Hotel brands and owners: Should they share the risk and reward?

Hotel brands and hotel owners often don't share in both the risk and reward.

In a prior article, I discussed the antithetical nature between hotel brands and those who own branded hotels. In this piece, I look at hotel investment and development, with the focus on risk versus reward. Specifically, with risk heavily weighted toward owners, should hotel brands share, not only in the good times, but in the rough patches, too?

As a hotel owner, you’ll have many choices: how much leverage is right; will a rooftop bar bring in added revenue; how should I match my target customers’ tastes to food and beverage; perhaps a fro-yo machine in the lobby is just the thing to bring in more walk-in business.

But maybe the most pressing and important decision is this: What brand will help maximize my investment? It’s a fair question, and in today’s hyper-competitive hotel landscape, brand plays a crucial role in the hotel’s ability to, as the adage goes, “put heads in beds.”

The question then is: Will your brand meet its and your expectations?

In today’s asset-light, fee-based approach, hotel brands are, to borrow a poker term, the rake. Which is not to say that brands don’t offer value; they absolutely do. Marketing services, distribution, revenue management, to name a few, but for a cost.

What they hardly do is share in the risk. Can’t meet your debt service? Sorry, hope you can negotiate with the bank. Another hotel opened up down the street siphoning customers? Well, it’s not our brand—(though it may very well be one of their other brands!).

Hotel companies are not real estate companies; they are a promise to customers of a certain experience. But as a hotel owner, if you are going to fork over a percentage to brands, shouldn’t they prosper in heady times and suffer during the lean ones?

Anders Nissen, CEO of Pandox AB, which owns a portfolio of 100-plus hotels spread through Europe, sure thinks so. He makes it clear: Hotel brands should share in the success and failure of a hotel.

To be sure, Nissen is not a proponent of U.S.-based hotel brands, often using language too pejorative to be written down here. For one, he told me, “They don’t know how to operate hotels.” Fair enough; it’s not their true bread-and-butter anymore. Third-party management companies play a larger role today because of that.

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Then Nissen told me: “Brands don’t add any value.”

That hit me because it sounded similar to what Leland Pillsbury, the co-founder of Thayer Lodging Group, has been proselytizing for some time. In April 2015, I attended the Hotel Equity & Lender Perspectives Conference in Boston. There, Pillsbury delivered impassioned remarks focusing on today’s hotel brands. “Brands are becoming less valuable and less relevant to hotel owners and customers,” he told the audience. “They aren’t as strong as they were. They are great at competing, but poor as collaborators.”

Nissen and Pillsbury could go on tour together, they are so in sync. As Nissen explains, illuminating Pillsbury’s point, brands are not financial partners. In Europe, many arrangements are thus: An owner acquires or builds a property, then leases it to the brand to operate. That’s the arrangement; it sounds blasphemous here in the U.S. “Two parties come together, invest together and share the risk and upside,” Nissen said. “If they don’t want to share our risk, why should we sign up with them?”

Nissen makes a point that I’ve heard before. If you don’t have skin in the game, are you less inclined to care and focus in the same way as if you were an invested party? Back to my poker analogy, it’s like playing with house money: If I win, awesome; if I lose, let’s go hit the buffet.

The hotel industry thrives on the ability of developers to build and own hotels. Without property to put their name on, hotel brands would be hard up. Short of an infusion of key money, then, what is the true value of a hotel brand? Ask yourself that.

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