In today’s operating environment it seems almost hard to believe, but there was a time when hotel brands owned, operated and managed their own properties.
Beginning in the US in the mid-1950s, however, those seeking real scale began to ask “why?” – disposing of properties from their balance sheets and offering third-party owners the chance to enter into a franchise model and access the benefits associated with a globally recognised brand.
But while franchising gained a huge amount of ground quickly in the budget segment, that’s where it remained for many years, with brands typically wanting to stay in charge of the management of their mid-market and higher-end properties, even while pursuing an asset-light strategy. Management contracts, whereby hotels were developed by or sold to investors and leased back under long-term agreements, became the dominant business model for anything higher end than economy properties; until the past 15 years or so, when franchising has not only expanded to mid-scale, upper-scale and even occasionally luxury hotels. It’s also crossed the Atlantic and taken hold in the UK, Ireland and – with gathering momentum following a slower start – continental Europe.
Take Hilton, for example. The company has been instrumental in popularising the franchise model, first in the US and now internationally. Franchise rooms now make up approximately 44% of its pipeline in EMEA. In 2018, the group opened more hotels in a year than ever before, taking its total number in operation across EMEA to more than 515 properties across 64 countries and territories. Of those trading hotels, approximately half are managed and half are franchise properties.
“This model means that rather than focusing on real-estate asset management,” says Patrick Fitzgibbon, Hilton’s senior vice-president of development for EMEA, “we are instead able to focus on creating exceptional brands that drive great returns for our owners.
“Being flexible to franchise or management opportunities has helped us deploy our brands at scale, and our focused service growth in particular has been driven by the model.”
Locate the key USP
One reason for the rapidly growing popularity of franchising is that as the asset-light development model has become the norm, another player has become an important part of the hotel sector – dedicated hotel management companies.
Instead of the brand taking care of everything – or putting their faith in independent hoteliers with little or no brand experience – the entry of these operators into the market means that there is now often a threeway split between management, asset owning and the traditional brand, with each party focusing on what they do best.
Nicholas Northam is executive vice-president international for one such company, Interstate Hotels & Resorts, which has been operating for almost 60 years, and manages hundreds of Marriott, Hilton and IHG properties globally, among many other brands.
“It’s pure,” he explains. “Investors can start investing in an asset class they might have been precluded from in the past because they didn’t know how to run a hotel and the brand can focus on being the brand manager.”
“As we own nothing, our focus is completely aligned with that of the owner, who employs us. Our focus is on understanding what they want and delivering on their objectives. We are not diverted by brand issues. We are not diverted by asset issues. We purely focus on managing hotels and we bring to owners expertise, experience, professionalism and systems that are all absolutely focused on managing hotels.”
Patrick Fitzgibbon, Hilton
RBH Hospitality Management’s portfolio spans brands including Holiday Inn, Courtyard by Marriott, Aloft and ibis Styles across the UK. Chief operating officer Neil Taylor explains that other benefits for owners result from the scale an experienced hotel management company brings to the table. “We give the owner a voice with the global brands as well as much greater purchasing power,” he says.
Meanwhile, the brands themselves can have confidence that their property – whether it’s a Hampton by Hilton or one of Marriott’s high-end collection hotels – is going to be managed to the brand standards it demands. “The brand standard is critical,” Northam says. “It’s really important for brands that each hotel with their flag on it represents the brand. It’s only as strong as its weakest link.”
The guest experience of a lifetime
Typically, a hotel management company’s work starts well before a new hotel becomes operational and includes everything from helping the owner decide which brand is most suitable for the site to working with the hotel brand to secure a franchise agreement. A commercial strategy will then be put together that reflects the style of the hotel, the brand and the location. But, in a part of the business that can seem dominated by financial metrics, it’s the people side of things where companies like RBH and Interstate claim they can really move the needle.
5-10 points
The amouunt that Interstate claims to drive additional EBIDTA into the hotels it manages.
Interstate
“People for us are huge; in fact, people are all we’ve got,” Northam says. “And people want to work for Interstate because their career can go much further than it would with a one-off owner because of the size and scale we have an as organisation.
“Great service is delivered by great people; it’s an old adage in the hotel industry. If you look after your people, they will look after your customers. We are all about the recruitment, the training and the recognition – focusing on looking after our people and making sure they look after the customers.”
RBH promises a similar approach. “One can get so mixed up in numbers and bottom line but you know what? If you get your customer service right, that’s going to deliver the bottom line for you,” Taylor says. His strategy to drive operational excellence at RBH-managed hotels is made up of five key areas – demand creation, profit improvement, culture, innovation and use of technology, and guest experience.
The latter is where his focus lies in 2019. “What we really want to achieve across our portfolio is a guest experience that wows visitors and creates not just satisfied customers, but customer advocates, consistently. Advocates will make repeat visits, become regulars, and recommend your hotel to those within their own circle and beyond,” he explains.
RBH is also moving to the ReviewPRO system to monitor feedback and performance across the portfolio via the platform’s Guest Review Index (GRI) scores. A study the company carried out with STR and Cornell University showed that a one point increase in GRI score could result in a 1.42% rise in RevPAR.
17
Number of different brands RBH operates across its portfolio.
RBH Hospitality Management
“This seems marginal,” Taylor says. “But when you look at it across an entire portfolio, it really stacks up. If the entire RBH portfolio achieved ~this increase in GRI score, it would translate to a revenue uplift of £3 million.” Of course, there are also drawbacks to having so many parties involved in one property. On top of the brand, the management company and the owner, there will often be an asset manager employed by the owner, Northam says.
This can lead to complexities and complications, which mean that much of his job ends up being relationship management.
Higher-end franchises
Across the board, the numbers speak for themselves. “They have to,” Northam says. “That’s all we do.”
Historically, Interstate has boasted generating typically between 5–10 points of additional EBIDTA into the hotels it manages. Over the past two to three years, more and more of these have been at the higher end of the market.
RBH, too, will open key high-end hotel projects in 2020 including Curio Collection by Hilton London Stratford, Canopy by Hilton London City and Westin London City, while from the brand perspective, Fitzgibbon says Hilton is certainly seeing more opportunity to franchise in its collection brands, which target independent hotels looking to unlock value by joining Hilton’s system.
“Curio Collection by Hilton is increasingly popular in the region. We now have nearly 40 hotels trading or under development under the Collection in EMEA,” he says. “The majority of these are franchise properties, with owners opting to use, often local, third-party management companies, facilitating access to our commercial engine and distribution capabilities, while maintaining their unique identity.”
The recently launched luxury collection LXR Hotels & Resorts is also likely to see a number of hotels operate under franchise agreements. Although it’s unlikely Hilton will cede control of its most luxurious offerings entirely.
“By their nature, luxury and full service hotels have typically more complex management needs, and so we’re often more comfortable managing ourselves,” Fitzgibbon explains.
That said, Hilton has established brand guidelines and a dedicated team of brand performance professionals who ensure that franchise and third-party management partners have excellent support when a property is franchised.
As Fitzgibbon concludes: “We have strong partnerships with third-party operators in EMEA and we look forward to the growth of both their and our businesses, and ultimately happy owners and investors who want to continue to grow using both models.”
