HOTEL ANALYST CONFERENCE COVERAGE 2017
Agreements Swing In Owners’ Favour
Landlords appear to be winning greater concessions from the brands, in franchise and management agreement negotiations, as the balance of power moves more in favour of the hotel owner.
Franchise deals are moving to shorter durations, or come with break options, while key money is again being offered to sweeten management agreements, delegates at the Hotel Operations Conference heard. While the legal fundamentals of agreements are unchanged, new clauses and options are being explored; in many cases, this gives all parties the opportunity to exit, should a hotel not be performing well under an agreed contract.
Vivek Chadha, owner of hotel group Nine Hospitality, said he needed to balance the long term view with other, short term issues. He favoured a 15 to 20 year commitment to a brand. “As an owner, you invest a lot. “If you don’t have faith in the brand working, you shouldn’t sign into the brand.”
However, he said he needed a shorter agreement. “ Twenty year leases are too long,” particularly if compared with bank finance commitments of a maximum five years. “Having an exit clause will be much more important for the owner.”
The brands demonstrated their willingness to be flexible. Peter Till, managing director of Choice Hotels UK, said he had spotted a migration of clauses from management contracts, into franchise agreements, though Choice is trying to simplify things: “We’re starting to put together a tri-partite agreement.”
“Our terms are one, three, five and 10 but if something’s not working out, we can address that,” said Till. “Franchisors need to become more flexible, and be much more involved with the property. The pendulum of power has been shifting to the franchisees, we are seeing shorter contracts.”
Tim Walton of Marriott said that, despite absorbing Starwood, the company still needs to grow to deliver shareholder value. And that growth will predominantly come from one route. “We expect 85% of our growth in Europe to come from franchising over the next five years,” he promised. “Franchising, we see as a salvation.” He said legal agreements were getting simpler, “and we’ve also become less precious”. He said financial incentives being offered included fee discounts, key money and rent support – “it can be quite significant”.
One thing Marriott will not be doing, is signing leases. “Leases are like toxic waste to Marriott,” confirmed Walton.
“To be honest, there hasn’t been much evolution – the agreements I see today look pretty much the same as 20 years ago,” said Babette Marzheuser-Wood, head of the franchise group at Dentons. “It is a form of joint venture, and it has to have a bit of give and take.” The changes she was seeing, however, were more walk away options, and break on sale clauses, though “it’s usually for a fee”.
Chadha revealed his thoughts on selecting a brand. “The first thing I look at, is how many hotels they have – we don’t want to be a guinea pig.” And, he said, the choice of a brand depends on location: “In provincial cities, a brand is very important.”
Julian Tee, director of Hetherley Capital Partners, said going unbranded “is a relatively bold move at the moment”, as it means relying on a local market, and on your own website winning bookings. “It’s a tough fight, but in some markets it’s worth fighting for.”
Chadha said he often benchmarks his own situation against that of other franchisees of a particular brand, checking with them to ensure he is not offered inferior terms. “The biggest thing is transparency” over issues such as costs. “How are they investing in the brand, what are they spending on marketing and so on.” But such clarity can sometimes be difficult, as Till explained: “Marketing fees go into a pot, so it is difficult to split out.”
Tom Magnuson, who has grown a soft brand through licence agreements, had a clear view on what the market needs. “Everything else in the business has changed – the situation calls for much more flexibility for owners. We’re seeing people happy with three to five years.”
Tom Page, global head of the hotel and leisure group at CMS, said management agreements remained a popular way for brands to expand. He noted that NoMad, Ace, Hard Rock, Citizen M and Malmaison are all offering management agreements to landlords, in a bid to expand their portfolios. And with that push are coming innovations. “Emaar recently announced they are offering base fee free management contracts – this is an interesting development.” Geared incentive fees are now common, while key money is being talked about once more.
James Munro of Arc Consulting Partners said his operational experience was that “key money can create some real goodwill with an owner – but in the long term, the owner tends to forget.”
Tee said of the Emaar offer: “It’s a headline that fills me with dread – I would advise anyone to read the small print to see where they will claw it back.” His business would look at alternative opportunities to earn profit from a management agreement, such as a reflection of the property’s value uplift on sale.
A panel discussion weighed up the merits of wider metrics for deciding management agreement recompense. Peter de la Perrelle, managing director of Tower Hotel Management, said there was “a good argument” for widening the metrics used to measure incentive fees. This might well include guest feedback via internal measures, or scores from Tripadvisor. “Flexibility is key, you have to align the agreement with the owner’s outlook.”
Tee said that it often demanded an owner invest, “to ensure metrics are worth measuring”. But ultimately, he noted that a good guest experience is the one key that ensures greater profits for everyone to share.
HA Perspective [by Katherine Doggrell]: The argument over who needs who most is likely to rage off between owners and brands, but one area where there has been movement is in the options available. It’s a veritable Airbnb out there, with one-year agreements the stuff of glorious fantasy or waking nightmare five years ago, depending on which side you were on.
Fuelling this is the changing profile of investors and their shifting requirements. No longer does the family owner want to build up a glorious portfolio of Hiltons to pass down to the kids. Brands are being bought in for quick fixes on struggling sites, as a route to cheap procurement as well as distribution, in short, for every situation there is now a brand which can help with short term, as well as long-term goals.
The most telling shift in the position of the brands is how eager owners are to be able to market their hotel free and clear of the flag when it comes time to tell. The value of the brand is while it is operating and one owners knows that the next wants to make the choice themselves. It all means that brands cannot rest on their laurels as the beauty parade never ends.
Additional comment [by Andrew Sangster]: There is a paradox between what a franchisee wants and what they need. Having short-term contracts, preferably ones that can be terminated at will, seems like an owner’s dream.
But this only works if the owner can terminate while the brand cannot. If brands can terminate contracts too, as most likely, in most legal systems, they would be able to do if the owner can, the result may well be a destruction of value for owners.
Imagine building up a successfully trading portfolio of a major limited service hotel brand under franchise. The brand owner sees the huge amounts of cash being generated and decides that it is time it got a bigger share. It can terminate the contracts and offer new contracts to other owners on more beneficial terms for the brand owner. If the owner has the right, then, in a balanced contract, the brand would have the right to terminate too. Ouch. You don’t always need what you think you want.
Third Parties Face Growth Threat
The third-party management sector in Europe is growing in Europe, delegates at The Hotel Operations Conference, hosted by Hotel Analyst, were told.
With a product relying on tight margins, there were concerns that expansion could run the risk that efficiencies could be lost to size.
At Interstate Hotels & Resorts, Steve Terry, VP development, UK, told attendees that the company’s ambitions lay in Europe, adding: “Europe is quite difficult. It’s all well and good to say that you’re going to expand here and there, but how can you support that? Is there an infrastructure where you can add value? At what point do you create the office in Europe to support growth? The ultimate plan is for Interstate to be as big in Europe as it is in the US. The US is a more transactional market – you win 80 deals in a year but lose 70, while Europe is a growth market.”
Nick Turner, managing director, Bespoke Hotels International, also described ambitious growth targets, commenting: “We see lots of growth, we’re looking at doubling our size to 400 hotels in the next five years. We’re fairly close to a Chinese deal to take Bespoke into China.”
Brian McCarthy, managing director, Valor Hospitality, challenged the size of the bigger players, adding: “If your organisation is the perfect size, you can drive the intensity, but some of the big companies risk being too bureaucratic.”
Faced with the question of whether growth meant that the savings and efficiencies offered by a third-party management group were under pressure, Terry said: “The people in our organisation are entrepreneurial people – that’s the most important thing. We can’t become too corporate.”
The organisations insisted that friction between the brands, owners and third parties was a thing of the past.
Terry said: “We do not insist an owner has a brand – 50% of my signings this year an independent. It’s all about what works for the owner – we debadged a hotel last year and the performance increased quite considerably. Not all brands are great, not all add enough value to justify their fees.
“Our value is purely our fees. From our perspective that is aligned directly with the owner because a lot of our fees are profit. That’s why we have to generate profits for the owner, whereas for the brand the value is in the brand.”
McCarthy said: “It should be a collaborate approach with common goals – then all the politics goes to one side. It should be performance, not politics. We work with the brands and produce the goods We only want to work for a small number of owners. The brands take their fees from the top-line revenue and the owner gets their value on exit. We don’t need someone to come in and dice and slice the P&L. Get a common agenda where everyone benefits. I believe owners will create their own platform.”
The owners remained the priority. John Stuart, COO, Redefine BDL, said: “We are totally aligned to the owner, we know what the short, medium and longer-term plans are.”
Turner added: “There are lots of niche spaces not being catered for in the UK by the brands. We are unemotive about assets – we drive our own revenue and manage it, without tension with a brand. We find it is more profitable to make the hotel the brand.”
Echoing McCarthy’s point, Charles Human, managing director, HVS Hodges Ward Elliott, told delegates that he saw portfolio owners creating their own management platforms, taking Starwood Capital and its Principal hotel group as an example.
Human added: “There is a lack of third-party operators, especially in the EU. US investors are used to the model and bringing it over. Investors will increasingly acquire or create their own management platforms to increase control and returns.”
Investors were, he said, drawn to unencumbered and leased hotels – with a strong covenant – which he described as the most liquid assets. Human said that third-party managed sites transacted more often – making up 4% of deals in the UK in 2012/13, to 30% in 2015/16,
Turning back to the flags, Human pointed to branded managed hotels’ fees at 10% to 13% of rooms revenue, while third party fees were at 10% to 12%. “The numbers,” he said, “are compelling”.
An increasing number of owners are feeling compelled.
HA Perspective [by Katherine Doggrell]: The third party operators have caught the imagination of owners, who have felt themselves starved of a proper say in the action for too long. Someone who can represent their interests in the mystifying world of hotel operations is long overdue.
But it’s not a done deal and there remains much to debate between the cost of a brand against the cost of a third party plus franchise. Later in the day Peter de la Perrelle, managing director, Tower Hotel Management, took issue with Human’s figures, commenting that “you get what you see with a white label” while the brands came with the potential for add-ons. Tom Page, global head of hotels & leisure group, CMS, said that, at least with the brands there was “a single throat to choke”.
So it’s all good, positive imagery. But as the third parties get larger they are at risk of falling foul of the same crimes as the brands are accused of: Being too large to keep an eye on the minutiae of the bottom line. Of course, scale also brings bargaining possibilities and procurement opportunities.
Meanwhile, owners are starting to think that maybe this operations malarky isn’t so hard after all. Later in the day Nadler Hotels’ CEO Robert Nadler told how working with the OTAs and some off-the-shelf software was filling rooms and London & Regional Properties’ Henri Wilmes described how the group as been running its own sites and it’s all turned out very pleasant, thank you very much. As the song says, sisters – or in this case, brothers – are doing it for themselves.
Additional comment [by Andrew Sangster]: The rise and rise of third-party operators is a well-documented phenomenon. But the reasons to explain the change is subject to much debate.
Some claim that it is due to a failure of the big brands to be effective managers. While it is true that not every hotel can be the best run within a portfolio, the evidence to support the contention of a complete meltdown of the management capabilities of the global majors is weak. As ever, the reality is rather more nuanced.
For the global chains, it is true that they are going to see the best returns from franchising. But for most, they know that managing hotels is integral to their mission to be a leading hotel company.
Sure, there are pure-play franchisors like Choice, but those global majors with existing strong management operations seem intent on maintaining this part of the business. The idea is to grow franchising but also to grow management.
One to watch is the swingometer of revenues from management versus revenues from franchising. Right now, it is clear that management is an integral part of the business model. This is not a case of having separated off real estate assets, operations are set to follow.
In developed economies with a strong business culture that supports franchising, it would be a foolish brand company that did not pursue franchising as the dominant growth strategy. But alongside this, it is perfectly reasonable to simultaneously be growing the managed business.
The fast food industry is an instructive example of how company-run versus franchised can play out. In the UK, McDonald’s has 1,250 restaurants of which just over two-thirds are franchised. Despite a strong and well-established franchise community, McDonald’s has chosen to keep a substantial portion of its restaurants directly under its control. Why is the hotel industry going to be any different?
Profits Slip Away
Hotel operators continue to worry about the challenge of improving productivity – trying everything from automated check-in to grab-and-go breakfasts to cut costs. But across Europe the sector continues to see profits slip, and an obsession with revpar may be the reason.
Pointing out the necessity for action was Jonathan Langston, the co-founder of Hotstats. In a detailed presentation, he noted how hotels have seen a continual erosion of profits over the last decade. He argued it was, in no small part, down to an unhealthy obsession with using revpar as a performance measure.
“Hotels are working harder, for less reward,” he noted, showing that non-rooms revenue had declined in many cities. He took a closer look at hotels in Prague and Vienna, because “both of these were the darlings of Europe.” Prague is still suffering from the oversupply delivered in the last boom, and as a result, revpar is still EUR10 below its previous peak. The result is similar in Vienna. While not suffering from overbuilding to a similar degree, the market saw a major decline with profit per room falling by 30% in just one year.
“The focus on rooms has under-optimised performance,” said Langston. “The pursuit of revpar has cost EUR340,000 per hotel.”
One area where costs have risen markedly is in “the spend on getting business through the door”. This spend, often to OTAs, has meant the UK regional market, for example, seeing gross operating profit decline since the 2000s, and only start to recover in 2013.
One issue for every owner is choosing the right brand, and Hotel Operations Conference delegates heard three pitches from large, medium and small operators. Philippe Bijaoui, chief development officer EMEA for Wyndham, said scale was a big benefit. The group offers a wide selection of brands at differing price points, and has 50 million members in its loyalty programme. Bijaoui cited examples where a rebrand to a Wyndham flag had delivered immediate benefits to one property by way of reduced OTA commissions, and a medium term benefit as loyalty programme guests started booking into the reflagged hotel.
Midsize player Deutsche Hospitality has underlined its aspirations with a corporate rebranding, and by expanding from 87 hotels in 2011, to 130 today with a strong pipeline. “We will look at lease, management and franchise,” said Claus-Dieter Jandel, the group’s chief development officer. Alongside its established Steigenberger four star brand, it has grown IntercityHotels as a limited service offering, and more recently launched boutique brand Jaz in the City.
Representing the niche player was Robert Nadler, who has built his eponymous UK brand in London and Liverpool, with Manchester on the way. “If you’ve got a big box, you’ll be better off with a big brand,” he admitted. However, he said that OTAs help small hotels market effectively, adding: “There are enough tools out there to help us compete with the big brands. OTAs give me enormous reach, and their banner effect really works.” But for a landlord, he said Nadler could offer more, including vital linkage with local businesses: “We work with the local community as our food and beverage offering.”
HA Perspective [by Katherine Doggrell]: The vagaries of hotel KPIs have long troubled the sector, as the bedroom-is-all approach has many owners perplexed when their brand demands only the shiniest of chandeliers for the ballroom.
The rise of the OTAs has helped focus the minds of all involved, as the cost of selling that room rises and the need for ancillary revenue gets ever-more pressing. This has meant more innovative F&B but also, as in the case of AccorHotels’ Joe&Joe, a new way of looking at rooms (with a nod to the hostel market).
For the brands, the message is being shouted ever-louder in their ears – every element of the hotel must be made to perform and owners are watching closely. Last year’s drive to book direct came at a cost of owners and, as they show no sign of retreating on loyalty discounts, scale is also being touted as a bargaining chip with the OTAs. As the big brands play on their distribution strengths they are playing the same game as the OTAs. Whether they will claw victory this time depends on whether they can defeat their rivals in the march for scale.
Facing The Productivity Challenge
A major issue vexing participants at the Hotel Operations Conference, was how to keep pace with rising costs, in a bid to maintain profit margins. With the sector’s profits seemingly on the slide, any opportunity to improve costs and productivity will be in sharp focus.
One major cost in the hospitality sector continues to be that of personnel, and a Hotstats presentation noted that payroll can easily absorb any uplift in revenues. In the UK, that cost has come under greater pressure thanks to the introduction, and uplift, of the minimum wage, as well as the worries over Brexit and its potential to encourage mainland European workers to leave the UK and return home.
Hilton’s Steve Cassidy argued the brands have done a good job. Hilton created nearly 20,000 jobs in 2016, and offers low skill entry points as well as a career stream for those want one. He said the company directly employs lots of people, as it directly manages a good quantity of its properties, including 65 in the UK alone.
But he warned: “Arguably the people and talent challenge is more complex than ever before.” In particular, rising costs are a serious pressure. “We have a fabulous industry that offers opportunities galore – perhaps we haven’t sold it well enough.” He said the sector needed to have a “compelling proposition” to attract talent.
Executive search specialist Lesley Reynolds said the sector had no image problem at a senior level: “At the senior end, we are able to attract individuals from other sectors.” But it needed to reward young talent in a way that is relevant to them. Otherwise, they will simply head for another business that does offer such rewards.
The issue was reflected in a presentation by Anna Pollock, the founder of Conscious Travel, who argued that successful businesses need to move away from focusing purely on profit, in a world of connectivity, unpredictability and ambiguity – and where Millennials need considering not just as customers, but as staff. “How do we align our businesses with what matters to people?” Julia Fenton, CEO of Business HorsePower, warned that 70% of staff are typically not engaged, and that is a big issue for employers in the sector.
Chris Mumford, managing director of Aethos Consulting Group, said that “the war for talent has been around for a long time.” Luxury hotels in London typically see a 35% turnover in staff annually. “There are a lot of things that people could be doing better.” He suggested the big brands need to be flexible on career paths, meeting the aspirations of team members rather than shoehorning them into a pre-planned schedule.
Aside from the ongoing battle with the OTAs for online business, there is also the potential for improved productivity from smarter working. Mumford said artificial intelligence held promise. “There’s quite a lot of places where tech will have an impact.” His own business is exploiting ways to automate the process of filtering applicants in the recruitment process. “Linkedin has probably replaced the CV,” he added.
Also, a fan of smarter working was Patrick van der Wardt of Amadeus Hospitality. “Personalisation is key in loyalty,” he insisted. There needs to be a central guest profile, with information that allows for targeted offers. “The problem currently is the data is everywhere, and not in one place.” Guests are generally happy to share data, he noted, and consumer opinions have shifted even in the last couple of years as guests come to expect companies to behave more smartly: “The creepy factor is gone.”
“The hotel industry has been very slow to personalisation,” said Avvio CEO Frank Reeves. “Consumers have an expectation of personalisation.” It enabled quick wins, and Reeves suggested a “focus on advocacy” to encourage sharing on social media, and using moves such as giving guests discount codes. The challenge of finding customers on the internet remains a challenge as ever. “Organic website traffic has fallen off a cliff” and so the conversion rate is key. He said the behaviour of the OTAs also encouraged consumers to move in new directions: “We’re seeing cancellation rates up across the board.”
HA Perspective [by Katherine Doggrell]: Brexit has slipped for a moment from the election campaign, as the horrifying events in Manchester rightly took precedence, but it has never left the mind of the hotel sector.
Staffing is an issue which has been building since the sector launched, with the idea of a bed you could sleep in, but didn’t have to make yourself. Issues abounded, but have never been resolved – although EasyHotel had a good go when it tried to offer a discount if you hosed the room down yourself.
The sector leans heavily on immigration for staff and, despite chat of barista visas, it knows that it is not a priority of the government, which, if anything, is likely to point to an opening-up of jobs for UK citizens as a result. If UK citizens were in any way inclined to work in the service sector this would be an argument, but, as they do not, bed-making robots it is.
The result is likely to lean heavily on technology. Greater efficiency in all matters which will mean less staffing required at the lower end of the market – an end which is likely to see a greater demand as the wallets of the British are pressed by Brexit in any case. And, in the areas where there simply has to be a cocktail waiter and two staff on reception? Time to get your wallets out.
As Nadler Hotels’ Robert Nadler told us during the lunch break, the sector has to stop moaning about the cost of the new National Living Wage and show its staff that they are valued by a sector which has leaned on the cheap option for too long. As the conference heard, options such as dual-branded sites are saving cash in back-of-house. Those savings should be reinvested into people, through pay and training, if the sector is to be viewed as a career and not just a student stop-off point.