By Pierre Marechal, Vice President, Strategic Advisory & Asset Management at JLL
Few decisions made during the development or repositioning of a hotel attract as much attention as the choice of brand. It is understandable. The operator can influence almost every aspect of the property, from its positioning and distribution to operating standards, staffing and capital requirements, often under an agreement that lasts for many years.
Yet the discussion can become surprisingly subjective. Owners develop preferences for particular brands, advisers debate whether international or domestic operators are better suited to a market, and considerable attention is paid to which name will eventually appear above the entrance.
There is a more fundamental question that should come first: what economic value is the operator expected to create for this particular hotel?
There is no universal answer. An international brand can be extremely valuable for one property and relatively expensive for another. An independent strategy can offer flexibility and attractive economics in the right circumstances, but it also requires capabilities normally supplied by an operator to be provided elsewhere.
The decision, therefore, needs to start with the asset rather than the flag.
Highlights
What Economic Value Does an International Hotel Brand Bring?
International operators can provide substantial advantages. Their reservation systems and loyalty programmes can deliver demand that an individual property might struggle to access independently. Global sales networks can connect hotels with corporate and leisure accounts, while established revenue-management systems, technology and operating processes can be difficult and expensive for a standalone owner to reproduce.
The benefits can also extend beyond day-to-day operations. A recognised brand may provide additional confidence to lenders or development partners and, depending on the asset and its likely buyers, may improve liquidity when the property is eventually sold.
These advantages are valid, but they should be quantified as far as possible.
If the operator is expected to produce an average daily rate (ADR) premium, what is a realistic assumption for that premium? Should its loyalty programme be central to the proposition, how much business is expected to come through it, and at what acquisition cost?
Where the brand can support higher occupancy, what does that mean for operating profit once the cost of serving those additional occupied rooms is included?
Making these assumptions explicit gives owners a basis for evaluating whether the operator ultimately delivers the value it promised.
Look Beyond Hotel Management Fees
The other side of the calculation is more familiar. Owners generally spend considerable time negotiating base and incentive management fees, marketing contributions, reservation charges and other system costs.
And rightly so. Over a long-term agreement, relatively small differences can amount to significant sums.
But focusing exclusively on fees can lead to the wrong conclusion.
A relatively expensive operator can still represent excellent value if it generates substantially more incremental profit than it costs. Equally, an apparently inexpensive operating structure may prove costly if the hotel relies heavily on third-party distribution, struggles to achieve an adequate rate premium or lacks the commercial infrastructure to compete effectively.
Some costs also fall outside the management-fee calculation.
Brand standards may require additional development expenditure or future capital investment. Owners may have less flexibility to change a restaurant concept, adjust the room product or defer a renovation.
Those requirements may be entirely justified, but they form part of the overall economics and should be considered from the outset.
Compare Hotel Operating Models Side by Side
One practical approach is to build competing business cases before committing to an operator.
Take the same hotel, with the same number of rooms, location and basic product, and model it under different operating structures.
The objective is not to pretend that a ten-year forecast will be perfectly accurate. It is to identify the assumptions on which the investment decision depends.
Under an international brand scenario, ADR might be higher because of stronger recognition and distribution. Occupancy may also improve, while direct bookings and loyalty business could reduce reliance on some third-party channels.
Against these benefits, include the complete fee structure, additional system costs and any incremental capital requirements associated with maintaining the brand.
Then model a credible alternative.
This might be a domestic operator or an independent hotel supported by the owner’s own commercial infrastructure.
Perhaps the rate assumption is lower, but so are fees and capital requirements. The hotel may also have greater flexibility over food and beverage (F&B) concepts and positioning.
On the other hand, customer-acquisition costs could be higher, and the owner may need to invest in revenue management, sales, technology and talent that an international operator would otherwise provide.
Ultimately, the comparison should arrive at cash flow rather than stop at revenue.
Final Thoughts: Why the Right Hotel Operator Depends on the Asset
This exercise also explains why there is little value in declaring international brands, local operators or independent hotels universally superior.
Consider a luxury resort relying heavily on long-haul international demand. Global distribution and loyalty programmes may be enormously important to that property.
Now consider a hotel whose demand is predominantly domestic and whose owner already possesses a sophisticated commercial platform. The incremental contribution of the same international operator may look quite different.
The owner’s capabilities matter, too. An experienced hospitality group can realistically retain functions that a first-time hotel investor may be better served outsourcing to an operator.
Location, positioning, customer mix, financing and the likely exit strategy all influence the calculation. Even two hotels owned by the same investor may reasonably arrive at different conclusions.
This is why hotel operator selection should be treated as an investment decision rather than a branding exercise.
The relevant question is not whether a particular flag is prestigious or whether international operators are generally better than domestic ones.
It is whether this operator, for this asset, is expected to create enough additional cash flow and value to justify its total cost.
Owners will never be able to quantify every benefit perfectly, and qualitative considerations will always play a role in an operator relationship. But making the assumptions explicit leads to a more informed discussion and a stronger basis for decision-making.
A hotel flag can be extremely valuable. The owner should simply understand what they are buying.
Highlights
Read the Chinese article here.
