Chapter 2 Lecture Outline The Structure of the Lodging Industry Learning Objectives 1. 2. 3. 4. 5.
To inform you about the different types of investors who own hotels. To tell how hotel management companies help hotel owners operate their hotels. To describe the importance of management contracts in the operation of hotels. To teach you about the impact of franchisors in the lodging industry. To explain how franchisors and franchisees work within a franchise agreement to assist each other in promoting a hotel brand.
Hotel Owners Hotels are operated for two reasons: • To meet the needs of the traveling public. • To meet the hotel owner's desired return on investment (ROI). Return on investment (ROI): the percentage rate of return achieved on the money invested in a hotel property. Hotel income after taxes = ROI % Total hotel investment Those who own hotels own two distinct assets: • Real Estate: involves the land, buildings, and furnishings • The Operating Business Itself: includes profits made by running the hotel
Investors Many invest in hotels for many numerous including: • Favorable tax status resulting from the hotel's depreciation. Depreciation: the reduction in value of an asset as it wears out. This non‐cash expense is often termed a "tax write‐off" because the decline in value of the asset is tax deductible. • The long‐term effects of real estate appreciation. Appreciation: the increase, over time, in the value of an asset. The amount of this increased value is not taxed unless the asset changes hands (is sold) • The profits that can be made from the hotel's monthly operation. Investors are not typically active in the management of a hotel. An investor can be an individual, a corporation, or any other entity that seeks to acquire a hotel for its own purposes.
Owner/Operator A hotel investor who also manages (operates) the hotel. Can be an individual and their family members or a large multi‐national hotel company
Management Companies Investors with only one hotel will often hire a single General Manager (GM). General Manager: the traditional title of the individual at a hotel property who is responsible for final decision‐making regarding property‐specific operating policies and procedures. Also a GM is the leader of the hotel’s management team. Investors with more than one hotel, however, are likely to use a management company. Management company: an organization that operates a hotel for a fee. Sometimes referred to as a contract company.
The Role and Structure of Management Companies Management companies are able to help investors with several properties recruit, train, and supervise the many G.M.s required to manage those properties. Special circumstances owners face in the operation of their hotels: • Managing/directing a major (complete) renovation of a hotel • Operating a hotel in a severely depressed market. o Depressed market: A hotel market area where occupancy rates and/or ADRs are significantly below their historical levels. • Bankruptcy/repossession define of the hotel • Managing a hotel slated for permanent closing • Managing a hotel because of the unexpected resignation of its general manager • Managing a hotel for an extended period of time for owners who elect not to become directly involved in the day‐to‐day operation of the property Management companies receive a fee for their service(s), the amount can typically range from 1 and 5 percent of the hotel's monthly revenue and can be tied to the hotel's operating performance. Management companies that specialize in helping lenders maintain repossessed properties until they can be resold will generally: • Secure and, if it has closed, reopen the hotel • Implement sales and marketing plans to maximize the hotel’s short‐ and long‐term profitability • Generate reliable financial data about the hotel • Establish suitable staffing to maximize guest and employee satisfaction • Show the hotel to prospective buyers • Report regularly to the owners about the hotel’s physical and financial condition Management companies can be grouped as:
First tier (management company): Management companies that operate hotels for owners using the management company’s trade name as the hotel brand. Hyatt, Hilton, and Sheraton are examples. Second tier (management company): Management companies that operate hotels for owners and do not use the management company name as part of the hotel name. American General Hospitality, Summit Hotel Management, and Winegardner and Hammons are examples. Hotel management companies can be segmented based upon the manner in which they participate, or do not participate, in the actual risk and ownership of the hotels they manage. • The management company is neither a partner in nor an owner of the hotels it manages • The management company is a partner, with others, in the ownership of the hotels it manages. • The management company only manages hotels it owns. • The management company owns some of the hotels it manages and none or only a part of others it manages. o Own all of a specific hotel as well as manage it o Manage and be an owning partner in another hotel o Manage, but not own any part of, yet another hotel property
Management Contracts Management contract: an agreement between a hotel's owners and a hotel management company under which, for a fee, the management company operates the hotel. Also it is referred to as a management agreement or an operating agreement. Major elements of management agreements include: • The length of the agreement • Procedures for early termination by either party • Procedures for extending the contract • Contract terms in the event of the hotel’s sale • Basic management fees to be charged • Incentive fees earned or penalties assessed related to operating performance • Management company investment required or ownership attained • Exclusivity: can the management contract company operate competing hotels in the area? • Reporting relationships and requirements: how much detail is required, and how frequently will reports be produced? • Insurance requirements of the management company: who must carry insurance and how much? • Status of employees: are the hotel’s employees employed by the owner or the management company? • The control, if any, that the owner has in the selection or removal of the general manager and other managers employed by the management company who work at the owner’s hotel.
Management Company Pros and Cons Advantages of selecting a qualified management company to operate a hotel:
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Improved management quality Documented managerial effectiveness is available Payment for services can be tied to performance Partnership opportunities are enhanced
Disadvantages in the selection of a management company: • The owner cannot generally control selection of the on‐site GM and other high‐level managers • Talented managers leave frequently • The interests of the hotel owners and the management companies they employ sometimes conflict • The costs of management company errors are borne by the owner • Transfer of ownership may be complicated o Buy‐out: An arrangement in which both parties to a contract agree to end the contract early as a result of one party paying the other the agreed‐upon financial compensation. Investors Hospitality Management (IHM) was one of the very first hotel management companies to offer hotel owners a customized “Green Plan” for each property IHM agreed to manage. To learn more, please visit: www.investorshm.com
Franchising and the Lodging Industry Franchise: An arrangement whereby one party (the franchisor) allows another party to use its logo, brand name, systems, and resources in exchange for a fee. Franchisor: An organization that manages a brand and sells the right to use the brand name. Franchisee: An individual or company that buys, under specific terms and conditions, the right to use a brand name for a fixed period of time and at an agreed‐upon price. Brand: The name of a specific hotel group. For example, Holiday Inn and Comfort Inn are two different brands. Additional examples of brands include Hyatt, Hampton Inn, Super 8, and Radisson.
Hotel Franchisors The first significant hotel franchising arrangement began in the 1950s with Kemmons Wilson and his Holiday Inn chain. Chain: the term used to describe a group of hotels, all of whom share the same franchise brand name. Also called "brand" or "flag." Holiday Inns now franchises its name as part of the InterContinental Hotels group. The InterContinental Hotels Group (IHG) is a company that franchises multiple brands. To see their Web site and list of managed brands, please go to: www.ichotels.com It is important to understand that, in most cases, franchise companies do not actually own the hotels operating under their brand names, they own the right to sell the brand name and set the standards that are followed by affiliated hotels.
Conversion: The changing of a hotel from one brand to another. Also known as "reflagging."
Hotel Franchisees When a hotel investor buys a franchise, the hotel can connect to the Global Distribution System (GDS). Independent hotels can purchase a connection to the GDS, but it is costly. Affiliation with a strong brand can increase hotel sales and profitability. The fees paid by the hotel owner, typically 3‐15 % of generated room revenue, to the brand managers will vary based on the strength of the brand name. Factors that hotel franchisees look for in a specific brand include: • Perceived quality/service level of the brand o System‐wide: The term used to describe a characteristic of all hotels within a single brand. Used, for example, in: “Last year, the system‐wide ADR for our brand was $99.50.” • The quality and experience of the brand managers • The amount of fees paid to the franchisor • Direction of the brand Hoteliers can detect clues to the future success of the brand by examining: • The number of hotels currently operating under the brand name. • The % of hotels that have elected to leave the brand in each of the past five years. • The number of new properties currently being built under the brand's name. • The number of existing hotels converting to the brand (if conversions are allowed). • The ADR trend for the last five years in comparison to the ADR trend for other hotels with which the brand competes. • The occupancy rate trend for the last five years in comparison to the occupancy rate trend for hotels with which the brand competes. • The % of total hotel room revenue contributed by the brand's reservation system and the % of hotels within the brand that achieve that average rate of contribution.
Franchise Agreements Franchise agreement: A legal contract between a hotel’s owners (the franchisee) and the brand managers (the franchisor) that describes the duties and responsibilities of each in the franchise relationship. Federal Trade Commission: The FTC enforces federal antitrust and consumer protection laws. It also seeks to ensure that the nation's business markets function competitively and are free of undue restrictions caused by acts or practices that are unfair or deceptive. Titled, "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," or more commonly referred to as the "Franchise Rule." To learn more, please visit www.ftc.gov/bcp/franchise/16cfr436.htm The Franchise Rule requires that franchisors:
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Supply potential franchisees with a disclosure document at the first face‐to‐face meeting or 10 business days before any money is paid by the franchisee to the franchisor, whichever is earlier Provide evidence, in writing, of any profit forecasts made by the franchisor Disclose the number and percentage of franchisees achieving the profit levels advertised in any promotional ads that include profit claims Provide potential franchisees with copies of the basic franchise agreement used by the franchisor Refund promptly any deposit monies legally due to potential franchisees that elect not to sign a franchise agreement with the franchisor Not make claims orally or in writing that conflict with the written disclosure documents provided to the franchisee
Franchise Offering Circular (FOC): Franchise disclosure document prepared by a franchisor and registered and filed with the state governmental agency responsible for administering franchise relationships. Brand Standard: A hotel service or feature that must be offered by any property entering or remaining in a specific hotel brand. For example, “The franchisor has determined that free wireless internet access in all guest rooms will become a new brand standard effective on January 1st. next year.”
Ownership and Management Alternatives There are a variety of ways that hotels can be owned and managed, including: • Single‐unit property not affiliated with any brand • Single unit properties affiliated with a brand • Multi‐unit properties affiliated with the same brand • Multi‐unit properties affiliated with different brands • Multi‐unit properties operated by a management company or the brand • Single or multi‐unit properties owned by the brand
Ownership and Operational Challenges Franchise Service Director (FSD): The representative of a franchise brand who interacts directly with a hotel franchisee. Different brands may title this important position somewhat differently, but each will have a comparable position. The FSD will monitor the franchisee's compliance with the franchise agreement. They may: • perform inspections • assist the hotel sales effort • monitor and advise about the hotel's use of the franchise‐provided sales tools • advise the franchisee on the availability and use of other franchisor resources Hotel owners, management companies, and franchisors must all work together to further the hotel industry.
Chapter 2 For Discussion Responses 1. The following factors are among those could cause a hotel's real estate value to increase: •
Population growth in the area surrounding the hotel
Increased travel to the area in which the hotel is located (market growth)
The building and opening of new attractions near the hotel
Renovations and improvements made to the hotel building
Improved image of the brand with which the hotel is affiliated
The following factors are among those that could cause a hotel's real estate value to decrease: •
Decline in the aesthetic or economic standing of the area
Negative changes in traffic patterns
Economic growth is away from and not including the hotel
2. The following factors are among the potential advantages of working for a hotel management company: •
Improved job security because the management company likely operates more than one hotel
Opportunity for advancement to larger hotels in more desirable locations
Can gain expertise from working with many hotel managers employed by the management company rather than with one hotel owner only
Greater corporate structure may mean the availability of better support and advice in a time of need
The following factors are among the possible advantages of working directly for a hotel’s owner. •
Decreased chance of a forced relocation as a requirement for advancement
Closer personal relationship with the hotel's owner
Fewer reporting relationships (lines of authority)
A management company may have less of a long term interest in the success of the hotel than does the owner
3. Possible student responses could include: •
An attempt by the owners to save on fees
The strong local reputation of the property
A hotel that does not easily fit the brand standards criteria of any established chain.
4. The hotel brands students select will likely vary. Among the factors that might make a traveler want to choose a higher priced brand include the quality of customer service provided, high quality rooms, extensive amenities, comfort, the status associated with the hotel and its other guests and who is paying for the room (e.g. corporate expense account vs. personal funds payment). 5. The hotel brands students select as their reference points may vary, however, factors that might make travelers choose lower priced brands might include good perceived value for money spent, cleanliness, convenient location, free parking, comfort, and the status or image (thriftiness/ wise spending) perceived to be associated with staying at the hotel. 6. The brands students list will vary, but brand standard variations associated with the brands chosen will likely include the range of food service offered (e.g. 24‐hour room service vs. no room‐service), operating hours of restaurants and lounges, and menu prices. Additional standards that could vary include room size, bedding quality and number of in‐room amenities, service levels, exercise and other facilities available to guests. Hotel design and décor standards are another area in which brand standards vary significantly. 7. Student responses will vary. Some students may report that the brand they prefer has high name recognition, higher standards of quality, greater assurance of a good value, or greater strength in enforcing system‐wide standards. Point out that brand preference is often tied to the rates charged to its guests and those guests’ willingness and ability to pay that rate.
8. Students may or may not agree that their are too many different hotel brands, however, all students should be made aware that the existence of too many brands (a condition called brand proliferation) can be harmful to the entire lodging industry if it decreases consumer awareness of the unique characteristics of an individual brand. Also, it can create unnecessary and harmful competition between franchisees affiliated with a single franchisor offering more than one brand in their market area (for example, different franchisees competing, in the same market area, with the owners of a Sleep Inn, Comfort Inn, and Quality Suites brands; each of which is franchised by Choice Hotels International and each of which may compete for the same guests.) 9. Guests who erroneously believe that brand managers own hotels rather than individual operators may be less likely to patronize brand name hotels if they prefer to support locally owned and operated hotels. In addition, hotel owners who do enter into franchise relationships are sometimes felt by their guests to "work for" the brand. This can cause confusion about who actually owns, and is responsible for what happens at, the owner’s lodging property. 10. After comparing a high priced and low priced hotel brand’s Web site, students are likely to note that the: •
Quality of Web sites is comparable
Ease of use is similar
Graphics and text are of equal quality
Speed of use is of approximately equal quality
The result is that it may be increasingly difficult for higher priced hotels to sell their rooms unless they can convince consumers of the real value to them of paying higher rates for rooms.
Chapter 2 Team Activities 1. Students assigned the completion of this activity could be asked to prepare visual aids that clearly identify the different franchisors and the brands they represent in your area. Presentations could be made by handouts, flip chart, chalk board, PowerPoints or even by a simple listing. Check the teams for accuracy and remind them that brands, like hotels, are often sold among franchisors. Use the most recent example of a hotel chain’s sale to illustrate the point. The Wyndham Worldwide Corporation’s 2010 purchase of the Microtel and Hawthorn Suites chains from the Global Hyatt Corporation could be used as one recent example of this common practice. 2. Student teams may have difficulty determining exactly who actually owns a hotel operated by a first tier management company. This is the case because hotel owner groups may, for a variety of reasons, seek anonymity in their ownership of a hotel. Explain to teams that the reason many owners employ first tier management companies is to help ensure just such anonymity. The important learning point for students assigned the completion of this activity is that a hotel’s owner and its first tier operating company are very likely to be two very different entities.