INTRODUCTION TO HOSPITALITY Seventh Edition CHAPTER 2 The

INTRODUCTION TO HOSPITALITY Seventh Edition CHAPTER 2 The Hotel Business Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Objectives • After reading and studying this chapter, you should be able to: 1. Describe hotel ownership and development via hotel franchising and management contracts. 2. Explain the diamond rating classification of hotels. 3. Classify hotels by rating system type, location, and price. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Objectives • After reading and studying this chapter, you should be able to: 4. Discuss the concept and growth of vacation ownership. 5. Discuss sustainable/green lodging. 6. Identify trends influencing the hotel business. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Development and Ownership • The lodging industry is a more than $155 billion industry, which includes approximately 53, 000 properties with almost 5 million guestrooms. • Franchising and management contracts are the two main driving forces in the development and operation of the hotel business. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Franchising • Franchising in the hospitality industry is a concept that allows a company to expand more quickly by using other people’s money, rather than using its own financing. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Franchising • Under a franchise agreement, the company or franchisor grants certain rights—for example, the right to use the company’s trademark, operating procedures, reservation systems, marketing know-how, purchasing discounts, etc. , for a fee. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Franchising • In return, the franchisee agrees to operate the restaurant, hotel, etc. , within guidelines set by the franchisor. • Franchising was the primary growth and development strategy of hotels and motels during the 1960 s through the 80 s. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Franchising • Challenges to the franchise agreement include the maintenance of quality standards and the financial stability of the franchisee. • Franchise fees can vary tremendously and are often negotiated between the franchisor and the franchisee. • The average agreement is 3% to 4% of room revenues. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Is There a Franchise in Your Future? • It is predicted that more than half of retail sales in the United States (including restaurants) will soon be transacted through franchised units. • There are jobs working directly for a franchisor, a franchisee, or you might buy a franchise yourself. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Is There a Franchise in Your Future? • Many franchisors own their own units, which they use to test new operational or marketing ideas. • Many of the mistakes that a new entrepreneur may make have already been overcome by the franchisor. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Is There a Franchise in Your Future? • The franchisor might also provide other support services at little or no cost, such as marketing and advertising, site selection, construction plans, assistance with financing, and so on. • This assistance leads to a second reason for buying a franchise, reducing your risk of failure. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Is There a Franchise in Your Future? • Franchising does have some disadvantages. • Freedom is somewhat restricted. • You must operate within constraints set by the franchise agreement and operational standards. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Referral Associations • A marketing consortium or referral organization is a group of independent properties that refer businesses to one another. • The benefit is that independent hotel operators are able to compete with chain operations. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Referral Associations • Referral associations share a centralized reservation system (CRS) and a common image, logo, or advertising slogan. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Management Contracts • Management contracts are popular because there is little or no upfront financing or equity involved. • The management contract usually allows for the hotel company to manage the property for a period of years. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Management Contracts • In return, the company receives a fee determined by a percentage of gross or net profit. • These contracts usually state a percentage of sales or operating profit at 2 + 2 percent. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Management Contracts • Hotel companies enter into these contracts because less capital is “tiedup” in managing a property than is required in owning them. • Hotel operators are demanding better results and reduced fees from these management companies. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Real Estate Investment Trusts (REIT) • About 300 REITs exist with a combined market value of $70 billion. • These companies do not pay corporate income taxes. • They are required to distribute 95% of net income to shareholders. • A REIT must have 75% of its assets in real estate. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Development • Hotel ownership and development is capital intensive. • A feasibility study is done to assess the viability of any project. • This study determines the degree to which the proposed hotel project will be financially successful. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Development • One of the most important documents is a Summary Operating Statement, which details revenues and expenses for a period of time. • Close to 70% of a hotel’s revenue and most of the profit comes from the sale of rooms. • About 26% of a hotel’s revenue comes from food and beverage sales. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Development • There are two views on remodeling versus new hotel construction: – Newer properties are not usually profitable for several years due to high construction costs and lack of immediate market share. – A remodel will have the cost of the remodel plus higher operating costs for energy and maintenance. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Development • Older hotels are often remodeled every seven years after becoming dated and losing market share. • The advantage to older hotels is that they are recognized in the market. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

The Economic Impact of Hotels • Hotels provide direct and indirect economic impact to their communities. – Direct § Sales of rooms mean millions of dollars into the local community. – Indirect § The ripple effect (or Multiplier Effect) when money spent by tourists and employees is re-spent in the community. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

The Economic Impact of Hotels • Communities also benefit from the Transient Occupancy Tax (TOT), or the bed tax. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Classification of Hotels and Lodging Properties • American Hotel and Lodging Association (AHLA) indicates there were 52, 887 hotels and motels in the U. S. in 2013— about 4, 926, 543 rooms Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

The Lodging Industry • Hotels may be classified several ways and have one or more affiliations: – The Smith Travel Research (STR) system. – The Forbes Travel Guide Five-Star rating process. – The American Automobile Association (AAA) Five-Diamond rating system. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Affiliations • A hotel may have multiple affiliations: – Chain. – Parent company. – Operation (corporation, franchise, or independent). – Management company. – Owner. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Affiliations • A hotel may have multiple affiliations: – Asset management company. – Membership or marketing group. – Corporate: owned or managed by a chain or parent – Franchise: operated by a third party – Independent: not affiliated with a parent or chain continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Affiliations • Hotels may be affiliated with a management company that operates the hotel on behalf of another party. • They may be affiliated with one or more membership and marketing groups that provide various benefits. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Affiliations • They may be classified as quasi-chain— a cross between a chain and a marketing group for independent hotels. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Hotel Classification by Rating System: AAA and Forbes • About 3% of the 59, 000 properties inspected by AAA in North America earn the 5 -diamond award each year. • In 2013, only 124 lodging properties received this highest award. • Forbes uses a 5 -star rating system, with only a few dozen earning its highest awards. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

City Center and Suburban Hotels • City center hotels meet the needs of business and leisure travelers with a wide range of accommodations and services. • They usually offer a signature restaurant, lounge, named bar, meeting and convention rooms, a ballroom, and often a fancy nightspot. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Resort Hotels • Resort hotels were developed with the growth of rail travel. • Luxury resort hotels were developed in the late 1800 s to receive the clientele arriving by rail. • Some resorts are family friendly. • Some resorts work to attract conventions and conferences, which increase occupancy. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Resort Hotels • Resorts have diversified their marketing to attract business and sales meetings, incentive groups, sporting events, spas, adventure tourism, and ecotourism. • Expectations are high in a resort, thus the staff is highly trained to pamper the guest. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Resort Hotels • In some developing countries, it is difficult to hire, train, and retain competent staff. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Airport Hotels • In general, airport hotels have a high occupancy due to the number of travelers in airports. • These hotels are usually full-service with as many as 600 rooms. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Freeway and Interstate Hotels and Motels • Freeway hotels and motels grew quickly in the 1950 s and 60 s. • They provide a convenient place to stay near freeway exits. • Smaller in size and rooms, often operated by independent owners or franchised. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Casino Hotels • The entertainment and recreation sector is an important economic driver for U. S. growth. • One of the fastest growing segments of the entertainment field is gaming. • Larger casino hotels attract conventions. • There are now more than 150 hotels on Native American lands. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Conference and Convention Hotels • These hotels have large public areas and banquet facilities, a business center, travel desk, airport shuttle, and many other amenities. • These hotels have a minimum of 300 rooms and 20, 000 square feet of meeting space. • They usually have multiple banquet areas around the grounds. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Full-Service Hotels • These hotels offer a full range of facilities, services, and amenities for both business and pleasure travelers. • Hilton, Hyatt, Four Seasons—just to name a few. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Economy/Budget Hotels • Clean, reasonably sized, and furnished without “frills. ” • They do not offer meals or meeting rooms. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Boutique Hotels • Hotels with a “different” experience. • Unique in architecture, style, décor, etc. • Twenty-five to 125 rooms with a high level of service. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Extended Stay Hotels and All-Suite Extended Stay Hotels • Provide accommodations to travelers staying for more than 5 days. • Rates depend on the length of stay. • Guests are usually professionals or families. • Offer full kitchens with more space per room. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Condotels, Timeshares, and Mixed. Use Hotels • A combination of a hotel and a condominium. • Sometimes built as a hotel and then sold as condo units. • May have other facilities, such as a spa or sports area. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Bed and Breakfast Inns • Offer a wide variety of accommodations and costs. • They provide an alternative to traditional lodging. • Usually owner occupied with just a few rooms available for rent. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Best, Biggest, and Most Unusual Hotels and Chains • The largest hotel in the world is the Izmaillovo in Moscow with 7, 500 rooms. • The MGM in Las Vegas now has 7, 372 • The Venetian, also in Las Vegas, has 7, 117. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

The Best Hotel Chains • The Ritz-Carlton and Four Seasons are usually rated the highest quality chain hotels. • The Ritz-Carlton has received the Malcolm Baldrige National Quality Award from the U. S. Department of Commerce. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

The Most Unusual Hotels • The Treetops in Kenya • The Ice Hotel in Swedish Lapland • The Underwater Hotel at the Great Barrier Reef Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Timeshare, Vacation Ownership, and Fractional Ownership • Vacation ownership is the fastest growing segment of the U. S. travel and tourism industry. • Vacation clubs are a variation of the “time share. ’’ • Many leading hoteliers are entering into this market. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Timeshare, Vacation Ownership, and Fractional Ownership • Timeshare ownership lets owners save on the rising costs of vacation accommodations over a long-term period. • Vacation or fractional ownership is a form of real estate ownership or right to use a property in part. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Timeshare, Vacation Ownership, and Fractional Ownership • These properties are often resorts or urban condos, townhouses, or singlefamily homes that are owned by multiple parties. • Timeshares also provide the possibility of world-wide travel by means of ownership exchange. continued on next slide Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Timeshare, Vacation Ownership, and Fractional Ownership • The purchase price is locked in, and this helps to ensure lower prices in the future. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Travel the World Through Exchange Programs • International vacation exchange programs allow owners to trade their timeshare intervals for vacation time at facilities around the world. • These resorts are affiliated with other exchange companies around the world and actively market memberships based on the terms. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

International Perspective • The global economy is segmented into large trading blocks: – European Economic Community (EEC). – North American Free Trade Agreement (NAFTA). • These agreements reduce limitations on transfer of goods and labor. • This leads to increased travel, tourism, commerce, and industry. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Sustainable or Green Lodging • Developers are more environmentally conscious because properties can be developed on a sustainable level and cost less to operate. • Energy is continually increasing in cost. • Lighting can amount to as much as 30% to 40% of electrical consumption. • Water conservation can reduce waste and cost. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.

Trends in Hotel Development and Management • Topics include areas such as capacity control, safety and security, technology, assets and capital, new management, globalization, consolidation, diversification, vacation ownership, and an increase in spas and treatments. Introduction to Hospitality, ICD-10 -CM/PCS Coding: A Map Seventh to Success Edition Lorraine John R. Walker M. Papazian-Boyce Copyright © 2017, 2013, 2009 by Pearson Education, Inc. All Rights Reserved.