Brands moot contract ‘flipping’

The global operators were being encouraged to be more flexible in their contracts, offering the chance to flip between management and franchise, delegates at the Hotel Operations Conference heard.

Caution was urged in relation to funding, with concerns that lenders were more reassured by long-term contracts, rather than those which might change within five years.

Frank Croston, partner, Hamilton Hotel Partners, said: “I would expect to see more flexibility built into the contracts, to be able to flip from management to franchise, I think we may see an early adopter from one of the global majors. The world is changing too fast, do you feel comfortable locking yourself into the same contract for 20 years?”

The operators were largely open to the concept, with Paul Thomas, senior director of international development, Marriott International, commenting: “For the right opportunity, say the acceleration of a brand, in the right market, with the right owner – we would consider it.”

Philippe Bijaoui, chief development officer, Wyndham Hotel Group, added: “Flip to franchise? Why not. If you are good enough you will flip back.”

David Kellett, VP, head of development, IHG, said: “The longer term the better from a brand perspective. Our role is to be balanced and flexible. Long-term contracts build consistency, but there can also be alignment. We need to be more pragmatic.”

Steve Cassidy, SVP & managing director, UK & Ireland, Hilton, was more cautious, adding: “I would hope, with a property managed by us, that was a conversation that never needed to happen. If we’re doing a good job that wouldn’t come into the debate. The development process and the ongoing management process is a consultative process with the owner. It’s important that we join those dots correctly because we’re in a relationship for the long term.”

Bijaoui pointed to the role of the funder in the agreement, with the comment: “A lot of funders are eager for long-term contracts, they don’t want the owner to flip. Twenty years is a long time, but I think we should do a good job and keep the owner that way.”

Later in the day the subject returned to the debate, with Andrew Rouse, commercial development director, Vine Hotels, telling delegates: “Banks will price their risk according to a 20-year loan profile. It is hard to see what a bank would think if you could terminate an agreement in five years as they might see a lot of risk in that. If you think it’s unlikely to work for five years, you might be better placed to find a better brand from the outset.”

Vivek Chadha, managing director, Nine Hotel Group, added: “From an investor’s perspective, a loan agreement is five or seven years, so why not a franchise agreement? It’s important that a brand understands how our environment is going to change. I’m a big believer in brands and as they’re changing we should be able to shift, maybe change brand or renegotiate terms, maybe see how they can reinvest.”

Flexibility has already made its way into the market. Thomas Magnuson, CEO, Magnuson Hotels, said: “In the US employees can be terminated at will and owners think the same of agreements. To us even a 10-year agreement is a thing of the past. They need to be adaptable to the market, to the situation. Does it even need a brand, does it need a platform instead?”

One route to more easily-changed contracts was seen through the growth of the third-party operators, with Nicholas Northam, managing director, Interstate Europe, commenting: “Owners are wanting more flexibility and third parties can offer more flexibility in terms of contract terms.

Haydn Fentum, CEO, Bespoke agreed: “The big difference between us and the hotel companies in flexibility – you would be hard to find two management contracts which are the same.”

“We have much sharper pencils when it comes to contracts,” said Peter de la Perrelle, managing director, Tower Hotel Management.

The brands as well as the owners welcomed the third parties, with Bijaoui commenting: “If you want to grow in France, Spain, Italy, Germany, you have no choice but to sign a lease agreement. We have to work with white label companies who are taking the risk – we finance some. We signed 79 contracts last year in EMEA – and India – and we injected capital into some white-label companies.”

Driving the new entrants to the market was the move of hotels into the mainstream as an asset class, with Christian Mole, head of hospitality & leisure, UK & Ireland, EY, describing ongoing growth in transactions, with a “wall of money” drawn to the sector, but warning: “There’s general view that the brands aren’t good at managing profitability, particularly at the midscale. We’ve seen good results from moving from managed to franchise.”

Despite the support for greater negotiation between brands and owners, a step too far was felt to be a scale of declining fees as the property aged, with Thomas adding: “We have to be flexible, but are we going to move to a declining fee structure? I can’t see that happening.”

HA Perspective [by Katherine Doggrell]: The rise of the third-party operators has been a trend which much intrigues us here at Hotel Analyst, playing as it does to rebalancing of power between the owners and brands as well as to the growth of brands’ pipeline and attraction of the sector to real estate investors.

As they aim towards the dominance of the offering in the UK, inevitably they raise the spectre of whether brands should be operating hotels at all, or whether they should stick to knitting. Northam thought not, commenting: “If the brands decide they don’t want to operate any more, they run the risk of losing credibility when they tell owners how to run the hotels”. The brands can’t very well moan about the way the pillow is plumped if the only pillows they see are the ones they wake up face down on.

The third parties are, instead, very much pro the brands, with Northam adding that being brand agnostic came with its own advantages: “We have the luxury of seeing how each brand operates, which is an advantage”. In a sector not renowned for sharing best practice, there is much to like in those who cherry pick.

Additional comment [by Andrew Sangster]: Hotel operations are often overlooked as a value creator. Historically, the focus was always on the real estate with brand/distribution getting more prominent in the last decade or so.

So, the first pillar of value creation, real estate, has been complemented first with the emphasis on brands through the asset-light approach of the global majors and now secondly with the pillar of value creation that is operations.

In the UK in particular, this business cycle has seen the rise and rise of third-party operators and an increased focus on how things are run. Helder Pereira, CEO of RBH, one of the biggest UK white label operators, said, during a one-on-one during the conference that I conducted, that it was the recession and the availability of portfolios of distressed properties held by banks that gave his business a jump start.

Since then, however, the growth of white labels has relied more on organic contract acquisitions with owners seeing the potential of what the third-party operators bring. And this has been the case in continental Europe, notably in Germany, where the likes of Event Hotels have become established.

At the same time, the nature of this business cycle has meant that private equity did not have the opportunity to pursue its usual policy of buying low and selling high. The amount of distressed sales was comparatively small and pricing remained robust.

The typical PE play was, in past cycles, to take on the real estate, hold it for a while and then sell. The opportunity to buy low was often enhanced by the low rating given to property held in listed companies compared to that same property held privately.

The public to private arbitrage has not been there this cycle, nor the same level of obviously cheap property, and so PE had to roll up its sleeves and do some heavy lifting on the operational side. The great mantra here was to obtain a platform from which PE could create synergies through acquisition.

This worked for the early movers like Starwood Capital but soon everybody was at it. If several bidders are factoring in a premium for the platform, anyone looking at just the real estate opportunity would struggle to compete on price. And so it has proved.

Pereira points out that most of these PE platforms should not be considered examples of proper third-party operators. Shorn of the real estate, the platform itself has little value.

The sustainable third-party operators are those which are able to demonstrate to independent owners the value of their services. And RBH does appear to have done just that.

This has certainly been helped by the push of global brand major hoteliers to grow franchising but it is too simple to declare that the global brand majors are exiting management, as the panel of global majors showed. The message that came through was much more nuanced.

Management is, and will remain for the majority, a core competence. For a small number of the global majors, namely Wyndham and Choice, management is not a core part of the business model. But these companies make no secret of their franchising focus.

Thus we will continue to have a rich and complex landscape in the hotel sector for some time. We have the global brand majors making a dash for scale and whose business model is focused on strong net system growth. There are the third-party management companies who both complement the global brand majors and compete with them.

There are the smaller national and regional chains who are positioned between asset-light growth but remain focused on asset ownership and gradual expansion through this route too. Plus there is the growing band of institutional investors pumping money into hotel and hosted accommodation real estate. And myriad other business models involving brand, operations and ownership in some combination.

What matters in all cases is understanding how the value creation works and understanding where it is working best. Europe now has focused hotel brand companies, it has focused real estate owning companies and now focused operators are gaining a hold. For the latter, however, we still need to see an active transaction market. When (and I believe it is a case of when rather than if) it emerges, this niche will truly have come of age.


Hotels told to multi-skill employees

The hotel sector was trying to do more with less in terms of staff, as the pressures of rising wages and, in the UK, Brexit, exacerbated the war for talent.

Delegates at this year’s Hotel Operations Conference heard that the challenge facing hotels was maintaining customer service and brand standards while increasing retention.

Per Denker, COO, Zleep Hotels, said: “In the Scandinavian countries we have very high salaries so staffing is not a new discussion for us. At Zleep Hotels we merged a lot of functions in the hotel, so you check in and check out at the same time. The staff are still there but we try to give them a multi-functional position. They help people with the check in, they can work the bar, they are more like a host than a traditional receptionist.”

In four of the company’s hotels there are now no staff overnight. Denker said: “Those hotels are supported by the other hotels nearby which are running 24/7. If you have an emergency, you will not be alone.”

For Steve Cassidy, SVP & managing director, UK & Ireland, Hilton, the issue of staffing was also not new. He said: “There were a lot of headwinds on employment before Brexit. We need to be innovative in terms of finding a solution. We need to be better at recruiting and retaining employees.”

At Dorchester Collection Academy, Beth Aarons, global director, said that the company had been impacted “quite dramatically” by Brexit. Aarons said: “We saw a change overnight in applications. We had already changed our strategy to be UK-centric, against people who were passing through for a year. We’re no longer competing just with hotels, but standalone restaurants and Airbnb, so all of us have to look at how we can use technology to have the right people in the right place at the right time.”

While hotels were demanding more staff, staff themselves were becoming more demanding. Aarons said: “We really listen to our employees. We have been using engagement surveys for a number of years, however, the information wasn’t always as relevant, so we now take employee feedback in the moment.

“We need to communicate to the team why we can’t do something, as much as when we can. Two-way communication is incredibly powerful.”

Janet Roberts, lead culture coach, Cycas Hospitality, added: “We can’t stay as what we were five years ago. The teams want interaction – we have an app which is inclusive and encourages feedback.

“We talk positively, we don’t talk about turnover we talk about retention. You can have the best pay in the world and the best benefits but so does everyone else. We have a set of values that creates fun – from the top. We have audition days which give us a chance to see them and they can get to know us, which is important.

“We also changed the appraisal system and we now have a monthly conversation with a quarterly objective – they set their own objectives and the bonuses are linked. We can train the skill, but we can’t train the attitude. People just want the greatest environment to work in and that’s what we try and do.”

Denker added: “We have our own academy so we train our own staff, but we have also found that if we consult with the staff about what we need to do, there is a less need for training, if we collaborate.”

Another proponent of a fresh approach to recruitment was Thomas Dubaere, COO, Northern Europe, AccorHotels, who said that guests were now looking for “personalised service” in an environment where “staff engagement is the first KPI for success. It’s much different from what we have been doing for the last 100 years.”

“I’m here to ask you to throw away many things,” he insisted, starting with hotel manuals and scripts, and even applicant CVs. As in other industries, he said the hotel sector needed to recruit based on passion.

As part of the physical changes at its properties, Accor was ripping out reception desks, and with it the desktop computers of old. New format properties were mobile-enabled, giving staff tablets or smartphones to operate from. And, he said, this had two benefits. First, “we’re putting our guests in front of our people,” enabling a more personalised service to be delivered. Second, staff found mobile apps much more intuitive to use, substantially reducing training requirements.

Dubaere said the change required team members to be more fluid and reactive in their dealings with guests, something that was harder to train for. “There’s a lot more psychology in training our people,” with teaching technical skills being “the easy part.” And with such change, he put a positive spin on staff churn. “Let’s be honest, we have staff turnover – it gives you the opportunity to recruit differently.” Outside the hotel sector, Mike Williams, chief people officer, Byron Burgers, made the case for well-motivated staff driving revenues and building the brand. He said: “Private equity are interested in growing the business through expansion – so talking to HR it’s vital that you have that commercial agenda. One of the areaClick or tap here to enter text.s which can drive 3% like-for-like sales is having brilliant managers. Our training strategy protects our brand – we have an induction programme before they even hit the brand.

“There has been a war for talent – pay and reward strategies are now really relevant. We need to have a point of difference. If we grow 50% of our management requirements from within, that saves on on-boarding costs. The way that you treat people becomes correlated with how the brand is viewed and making HR clear about that relevance really helps.”

Williams concluded: “We want people to do the right thing when we’re not looking.”

HA Perspective [by Katherine Doggrell]: Frank Croston, partner, Hamilton Hotel Partners, never a man to have to rummage down the back of the sofa for an opinion, told the conference: “I sometimes think that hotel companies are less consumer centric than they should be” and, with the pressure on hotels from all sides, it’s easy to imagine the customer losing out in the need to cut costs.

The over-arching message from this year’s event was that service remains key to customer happiness – and happiness can be directly correlated to repeat bookings – but service doesn’t look like it used to. Service now is getting rid of friction points.

Look at Airbnb. Some of the best service this corespondent has received has been from Airbnb hosts, but hosts that have only existed online. This has ranged from keys delivered to friends because of changes to transport details, food bought in so that it was in place to feed late-night arrivals down to good recommendations for local restaurants. All service which is well within the purview of hotels, but rarely done.

The challenge for the hotel sector is not so much delivering these small flexibilities and considerations, but finding the staff with the mindset to do so. The sector needs to changes its image if it wants to attract those who can think with agility and it’s not just a matter of real-time feedback to line managers.

Hotels aim at the margins

While hotel revpar continues to grow, margin growth is harder to find as costs continue to rise.

Delegates at the Hotel Operations Conference heard a range of suggestions to help improve the bottom line, both by improving revenues and cutting costs. Times change, and as Simon Allison, chairman, Hoftel, pointed out, it’s a while since hotels earned 10% of revenues from telecoms, and made a profit on laundry services.

There was no shortage of innovative ideas, many based around smartphone apps. Recent market newcomers promised the potential for renting rooms by the hour, selling meeting rooms online, upselling early check-ins and renting car parks to non-residents.

Hotels had plenty of opportunities for generating non-rooms revenue, and Laura Rafferty-Trow of Spectrum Solicitors said buildings often had potential for the siting of rooftop mobile phone masts, for advertising billboards and for energy generation and storage. “ It’s not rocket science, but there are some bear traps,” she warned of the masts and billboard opportunities, but with the right contracts in place, these could deliver pure additional income with no operational consequences. A typical mobile phone contract is 10 years long: “We’re doing deals for propcos, opcos and brands.”

She also noted that while many people were aware of using rooftops for solar PV energy production, fewer knew of the opportunity to site battery storage units on their properties. These could store cheap energy which could be used when mains supply was expensive, or could be connected to the grid to balance local supply – something that would become more of an issue as electric car use grows. “There’s a big opportunity there,” she predicted.

Neeraj Handa, group director of Cairn Group was already exploiting several additional revenue streams from his national portfolio of hotels, with phone masts on some of the buildings. He was also partnering with electric car company Tesla, who were fitting fast charging stations at some hotels. “It’s a food and beverage opportunity, as the drivers will be charging their cars for 40 minutes or more.” Cairn was also exploiting the potential of renting basement spaces to gym operators, and looking at concessions for restaurants and in lobby spaces. The company is also testing bidding apps, to allow guests to upgrade their reservations.

Also looking to make more of lobby spaces was AccorHotels, with its fresh approach labelled AccorLocal. Thomas Dubaere, COO, northern Europe described plans to improve utilisation of lobby spaces and underused meeting rooms. As examples of the concept, he said group hotels would be looking to provide an after-hours collection point for local retailers such as florists, and would be encouraging local groups such as yoga classes in, to use meeting rooms during the evening. “There will be a cost, but it will be less than during the day,” he promised, to promote take-up.

However, Allison was sceptical of some of the innovations: “The problem is, many of these are just a commission, so is it worth it? I think there will be quite a big turnover of ideas, some will work, some won’t.” And Handa added: “The problem is, none of the ancillary rooms are as profitable as the bedrooms.”

Some of the new idea providers were on hand to explain how their wares deliver superior returns. Just Park, which runs via an app, started out as a service renting people’s drives but today offered a range of convenient parking options for users – and rents out underutilised hotel car park spaces. “Our platform allows hotels to generate revenues,” said the company’s Guy Cohen, with no cost or management consequences for hotel management. “There’s one thing that hotels need, that’s visibility – and we’re adapting to hotels in different ways.”

Food delivery service Deliveroo has also moved into the hotel market, ironically after noticing its service was being used by hotel guests. The company links takeaways with customers who would like food delivered to their door, and has adapted its service to replace room service. Hotels can create their own menu, served to the guest digitally or in paper form, and once an order is taken, Deliveroo drops it to the hotel staff for a personal last stage delivery. Hotels have the option to add a service fee to prices, while Alberto Lo Bue, head of Deliveroo for Business said there was a cashflow advantage as hotels take payment on order, and settle up with Deliveroo in 30 days. “We want a guest in a hotel to have a better experience.”

Never mind what’s going into the bucket, plugging the holes is equally important. A panel reviewing cost reduction strategies noted that, on some fronts, hoteliers have barely got started on containing costs. “Sustainability is still a very novel concept for the hotel industry, I would say embryonic,” said Benedetta Cassinelli, joint managing partner at Considerate Hoteliers. Her organisation focuses on workshops that help clients enact change to reduce resource use, thus saving costs.

One hotel, for example, changed its shower-heads, and invited guests to a free drink if they requested not to have daily linen and towel changes – saving an audited 41% on water use after six months. But sometimes, it’s not just the cash saved that matters. Cassinelli is working with the Qbic hotel brand, to substantiate its marketing claim of being London’s greenest hotel.

Andrew Parsons, director of business development at PSL, helps hospitality businesses keep a cap on food costs, improving profits in the F&B function. “It can be a profit centre for a hotel,” he promised, while those who fail to watch seasonal price moves can end up losing out. “Have a look at your basket, negotiate with suppliers,” he advised, and watch for seasonal trends that send the price of individual food items up; a good chef needs to change their menu to adapt to what is in season, and therefore better value. Regular recosting of dishes, and a daily “food flash” that records costs and takings, are key to measuring profitability.

While there had been a trend towards importing high street restaurant brands into hotels, Parsons warned this was not always the solution. He pointed to two provincial hotel clients, where their own restaurant offer had become an in-demand destination for local people, creating a profit centre independent of hotel guest demand.

Denis Brennan, a director at cost reduction consultancy Auditel, said credit card transactions were a key area to look for savings, while also being an area where the service offering needed to meet what guests demand. “It is a minefield, difficult to follow and understand,” with the waters muddied recently by European legislation. Added to this, the mainstream card service providers each have their own statement formats that are “masterpieces of confusion marketing”. Service providers don’t generally offer a volume discount, and there are some more comfortable with the hotel sector than others.

In a changing environment, hoteliers also needed to decide what choices they offer guests. The convenience of fast guest checkout had to be set against Visa charging up to 1.8% for “customer not present” billing, versus a regular 0.4% fee for a lower risk face to face transaction. “You need to decide whether the service is worth the cost.”

Other recent changes included the lowering of Amex card fees. The payment method had been shunned by some businesses in the past, but that was changing: “I don’t think you can run a business by refusing Amex,” he warned. “And you have to consider new technology.” With more hotels offering app-based bookings and room keys, payment by smartphone will become more prevalent. “The terminals have to be right for the nature of the business.”

Frazer Durris, managing director of energy consultants BusinessWise Solutions, said too many businesses focused on picking a fixed price energy contract, looking for certainty of costs, when it could actually be cheaper to adopt a more dynamic approach. In addition, there was always scope to look at actual usage, benchmarking performance and implementing changes such as installing LED lighting, and sensors to reduce consumption. “A good energy management strategy will make a 25% impact on costs.”

But, for those that did team up with the right experts, there are considerable savings to be had. Durris suggested a potential overall 32% saving on energy, while Parsons said his company typically delivered a 10% to 15% saving on food costs, “and it’s like-for-like on quality”. Brennan said one client had cut card transaction costs by 40%, though this was not typical and savings varied a lot. But in one recent case, involving a client still in contract, he had still negotiated an immediate 18% reduction in fees.

HA Perspective [by Chris Bown]: Times have changed, and as the hotel becomes a stopping off point where so much else of our increasingly decentralised lives continue to happen, so hotels need to be fleet of foot in adapting to those changes. Whether it is accepting that guests order takeaways rather than room service, or buy a new shirt rather than pay for laundry, change presents opportunity.

The irony is that some of the people who use Just Eat, Deliveroo or same-day Argos delivery actually work within hotel companies – they just haven’t been given the space to work out how Millennial lifestyle changes impact the businesses they work in.

One massive change is the decentralisation of energy supply. Never mind putting photovoltaic cells on the roof and a windmill in the corner of the plot, hotel landlords now need to be considering whether to put battery stores in those unused basement parking spaces. This isn’t sci-fi, it’s happening now, with start-up Pivot Power scouring the country for battery storage sites that will double up as car charging stations.

The move to electric cars also presents F&B opportunities, as Cairn’s Handa noted. Recharging drivers will recharge their bellies in the time it takes to top up their batteries. And Tesla drivers can afford more than a Tesco value snack.

And it has often been noted that, in a world where brand, opco and landlord are not ideally aligned, in the hotel sector it can simply be too difficult to work out whose job it is to go green. Even though the payback for many upgrades is quick, landlords are reluctant to spend.

But that “save the planet, put used towels in the bathtub” card beside the washbasin won’t cut it any more – there’s major money being wasted, and both individual and corporate guests are starting to ask about the sustainability agenda. What was no-one’s job is becoming everyone’s responsibility.