, guest satisfaction fees, training fees, loyalty programs, centralized payments, fees for mandatory property improvement plans, transfer fees, and so on. While the monthly base royalty fee for a franchise might be 5% of gross revenues, the actual fees paid to the brand can be much higher.

Brand Standards

While brand standards might provide guidance, they also incur costs, especially since hotel companies, with the goal of a uniform product, can be unwilling to adjust their brand requirements, even when the circumstances make it hard to justify the standards.

Changing Brands

Almost all hotel companies rely on long-term, no-cut agreements, often lasting 20 years or more. While this makes sense to the hotel companies, it can be a burden to owners, especially if, as can happen, a flag loses favor, is no longer competitive in the market, or imposes standards that are challenging to meet at a reasonable cost.

Competition

One other impact of a multitude of brands is the possibility that a hotel company will establish offer multiple brands that compete for the same customer or demographic at similar prices. Owners usually expect that they will be the exclusive operator of a given brand in an area. Non-compete provisions are increasingly limited and virtually never cover other brands, even if they will pose real competition for the first brand. While hotel companies have a very specific idea of the guests their brands are intended to attract, when a hotel owner sees five, six or more hotels, all under the same hotel company reservation system, in the same market, the owner might begin to wonder if the neighborhood is getting too crowded.

What’s the right decision?

A hotel owner needs to consider some key issues in deciding not to brand a property:

• Do I have the resources to operate a hotel without a brand? This would include creating an identity for the hotel, executing its construction or refurbishment, and extending the identity through its operations.
• How will I attract guests? If the hotel has an obvious clientele – a major attraction, a university hospital, or some other factor that will draw in guests, a vibrant reservation system won’t be necessary.
• Will I be able to obtain funding? Lenders and investors are often more comfortable with an existing brand because it has a track record, while an unbranded hotel may have a more difficult time attracting funds.
• Do I have hotel professionals on my team? The byword of industry today is disruption – violating business models is all the rage, and markets often reward entrepreneurs who break the rules. At the same time, there are reasons rules exist, and since hotels are highly regulated, it’s often more effective to stay in the box than jump outside.

Getting it Right

Most hotel owners and developers don’t negotiate with brands on a day-to-day basis. The best, most effective way to get the right brand is to engage an expert consultant who does. As hotel lawyers, we at JMBM’s Global Hospitality Group® serve that function by investigating the owner’s goals, the specifics of a project and its market fundamentals. From that, we identify an exhaustive list of possible brand and operator candidates. Working with the hotel developer or owner and other team members, we review and prioritize choices, and compare the different terms the brands demand.

We have come to this approach through lessons learned over the last two decades — the JMBM Global Hospitality Group® has represented clients in thousands of brand management and franchise agreements over the years. Asking the critical questions before selecting a brand, or deciding not to brand, is the key.

For more information on branding and hotel management agreements

Click for the latest articles on Hotel Management Agreements and Hotel Franchise & License Agreements. Select individual articles on these topics are listed below for your convenience.

JMBM’s Global Hospitality Group® announces 5th edition of The HMA & Franchise Agreement Handbook

Hotel Lawyer: 5 Tips for your next Hotel Management Agreement (HMA)

BEFORE you sign that (nonbinding) letter of intent, think about this!

Hotel Lawyer: Franchise & Management Disputes in a Covid crucible

Hotel Lawyer: Brand franchise owners ask “What happened to my Area of Protection?”

Hotel Lawyer: Tips on negotiating your annual hotel budget

Hotel Lawyer: The PROs and CONs of multi-branded hotels

Hotel Lawyer: What’s up with all the new hotel brands and what does it mean to you?

 

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This is Jim Butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators, and investors. This advice covers critical hotel issues such as hotel purchase, sale, development, financing, franchise, management, ADA, and IP matters. We also have compelling experience in hotel litigation, union avoidance and union negotiations, and cybersecurity & data privacy.

JMBM’s Global Hospitality Group® has been involved in more than $125 billion of hotel transactions and more than 4,700 hotel properties located around the globe. Contact me at +1-310-201-3526 or jbutler@jmbm.com to discuss how we can help.

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