Post an unexpected 2nd wave and lifesaving lock down in recent weeks, the evergreen topic of operator selection in the hotel industry in India and larger landscape of South Asia has clearly gained incremental
importance and momentum. Multiple conversion transactions from an independent hotel to branded hotel ecosystem have aided this movement.
Nandivardhan Jain, Founder & CEO, Noesis Capital Advisors, a leading Hotel Investment Advisory firm in India discusses importance of brand affiliation and provides reasons why it’s more important today than before.
In recent months, the topic of brand affiliation via operations and management contract/ manchise / franchise in the hotel industry in India, has gained significant momentum. Multiple conversion transactions from an independent hotel to branded hotel have aided this movement. With concerns related to health & hygiene on the minds of travellers, demand for international & national hotel brands is on the rise with corporates and HNIs alike veering towards this segment. This in turn is convincing large numbers of independent hoteliers to affiliate with a well-positioned hotel brand, which has a national coverage and a strong brand visibility.
Based on the recent market research, an exercise was conducted by NOESIS team within India for domestic travel wherein approximately 73% of traveller’s responded that branded hotel/resort is their first preference of stay in India. On the other hand, it may be noted that the brand penetration is quite low in our country, less than 16% comprising 160,000 rooms across the nation.
There is a contraction in demand for rooms due to restrictive travel across the country. Last two quarters from October 2020 to March 2021, branded hotel operators shaved off prices by 50 to 60% in key markets such as Mumbai, Delhi NCR, Bangalore, Hyderabad, Chennai, Kolkata, Pune, Ahmedabad,
Jaipur. This temporarily relieved concerns on occupancy.
While this kept branded supply afloat, but led to a cascading impact on standalone/independent hotels propelling their market share towards the branded hotel segment. Leisure markets like Goa & Udaipur where most of the branded hotels in last two quarters traded closer to their pre-covid level numbers in terms of ADR & Occupancy. In the same markets, one fourth of the independent hotels are either partially or fully shut, given lack of economies of scale, big marketing budgets, traditional source of business drying out, limited scope for innovation.
It can be assumed that the share of branded hotels in the overall market will continue to rise as conversion for independent hotel owners in most of the markets has now become a survival compulsion
rather than a free choice considering current market scenario and traveller expectation. Although these
brand affiliation charges reflect an additional fiscal impact of 5% to 8% of the hotel revenues, its suitably
compensated with rise in business quantum, occupancy, ADR resulting in overall increase in profitability
and in a long run asset appreciation for the hotel owner. It’s comparatively easier to unlock the real estate
value of the asset if one is flagged as a branded asset.
Majority of these independent hotels are within the bracket of 30-100 rooms. International operators’ cost structure and strict international fire life safety standards, majority of these hotels may have to undertake significant changes, which may render the association technically & financially unviable. Given this <60 keys would be sweet spot for domestic mid-market hotel brands. For >60 keys in Tier 1, 2 markets with a flavour of pan India or international source markets, it may pay to engage with international brands on franchise basis. Furthermore, for select set of >120 keys in Metros, Tier 1 Markets – International hotel brands on management contract would be most amenable.
In the interest of asset owners in the current market conditions, below points are an attempt to explain
what branded hotel chains bring on the table for the independent hotels with a brand affiliation.
1. Central Reservation System
Central reservation system is a core component of a hotel chain. Hotel chain CRS infrastructures enabled hotel units to participate in the distribution of the hotel chain. One of such benefits comes with a lower commission fee for a chain status hotel offered by online line travel agents (OTAs) in comparison to independent hotels. Usually, advantage is anything between 2 to 5% for a chain hotel. CRS plays a significant role especially in markets like India where branded hotels penetration is low. CRS brings business from Corporate RFPs, GSOs, GDS and Brand.com websites.
To take maximum advantage of CRS, while selecting a brand for your hotel, one needs to investigate how many properties that Brand has in that micro market, city and region. The higher the number of similarly branded properties, the higher is the possibility that this could lead to business cannibalization. Therefore, it is important to negotiate an area of protection clause for a long term with a Brand in the contract negotiation.
2. Guest Loyalty Programme
Hotel chains invest extensively in creating and maintaining their Guest loyalty programme which is an efficient way to make guests loyal towards their brand by making him feel special by offering better discounts, additional amenities and special status. A guest loyalty programme member of a hotel chain is likely to opt for a hotel in which she or he can get these additional privileges when they travel for work or leisure, as guest feels special.
An independent hotel can only rely on its own unit database. Guest loyalty programme brings additional business for an affiliated hotel from its large base of loyal members. This is considered as the cheapest source of business and is projected to be a replacement of the heavy on pocket OTA business. The loyalty program has two facets – providing lowest rate in the market to loyalty program members and facilitate redemption of points. While both have a cost for hotel owners, it is marginal considering the promotional potential of this target segment with very targeted & high visibility. The amount the hotel receives per room night booked by loyal guests against its redeemed points is a set amount on the basis of algorithm for that particular day occupancy.
It may pay to understand this algorithm at the time of contract negotiation with the Hotel chain especially in case of a leisure location where redemption rate may be higher than business locations.
3. Product Standardization
Chain hotels have a high to medium degree of standardization though it’s varying from brand to brand and format to format. Standardization from a hotel owner perspective can be helpful or a road block depending at which stage you are planning to enter into a contract with the brand. Most preferred is at Greenfield or brownfield stage and second best is at the time when renovation is due for your asset. However, it may be noticed in last 18 months that select brands have adopted a gentler approach on migrating to branded set up for well-maintained assets.
But from a business perspective, standardization helps in building a loyal customer base, as travellers know in advance at time of booking what to expect from your hotel which helps in a way in guest satisfaction. In other words, standardization is a brand promise to its guest travelling from one location to another, guest can be assured and knows well in advance what he or she is booking. Standardization is also useful from a hotel owner perspective as well. Owner clearly knows well in advance what he needs to develop or renovate. Standardization also assists in cheaper sourcing for construction, renovation
and even operating supplies.
4. Operational Efficacy
Brands offer operational efficacy measures and regularly develop tools to improve operational processes and to achieve better guest satisfaction, topline & bottom-line. IT Support to enhance productivity, to have checks & balances, revenue management software, regular training to hotel unit staff to use such tools efficiently. Brands can afford to invest in R&D with access to quality talent and financial back up due to its size and scale. These innovations attempt is to improve operational efficacy and hotel units gets benefitted by such initiatives in a long run.
5. Standard Operating Procedures
For Chain hotels standardization is very critical into day-to-day operation of the property. Hotel chains come with well-defined SOPs on the basis of their long experience in multiple regions. For a brand affiliated property during the pre-opening period, the brand gives assistance in hiring the right staff and training them with a well-defined SOP manual.
Without a brand affiliation, these standards would first have to be well defined and documented. Whereas with a brand affiliation this is part of the brand offering. These standards are normally updated at regularly by the Brand on the basis of its experiences at multiple hotels in the brand network. For e.g., most international and domestic brands upped their ante very early on in terms of health and hygiene as soon as the pandemic hit. Brands are not only proficient at evolving brand standards but also in communicating the same to its guests to bring a sense of known safety & security. Many Brands organized focused presentation to their corporate clients to communicate their upgraded Health and Hygiene Standards.
6. Improves Visibility for the Asset
One of the key reasons for selecting brand tie up is to get access to the wellplaced marketing infrastructure of a hotel chain. Developing a brand of your own requires significant investment, which in most of the cases is not financially feasible for a 50 to 100 room’s single hotel as economies of scale are visibly absent. Where as under brand tie up, the hotel unit can benefit naturally from the global or pan India sales and marketing set ups. Brand tie up helps hotels get direct access to the brand’s website, marketing programs and participation in global and national travel conferences to mention few. Hotel chains charge marketing fees to all the hotels under its portfolio to run marketing programs focused on the brand, which benefits the hotel units directly or indirectly as a brand halo effect. It is known how brands have built destinations in India with their entry into virgin markets.
7. Quality Control Process
Quality control process is undertaken by the Brand themselves or by a qualified third party. The quality controls are mandatory. Usually in franchise hotels, brands conduct yearly quality audit inspections with the objective of maintaining quality standards of the hotel.
Building an independent hotel’s own quality control process and overseeing its implementation can be time-consuming and costly. The introduction of an existing system can be achieved in a cost-efficient manner. In addition, the external controls like mystery audits create a certain pressure that calls for self-discipline for a unit operations team for a better operation.
8. Technical Services
During the construction or renovation phase, the Brand is available to the owner under Technical Services arrangement in an advisory capacity & supervises implementation of the brand standards. It is in the interest of the hotel to develop products as per brand standard requirements so that it can be integrated in the brand network. Technical service which helps owner to develop the right product efficiently.
Owners who are building hotels, considering current legal and development frame work, it is in the interest of the hotel owner to build fully FLS compliant hotels vis a vis NBC 2016 irrespective of its state applicability. This will create an asset of the future, thereby increasing potential valuation of the hotel as most of the investor’s review FLS standards during technical audits.
9. Develops Local Ecosystem
Brand associations establish credentials of your hotel of certain standard especially among your vendors, business circle, local administration and neighborhood as they view your hotel project with a brand more positively. Their expectations can be that a brand will raise awareness, generate quality demand and help in developing immediate local neighborhood prominence. This also helps hotels to attract quality talent and helps in lowering employee attrition rate of the hotel. Typically, a potential employee would prefer to have international or domestic brand and then a good quality indepenent hotel on its resume for future career planning. Quality manpower translates to a quality experience by customers, thereby increasing TripAdvisor scores of the hotel.
10. Networking Platform
Usually, the Brand organizes annual hotel owner meet upon where an exchange of thoughts can take place between fellow hotel owners. It is a platform to brainstorm on your doubts or concerns which other owners. With hotel chains, such meets could be held regionally or globally thereby increasing the exposure of a hotel owner, drawing from the wealth of latest trends, international standards and products.
Brand or your fellow hotel owners may approach the owner with more opportunities to work together. These are great platforms to to develop new partnerships. It is evident in several International and domestic chains where same owner has multiple hotels with same brand house.
11. Economies of Scale
Economies of scale are predominant in the area of material sourcing. Brands offer a pre negotiated contracted rate to the hotels, in which brands negotiate lower prices based on the number of hotels in the network. This is applicable to hotel daily operating supplies, hard & soft furnishings, plant & machinery and other items required during the development phase. Products offered by approved vendors assures quality and compliance to the brand standards.
12. Comfort For Your Bankers & Investors
Banks, financial institutions and institutional investors prefer branded hotels over unbranded hotels. This approach gives them security on potentially better financial performance in comparison to independent hotels. Therefore, they treat branded hotels as less risky than an unbranded property. Moreover, these financial institutions recognize the fact that brand system concepts are well placed. Hotel does not need to reinvent the wheel. This helps the financial institution to protect its investment to some extent. For Hotel owners who are evaluating how to tie up their hotel with a brand, we advise them to explore and evaluate all available brand opportunities during the selection process – whether international or domestic, whether management contract or franchise. Brand affiliation with the right brand increases the chances of success rate, therefore selection process needs to be robust.
13. Brand’s Financial Support
In some cases, Brands are willing to provide some financial support via refundable deposit or key money. Refundable deposit money is usually work as a last mile funding for the hotel completion or for its renovation. Brand’s target to recover this extended deposit within the first 3 to 4 years from date of commencement of hotel operations. In some cases, it can be interest bearing which is usually lower than the market rates.
Key money is on a non-refundable basis to finance the pre-opening budget or use the funds as a contribution to the FF&E. Usually brands offer an amount equivalent to their potential management fees for the first two years.
Another support for the hotel can come in the form of providing a performance guarantee or performance test to the owner. Such guarantees help owners in raising the capital. However, these may be offered in only a sliver of deals assuming strategic locations, big boxes and high quality assets. Ultimately the equity and brand brings to the table is its ability to market your hotel to drive operating business.
In the case of lease agreements, some of the brands offer refundable security deposit and upfront advance rent as well, which owners require for the completion of their hotel. Refundable security deposit is refunded by the owner to brand at the time of termination or expiry of the contract. Advance rent usually gets adjusted in the monthly rental over a period of first 4 to 5 years. These are prevalent with only select domestic brands. With the ascent of the pandemic, this model has seen severe shriveling.
In the current situation of pandemic we are going to experience demand contraction for hotel rooms in the next 24 months. Last financial year post lock down from the period of October 2020 to March 2021 majority of the branded hotels occupancy levels in the top 10 cities were higher than standalone/ independent hotels. Therefore, affiliating your hotel with a right hotel chain which can understand your hotel philosophy, existing guest profile and owner requirements can be a one viable option in the given market conditions.
The author’s aim is to show that there are many good reasons to choose brand affiliation. But adopt brand affiliation with caution. Affiliating with a right hotel chain is like a marriage as these contracts on management/franchise/manchise/lease are typically for long-term. So choosing the right partner is important for the success of your hotels. Negotiate commercial terms and legal points suitably; ideally take professional help to understand nuances and hidden costs. Non fee clauses such as performance test, area of protection, appointment of key personnel, termination clauses sometimes become more painful in long run that the fee itself. These need to be reviewed in a customised manner in light of your ecosystem.
