There are many opinions on what makes a good management company: One hotel owner might say, “Excellent returns on my real estate.” Another might say, “You’ve created a fantastic product I can be proud of.” A management company CEO might say, “Our income increased this year;” a guest might say, “It’s a cool place to stay.” All these statements could indicate a good management company, but which of these are the most important? The following hotel management systems are available:
- Owner operated (no brand).
- Lease contract.
- Franchise contract (owner-operated with brand).
- Management contract (third-party operator).
With a management contract, the owner orders services from a professional third-party operator, so it’s from this point of view that we shall evaluate what constitutes a good management company.
By market capitalization and number of rooms, Marriott International occupies first place among hotel chains with its message to owners being this:
“Our global strength is your advantage. Marriott International is the world’s largest travel company, offering unmatched choice for guests and driving unrivalled value for owners. With our expansive portfolio of brands, dynamic sales and marketing platform, and a global scale that drives efficiencies, our owners benefit from a clear competitive advantage and opportunity to maximize each hotel investment.”
Let’s review this:
- Recognition: A brand the audience will recognize.
- Territorial reach: Cross-regional network.
- Product: Resonating with your guests. This can be design, product aspects, services, standards, procedures and systems.
- Distribution system: Driving traffic and revenues to the properties.
- Organizational structure: Support where and when needed. In short, a ready system that saves time and mistakes.
- Competitive advantage: Has a recognizable advantage versus competitors.
- Maximizes investment returns (return on investment): Delivered through a higher ability (brand/system trust) to leverage increased efficiency and better capitalization.
In addition, they should deliver:
- Human resources: Attract better staff, retain them longer and increase their skill level faster.
- Statistical data: Provide references that highlight positive and negative operational aspects.
- Best practices: A knowledge pool.
- Control systems: A structure and system that monitors and directs change.
- Standards and standard operating procedures: Adaptable to local conditions and positive to business operations.
Why would an owner want the above?
- Save time and energy: Ability to remain focused on their core business.
- Reduce risks: Reducing risk of failure and enhancing the probability of success.
- Property value and revenues: The property value and operational results are higher compared to what the owner can do on their own.
It’s not easy for an investor/owner to hand over a property to a third-party management company. It takes both conviction and trust, so what shapes this?
- Trust: There are two central factors that form this: the quality of people and stability of execution. Trust must be earned through delivery of positive results.
- Conviction: The owner believes the property will be better off with the management company than without. He or she believes the “brand/image” effect on the local market, i.e. strong brand. He or she believes the system’s ability to attract paying guests to the property, i.e. the distribution system.
In short, the management company must be trusted and deliver the cash—without these, the relationship will not last.
In hotel real estate, it’s generally accepted that management costs are 10 percent of revenues generated. The hotel management fee breakdown is usually: 2-4 percent of revenues; 5-12 percent from gross operating profit; marketing fees 2 percent from revenues; central reservation fees 5-7 percent from system bookings or about 8-12 percent from total revenues.
What’s the minimum they must provide and what’s the maximum they can take? A good management company must provide additional profits equal to or higher than their own costs (at a minimum), otherwise it makes no sense. No owner wants to earn less than the management company, so that sets the starting point. Now, what’s a fair share? In my opinion, earnings of 10-20 percent of what the owner earns is fair. Why? Because at this level, there’s not much incentive for the owner to rethink and hire another management company.
It’s never just about cost, but about returns and cash flows. There are many rules of thumb used for this. But what’s the yardstick?
- Market capitalization rates: These are officially published statistics for most markets; usually around 3-5 percent.
- Yearly revenue increase: Your revenue should not be lower than your country’s gross domestic product growth (percent), plus inflation rate (percent).
- Company profits: Usually 20 percent. However, not lower than your country’s average net operating profit (percent).
- Gross operating profits: Is about 35-55 percent of total revenues. This efficiency usually starts from 100+ rooms.
A good hotel management company can deliver this and making the right choice is crucial to the success of your hotel. If a management company cannot deliver all the above, your money is probably better spent elsewhere. Happy hunting!
Blake Anderson-Buntz is managing partner of Horwath HTL.