Magnuson Hotels CEO chafes at the costs associated with large global franchise companies

IHIF 2018

Tom Magnuson, CEO of the eponymous Magnuson Hotels, is as opinionated as a hotel company CEO comes. He'll be a featured speaker at the International Hotel Investment Forum, March 5-7 at the InterContinental Berlin. At IHIF, Magnuson will join other global CEOs on the big stage to discuss the hottest hotel markets and where the development opportunities lie. In this Q&A, he takes the large hotel franchise companies to task, tackling OTAs, Airbnb, how independent hotels can survive, consolidation and the technology arms race.

1. What hospitality trends and storylines will dominate discussion at IHIF and why?

At IHIF, there will be much discussion around the emergence of new competitive forces, and how hotel owners can compete more profitably. Hotel competition and the rise in hotel supply are two important topics. Four years ago, an IHG global hotel census counted 325,000 hotels—these defined as 20-plus rooms in developed markets. Today, Booking.com states an inventory of 1.5 million properties worldwide. Meanwhile, founded in 2008, Airbnb lists 3 million properties.
 
The emergence of Airbnb is requiring independent and branded hotel owners to look for low cost, high-performance response strategies. In the UK, Airbnb already represents 22 percent of the national lodging supply. In New York, Airbnb will represent nearly 10 percent of total 2018 revenue. In very little time, this will be a case of OTAs replacing traditional travel agencies. Note that in 2001, OTAs were less than 1.4 percent of total bookings; today, they are about 50 percent.
 
Consolidation is also a dominant topic of discussion. How can individual and independent hoteliers compete with the ‘rush to scale’ by massive consolidators, such as Marriott? Our answer was a global hotel alliance with Louvre Hotels Group, owned by China’s Jin Jiang Hotels. This hotel version of an airlines marketing alliance includes 8,000 hotels and 800,000 rooms, which equates into the second-largest worldwide hotel group. Early website results are already seeing an 18.1-percent affiliate conversion rate across our website, the same affiliate conversion rate as tech giants Amazon and Apple iTunes.

2. What are the markets/countries that you looking at for future development and what makes them an attractive investment?

There are so many good markets, but our favorites are the U.S. and UK. The former is a top brand conversion market, and still the world’s biggest hotel market, but PIPs, a 10-percent franchise supply increase and new brands have created a midscale Main Street national occupancy of 55 percent that requires owners to look for lower cost operating models. According to Lodging Econometrics, 600,000 new rooms are being built in the U.S. At 80 rooms average, that represents 7,500 new hotels, a 10-percent increase in supply.
 
In the UK, there is the opportunity for the independent market to become branded. The 'Americanization' of the world via global branding is transforming a UK national landscape that was 70-percent independent only eight years ago into one where brands are the majority of UK supply in 2018.

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3. With so many brands in the marketplace, what makes them a success and are they differentiated enough in the market? Do both customers and developers understand the differences?

By the number of properties represented and number of users (140 million, by some accounts), the clearest emerging brand success story is Airbnb, which proves that consumers are rejecting traditional brand standardization in favor of uniqueness and localization. It is our premise that this disruption is presenting new opportunities for independent hotel owners who have struggled against the might of traditional franchise brands. While some see this as a case of weaker demand chasing more rooms, we see this market transformation as a breakthrough opportunity for independent hoteliers who can benefit from the investment Airbnb is making toward educating the world that uniqueness is desirable by consumers.

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4. What are the strategies hotels are employing now to boost revenue and curb costs?

The main strategy hoteliers are increasingly using to boost revenue and curb costs is to ask at the outset of a project, 'What platform do I truly need for this situation?' For customer acquisition, should it be independent, a network (affiliation) brand or a franchise?  The costs range from very little to 15 percent of your GRR plus PIPs. As U.S. franchise fees have outpaced U.S. room revenue growth by nearly 20 percent (6.5 vs 5.5) over the past five years, hoteliers are increasingly challenging the effectiveness of platforms offered. For an 80-room midscale franchise hotel, owners may ask if it’s worth paying $140,000 a year for a loyalty program when direct bookings have fallen 40 percent in the last five years? The good news: there have never been more platform options for hoteliers, and at $570 billion for 2017, the global hotel industry is growing about 4 percent per year, greatly outpacing the 2.4-percent global GDP.

5. What has been keeping you busy in the past year and what will you be focusing on in the year to come?

Magnuson’s 2018 focus is on staying ahead in the arms race of technology by introducing a single-solution hotel technology platform that unites complex and costly systems of PMS, CRS, channel manager, revenue management, review manager and reporting, into one low-cost ‘hotel in a box.’  Additional benefits of the system are automation of revenue management functions and our global Magnuson Rewards loyalty partnership with Amazon.com. In the year ahead, it’s all about driving continued profitable growth for our hotel owners.

The International Hotel Investment Forum is March 5-7, 2018, at the InterContinental Berlin. Find out more at ihif.com

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