“Is my hotel better off branded or unbranded?” I was asked this question often when I was the president & CEO of The Leading Hotels of the World for over ten years. First, I would correct them that it is not branded or unbranded but rather the consideration is individually branded, or chain branded. A brand is a name that stands for something in the minds of the targeted audience. The Villa d’Este on Lake Como is just as loved of a brand to its customers as the Marriott brand is to its frequent travelers.
Depends on Several Key Factors
The fact is it depends on several key factors. It is an asset by asset, owner by owner decision. If you are the owner of a beige-on-beige rectangular box in a B location without much supporting facilities, and you don’t intend to personally operate it, or your holding period is five to seven years, you are better off renting a chain brand than building your own brand. On the other hand, if you have an iconic hotel known to your target customer segments, located in the center of the demand generators, with all the supporting faculties in the hotel for your target customers and you intend to personal engage with the operations as it will stay in your family for generations to come, then why would you pay rent for 100 years.
What Kind of Hotel Is It?
Let’s start with the hotel asset. What kind of hotel is it? 1,200, 500 or 125 rooms? What quality segment is it in, luxury, upscale or economy? Where is it located, near demand generators (where target customers want to be) or off-center location? What city is it in, downtown, suburb, beachfront or mountain. What are the seasonal climates? What support facilities does the hotel have, function/meeting rooms, restaurants/bars, recreational facilities and office/retail/residential spaces.
Once the asset is closely examined, next is to determine which customer segments this hotel creates the most value for (their willingness to pay) and is there a large enough demand from these target customer segments for the hotel to be successful. How will the hotel find these customers and present itself in their consideration set and ultimately book the hotel? This is also the part to consider changes to the hotel asset which may lead to more profitable customer segments.
Hotel Owner’s Objectives
Finally, what are the owner’s objectives in terms of investment horizon, capital investments, operational engagement and risk preference. A highly leveraged asset without reserves needs consistent cash flow. Short holding periods won’t be enough time to build brand value into the asset. Lack of capital investment may limit the options to reposition the hotel to create greater value. Different owners may pursue different affiliation strategies for the same asset during the same investment period.
The order in which to assess the asset, customers and owner may vary. Sometimes it is better to start with the owner or the customer (especially in the development of a new project as opposed to the acquisition of an existing asset). This process is also very iterative until all three are aligned.
Hotels mostly accommodate demand rather than generate demand, with a few exceptions. Mostly, hotels can shift demand from other destinations, other hotels or other times in the future. Most of the sales and marketing efforts of a hotel is to shift demand.
Before Considering Brand Affiliations
Before considering any brand affiliations, figure out how much revenue the asset can generate on its own. Most owners underestimate the asset’s ability to accommodate demand available in the market. Once the asset driven revenue is determined, this is the time to consider how much more revenue an affiliation can add to the base and the cost associated with the affiliation. Affiliation fees should be calculated based on the additional revenue created, not just what is booked through the system. System delivery often overstates the revenue the affiliation adds on.
Also consider the capital cost associated with the affiliation. Brand standards benefit the brand consistency but may over capitalize assets for certain markets. Just as importantly, consider resources no longer needed if an affiliation is in place. Often the hotel leaves resources in place and ends up competing with the affiliation which is a total waste. In my experience, generally the higher end the hotel, more revenue is generated by the asset than any affiliations. Always start with “I don’t need an affiliation” before considering any affiliation.
Generating EBITDA is just as important if not more important than financing the EBITDA. I have seen many investors spend a great deal of time on financing a project and far less time on driving the earnings to support the investment thesis. Capital is critical in a hotel investment and so is the return of capital and its financial returns. In addition to an investment plan, a hotel investment needs:
Marketing Plan – who are the targeted customer segments and how to communicate with them,
Sales Plan – how to work with critical intermediaries in selling to the end users,
Distribution Plan – how will the hotel offerings be visible to the target audiences,
Operations Plan – how much resources are necessary to execute on the service strategy and brand building/compliance.
All the plans have to be in alignment or risk inefficiencies and ineffectiveness. Brand affiliation is an important part of these plans but only one part.
A Sidebar on the Luxury Segment
A sidebar on the luxury segment. A luxury hotel has an advantage in building its own individual brand over the other segments. Luxury hotels are often the site of well publicized business, political and social events. Celebrities are often seen at luxury hotels. Luxury hotels are often used as background in movies and TV programs. Their architecture and designs are often recognized by publications. This is a huge advantage and often low-cost publicity.
Should a hotel be “branded or unbranded”? The answer is similar to responding to the question “should I manage my own investment or hire a money manager?”, it depends.