By Dan King, HVS International
The successful non-traditional independent hotel will have management that knows how to make the property succeed without a brand through knowing the market, using the Internet and looking beyond quarterly goals to the long term.
In 1952 while traveling to Washington, DC with his family on vacation, Kemmons Wilson grew frustrated with the lack of consistently good roadside hotels. Vowing to change this problem, he started the Holiday Inn franchise system—and the lodging landscape was changed forever. Chains and franchises multiplied rapidly over the coming years, delivering a consistent product and a level of service that the traveling public knew that they could trust. The independent operator was squeezed out of the market and in most cases was not able to compete on the same playing field as branded hotels. Lenders recognized the value of the chain affiliation as an insurance policy that would allow them to make investment decisions knowing that there would be some corporate oversight by the franchise company, assuring minimum quality standards and a base level of business aptitude. They no longer had to depend solely on the expertise of the borrower when projecting future income levels and the security of their loan. Some independent hotels survived. Generally these were unique properties that had significant advantages in the form of location, physical plant, or reputation. But the franchising trend continued and the lodging market became increasingly dominated by branded hotels. With the development and growth of the Internet and third party booking engines, another sea change is upon us. It is now becoming increasingly viable to operate a hotel without the backing, and expense, of a national franchise. This article examines this changing playing field and sets forth some ground rules for investors who are considering owning an independent hotel.
Traditional wisdom maintains that to be independent you have to be a unique property—offering things that cannot be easily replicated by a branded hotel. Traditional wisdom assumes this because these are the types of independents that have survived in the past. Tradition is based on the past, not the future. Traditional wisdom is often a safe course but is seldom good for exploiting future trends. So what’s changed that can impact the dominance of the chains on the lodging industry?
First let’s consider the chains themselves. Most of them aren’t very good. For the large part chain management is motivated by attaining quarterly earning goals. They lack long-term vision, or if they have it, lack the stamina it takes to implement a long-term plan. Short-term growth is the Holy Grail. Most chain managers will sacrifice much in order to meet their quarterly earnings. The next biggest issue for the chains is that there are too many of them. They are victims of their own success. How many different hotel chains can you name? As a lodging professional, someone who works everyday to stay abreast of the lodging market, I’m often confused. When I travel I frequently encounter branded hotel properties that I know little or nothing about. How do you think the average consumer feels? The value of being a branded hotel has been diluted by the proliferation of branded properties. Finally, the truly great brands are often not available to most investors. In most markets the great brand is already represented in the market, and non-compete clauses come into play. Or the brand itself will only permit certain companies to hold their brand, usually those that are proven operators and already have a large portfolio with the brand.
Second, the Internet has changed the playing field. Not too many years ago it was difficult for an independent property to get noticed by the majority of the traveling public unless they had the special attributes valued in an independent. Not long ago when I traveled I would call my travel agent and they would book my airplane, rental car, and hotel accommodations. The travel agent had access to the Global Distribution System (GDS). I did not. How likely was it that the travel agent would book me in an independent property, unless it was of the traditional mode? How likely was it that the travel agent was going to choose a hotel they had never heard of, keeping faith that the management of the independent hotel would actually send them their commission, rather than choosing a branded property where the brand could guarantee payment? Now I can go on-line and in a few minutes know what all of my options are. Location, price, and facilities are available to me with a few keystrokes. I can see the independent hotel and can know what to expect…no surprises. I may not choose the independent hotel but if management at this property is doing its job right, I will know that the independent hotel is an option.
It’s widely felt that the brands lost control of their inventory and pricing on the Internet, now they are trying to take it back. They got in the game late but virtually every major brand has initiatives designed to get the consumer away from the third party travel sites. The best brands will have some success at this. Successful brands like Marriott already have customer loyalty and should be able to get many of its loyal travelers off of the third party web sites and back to their branded site. This will give the good brands better control of their pricing and lower costs per booking. Good for them. They will better control their market share. But frankly, an independent hotel wasn’t going to get many of Marriott’s loyal travelers anyway, particularly when they are traveling on business and are more concerned about accumulating frequent stay points than they are about almost any other consideration. An independent property will be happy to see the strong brands get off of the third party booking engines. It lessens the competition for them.
So if the brands have been diluted and the Internet has allowed the independent property to get in the game, what type of property can be operated successfully as an independent? Again, traditional wisdom holds that they should be unique properties or special in some way. I think that the types of properties that can be taken independent comprise a larger pool than that. But before I make that case, let me clarify one point. It’s not easy being an independent. It’s hard. The property must have strong management that knows what it is doing. You can’t just build it and think that they will come because you are on the Internet. You need to have a good strategy and better implementation. Most hotels should not be independent. But many more can be than are now. The successful non-traditional independent hotel will have management that knows how to make the property succeed without a brand through knowing the market, using the Internet and looking beyond quarterly goals to the long term.
The first rule is to know your market. Independent hotels need to be very sure that they understand where their business is going to come from and how they are going to reach the target market. This goes beyond a cursory understanding of what market segments they will serve. The independent property needs to know what specific businesses, groups, and local attractions will bring travelers to their door. They need to understand what these travelers want and how the hotel will deliver it to them. If the investor’s management team can answer these questions, then the first test is passed.
The second rule is to recognize that choosing to be independent is not about saving franchise fees, at least not in the short run. If the investor believes that a particular franchise is available and will deliver revenues that are as good as, or better than, the independent alternative, then pay the franchise fees. Life will be a lot easier. The successful independent hotel will not spend less on marketing and sales efforts than the branded property. They will need to spend every dollar that they would have paid the brand in order to establish the property in the marketplace. The advantages are that the independent property will get to choose exactly how to spend this money. It can be spent on a direct sales force, advertising, or public relation efforts. This is a blessing if your team knows what they are doing and spends this money wisely and effectively. It’s a curse if the money is spent ineffectively. In the long run, the independent property should be able to spend less in marketing and sales efforts than the branded property spends. However, this is a residual benefit that will not be received in the first two to three years of operation.
The independent property needs to have strong expertise in order to gain market share via the Internet. Some of this can be purchased from third parties. There are several excellent companies who will link the property to the Internet and the GDS and will provide advice and counsel as the landscape continues to change. However, these third party companies will only take the property so far. The successful independent property will need internal expertise in order to successfully gain business on the Internet. The rules change all of the time. Independent operators need to recognize that the Internet is their brand reservation center. The tools are there but there is no corporate staff to run it. The operator must do this himself.
What type of property can be operated as an independent hotel? Again traditional wisdom has held that these properties should be truly unique. They either have some irreplaceable location or facilities that cannot be easily replicated—particularly by brands that adhere to Henry Ford’s maxim that the consumer can have any color of Model T that they want, as long as it’s black. Properties that come readily to mind for these criteria are generally trophy hotels such as the Plaza in New York, the Brown Palace in Denver, or the Hotel del Coronado in San Diego. With the new realities of the lodging market, I believe that there are other types of properties that can operate successfully as independent hotels. For example, we at HVS recently took a hotel independent that was originally built as a Holiday Inn in the 1970’s. Does this property have an irreplaceable location? No (a good location but not irreplaceable). Are the amenities hard to replicate? Absolutely not. What’s more, the hotel competes for business as a mid-priced lodging facility against competitors that have brands such as Holiday Inn, Best Western, and Quality Inn. And the results? In the first nine months revenues are up by 40-50% (in a flat market). Bookings through the Internet of total rooms sold have increased to 15-18% from the 8-10% that were being delivered as a branded property. Why is this property succeeding as an independent hotel? First, we knew our market and had a plan for how to reach it. Second, we have a Revenue Manager who helps us work the Internet on a daily basis. Finally, we know what we want the property to be and are relentless in our efforts to achieve this vision.
The national brands will continue to dominate the lodging industry. However, there is an increasing opportunity to successfully operate hotels as independent properties. Many lenders will only make loans to branded hotels and it will take some time for most lenders to recognize that they can make good loans to independent properties. But when have most lenders ever been at the forefront of market changes? The primary source of funding for most independent hotels will therefore be local lenders who know the market, the borrower, and understand how the hotel will work. As these lenders have success, others will follow suit. So if you are looking at owning a hotel as an independent, don’t do it because you don’t want to pay franchise fees. If the brand will deliver revenues, then pay them. Do it because you clearly understand how and why you will be able to maximize revenues for the property without the brand.
HVS Hotel Management provides independent third-party management services to owners and investors of lodging properties and currently manages full and limited-service hotels across the country. Services include assistance to developers from earliest planning through successful operations. We combine renowned hotel industry expertise with a first-hand understanding of the lender experience, so we can confidently provide REMICs, Special Servicers of CMBS portfolios, and other institutional lenders and owners a comprehensive range of services for all types properties. HVS Hotel Management brings a consistent approach and a flexible implementation to all assignments. For more information regarding HVS Hotel Management, contact Dan King at (303) 554-9766 or Bill Huigens at (602) 743-4436.