BRAND NEW WORLD

Experts say the pandemic shutdown will result in brand contraction and create opportunities for acquisitions, both of which will be tempered by the limited access to financing.

TW illustration by Jenn Martins

TW illustration by Jenn Martins

TW illustration by Jenn Martins

While most hotel executives have long been bullish on robust brand expansion, many are singing a different tune during the pandemic.

When asked about the health of hospitality’s brand ecosystem during a June panel hosted by New York University, Hilton president and CEO Christopher Nassetta was quick to acknowledge that the sector “probably will have fewer brands,” given the sheer depth and breadth of negative impact from Covid-19. 

“I do think that when you wake up in two or three or four years, some things will be different,” Nassetta said. “Not every brand is going to make it to the other side. I’m not necessarily saying big brands, but there are thousands of brands of all sizes around the world, and this is a global crisis. There are going to be winners and losers.”

Nassetta didn’t go so far as to say any of Hilton’s 18 brands are at risk of going bust. 

But analysts are certainly wondering which flags industry-wide, if any, could be jettisoned.

“Ask every major hotel company, and they’re all predicting their peers will lose some brands,” said Bjorn Hanson, a hospitality consultant and adjunct professor at New York University’s Tisch Center for Hospitality, Tourism and Sports Management. “But when you ask them if their brands will be affected, they all say, ‘absolutely not.’ And they say that for two reasons. One, because it’s really hard to shut down a brand, and two, to eliminate one would mean that they’d have to go to the franchisees of that brand and, especially in this environment, provide financing for them to convert. Shutting down is an admission of defeat.”

Bjorn Hanson
‘It’s really hard to shut down a brand. Shutting down is an admission of defeat.’
Bjorn Hanson, NYU

While Hanson predicts that very few brands may ultimately end up on the chopping block, he does view the current downturn as a potential opportunity for companies looking to do some light pruning.

“Some people are saying that during this pandemic, these companies may actually have a window to terminate a brand, without having to admit it was unsuccessful,” added Hanson. “They can put the blame instead on the current environment.”

Of course, some brand segments may be better positioned to survive than others in the immediate aftermath of the crisis. According to Makarand Mody, assistant professor of hospitality marketing at the Boston University School of Hospitality Administration, the economy and midscale sectors will likely “come out of the pandemic a little bit stronger” than other chain scales.

“Based on some of the early reports we’re seeing, hotels that are in those economy and midscale segment categories seem to be holding up much better than others,” said Mody. “We’ve been seeing occupancies of between 30% and 40% in those categories, which is much higher than luxury, for example, which has been averaging at about 5% occupancy.”

Iconic luxury brands, however, tend to have a valuable halo effect on a company’s overall portfolio. Therefore, the weakest link for many hospitality giants will likely be their brands in the upscale and upper upscale segments, said Mody.

“Brands [in those segments] will be challenged because they aren’t generating as much top-line revenue right now, but there are high costs associated with operating those kinds of properties,” he said.

From Hanson’s perspective, any hotel brand launched within the past five years, especially one that has been slow to build a pipeline, could be on shaky ground. Additionally, he believes some of the millennial-targeted brands that have crowded into the space in recent years may also miss the mark. 

“There are some brands that may have been somewhat ill-conceived; maybe the research was bad, or the launch was not well-managed,” said Hanson. “If I had to guess, I think it’s within this category of newbuild, millennial-oriented brands that there could be some losses.”

According to Chekitan Dev, a professor of marketing at Cornell University’s School of Hotel Administration, a hospitality brand shakeout “is inevitable.”

“Customers are going to be looking for meaningful and identifiable differences between brands,” said Dev. “Those brands that are not able to establish clear and distinct ‘swim lanes’ are going to perish. I fully expect a few brands to be phased out or consolidated.”

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Mergers and acquisitions

When it comes to consolidation, some analysts predict a spree of mergers and acquisitions could be on the horizon. Others, however, believe that while there are likely to be some challenged assets up for grabs in the coming months, potential buyers could be hampered by limited access to cash.

“M&A always ebbs and flows, but during any crisis or economic downturn, we do begin to hear more talk of it,” said Lalia Rach, an industry consultant and former dean at New York University’s Tisch Center. “However, no one in the industry has ever faced these types of cash flow problems or this level of uncertainty. Even for these incredible, global hospitality companies, their cash reserves could become an issue. And then there are the hedge funds — they have money to spend, but I don’t think they’ll spend it until demand comes back.”

During a recent virtual panel discussion, Hyatt Hotels CEO Mark Hoplamazian similarly expressed some skepticism over a post-pandemic buying frenzy.

“I reflect on Great Recession, back in 2008, 2009 and 2010, and there was a great deal of anticipation [for] all sorts of great opportunities to buy assets or platforms, probably at what people believed would be rock-bottom prices,” said Hoplamazian. “[That] never really materialized.”

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Pipeline squeeze

With the global economic outlook remaining rather bleak, many experts anticipate that pipeline growth will contract in the coming years. Consequently, hospitality companies will likely look to brand conversions in order to grow their ranks. 

“The only way that these companies are going to be able to keep growing is to be able to sign on existing hotels,” explained Boston University’s Mody. “New hotel developments are likely going to be pretty slow for the next three or four years, at least.”

For hotel owners, who are under tremendous pressure to cut costs, the decision on which flag to fly, if any, will likely take on additional weight post-pandemic.

“We might see some hotels scaling down, from, say, an upscale to a midscale brand, because scaling down is going to be much cheaper than scaling up,” added Mody. “We may also see increased interest in soft brands, because typically their fees tend to be lower than some of the hard brands. Also, you obviously don’t have to do too much renovation or there are fewer hard brand standards to adhere to.”

Another attractive option for fee-wary hoteliers might be consortium networks like Small Luxury Hotels, Leading Hotels of the World, Relais & Chateaux or Preferred Hotels & Resorts.

“These networks provide owners who want to remain independent a marketing affiliation and many services they need, and may also help them satisfy lender requirements,” said Hanson. 

Heightened interest in such networks already appears to be budding. Preferred Hotels & Resorts announced in mid-May that the brand had added 26 member properties to its portfolio for the year through April 30. And while the groundwork for many of those agreements was laid prior to the pandemic, Jonathan Newbury, senior vice president of strategic development for Preferred, confirms that new member activity remains steady.

“There’s a need to be a part of something larger rather than just being a standalone hotel these days,” said Newbury. “There is a trust factor involved with being part of a soft brand. And I think, for the next 18 to 24 months, especially, that’s going to be really important for independent hotels around the world.”

Jonathan Newbury
‘There is a trust factor involved with being part of a brand.’
Jonathan Newbury, Preferred Hotels & Resorts

Newbury added that much of the current membership interest is coming from independent hotels that have never affiliated with a brand before. Additionally, the group expects to start seeing an uptick in properties that have previously been branded and are preparing to deflag.

Preferred charges member hotels about 2.5% of gross room revenue, on average, while traditional franchise brands often take a cut of around 15% of gross revenue, said Newbury. In terms of commitment length, Preferred generally looks to ink five-year agreements with member properties. Traditional franchise agreements, however, can often extend to the 20-year mark. 

“We expect to see something similar to what we saw after the 2008-2009 crisis,” said Newbury. “We had around 80 or 90 hotels in the period between 2011 and 2015 that actually deflagged from franchise brands and came to Preferred Hotels & Resorts as independent hotels. And they all did so successfully — none of them failed, and most are still with us to this day.”

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Independents’ day

While it may seem as though it’s more challenging than ever to remain a completely unaffiliated, independent property in a post-Covid-19 world, the Boutique Lifestyle Leaders Association (BLLA), which counts approximately 300 independent hotels among its membership, is hoping to buck that assumption.

“There’s always been that stereotype, that you have to go to a brand to really make money,” said Ariela Kiradjian, BLLA partner and COO. “But one thing that our organization has helped prove is that you can stay independent and be a boutique hotel and not only turn a profit, but turn a big profit.”

Ariela Kiradjian
‘You can stay independent and be a boutique hotel and turn a big profit.’
Ariela Kiradjian, BLLA

In late May, the BLLA launched its #BoutiqueStrong campaign, intended to help provide support to independent hotels amid the crisis. As part of the initiative, the BLLA has put together the #BoutiqueStrong Council, a task force of industry experts offering independent properties educational assistance. The BLLA has also debuted a social network, dubbed the BLLA Collective, providing member properties with a community sounding board for problem-solving and advice. 

Moreover, the organization has added an “on-the-house” membership option for select, eligible boutique properties, providing them with complimentary access to BLLA resources and the ability to be listed on the group’s Stay-Boutique.com website.

“The big brands are using all these advertising tactics to lure independent hotels in, so we knew we had to do something in response,” said Kiradjian. “We want to provide resources so that owners can get the knowledge they need in order to have that choice to stay independent and boutique, if that’s what they want to do.”

Meanwhile, Kiradjian remains confident that the guest loyalty many boutique properties have focused on cultivating over the years will help them weather the storm.

“For boutique properties, it’s not about the loyalty points,” said Kiradjian. “It’s about what kind of culture they’ve created. Culture, not a point toward a free room, is how you create a real sense of loyalty.”

Mody agrees, citing Boston’s Hotel Commonwealth, near Fenway Park, as an independent property with a solid following that’s unlikely to need any brand affiliation. 

“If I’m an established boutique hotel already, and I’ve been in the market for years and I have my customer base, then I’m probably the type of property that won’t be jumping onto the soft brand bandwagon anytime soon,” said Mody. “The Hotel Commonwealth is honestly a perfect target for the soft brands, but they have such a strong market and a strong identity themselves that they simply don’t need one.”

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