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Up For Debate

Owner, Brand Execs Discuss Their Differing Perspectives On Key Lodging Issues

Monday, September 30, 2019
Dennis Nessler
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Brand proliferation, declining REIT stock prices, and the value of loyalty programs were among the topics debated by a panel of high-level executives representing both brands and owners at last week’s Lodging Conference.

The panel, “A View From The Top,” was moderated by Don Landry, owner, Top Ten Hospitality Advisors, and included David Kong, President and CEO, Best Western Hotels & Resorts; Tyler Morse, CEO, managing partner, MCR Investors; Heather McCrory, CEO, North & Central America region, Accor; and John Mehlman, President and CEO, Hospitality Investors Trust.

Kong began by pointing out he’s not as concerned about the current state of the economy as the stock market continues to climb, but rather is more focused on overbuilding within the lodging industry.

“The fact of the matter is in a lot of markets we have a lot of new hotels opening up and that’s putting pressure on occupancy to begin with. Then you have a situation where you have OTAs and market managers coming to the hotels and trying to convince us to lower rates to get better placement and then you have these new hotels that opened up trying to take market share by lowering their rates. All these things are putting pressure on the rate when occupancy is already challenged,” he said.

Mehlman, meanwhile, was asked about the struggles of REITs, particularly in the public markets. “We’re at an inflection point I think in the capital markets as well as in the REIT business. We’re in the single-night risk business. We change our prices every day and for the first time in about 25 years we can’t correspondingly shift the rise in expenses into our rate. So normally you could push that 2 dollars or 3 dollars into your rate and get it back and it’s not happening. We’re running our hotels and we hope to [achieve] 2.2 percent RevPAR growth, but our expenses, mostly labor, are going to be minus 3.5 percent. Friends that is a flat EBIDTA year,” he said.

Morse reinforced the point and took it a step further.
“I think hotels should not be owned by public companies, it’s crazy. It’s the most volatile asset class in the world in the real estate space. It’s one-day leases. Everybody checks out at 8 in the morning and you don’t know whether they’re going to come back at the end of the day; or a storm rolls through and RevPAR gets crushed. It is a highly volatile asset class that doesn’t lend itself to the public capital market,” he said, adding that conversely franchise companies are “terrific public companies.”

The subject of brand proliferation and the continued launch of new brands, particularly in the boutique and lifestyle segment, has been a frequent topic of conversation in industry.

“There’s a lot of controversy should you have more brands or less brands? I think it’s about the DNA of the brand. If a customer is looking for that I think it’s really important; whether it is design, art, service levels or the style of a hotel. I think people are looking for those things and a brand will only survive as long as what the customer is looking for is delivered. As soon as you’re not delivering on that front then you’ve got a problem with your brand. I do believe we’re going to see it continue to grow in terms of number of brands and some will fall off, but I think it will continue to grow and morph to what people are specifically looking for,” noted McCrory.

Kong, meanwhile, also sees brand expansion as opportunity.
“If you look at the new brands that have launched recently most of them are boutique or lifestyle...In short it’s not easy to be successful in the boutique or lifestyle [segment]. You can have the box but the experience is much more than that. I think it’s gaining a lot of popularity because if you look at the performance of those brands it’s in general much better than the traditional hotels,” he stated.

Morse, however, provided some skepticism from the perspective of an owner.
“Let’s be honest with ourselves the reason why the brand companies have 39 brands or 33 brands is simply so they can carpet-bomb the landscape with new hotels to compete with the existing hotels because of the concept of radius restriction. This is the tug of war between the owners and the brand companies. When brand companies left the owned business they are in the business of more units. If you create a new brand then all of a sudden you can put more units into 2,000 markets across America,” he said.

One brand that has garnered a lot of attention is Oyo Rooms, a global economy chain of leased and franchised hotels, homes and living spaces, which has grown to one of the largest hospitality companies in the world since being launched by founder Ritesh Agarwal in 2013.

Mehlman sees more success ahead.
“The secondary market is quite buoyant in terms of buyers of hotels and they are a variety of different ethnicities. They are really the epitome of the American dream story to build their family companies this way. So far we’ve sold about 25 hotels in the last couple of years and most of them have come out of this world. I believe this is where Oyo can be a player to consolidate this type of buyership and investor and take advantage of the synergistic plays that they have in those type of markets,” he noted.

Finally, the value of loyalty programs to owners generated considerable debate.

Morse offered his perspective. “Loyalty programs cost a fortune, the technology behind them is staggering in its expense. I used to work for Barry Sternlicht at Starwood and very early on he said ‘if I had to do it all over again I would not have created SPG [Starwood Preferred Guest].’ The cost does not outweigh the benefit, but the genie was out of bottle and once the genie is out you then you’ve got to promote the genie,” he commented.

Kong, however, took issue with that perspective, referencing the powerful reservation systems of companies like Marriott and Hilton and their ability to attract owners because of it. “What drives that? It’s the loyalty program. You’ve got to look at the loyalty program not just as a cost, but it’s an investment in marketing to drive more business to your hotel. How can Marriott support four different brands on the same street corner if it’s not because of the loyalty program?” he said.
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Dennis Nessler    Dennis Nessler
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