1. The Birth of the Modern Lodging Industry Chapter 4

2. 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

3.  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

4.  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.)

5.  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.)

6.  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.)

7.  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

8.  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.)

9.  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.)

10.  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.)

11.  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.)

12.  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

13.  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.)

14.  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.)

15.  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.)

16.  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

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

18.  1980 and Prior  Four Types of Properties  Luxury  Commercial  Resorts  Motor Hotels  Each type had their perspective customer Market Segmentation

19.  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.)

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

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

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

23.  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

24.  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.)

25.  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

26.  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.)

27.  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.)

28.  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.)

29.  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.)

30.  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.)