Finding Your Flag

Flag selection is one of the most critical decision you have to make when building a new hotel or rebranding, outside of location and financing. It can have sweeping impacts on just about every operation, and yet there are few guides available, apart from speaking to each firm’s sales folks and eliminating those brands in immediate geographic conflict.

Accordingly, I’ve arranged a panel discussion with four individuals representing a broad range of experience in flag selection. Below their brief profiles are eight questions I posed to them during the confab.

Rupesh Patel (info@smartguests.com), CEO of 3Hospitality. Rupesh is an owner/operator of several Dayton Beach properties.

Michael Pleninger (mlp@nhghotels.com), Chairman of Newport Hospitality Group. Michael’s team manages over 40 branded properties primarily in the Mid-Atlantic United States.

Vikram Sood (vikram.sood@sbcglobal.net), Principal of Nupala Hospitality Development. Vikram manages critical hospitality projects for owners/operators, primarily in Southern California.

Anil Taneja (anil@palm-holdings.com), President of Palm Holdings Group. With more properties under development, Anil currently owns and manages numerous hotels in Canada, Florida and the United Kingdom.

 

What are the most important elements in the selection of a brand?

Pleninger: We are strong believers in brands. Rarely can an independent hotel’s performance not be enhanced by a brand affiliation. The increased value results not just from higher RevPAR during the time of ownership, but also, and perhaps more importantly, a higher profit multiple upon sale.

The variance between brands is significant. This improvement is the result of enhanced national marketing, brand loyalty and better yield management. In terms of higher sales multiples, certain brands appeal to a broader audience of potential buyers, thus improving the overall marketing viability in a sale and improving any sale proceeds.

In terms of the expense of a brand, an owner must first factor in all the franchise fees – royalties, marketing, reservations, loyalty programs, OTA commission rates and others. These fees can be rather significant in many cases, but they may really only be the tip of the iceberg.

The real cost of adopting a franchise is the cost of becoming and remaining brand compliant. These costs range from significant capital expenditures to alter the building itself to ongoing operating costs to support differing amenity requirements. As a whole, these increased costs are generally a good investment as they serve to maintain the quality of the guest experience and improve guest loyalty.

Sood: To echo Mike’s thoughts about financing, I start by with overall strategic thinking regarding the positioning of the hotel in terms of luxury, upscale, limited service and so forth. Look for proven results in delivering profit and qualitative objectives in the designated market. Understand what kind of support is provided, such as sales, e-commerce input, public relations, technology platform, human resources and training.

Next, look at the owner relations team. Are they effective in communicating with ownership through regular reporting, owners’ events and so on? How do they respond to owner grievances? How responsive are they to resolving issues?

From a market standpoint, will the flag provide a competitive advantage based upon demand for that flag? Is the market saturated in that segment? This is critical to determine. And along that line of thinking, can you get some sort of territory protection agreement?

Once you’ve addressed those questions, then look at financial requirements. What kind of property improvement plan (PIP) is required if the hotel is a takeover or in the midst of a renovation? In other words, what are the costs to ‘play’? Some flags are just not worth the money after you add up franchise, marketing and purchasing fees.

 

When making a selection, what process do you undertake?

Patel: There are dozens of key elements to decide from when selection the right brand to marketing and selling your property. Selecting the proper flag that fits your location, property and rates are probably most important. One of the biggest mistakes an owner can make is rushing into signing an agreement without learning how they plan to improve the property and business, whether the flag will help with setup, and all related costs (which in itself can be a hefty PIP).

Taneja: Here is our topline list. First comes brand representation in a specific area. Next is market demographics – in other words, is that brand stronger in leisure or in corporate? We then look to see if the brands have representation with major demand generators as well as if such generators exist – for instance, major local employers. Lastly, costs to operate brands vary, such as the spread in costs between a Best Western when compared to a Holiday Inn Express.

Pleninger: When we are choosing a brand for a hotel, we consider three primary points – market demand, existing brand penetration in a market and brand cost. In terms of demand demographics, we want to get a thorough understanding of the current guest demand and how that aligns with guestroom supply. When we look at a market, we look at the existing brands to determine if a suitable brand option exists. We are looking to see if one brand is underrepresented in the mix.

We are also very mindful of the broad impact of loyalty programs being spread over too many hotel rooms. Finally, we breakdown our brand options in terms of operating cost and development or conversion cost. We analyze the anticipated increase in operating cost against any improvement in RevPAR.

Sood: I start with interviewing ownership. Do they have a penchant for one particular flag over another? Next, look at the market. Which flag is underrepresented? Reach out to various brands and have them view the property, and then make a formal presentation. Ask them for a modified strategic plan to see if they have the right mindset and skills to deliver the result.

Next, interview all the key stakeholders, including operations, sales and marketing, technology, brand performance teams and so forth. Are they skilled enough to support the property once the agreement is signed? Don’t forget to ask for references from other ownership groups and find owners that may not be on their list to provide further insight.

 

How important is local support, such as having a regional representative?

Patel: Many hoteliers will consider conducting a feasibility study to determine the economic value. If a brand you are considering does not have local support, simply ask yourself, why?

Sood: It depends on the destination. In locations where one has to work hard to create demand, then it is vital as the brand team has to understand the destination and its key demand drivers. In some cases, it is important to have boots on the ground in the primary feeder markets for your property in order to determine if those conditions exist.

Pleninger: On the whole, local support is not terribly important to us as we have a very deep operating bench. As a successful hotel management company, we have a highly experienced team of hospitality professionals supporting our hotels. We have dedicated teams in operations management, revenue management, sales and marketing, renovations, purchasing, and human resources.

 

Are franchisee requirements negotiable and what areas are the most negotiable?

Taneja: Yes, they sure are! If we are doing a portfolio deal, we are able to secure better rates or key locations. We find that some brands are more flexible than others. The smaller the brand, the more flexible it is. All items can be negotiated, and usually we see more flexibility on length of contract than anything else.

Pleninger: While everything in life is negotiable, we have found that brands are most amenable when the negotiated topics are minimized. Additionally, the success of a negotiation is dependent on the quality of the proposed location. Brands are also willing to negotiate around the initial fee structure to help a developer defray initial ramp-up costs. My advice is to make a short list of critical points then present them in terms of the impact to the guest experience or deal viability.

Sood: In my mind all points are negotiable if your property is of particular interest to the brand or is an iconic building. Otherwise, it becomes very difficult to get the big brands such as Marriott or Hilton to bend on their fees. They have too much influence and, in good economic times, are turning down more than they are accepting. In some cases, the marketing fee can be lowered as can fees associated with participation in some of their brand-wide marketing programs. I have also seen fees frozen for the first four or five years by a brand in an effort to secure a management contract. However, be forewarned that early termination fees are difficult to get out of with the big brands.

 

Are there any new brands that come to mind that represent especially lucrative opportunities for those looking to expand their portfolios?

Pleninger: Every franchise company is looking to expand its brand offering. For new builds, we are attracted to DoubleTree, Home2 and Tru as well as the new generations of Fairfield Inn & Suites and TownePlace Suites. These five brands are sponsored by Hilton and Marriott respectively, both offering strong brand development teams and versatile demand characteristics that will allow them to succeed in many markets. Of note, it will be important to see what brand opportunities come out of the Marriott acquisition of Starwood.

Sood: I am keeping a keen eye on Kimpton 2.0. With the IHG engine behind them, they are developing some very interesting hotels in key markets. Next would be Two Roads Hospitality, a merger between Commune and Destination Hotels. Once the details are sorted out, this will be a very compelling option. Last comes Auberge Resorts. They have built a world-class team and are going to be significant players in the future.

 

How much support can you expect from a franchisor insofar as hiring, training, build, FF&E and so on?

Patel: Franchisors are known to steer away from actually helping you run the ‘operations’ itself. However, nearly all brands have a construction and opening services team that will help open and guide you in the right direction.

Taneja: Select-service brands such as Hampton and Holiday Inn Express provide a lot more support to owners than when you go up a tier. They tend to deal with private owners as well as regional hotel companies and have geared themselves up to support just that. Marriott is extremely helpful with FF&E as you purchase directly through their own procurement department. All brands provide guest-facing training as well as general manager training. However, it is up to each manager to keep the training updated and for all necessary follow-up.

Sood: For me, it really depends on the franchisor. They will typically provide very good support in terms of design and construction input as well as support during the development phase. They may also provide valuable guidance on the physical layout, soft goods, technology, and occasionally public area design and space planning. Some do well with FF&E procurement because of their purchasing power, but this is typically an owner decision.

My experience on the hiring and training side has varied, though. Some have been great at sourcing senior leaders for their properties while others have really struggled. As for training, the big brands do a good job with the basics of fire/life safety, cyber-security, food safety and a general orientation with the hourly staff. But it is really up to the property general manager to provide a deep dive into developing the employee culture and operationalizing the brand.

Pleninger: You have to think broader for these sorts of questions. Once selected, a good brand will act as your partner – good and bad. They will support your development process with thorough design reviews, FF&E purchasing assistance and detailed opening plans. As you open, they will assess your initial marketing plans and help with rate strategies to accelerate the ramp-up process.

Some franchisors even provide opening training assistance, usually confined to reservation systems and franchise standards. In the event that the franchisor feels that the developer is not equipped to manage the hotel, they will recommend that a professional team – either brand-affiliated or independent – be hired for management.

 

Is the franchise business competitive? As in, can you play one franchisor off against another?

Sood: This can be done at times when one contract is ending and the owner is looking at other option. It does not pay to have a combative relationship with your brand unless they are in violation of their agreement or are falling short of the performance measures that were laid out. There is a proper way to document any shortfalls and escalate the issues to the top of the food chain. In the independent space, this may happen more often as the franchise fees are often more flexible if an owner is exploring a soft brand or looking for a regional management company that will sometimes back off their fees.

Pleninger: While the market is certainly competitive, the top brands know their value to the ecosystem. Additionally, this is a small enough industry that if you are seen as being manipulative, your reputation and ability to complete deals will inevitably suffer. Rather than playing brands off each other, franchisees are probably better in the long-term by asking for marketing assistance and reasonable concessions based on economic or guest situations.

Taneja: Just to add one more thought, now that Marriott bought Starwood, this particular aspect is going to get a little more difficult to pin down. Generally, in the lower-tier brands, you are able to do so. However, we try to look at which brand would fit the hotel better versus trying to get the best deal by playing them all off each other.

 

Does a franchise ever get tired?

Sood: This happens quite often. There are many case studies (IHG-Holiday Inn, Hilton and Marriott already come to mind) showing that certain segments within these brands became stale as travel trends changed and client preferences evolved. This may have pushed the formation of Curio, Autograph Collection, Tru and other new soft brands or lifestyle brands. Some may argue that the Starwood merger was driven by Marriott wanting access to a fresh family of brands.

Patel: Absolutely, there are more than a handful of flags that haven’t moved forward with the rest of the industry insofar as marketing, trends and standards. These brands are known to take in any and every property under the sun. I think this is when a brand gets tired. Reinvention is hard when a brand gets old and worn out.

Taneja: Also in agreement! We saw that with Howard Johnson and many other brands out there today. Brands try to lift the customer perception of those weaker brands, but owners are quite often resistant when they don’t make an acceptable ROI. This ultimately becomes a double-edged sword.

(Article by Larry Mogelonsky, published in Today’s Hotelier on December 1, 2016)

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