Hotel brand franchise affiliation vs the independent alternative

It’s probably more or less impossible to 100% evaluate the benefits of one hotel brand franchise affiliation to another and also compare it to going the independent route and get it 100% right taking into account numerous aspects including perception in the market of one brand or franchise to an other.

It’s complicated, difficult, and challenging.

300 odd franchise/brand/chain management options in the market make this a real headache. Then how to decide between the one chosen as your 1st preference and going the independent route.

Yet, a certain owner I recently met, new to the UK, was more focused on asking me for advice as to “ what brand would you choose” as if I had the answer out of a hat! He liked my idea on one with the comment “ yes, I know owners who think highly of them”.

It’s not about past performance with others, it’s what best fits your unique circumstance. That circumstance being highly technical, re investment, location, positioning etc etc etc.

Assuming one has a preference, how to address the independent alternative as an option?

In the past being or not being associated with a franchise has involved, as the primary focus, understanding how much business has been or could be driven through brand reservation systems and the online presence. Trouble is one can’t estimate how much business a property could have achieved by being a stand-alone, by itself, if it was an independent for comparisons sake.

One has to also figure out the comparison in the cost of booking aspects from a brand/franchise to being an independent. How much is an owner paying for all those guest promotional programs, the advertising, and its contribution to a central reservation system? Complicated, just look at group and other business that is driven at property level and then possibly added into the affiliation reservation system count.

In brief, franchise management fees can be as a % of revenue 7% to 10%, with 9% that’s 45% of one’s net operating profit if a hotel generates a 20% NOP, which is about average.

45%!

Now lets assume 25% of one’s rooms generated business has been through the affiliation, the other 75% through the hotel’s direct efforts. Taking the 9% as above the actual bottom line effective cost of rooms achieved by affiliation association is 36%. That’s the ratio of affiliation fees paid on rooms revenue to the % of business this affiliation has in rooms income terms benefited a property.

Not cheap is it!

Where do we break even in this circumstance? How much business is needed to break even with a 9% fee cost to owner? How much additional business does this affiliation need to generate that one could not have achieved by being an independent operator?

With a 100 roomed hotel achieving 70% occupancy with a ADR of $100 the fees equate to $229,950. With a department profit of 75% that’s 3066 room nights required, or an 8.4% in real term increase in occupancy.

Brands and franchise affiliations do work, a lot has to be said for going that route, however not for all, and in my view not for many that have this relationship.

With the modern world changing, with ecommerce evolving at break neck speeds and with so many options for independent properties to take advantage of the more than 60% of hotel bookings on average influenced through the web, according to some experts, owners would do well to think through very exactly what benefits going the independent route can offer.

Greater flexibility in pricing and positioning, more precise control, more control and options to choose service levels, in design, in marketing, more influence on management, more flexible use of capital to meet positioning standards. Probably easier to sell and exist the investment. That’s a very simplified view.

For advice on the independent route and putting a business plan and operation in place to take advantage of today’s ecommerce, non franchised/chain reservation systems, putting a sales team together, and a marketing program for a stand-alone resort, that would not cost that 9% annually, contact me via mark@turnerlodgingco.com.

The hotel acquisition process simplified (Part 2)

Negotiation of the deal, BTW please see part one of the hotel acquisition process

So the bid price has been in principle accepted so we need a document outlining the project and the analysis as to what led you to that position.

This guiding paper being the foundation of the operational business plan would include,

A description of the property, the market summary and the projected market opportunities, all the financial information with the cash flow projections, financing aspects, management and brand affiliation opportunities, renovation costs and an engineering plan in general regarding future requirements related to the building .

Now the process of serious negotiations can begin, and the buyer needs to take these next steps forward with due care.

The hotel procurement terms consist of these most important aspects of a deal.

The price, the financing package including seller options, title and property condition, default aspects, an agreement on what is defined as a hotel asset (this list consists of, but is not limited to the land and property, cash, all inventories, prepaid deposits and expenses, all equipment be it fixtures fittings and all equipment, from linen to spoons to security cameras, vehicles, licenses and permits  as well as staff lists, all operational human resource records, all sales and marketing information, clients data lists, suppliers, key accounts, accounting books of record).

Numerous aspects are involved to come to an agreement to the final sales price.  Seller financing will push the price up, long payment terms will push the price up. Can a mortgage be taken over? What is the financial strength of the buyer and how quickly can the property be bought? All will influence the price.

Also a list of contingencies come into play, such as the buyer not being able to secure  financing, get the required licenses and permits to operate, achieve the deal line of due diligence completion.

The contract aspects evolve around agreeing on a non binding letter of intent, or an other option is to go straight into a binding agreement with a list of all the way outs, (for what ever reason during the due diligence process, lack of financing, unable to obtain permits etc.).

It costs more and takes longer to negotiate a binding agreement with outs, and the negative aspect of the LOI initial approach is that you are lengthening the whole process.  You are trading off wasting time with this process compared to  a gamble the due diligence results will be to your satisfaction by going straight into a non binding contract.

Letters of intent can serve good purposes when complicated transactions are being negotiated, for certain legal reasons, if a group of investors are involved.

What goes in and what does not go in these non binding letters of intent or a binding document with outs will be carefully discussed with your lawyers and all advisers. For example does the buyer want the seller to not be able to sell to any one else during and initial period, perhaps the whole due diligence period? Can this be negotiated? Is there a time line for all this process to be completed?

Probably both parties will want to be able to be able to terminate at any time without damages, and as a buyer may be spending a lot of cash during the due diligence period, then they need to have full clarification of their rights to enforce the seller to proceed with the sale.

The due diligence period incorporates the following:

  • A legal description of the property
  • All employees, name, remuneration package details, position, all benefits.
  • All engineering plans and architectural specifications will be provided
  • All insurance aspects with details of all coverage with the costs and details on all limitations
  • All inventories detailed
  • An accountant will audit the profit and loss statements
  • An audited balance sheet for the last five years will be produced
  • Capital and construction expenditure for the last five years detailed and an estimate  of  projections for expenditure required next three years
  • Details of any actual or possibly pending legal threats or litigation against the property.
  • Details of any mortgages on the property.
  • Fire, health and safety reports with an engineers report
  • Land tax and property tax applicable with proof of payment last 5 years
  • List of all supplies of services.
  • List of all tenants, rents, lease details
  • Occupancy and average rate the last three years clarified
  • Recent appraised valuation of the building
  • Reservations and deposits
  • Service contracts with third parties, with details on all issues the buyer will assume like franchises, licenses, permits, management agreements, union agreements.
  • The current operating year profit and loss statement with comparison to previous year will be ascertained to which the management will comment and add certain costs that may be missing so a true reflective NOP can be clearly determined
  • Trade names and copyrights.

Following successful completion the final purchase and sale contract is drawn up.

The content and issues outlined in this document are normally like this.

The property description, the list of assets being purchased, title and survey aspects, all licenses and permits and franchise agreements, the date of transfer,  all the financial terms with the terms of finance and information related to present trading results, the details of the due diligence with the obligations and  rights of both parties, occur and the rights and obligations of each party, closing documentation, closing expense obligations, and legal aspects.

In addition since staff are the most important ingredient of a successful business and one is buying into their expertise their needs should be very much at the forefront of the buyers mind.

The take over of the staff should evolve around the sellers officially terminating all employees on the day the property changes ownership, and then the buyer re hires them (or whoever they wish to hire) on a probationary basis. Management should by this time have a good idea on the benefits of re hiring most staff as the analysis of staff strength should be a critical component of the due diligence process. Aspects covered include staff medical records, pension and benefits, and vacation days owned.

Often a buyer will decide that all staff can bring forward their benefits and an accounting transaction is worked out. Legal advice being taken regarding assuring the buyer avoids taking over any liability issues.

The hotel closing day transactions incorporate calculation of that days property’s revenues and expenses and the physical stock take of all inventories included in the purchase price.

Once the necessary calculations have been worked out and the cash transferred the buyer is the owner!

For advice along the tricky road of hotel acquisition contact mark@turnerlodgingco.com.

Hotel business plans: does your asset manager participate?

In the world of international hotel management business plans are for all purposes, most sit on shelves gathering dust as soon as they are completed, some approved by the board then handed to the banks, perhaps incorrectly compiled solely by the financial department.

In the hospitality world of hotel brand management most form an annual ritual of head office wishing to find out what their management fees will be under pressure from the CEO who is hell bent on growth, while the GM and the team put a proposal that is rather conservative knowing that some so called expert higher up will boost it up killing off any incentive to achieve it.

Some are for owners who do need the truth, some are for owners that do not need the truth, for what ever reason and they are numerous.

Some are to back up the feasibility study to obtain financing for a new project.

Some are the feasibility study (we are building it so you better tell me how much profit we will make 1st year!).

Some don’t gather dust, those created by smart business operators and owners.Some are for real.

Real ones are living documents, put together by all members of the team, from the bottom up, line item by line item for each cost center and for each market segment being part of the revenue generation plan. Everyone is in sales so everyone is involved. Everyone you ask, yes, even the pot washer.

The result is a plan that with some prodding skywards from those above is an achievable and motivational tool that the owners and operators can feel proud in achieving.

Yet how many actually make sense, and that are worked on monthly by hotel owners and management as a team, with an asset manager who has the skills to see things from a different angle to that of the management company and who is probing for opportunities to unlock value during the annual business cycle. Not all that’s for sure.

For resort management or hotel asset management that really makes a positive difference, email mark@turnerlodgingco.com.

Hotel asset management for food and beverage

Area Directors often lack the skills set to analyze and critique a hotel’s asset management  program for food and beverage.Many just don’t have the experience or background, and many corporate food and beverage executives are more focused on bringing out group-wide programs or promotions, mostly of some meaningless importance, which could well be driven at hotel level, instead of focusing on areas where real difference can be made to an owner’s real estate asset value.

Given approximately 65% on average of full service hotels revenue comes from room sales, at around a 80% profit margin, and with that the majority of a management company’s fees , it is no wonder the focus is on the rooms department to drive profits, but this is barely partially correct.

Owner’s needs are therefore often neglected. Positioning a hotel’s food and beverage offering is critical to drive profits in both rooms and the food and beverage operation, lack of skills and ability at corporate level therefore affect profits and with that a hotel’s value is not maximized.

Lets take the UK here, and ok, some efforts at corporate level have been made by some, but let’s face it, they are few, and hotel restaurants on the whole are a dying breed. I blame corporate leaders and so called brand franchise standards.

Asset Managers are not tied to some corporate protocol and brand standard, and have the skills set to asses a food and beverage operation to bring in positive change. They can bridge the gap between owners and management, safeguarding the owner’s asset interests.

In food and beverage this is a detailed process, from understanding a hotel’s investment strategy, its type, positioning, asset hold period, and capital resources, to assessing the existing conditions, studying the hotel offering or what is termed the food and beverage program, the competitive set and local offering, doing a swot, and compiling a financial analysis.

Then produce a road map, putting it all together. For owners’ best interests.

Let’s take just the financial aspect of this process alone. No help here from external sources and industry reports, this involves knowledge and the ability to get down to the core of how the food and beverage department is operated. Scary stuff for some management companies!

An important key to this process is to breakdown the profit of each outlet within this department. Opportunities are so often lost because of management mostly just looking at the whole department’s net profit and not what outlet is drawing down profit potential within the whole department. A lazy approach at best.

I could talk all day on this, but let’s as an owner ask ourselves a few questions, in this small segment of financial analysis within this large area of expertise.

  • Do you know how each outlet is contributing to profit, that’s breaking down all costs including kitchen production cost?
  • Do you know if all your labor costs and labor production skills are in line with your average checks and service levels?
  • Do you know your group vs. transient per cover expenditure?
  • Do you know how your average check per seat compares throughout your departments, and with it the reasons and opportunities and the action plan you have to improve it?
  • Do you know your outlet loss leaders?
  • Do you have a detailed financial profile on each outlet and with that the issues and plan to improve performance?
  • Is your pricing focused on margins only, and not based around menu engineering and with that a focus on the amount you actually bank?? That’s an eye on $’s not %’s

That’s a few of many that need asking, just in the finance reality check.

For a reality check on your food and beverage department contact me at mark@turnerlodgingco.com

 

Condominium hotels and resorts advice for investors (Part 3)

Have you read Part 1 and 2 regarding condominium hotels and resorts?

Following on in this true saga, the next morning on awakening you feel water on the bathroom floor and look up to see on the bathroom ceiling a water stain and dripping water. A quick call to the front office agent and you get passed onto the rental maintenance department. However you are then  passed onto the common area building maintenance department, (the strata property management company as your building has both a rental and a strata property management company and is not managed by one operating entity)!

You are becoming confused…

The strata property manager then makes it clear this is a strata issue and that the owners of the unit above will be contacted and this issue will be fixed by the strata property management company.

The strata property manager now has to ascertain the reason for this leak, and after some time and cost to the owner above concludes it was from a leaking water pipe connection to the dishwasher in the kitchen above, which backs onto their bathroom.

So you pass that information off thinking that the owner above wasn’t in the unit at the time  and why didn’t the rental management company take action on this to stop it, as they rented the unit out. Or shouldn’t they have charged the renter you think, but on asking the strata manager for an explanation so you can better understand how the system works get told that the rental management company didn’t report the issue, as they should have done, and the guests were not charged for any damage. On asking the rental management company why this happened you are told that the guest checked out before they noticed anything wrong as it was a hidden pipe problem, so they could not consider charging the renters, and anyway this was a wear and tear issue and not related to any actual direct action which could be defined as abusive by the renters, so no action would have been taken to charge the renters anyway.

You are perplexed and further confused.

Why was the leak not reported to the strata manager earlier, why did housekeeping not report the damaged ceiling in the suite below?

All this leaves you wondering why you did not have this kind of discussion with the strata property manager and the rental manager prior to purchasing the unit. You reflect that the only information you were supplied was some beautiful artistic renderings and some income projections. You leave more troubled than you were when you arrived, blaming yourself for not doing adequate due diligence on buying a second home.

Now add-on to this, how about this model being further complicated by a developer promoting it as a fractional development with 3-month segments with 4 possible owners,  and a flexible rental pool option? One owner can rent if they wish, the others may not if they do not wish to.  Yes, it happens! Anything to sell something!!

Work that one out!!

Who pays for what, is the first question one needs to ask as a buyer, then do your sums and work out the bottom line and ask yourself ‘will this be a good financial deal for me?’ It is a financial investment transaction, you are not buying into a second home, you are buying into an investment where the users of the unit will not be as caring as you, with an investment model which over the years has proven to be a risky one.

Lesson:  Owners and buyers, beware of the so-called ‘income projections’ presented by the developers and uneducated real estate agents that are totally unrealistic and that bear little or no resemblance on what the net income could possibly be. Get independent advice before buying into a condo hotel.

Lesson: Developers partner with hospitality management that knows how to get results!

Developers who want a partner to make a long term success of a project please contact Mark, and for owners, please do the due diligence!

What hotel star rating do you need?

Do you know about hotel star ratings? Ok they are generally different from one county to the next, for good reason. In Austria a 4 star hotel needs to have a 4 course set menu available daily in the restaurant, in Hong Kong room sizes are smaller, that would have an impact on a North American standard rating. Hence no world wide hotel rating system exists.

Where do you really stand? More importantly where do you want to stand? What is your proposed market positioning to maximize ROI, how do you propose to get there?

Do you have an asset management plan that is geared to unlock value in balancing your star rating with what you need to be and no more?

Consider all of this!!

The following items are considered during the inspection process by that hotel inspector  

1. Guest Arrival Phase

Advertising/Media Professionalism; Reservations/Phone Assistance; Restaurant Location; Signage; Building Appearance; Parking; Valet Parking; Grounds; Entrance; Maitre d’ Stand; Coat Room; Initial Greeting; Cocktail Lounge (Location/Décor/Service); and Seating.

2. Guest Room and Bath

Living Space; Decor; Drapery; Linens; Technological Items (TV, Telephone, Ipad etc.); Minibar; Odor/Ventilation; Heating/Air Conditioning; Furniture; Beds; Walls; Closet/Storage/Drawers; Fixtures; Lighting; Floors; Housekeeping; Additional Amenities; turn-down Service; Bathroom Linens/Amenities/Physical Product; and Robes.

3. Public Spaces

Lobby/Public Spaces; Elevators; Hallways; Signage; Banquet/Meeting Space; Pay Phones/House Phones; Temperature; Public Restrooms; and Security.

4. Product/Services

Concierge/Guest Services Staff; Fitness Center/Equipment; Day Spa Equipment; Fitness Center Staff; Day Spa Staff; Fitness Center Services; Day Spa Services; Fitness Center/ Housekeeping; Day Spa Housekeeping; Business Center Equipment; Business Center Staff; Business Center Services; Gift Shop Staff; Gift Shop Services; Retail Outlets Staff; Retail Outlets Services; Laundry/Valet; Shoeshine; Newspaper Delivery; Pool Cleanliness/Safety; Pool Lounge Area; Tennis Court Conditions; Tennis Court Services; Golf Course Conditions; Golf Course Services; Beach Condition; Beach Services; Condition of Hiking/Running Trails; Skiing/Snowmobiling; Watersports Services; Watersports Equipment; Children’s Programs; and Transportation.

5. Departure

Check-out; Bill Accuracy; Baggage Handling; and Valet/Car Services.

6. Food and Beverage

Room Service Order Taking; Room Service Timeliness; Room Service Delivery; Room Service Product; Room Service Pick-up; Bar/Lounge; Primary Restaurant Rating  Secondary Restaurant Arrival; Secondary Restaurant Physical Property; Secondary Restaurant Service; Secondary Restaurant Culinary; Secondary Restaurant Beverage; and Secondary Restaurant Departure, etc etc etc!!.

Confused? So you should be.

What’s best for a property is no easy answer. What level of service and product standard will maximize your ROI? What investment plan do you have to make sound capital investment  plans that will position your hotel correctly and create or unlock asset value?

In need of help, the hard part, the implementation? Then contact us, we can help you consistently achieve your desired service and product standard that fits into your asset management and operations plan that will maximize your ROI.

Resort asset management and rooms revenue management

For most mid and smaller sized independent resorts one does not have to invest in a revenue manager to reap the rewards of applying some simple rooms revenue management  tactics to your asset management program to improve your bottom line.

This role is a key daily component of the Manager and whoever is overseeing front office operations.

It can be a bit over the top when you get involved with revenue management experts who seems hell-bent on making this process sound more complicated than it need be.

Simply put revenue management is a process of anticipating hotel occupancy and market demand and to determine how it will affect your hotel, once you can anticipate your market demand then you can correctly positioning your rates.

Firstly put your occupancy and average room rate to one side and think of your hotels revenue income per available room, this is called Rev Par. You can calculate this taking your occupancy (70%) and multiplying it by your average room rate (S$ 100), therefore the result is 0.7*100 equals $70.

Most of us know that in general terms improving ones average room rate generates more profit than just increasing ones occupancy. The added revenue generated is not subjected to operating costs associated with improving occupancy. So we need to focus on both in tandem. This is a bit is a waste of time if ones occupancy is always so low that one never has those peak and high demand periods, but lets assume you like most hotels you have some.

Please note here that lowering ones rates in general across the board to drive occupancy tends to be a fools game, only rarely will this result in improved bottom line profit. Say you increase your rev par to $72.25 by dropping your rates from $100 to US$ 85 and by some miracle that stimulates sales to 85% occupancy. A 15% drop in price has some how generated a 21% increase in rooms demand.  Not very likely. Then you take the associated operational costs, and that includes maintenance and replacements applicable for those  additional rooms sold, and guess what, you are worse off. Then you have to figure out how to get the rates back to where they where.

Revenue management simply takes advantage of increased demand periods.Take that competitors study you have just competed which will detail all your competitors pricing and ask yourself:  are my rates correctly positioned for my market, do we offer value, are we truly competitive. With that knowledge the revenue management process you apply is simply having complete knowledge of the market demand for hotel rooms for your local area and ascertaining how that will affect you property, and with that knowing what rate strategies you can apply to improve your rev par through room rate pricing. Maximizing your yield potential. The process is to create a “base” of business through a range of rates to appeal to a wide range of potential clients.

Once this base business is booked, by whatever market mix, lower rates can then be closed for sale and higher yielding rates can apply The key to successful revenue or yield management is to review advance reservations and make rate close-out decisions as often as might be necessary; generally, three times per week.

Hotels practicing revenue management gain an insight into the ebb and flow of business, knowledge of reservations booking pace, and a true understanding of factors which impact occupancy and average rate. Nothing complicated, and although there are many different strategies one can use it just boils down to good old common sense that need not be over complicated by those experts.

Larger more complicated resort hotels have far more complex revenue management  models, where some expert asset management advice will go a long way to reap better financial returns.

Contact us for assistance in creating your resort asset management plan incorporating winning revenue management strategies that will cost you far less than the financial reward you will reap.