The hotel industry’s thirst to acquire boutique properties is unquenchable. The race is on for corporations to make certain they don’t miss out on this megatrend. Big players are trying to participate in the boutique bonanza by buying rising stars in this category, but merging properties that flaunt localized individuality over systemized efficiencies can create special challenges for bottom-line driven organizations.
Want a piece of the booming boutique hotel industry? What started out as a few quirky properties a couple of decades ago has quickly grown into a $17.3 billion market in the United States in 2019 and is expected to continue growing at 2.7 percent, according to IBISWorld. Factor in that the boutique niche is now an expanding global trend and the market opportunity becomes almost unavoidable for hospitality industry leaders.
Don’t expect the boutique trend to go away anytime soon. Generation X consumers started the boutique revolution in an effort to break the chain properties mold that previous generations celebrated for comfort and consistency. Younger hotel clients want their lodgings to be unique, full of character; to bring a sense of the local community into the property. This trend shows no sign of ebbing as Gen Xers grow older. Millennials too are joining the crusade, favoring hotels that embrace local flavor and deliver unexpected touches such as a goldfish in their guestroom or a wine tasting social in the lobby. This market observation compels many corporations to develop strategies to build or acquire lodgings that reflect the younger generations’ evolving tastes.
These character-rich properties have been realizing large gains in revenue per available room together with a high average daily rate over the past several years. Recent acquisitions show that the large hotel corporations clearly want a piece of this action. Unfortunately, the recipe that leads to creating memorable boutique hotels doesn’t always align with the business models used for decades by most chains.
Integrating newly acquired boutique properties into an existing portfolio of more traditional properties is proving to be a challenge for many industry players. Corporate-run hotels often profit from cost optimization. They factor consistencies into their equations, and they streamline purchasing. Working in volume, they are able to keep costs low and profits higher than hotels that deliver a more localized experience.
Boutiques have become disruptors. The rise of specialty properties challenges the industry’s long-standing business model. Boutiques and other lifestyle properties achieve relatively lower profit margins thanks to their comparatively higher levels of service and wider selections of varied guest offerings. According to CBRE’s Trends survey, boutique hotels achieved a gross operating profit margin of 33.8 percent in 2017 versus the 38.3 percent average for all hotels included in their survey. Consequently, a boutique’s local appeal and focus on what some may call “quirkiness” adds a level of complexity that, in turn, can erode profits.
How to Enter the Market
Entering the boutique market is an opportunity most industry players can’t pass up. Missing out on this trend could be far costlier to hospitality organizations than jumping in. So, despite lower margins, hoteliers must push forward and figure out how to compete in this niche subsector over the long-term.
When buying existing boutique properties and folding them into your existing organization, you must do so strategically. The acquisition of boutiques requires greater attention from the executive suite than the purchase of more standard properties. Consider these five tips for success as you prepare to move forward:
1. Identify and Protect the Key Ingredients in the Secret Sauce
Investigate what makes the boutique properties you are acquiring special. Can you identify the top factors that drive customer loyalty to a particular boutique property over others in its category? Make a careful assessment of the “must keep” characteristics of the properties and their service model. There are probably only a handful of ingredients that truly make a difference and uncovering what these are, and retaining them post-acquisition, is essential to success. Once you discover which ingredients make the secret sauce special, decide how you are going to staunchly preserve and protect them because stripping away the unique flavors of a property can destroy the delicate balance of the guest offering.
2. Don’t Overprotect
You probably can’t keep all the characteristics of the acquired property unaltered. After all, if a “business-as-usual” approach could achieve the property’s full potential, an acquisition would not have been sought. Just as you’ve figured out the boutique’s secret sauce and protected it at all costs, now identify what your established, efficient corporation can do to add value to the new acquisition and figure out how to make those changes, mindfully and gradually. Make sure that none of your changes affect the secret sauce recipe—it’s a delicate balance, and walking that tightrope is the key to success.
3. Find a Path to Scale and Grow that Respects the Secret Sauce
The ability to take that secret recipe and scale it effectively in a way the enables you to grow the footprint of your newly acquired boutique without eroding its unique identity is the holy grail of the boutique acquisition trend. Find a way to use your team’s corporate efficiency skills to create systems and easily replicable processes around the boutiques creative approach. Systematic, efficient back-office processes and a streamlined approach to innovating need not be stifling if done right. The optimal structured approach can allow effective scaling while making sure the secret sauce remains as present in the new additions as it was in the original.
4. Accept Lower Margins in the Short-Term
Despite higher RevPAR, margins often are lower among boutique hotels. Although most executives are aware of this, and “in theory” accept it going in, the slow creep of “corporate business as usual” over time leads to trying to get margins in line with the rest of the portfolio. Restrain yourself! Don’t ruin the secret sauce by attempting to squeeze more margin out of the admittedly enticingly high ADRs. If you can’t live with existing boutique margins, find creative ways to add high-margin offerings that may allow you to push RevPAR and ADR high enough to make up for the higher costs rather than simply focusing on cost optimization.
5. Third Parties Can Add Value
Consider bringing in third-party advisors to work on-site to protect your new purchase. The process of absorbing new brands, especially specialty properties, can challenge long-held ways of doing business and in-house staff may not be able to adapt their behavior drastically or quickly enough to accommodate the nuances of the boutique model, regardless of how much they might want to. When hiring outside advisors, make sure to bring in a team that is not only objective but will be perceived as being objective by both your current team and the newly acquired team. Employees need to be reassured that those managing the transition serve the company’s needs best and are free from bias.
Advisors also need to be experienced with different ways of doing things. Seek teams that have enough experience with best practices from not only other hotel organizations, but also other industries and geographies, to help you find creative, non-standard solutions to your challenges. They should also be aware of the cultural differences between the acquiring brand and the boutique properties. Imposing the culture of an established large corporation on the more “startup style” small boutique hotel culture too quickly can backfire, causing frustration and a fast brain-drain as talent flees. This can ruin the secret sauce and erode the value of your investment.
Amira elAdawi is founder/managing partner of Global Perspectives, a merger and acquisition consulting company.