Hoteliers grapple with rising fees

A $100 booking is never truly a $100 booking at a hotel. With each booking comes multiple fees as a percentage of revenue. And those fees have been on the rise over the years as the industry enjoys a healthy market.

“There are lots of fees that hotels have to pay that we label as double-edged swords. If you look at some of the expenses that are not directly revenue-acquisition costs, but they’re just costs of doing business … and are paid as a percentage of revenue,” said Robert Mandelbaum, director of research information services at CBRE Hotels’ Americas Research. “In the one sense, if you’re paying more, it’s probably an indication that your revenues are going up, which is a good thing. However, these expenses are rising at a faster pace than most other expenses because inflation has been so low.”

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Research from CBRE’s “2017 Trends in the Hotel Industry” report shows that hoteliers in the United States enjoyed their seventh consecutive year of increasing profits in 2016 despite a slowdown in revenue growth. Total operating revenue, driven by a 0.2-percent rise in occupancy and a 2.5-percent growth in average daily rate, increased 2.4 percent in 2016 for the average hotel. By limiting the growth in operating expenses to 1.6 percent, managers at the surveyed properties were able to extract a 3.7-percent gain in gross operating profits for the year.

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However, what is clear from the research is that fees have been on the rise. Two areas that have seen increases, according to experts and their research, are commission fees and franchise fees.

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Commission Fees

The annual change in rooms-department commissions from 2015 to 2016 saw commission fees increase 6.8 percent, according to CBRE’s “2017 Trends in the Hotel Industry” report. Rooms-department commissions are those fees paid to travel agents, online travel agencies and other intermediaries. Credit-card commissions also grew 2.7 percent over the same time period.

Rooms revenue, meanwhile, saw an increase of 2.6 percent, according to the research.

“There are so many different types of intermediaries now in the forms of OTAs,” Mandelbaum said. “Even the group segment is seeing growth in this area where there used to be a direct relationship between the hotel sales manager and the meeting planner.”

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The emergence of third parties in the group space is making the segment less profitable, Mandelbaum said. Additionally, hotels are starting to see groups pay with credit cards more. Thus, credit-card commissions are eating into profits.

“That’s another 3- to 4-percent fess off of potentially thousands or millions of business at big hotels,” he said. “That’s a large amount of money that 10 to 15 years ago wasn’t an issue for group business.”

Franchise Fees

Franchise fees have also been on the rise, according to Bomie Kim, market research analyst at HVS and co-author of the firm’s “Hotel Franchise Fee Guide.”

“In this current cycle, certain brands have increased royalty fees, which aligns with the strong market fundamentals in the hotel industry,” she said. “We have also witnessed fewer companies offering key money for developers and owners, as fewer enticements are required in today’s environment to stimulate development in the United States.”

The median franchise cost was 11.7 percent of rooms revenue, according to the most recent "Hotel Franchise Fee Guide." Meanwhile, the average cost was 10.9 percent of rooms revenue.

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Kim said that brands strive to keep their fees competitive with competing brands.

“They want to charge hotel owners certain amounts, but they don’t want to go too high or too low,” she said. “Larger brand companies have figured that out by different brands and similar product types … and the percentage of revenues is similar by brands.”

For example, the report shows that the royalty fee as a percentage of rooms revenue for InterContinental Hotels Group (5.1 percent), Hilton, Inc. (5.5 percent) and Marriott International (5.5 percent) are all in line with each other. The story is similar for sales fees, marketing fees, loyalty fees and the initial fee.

*Marriott excludes former Starwood brands in the table above
Source: 2015/2016 HVS Franchise Fee Guide

“Profits and franchise fees reflect a complicated relationship,” Kim said. “Branding a property brings enhanced revenue, but the ultimate gain in profitability varies from property to property.

“Profits are not directly aligned with the level of franchise expense, as the effectiveness of property management and marketing plays an important role,” she added. “Therefore, under competent management, franchise fees should not cut into profits, but rather should ideally enhance profitability through increased [revenue per available room].”

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