How to choose the right flag for your hotel

By Edward (Ned) Levitt & Frances K. Macklin

As lawyers, we often hear someone say, “I am going to get the best lawyer” for this or that legal problem. However, the search should really be for the “right” lawyer; the right lawyer for the problem, the right lawyer for your budget, the right lawyer for your own style and personality, etc., etc. So it is with the search for a hotel flag to fly proudly above your property. Don’t just look for the “best” flag; look for the right flag for you.

It is important today for many hotel operators to be part of a chain with strong brand recognition. Rich Eichler, of Rich Eichler Consulting Inc., with over 20 years of experience in the hotel industry, agrees with this statement, but goes further and predicts that brand awareness and usage will only increase in the future.

The numbers would bear this out, as currently approximately 70 per cent of all U.S. hotels operate under an established brand. With the growing influence of the Internet in travel and accommodation, the power of branding is growing. The brands have the financial resources and marketing savvy to be on top of the search engine heap more often. They are also better equipped to keep up with today’s rapid technology, demographic and market changes than the independent hoteliers.

These brand benefits, however, come with a cost. Some high-end hotel franchisors insist on managing the hotels operating under their flags. In these cases, the “owner” is reduced to the status of a silent investor. Where this is not the case (ie. for franchise-only hotels), royalty rates often run in the vicinity of 10 per cent of gross room revenue and, for luxury brands, can run significantly higher. On top of this are the costs of maintaining the standards of the brand and the capital costs necessary to construct or retrofit the hotel to meet the standards, which can run from $75,000 per key for a limited service property to $175,000 or higher for a full service hotel.

To justify these costs, the brand should deliver between 25 and 30 per cent of the hotel’s business through effective reservation systems, marketing strength and solid programs such as loyalty programs. It is also reasonable to expect an improved bottom line from the franchisor through operational support. Eichler sees an added benefit with the right brand in allowing the franchisee to increase room rates, not just occupancy, because the brand brings with it an increased value proposition (real or perceived) for the guest.

The right choice of flag for a hotel requires a careful and thorough analysis of both the market in which the hotel operates or will operate and the markets which will “feed” the hotel with customers. The expectations of the business traveller, on an expense account, with plans for a limited stay, will differ considerably from that same traveller on vacation with the family. Does the brand you are considering bring with it a reputation for consistently meeting the expectations of your target customers?

Often, the search for the right brand narrows down to several choices. What then are the factors that should be looked at to make the final decision? Among the many matters to consider is the brand’s track record for spotting trends and reacting to them quickly and effectively. For example, everyone knows the population is aging rapidly, but what impact will that have on occupancy rates, budgets, needs and expectations? One view might take the classic image of aging and project an increased need for hand railings in bathrooms, more “easy chairs” and more ramps for wheelchairs.

A more progressive and insightful approach from a category leader might be to recognize that there will be a demand for older workers to retire later than has historically been the case and the incredible tenacity of the baby boomers to stave off the effects of old age. If this analysis is correct, the end result would be an increased demand for hotels that offer senior-friendly exercise facilities, spa services and healthy food.

And what about the “greening” of the hotel industry? How can an independent possibly cope with the rapidity of this paradigm shift? The demand for more eco-friendly hotels is increasing exponentially and requires tremendous resources, accurate market research and skilled operational innovations to meet the demand and make it rewarding economically.

Planning for success in the budget market can be even more challenging than planning for the luxury market, as the margin for error is smaller, like the margin of profit. Again, there is a clear need for, and potential to benefit from, the franchisor’s extra resources in providing what the customers want, at a price they will pay, which trumps everything else. Many hotel franchisors today have offerings in many hotel categories, so it is not just a question of which franchisor, but also which flag within the same franchise system.

The decision to join a franchised hotel chain and then which one and which flag within the chain is challenging and complex. Taking enough time and investigating the available options thoroughly and knowledgably is necessary and there are no shortcuts. The rewards are, however, considerable.

Edward (Ned) Levitt is a partner with Gowling, Lafleur, Henderson in Toronto and co-chairs the firm’s national franchise and distribution law group.

Frances K. Macklin is a partner with Gowling, Lafleur, Henderson in Toronto and practices in the hotel sector.