The Birth of the Modern Lodging Industry Chapter 4

1.The “Three-Party” Hotel Structure 2.Franchise Agreements and the Benefits 3.Hotel Management Contract and the Benefits 4.Market Conditions for Brand Conversions 5.Impact of segmentation and consolidation 6.Globalization of the Lodging Industry Learning Objectives

 Early years consisted of Independents  Eventually two chains emerged  Today, there is the Three-Party Structure  1 st Party is the Ownership Group  2 nd Party is the Management Company  3 rd Party is the Brand or Franchisor “Three-Party” Hotel Structure

 1 st Party - Ownership Group  REIT or Real Estate Investment Trust  Wealthy Investment Group  Owns the hotel but leaves the managing and branding to the hotel professionals  Assumes all risks  Only makes money if the hotel’s profit covers and exceeds all financial obligations “Three-Party” Hotel Structure (cont.)

 2 nd Party – Management Group  Can grow rapidly by managing hotels of multiple ownerships groups  Can be a Hotel Chain or Independent Management Company  Makes a profit without the financial risk “Three-Party” Hotel Structure (cont.)

 3 rd Party – Brand or Franchisor  Hotel Franchise Company  Typically a Chain affiliation  Rapid Growth of the Brand  Guaranteed profits without the Risk “Three-Party” Hotel Structure (cont.)

 Became popular in the 1950’s  Increases the number of hotels in Chain  Improves guest recognition of Brand  Recognized Franchisors  Marriott, Hilton, Starwood  Intercontinental, Accor  Choice Hotels International  Does not own or operate a single hotel Hotel Franchising

 Franchise Agreement  Franchisor  Owns the brand name and brand services  Has rules and regulations the hotel must follow  Requires a certain level of Quality Standards  Franchisee  Pays fees to use brand name and brand services  Must comply with rules and regulations  Must meet and maintain quality standards Hotel Franchising (cont.)

 Benefits for the Franchisor  Increases the number of hotels  Profits by taking a percentage of the revenues  Improves recognition of the brand  Benefits for the Franchisee  Pre-established brand and reputation  Central Reservation System  Marketing and Sales efforts  Loyalty Programs  Training and Technology Hotel Franchising (cont.)

 Franchise Fees  Initial Franchise Fee  Flat fee based on the size of the hotel  On-going Royalty Fee  Percentage of guestroom revenue (typically 3-5%)  Chain Services Fees  Percentage of room revenue or fee per occupied room  Covers loyalty programs, advertising & promotions, technology, CRS, or sales efforts Hotel Franchising (cont.)

 Franchisor-Franchisee Relations  Not always friendly  Franchise Advisory Council established  Promotes cooperation  Resolve disputes and conflict  International Franchise Companies  Less predominate than in US Hotel Franchising (cont.)

 Emerged in the 1970’s  The selling of hotels by the brand to new owners, but retained the right to continue managing the hotel on new owners behalf  Increased brand’s profitability  Generated more cash flow for shareholders Hotel Management Contracts

 Hotel Management Company  Firms hired by hotel owner to manage property  Has full and complete control of the hotel  Earns a fee for managing the property  Typically, 3-5% of total revenue  Plus, Incentive Fees based on GOP Hotel Management Contracts (cont.)

 Benefits of Management Contracts  Management has complete control over the day-to-day operation of hotel  Growth of a Chain and greater market penetration  Little to no financial risk  Woodley Road Lawsuit  Fiduciary Obligation of the Management company to manage the hotel in the best interest of the OWNER Hotel Management Contracts (cont.)

 Independent Management Companies  Not always a brand or chain  Offers same hotel management services  Management Company Competition  Out for bid to run hotel  May offer equity contributions to owner  Minimized long term contracts Hotel Management Contracts (cont.)

 A Brand Conversion is when: 1.An independent property joins a chain 2.A branded hotel changes from one brand to another 3.A branded hotel becomes an independent Brand Conversions

 When do conversions occur?  When new hotel growth declines and the brand still wants to expand Brand Conversions (cont.)

 1980 and Prior  Four Types of Properties  Luxury  Commercial  Resorts  Motor Hotels  Each type had their perspective customer Market Segmentation

 The rise of market research  Use of Focus Groups  Assessed the wants and needs of travelers  Determined interests not currently being met  Smith Travel Research (STR)  Reported hotel statistics and data  Most accurate and reliable in the Industry  Therefore, a brand created a brand within itself Market Segmentation (cont.)

 Today, there are many segments by PRICE  Luxury  Upper Upscale  Upscale  Upper Midscale  Midscale  Economy Market Segmentation (cont.)

 Today, there are many segments by LOCATION  Airport  City Center  Suburb  Business District Market Segmentation (cont.)

 Today, there are many segments by TYPE  Convention Hotel  Historic Hotel  Airport Hotel  Extended Stay Hotel  Limited Service Hotel  Boutique Hotel Market Segmentation (cont.)

 Trend that started around 1980  Consisted of mergers, acquisitions and takeovers  Affected ownership, management and brands  All time high in 1998 with 25 transactions  Today, there are only 7 major chains Consolidation

 Concerns of Consolidation  Minimize competition with only 5-6 major hotel companies  Does it benefit the industry or just the executives that make millions from transactions?  Loss of integrity from independent brands  Are the franchisees being considered?  Will it cut out jobs in the industry?  Is big really better? Consolidation (cont.)

 Europe  Each country is structured differently  No consistent rating of the hotels  Most are independently owned and operated  France most resembles the US with fewer chains  European Union has made it easier to travel within these countries Globalization

 Hawaii  Depends heavily on Tourism  Cyclical business due to external factors  Japan’s influence due to location and currency rates  Ideal climate, natural beauty and blend of culture Globalization (cont.)

 Asia and Pacific Rim  Japan once dominated the economy  Now more countries depend on Tourism  Guam, Korea, Philippines, Thailand, Bali, Australia  China has been the most explosive  Many US brands have expanded there Globalization (cont.)

 Mexico  Favorite of vacationers  Climate, beaches, sport fishing  Negatively impacted due to gang-related drug violence  Recently started promoting foreign investments  Largest hotel chain is Grupo Posadas  Uses hotel rating system similar to US Globalization (cont.)

 Central & South America  Tourism has been greatly deterred  Drug Trafficking  Political Instability  Lack of well known attractions  Popularity of Ecotourism may help  Rain Forests  Tropical Mountain Regions  Scuba Diving  Trade Barriers are diminishing Globalization (cont.)

 The Middle East & Africa  Middle East  Tourism deterred by threat of war and terrorism  Lodging industry is thriving  Investing in infrastructure improvements  Africa  Little tourism due to poverty, civil strife, instability  Exception is Kenya with safaris and ecotourism  Exception is Egypt with popular attractions Globalization (cont.)