1. Hospitality Services Course 7.1

2. Ownership and Management of Accommodation - Hotel chains  Hotels are managed and operated under different systems around the world, including: –Independently owned and operated properties (independent hotels) –Properties that are independently owned and operated, with chain affiliation (consortia) –Independently owned, chain-operated properties (management contracts, franchised properties) –Chain-owned and operated properties (hotel chains)  Two main kinds of hotel chains: –hotel consortia or voluntary associations, which group together independently owned and operated hotels, that join together primarily for marketing reasons –integrated chains or corporate hotel chains, which are made up of homogenous units – can be managed by the corporate chain or by a conglomerate Conglomerate – company that manages corporate brands and independent unbranded hotels

3. Company-Owned and Operated Systems  the property is owned by an individual or a company  the hotel can be built, bought or owned as a result of taking over an existing hotel company.  The general advantages of this system are: –owner has independence –more flexibility with decision making and thus decisions are often reached more quickly –direct ownership allows the owner major, if not full, control of the operating policies and procedures –in case of acquisition, there is the advantage of an existing market, which can be easier developed –since the owner and manager are the same, this individual or entity obtains the full benefits of the profits  The disadvantages in an owner-operated system can include: –substantial investments needed –owner has the full risk; in international settings, this can cause problems in unstable political environments –when there is only one or a few properties, the reservation system may not be adequate –more difficult to obtain capital for growth, especially if the chain is small

4. Franchising  basic premise - the owner remains in control of the management and the property, yet has the advantages of a large chain in terms of trademark or tradename and marketing outreach  In general, the advantages to the franchise system for an owner include: –right to use the brand name –start-up costs are reduced –being part of a reservations system which has international access –right to purchase supplies via the franchiser; in most cases this will afford savings to the owner –professional managerial assistance; this is of obvious benefit to an owner who may have limited experience in the hotel industry.  Among the disadvantages to the franchise system are: –the franchisee does not have complete management control. In general the policies and procedures must be followed as set by the franchiser. –the franchisee must pay for the franchise rights and agree to pay monthly fees. –the highest risk is quality control

5. Management Contracts  The management contract allows for the separation of ownership and operation.  The owners act as investors who allow someone else to manage the property –Initially – through leases – hotel owners rented out the property to a hotel company for management –Later – the concept was developed – operating company collects a service fee and an incentive fee from the owners  There are two types of management companies: –brand name hotel chains – Accor, Sheraton, Holiday Inn – management of their own brands –independent management companies – second tier management companies – most of them in the US.  The commission charged by management companies includes: –base fee – 2-4% full-service hotels; 2-5% - economy/limited service hotels; 1.5 –4% - luxury hotels –incentive fee – 15% of the increase in net operating income.

6. Management Contracts  The management contract system affords the following advantages: –investors are not required to become involved in the management of the properties –the brand name generally assists in the property marketing –the management team is provided for the owners –financing is generally easier to obtain  A management contract has the following disadvantages: –certain fees must be guaranteed by the owners; thus, the operational risk falls more heavily on the owner than the chain –owners and chains often do not agree on daily management practices; generally the owners have less impact on operations than the operator; –chains operate by standard management practices; these are often not flexible enough in international settings; –management contracts often result in strained relations between owners and operators.

7. Hotel consortia  Consortium = group of independent hotels or small properties that share the same marketing policy and the same reservation system  The main benefits of joining a consortium are: –joint production of guides and brochures, which advertise all hotels in the chain –joint national and international advertising campaigns –links into CRS –centralized purchasing of hotel equipment –technical assistance and management consultancy –freedom to make operational decisions –flexible contract, short-term –no obligation for operational standards compliance –greater company exposure to the market  The disadvantages might be that: –some consortia require members to comply with some rules regarding quality or image –members risk diluting their own image while part of the consortium

8. Integrated hotel chains  Integrated chains => develop and commercialize hotel products that are homogenous and consistent  management arrangements: –direct control, by complete ownership of the hotel –indirect control, through a franchise system or a management contract

9. Management Measures for Hotels  officially assigned rate for each type of room in the property - rack rate: –based on the investment cost and required revenues to cover fixed and variable operating costs –the highest rate charged for a room.  average daily rate (ADR) = total room revenue / number of rooms occupied  revenue per available room (RevPar) = total room revenue / total number of rooms = ADR*OR  yield management - main goal - to get the maximum rate for each room given the existing demand at a given point in time Operating expenses = fixed costs + variable costs * √no of rooms Operating revenue = price/room* no of rooms Operating revenue – Operating expenses ≥ 0

10. Management Measures for Hotels  Occupancy ratio (OR) = number of occupied rooms / number of rooms available for sale  rates charged for rooms vary from the rack rate in accordance with marketing programs  average rate per room occupied is an indication of discounting and multiple occupancy in the property  a higher average rate per room will be achieved when there is less room price discounting and when there are more guests per room  worldwide, room revenue accounts for aprox. 60% of hotel revenues & food and beverage revenue account for about 30% of the total  variety of meal plans: –American plan – FB –European plan – no meals –Bermuda plan – BB –Modified American plan - HB

11. Food Service Management and Operations  restaurants are especially susceptible to failure: –low ratio of profit to sales –the majority go out of business within 5 years  menu planning –basic to a restaurant’s success. –influences the financial investment that is needed to start a restaurant  Corporate-owned restaurants with multiple outlets or franchises have additional advantages in terms of cost- savings: –cost savings - limited menus –greater purchasing power –better market penetration through organized marketing efforts.

12. Alliances, mergers and acquisitions in the hotel industry  hotel industry –swept up in a powerful wave of consolidation. –unparalleled growth in the number of rooms, annual sales, and worldwide presence on five continents –emergence of new companies  Yardstick for defining a “global” company: presence in 125 countries, 250,000 rooms and 1,000 hotels  Unexpected vertical integration  Hotel groups, large and small, get bigger  Consolidation through market globalization

13. Market entry choices for international hotel companies  Sole ownership  Joint ventures  Franchising  Management contract  Strategic alliance  Consortia

14. Market entry choices for international hotel companies  Sole ownership – overseas expansion in the developed countries: –building a new hotel substantial capital investment exposure to political and economic risk –acquiring an existing hotel or a hotel company gaining instant market financial commitment  Joint ventures – partnership for developing and managing hospitality operations – entry choice in most developing countries:  Franchising – major market entry choice for international restaurant corporations –reduces the start-up costs –minimal risk to the franchiser –quality control  Management contract – international expansions particularly in developing countries –international expansion with relatively limited investment  Strategic alliance – cooperative agreement – mutual support and expansion of global presence –instant exposure to a foreign market –global structure for marketing and reservation –sharing of certain operational costs –brings together complementary skills  Consortia – global marketing and reservation services to independent hotels – management autonomy