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Franchisors plan to grow, but at what cost?
January 25 2013

During ALIS, a panel of executives from hotel brands debated the potential for hotel oversaturation, particularly in the U.S.

Highlights
  • Wayne Goldberg of La Quinta said the potential for an overabundance of hotel rooms is not a near-term threat.
  • David Kong of Best Western suggested there already are too many hotel rooms in certain segments of the United States.
  • Even traditionally suburban brands—mostly in the economy and midscale segments—now want distribution in urban locations.
By Jason Q. Freed
Contributing Editor, Tech Impact Report

LOS ANGELES—With industry fundamentals growing and the debt market loosening, hotel franchisors are looking at 2013 as an opportunity for strong global portfolio growth.

However, during the second day of the Americas Lodging Investment Summit, a panel of executives from hotel brands debated the potential for hotel oversaturation, particularly in the United States.

Wayne Goldberg, president and CEO of La Quinta Inns & Suites, pointed to the supply and demand equation to illustrate that more roomnights are being sold each year while supply growth remains minimal. Therefore, he said, the potential for an overabundance of hotel rooms is not a near-term threat.

On the other side of the coin, David Kong, president and CEO of Best Western International, pointed to a historical flatline of occupancy rates at or around 60% to illustrate how continuous supply growth affects occupancy, which in turn affects pricing power. A lack of occupancy growth, he said, suggests there already are too many hotel rooms in certain segments of the U.S.

“I think that for the most part, supply growth seems to be in check, but a lot of it is concentrated in the midscale and upper-midscale segment,” Kong said. “That creates a lot of supply in the marketplace.”

Eric Danziger, president and CEO of Wyndham Hotel Group, said he stands in Kong’s corner. Because oversupply routinely leads to cyclical downturns in the industry, there is proof that there is such a thing as too many hotel rooms.

“Much of the pain we experience is self-induced pain,” Danziger said. “Our industry has forever started building as long as there is bright light of any kind.”

Because of developers’ propensity to continually build new hotels, he said small, negative economic events often cause cataclysmic drops in hotel performance, and it typically takes six or seven years to recover.

“I’m hopeful that at some point we’ll address the future using history lessons,” Danziger said. “We’ll have more one-on-one relationships with customers.”

Danziger said he’s not against the development of new hotels in the U.S., so long as due diligence is done to ensure the market can absorb the new supply.

“There is room for more product—good product—so long as it coincides with moving not-good product out,” he said. “The difference in this cycle is that there are more hotels exiting the system than in prior cycles.”

Urban markets
For various reasons, most franchisors today are eyeing primary urban markets for development. Even traditionally suburban brands—mostly in the economy and midscale segments—now want distribution in urban locations.

“Urban markets offer great opportunity for all brands,” Kong said. “But at the same time, for a developer to think about a certain brand, they have to think about the (return on investment) they get with that brand.”

Kong said developers are looking at Best Western’s upper-tier product—Best Western Plus and Best Western Premier—because those flags allow the owner to command the rate necessary to exist in urban locations.

ROI, Danziger said, is always the main factor when deciding what brand fits where.

“I’ve never met an owner looking for ROE, which is return on ego,” he said. “They’re looking for return on investment.”

Goldberg said La Quinta continues to perform “very well” in urban markets—more so than other markets, in fact.

Global expansion
As U.S.-based brands further entrench themselves in foreign lands, it’s imperative they do so carefully and with the right partners, panelists said. After all, trusting a brand with an owner in another country is a risky step.

“Putting your brand in the hands of a third party is always an important decision whether in the U.S. or elsewhere,” Danziger said.

In China, for example, Danziger said brands should work hard to help third-party owners and managers execute efficiently.

“Our job is to learn how to help those people become great managers of our brand,” he said. “It’s the responsibility of our brand, if you’re not managing it yourself, to truly work hard to have the resources and be committed to help franchisees have the best returns possible.”

Danziger said finding the right people is a challenge in China.

“There is immense turnover in China because there are so many opportunities,” he said. “Young people today should be excited about the industry. They’re not. We need to pay better.”

Goldberg said it’s important for U.S. brands to differentiate their product for the global customer, which he said La Quinta is doing, specifically in Mexico, where the company has six hotels open and 15 under development.

“We have to make sure the product we put in those markets works in those marketplaces,” Goldberg said.

Jim Amorosia, CEO of G6 Hospitality LLC (the company managing the Motel 6 and Studio 6 brands after their acquisition by Blackstone Group LP), said he made it a priority to differentiate the business model when the brands entered Canada in the early 2000s. His team had to have “boots on the ground,” he said, and they needed to have expertise in the particular markets in which they would enter.

Amorosia said G6’s goals are to continue to remain centered in North America but that South America is appealing in the long term. Ideally, he said, Blackstone and G6 would eventually like to enter South America en masse rather than with one-off deals, although he recognized the difficulty in that from the economy segment.

While master license agreements are one way to accelerate growth in foreign lands, Goldberg said La Quinta avoids them.

“We won’t enter into master license agreements,” he said. “From my perspective, all you’re doing is giving control to someone else to determine whether or not we’re successful.”

Guest experience
While brand executives admittedly focus most of their attention on growth, it cannot be forgotten that the most important aspect of hospitality is the guest experience, the panelists said.

“There is tremendous opportunity in the industry to satisfy the guest,” Amorosia said. “As the population grows, you want to make sure you’ve got the right people delivering the product with a sparking smile.”

Kong cited a popular TV series “Hotel Impossible” and said show host Anthony Melchiorri finds problems in hotels that almost always source back to the hotel owner and the hotel GM.

“Problems always boil down to them,” he said. “Those two have to be the key to develop guest loyalty. Everything starts with them at the hotel.”

For that reason, Kong said Best Western is developing a program to better engage hotel owners and GMs that will focus on changing the culture of a property.

“If it’s just a program, it doesn’t stick,” he said. “It has to be about a cultural shift.”

“What everyone forgets is that we’re in the hospitality business,” Danziger added. “Oftentimes, it morphs into a real estate business or a stock business, but ultimately we’re in the hospitality business.”

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