The Structure of the Lodging Industry HayesNinemeier Foundations

The Structure of the Lodging Industry Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Hotel Owners Hotels are operated for 2 reasons: • To meet the needs of the traveling public • To meet the hotel owner’s desired return on investment (ROI): the percentage rate of return achieved on the money invested in a hotel property. Hotel income after taxes = ROI % Total hotel investment Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Two Distinct Assets Owned: • Real Estate Involved Ø Ø Ø • Land Buildings Furnishings The Operating Business Itself Ø Profits from operation Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Investors May invest in hotels for reasons such as: Ø Favorable tax status resulting from the hotel’s depreciation: the reduction in value of an asset as it wears out. This non-cash expense is often termed a “tax write-off” because the decline in value of the asset is tax deductible. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Investors Ø The long-term effects of real estate appreciation: the increase, over time, in the value of an asset. The amount of this increase in value is not taxed unless the asset changes hands (is sold). Ø The profits that can be made from the hotel’s monthly operation Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Investors Owner/Operator: a hotel investor who also manages (operates) the hotel. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Companies General Manager (G. M. ): the traditional title used to identify the individual at a hotel property who is responsible for final decision making regarding property-specific operating policies and procedures. Also, the leader of the hotel’s management team. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Companies Management Company: an organization that operates a hotel(s) for a fee. Also sometimes called a “Contract Company. ” Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Role and Structure of Management Companies Special circumstances: o o Managing/directing a major (complete) renovation of a hotel. Operating a hotel in a severely depressed market: the term used to describe a hotel market area where occupancy rates and/or ADRs are far below their historic levels. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Role and Structure of Management Companies Special circumstances (cont. ): o o Bankruptcy/repossession of the hotel Managing a hotel that is slated for permanent closing Managing a hotel because of the unexpected resignation of the hotel’s G. M. Managing a hotel for an extended period of time for owners who elect not to become directly involved in the day-to-day operation of the property Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Role and Structure of Management Companies Management companies that specialize in helping lenders maintain repossessed properties until they can be re-sold will: o Secure, and if it has closed, re-open the hotel o Implement sales and marketing plans to maximize the hotel’s short- and long-term profitability o Generate reliable financial data about the hotel Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Role and Structure of Management Companies o Establish suitable staffing to maximize guest and employee satisfaction. o Show the hotel to prospective buyers. o Report regularly to the owners about the hotel’s physical and financial condition. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Companies Can Be Grouped as: o First Tier: management companies that operate hotels for owners using the management company’s trade name as the hotel brand. o Second Tier: management companies that operate hotels for owners and do not use the management company name as part of the hotel name. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Companies Can Be Grouped: o By Size It is most helpful to consider the number of “rooms” managed, then the number of hotels managed, because it is more telling of the number of managers required. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Companies Can Be Grouped: o By Involvement Ø Ø Company is neither a partner in nor an owner of the hotels they manage Company is a partner (with others) in the ownership of the hotels they manage Company only manages hotels it owns Company owns, by itself, some of the hotels it manages, and owns a part, or none at all, of others it manages Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Contracts An agreement between a hotel’s owners and a hotel management company under which, for a fee, the management company operates the hotel. Also, sometimes called a management, or operating, agreement. Liable: legally bound to compensate for injury or loss. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Major Elements of Management Agreements o o o The length of the agreement Procedures for early termination by either party Procedures for extending the contract Contract terms in the event of the hotel’s sale Base fees to be charged Incentive fees earned or penalties assessed Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Major Elements of Management Agreements o o o Management company investment required or ownership attained Exclusivity Reporting relationships and requirements Insurance requirements, status of employees The control, if any, that the owner has in the selection or removal of the G. M. and other managers Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Management Company Advantages and Disadvantages Benefits of selecting a qualified management company to operate a hotel: • • Improved management quality Documented managerial effectiveness is available Payment for services can be tied to performance Partnership opportunities are enhanced Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Disadvantages in the Selection of a Management Company • • • The owner cannot generally control selection of the on-site G. M. and other high-level managers Talented managers frequently leave The interests of the hotel owners and the management companies they employ sometimes conflict The costs of management company errors are borne by the owner Transfer of ownership may be complicated Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Buy-out: an arrangement in which both parties to a contract agree to end the contract early as a result of one party paying the other agreed-upon financial compensation. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Franchising and the Lodging Industry Franchise: an arrangement whereby one party (the franchisor) allows another party to use its logo, brand name, systems, and resources in exchange for a fee. Franchisor: those who manage the brand sell the right to use the brand name. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Franchising and the Lodging Industry Franchisee: those who buy, under specific terms and conditions, the right to use a brand name for a fixed period of time and at an agreed-upon price. Brand: the name of a specific hotel group. For example, Holiday Inn and Holiday Inn Express are two different brands. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Hotel Franchisors In the 1950 s, Kemmons Wilson began the Holiday Inn chain. Today, there are over 1500 hotels within this franchise. www. ichotels. com o Chain: the term used to describe a group of hotels, all of which share the same franchise brand name. Also called “brand” or “flag. ” Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Conversion: the changing of a hotel from one brand to another. Also known as “reflagging. ” More than 75% of all U. S. hotels are involved in a franchise relationship. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Hotel Franchisees Buying a franchise allows a hotel to: • Acquire a brand name with regional or national recognition • Connect the hotel to the Global Distribution System (GDS) Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Hotel Franchisees Factors that hotel franchisees look for in a brand: • • The quality and experience of the brand managers Perceived quality/service level of the brand Ø • • System-wide: the term used to describe a characteristic of all hotels within a given brand. The amount of fees paid to the franchisor Direction of the brand Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Direction of the Brand Future success can be detected by examining: Ø Ø The number of hotels currently operating under the brand name The % of hotels that have elected to leave the brand in each of the past five years The number of new properties currently being built under the brand’s name The number of existing hotels converting to the brand (if conversions are allowed) Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Direction of the Brand Future success can be detected by examining: Ø Ø The ADR and occupancy rate trends for the last five years in comparison to those trends for other hotels with which the brand competes The % of total hotel room revenue contributed by the brand’s reservation system and the % of hotels within the brand that achieve that average rate of contribution www. franchisehelp. com Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Franchise Agreements: The legal contract between the hotel’s owners (the franchisee) and the brand managers (the franchisor) which describes the duties and responsibilities of each in the franchise relationship. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Federal Trade Commission (FTC) The FTC enforces federal antitrust and consumer protection laws. It also seeks to ensure that the nation’s business markets function competitively and are free of undue restrictions caused by acts or practices that are unfair or deceptive. “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” OR “ The Franchise Rule” www. ftc. gov/bcp/franchise/16 cfr 436. htm Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Franchise Rule Requires That Franchisors: • • • Supply potential franchisees with a disclosure document at the earlier of the first face-to-face meeting or 10 business days before any money is paid by the franchisee to the franchisors Provide evidence, in writing, of any profit forecasts made by the franchisor Disclose the number and % of franchisees achieving the profit levels advertised in any promotional ads that include profit claims Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

The Franchise Rule Requires That Franchisors: • • • Provide potential franchisees with copies of the basic franchise agreement that is used by the franchisor Refund promptly any deposit monies legally due to potential franchisees that elected not to sign a franchise agreement with the franchisor Not make claims orally or in writing that conflict with the written disclosure documents provided to the franchisee Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Franchise Offering Circular FOC (Franchise Offering Circular): a franchise disclosure document that is prepared by a franchisor and then is registered and filed with the state governmental agency responsible for administering franchise relationships in that state. International Franchise Association (IFA) www. franchise. org Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Brand Standards: a hotel service or feature that must be offered by any property entering, or remaining in, a specific hotel brand. Asian American Hotel Owners Association (AAHOA): an association of hotel owners who, through an exchange of ideas, seek to promote professionalism and excellence in hotel ownership. www. aahoa. com Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Ownership and Management Alternatives Ways in which hotels can be owned and managed: o o o Single-unit properties not affiliated with any brand Ø Market share: The % of the total market (typically in dollars spent) captured by a property. www. roney-palace. com Single-unit properties affiliated with a brand www. accor. com Multi-unit properties affiliated with the same brand Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Ownership and Management Alternatives Ways in which hotels can be owned and managed: o o o Multi-unit properties affiliated with different brands Multi-unit properties operated by a management company or the brand Single- or multi-unit properties owned by the brand Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Ownership and Operational Challenges Franchise Service Director (FSD): the representative of a franchise hotel brand who interacts directly with a hotel franchisee. Hayes/Ninemeier: Foundations of Lodging Management. (C) 2006 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.