Hotel owners and management companies looking to add value to assets and operations need enforceable, meaningful performance testing that allows both sides to better do their roles, panelists said during the Hotel Operating Agreements conference.
LONDON—As international leisure travel expands at robust rates, pressure is mounting on brands to maximize rates and grow revenue. But owners and management companies should judge brands’ performance rationally and regard termination of management contracts as a weapon in their arsenal only to be used when relationships have hit or near rock bottom, according to sources.
Speaking at a panel titled “Holding the brand to account” during the Hotel Operating Agreements conference, sources said termination tests should always be appropriate.
No one wants the relationship between owner and management company to falter because when that happens the only people left in the room will be lawyers, sources added.
“Each side is looking for value, and it seems to be that cash values are too blunt an instrument,” said John MacKenzie, a partner at legal firm Shepherd & Wedderburn.
MacKenzie added that he sees new areas emerging that might be added to the basket of performance tests.
“I can see performance standards moving into data collection. … I am not sure I know what standard I am asking for, but the drive we are seeing in terms of the collection of data, and what value it has, that might well soon creep into agreements,” he said. He referred to European Union general data protection regulations that come into effect on 25 May 2018.
Matt Costin, managing director, On the Move, at research firm BDRC Continental, said that while clearer, traditional performance tests always will have their place. Today’s challenge, he said, how much you can pin outcomes on the efforts of brands.
Owners themselves are aware of the pressures on the industry and for brands; they also need to protect their investments, said Henri Wilmes, VP of acquisitions at London & Regional Properties.
“Performance tests are the same regardless of what the contract is. We need to make sure that the tests are enforceable if things are not going well,” he said.
The brands tend to agree, according to panelists.
Panelists representing brands emphasized that all sides needed to know the business objectives of their partners and what is reasonably obtainable. If the dynamics of a destination change, the relationship already inherent in a partnership should be able to move up with the market, they said.
Presumably that would also be true of all the other players battling for customers, panelists said.
“We are in a competitive market. I always ask myself, ‘if it was my money, am I reaching profit levels that are acceptable?’” said Prakash Krishnamurthy, senior development manager at AccorHotels.
“Ask revenue managers, ‘how many contracts have you terminated?’ I suspect the number is small. When we structure agreements, what is in there is meaningful and make relevance to owners and what we need to do,” said Graham Dodd, senior director of development, United Kingdom and Ireland, at Hilton Worldwide.
He added that agreeing to details always is more complicated with management agreements than it is with franchise agreements.
“We are out there actively seeking long-term relationships, but we are flexible. We can also flip from management to franchises and offer some guarantees to exits depending on what (the owner’s) business model is,” Dodd said.
Brands maximizing performance
Panelists said that much emphasis is placed on performance in terms of top-line revenue, but there are other elements that add to the total worth of operations.
“We need to focus more on profit margins, but (brands) also look to the procurement side of things, providing services to owners that drive costs out of their assets. There are both offensive and defensive elements in choosing a brand,” Dodd said.
“Brands drive more business in good times, probably a little less in downtimes,” he said.
Costin said there is a strong correlation between brand affiliation and what they deliver at the end of the day.
He added that brands have pushed the envelope recently in terms of what constitutes the guest experience.
Other panelist expressed concerns over managing the costs of distribution channels and sharing data and information.
“Transparency, generally, is getting better and giving more comfort to owners,” London & Regional’s Wilmes said.
Proliferation of brands
Moderator Louise Wallace, partner at law firm CMS Cameron McKenna Nabarro Olswang, said with more brands represented by fewer companies—the result of recent mergers and acquisitions activity—owners often feel their investment interests are less protected.
Hilton’s Dodd said his company, with a stable of 14 brands, is fortunate to have more clarity between its flags than a company like Marriott International, which has more than double that number.
Dodd added when Hilton added another of its brands in the relatively small market of Woking, England, his first call was to the owner of the first flag there.
“It came down to the owners believing that two Hilton brands would work in the same market, but there have been opportunities we’ve turned down where contractually we could add another flag but did not feel comfortable,” he said.
AccorHotels’ Krishnamurthy said, for him, if there is an evident difference in flags’ price points, the decision is more straightforward, but there are even exceptions to that rule.
“In Heathrow, we saw the demand for another Novotel in Heathrow, but each case is different, and we, too, would speak to our owners first,” he said.
In the case of adding product, all sides, including guests, might differ in their evaluation of markets and demand, the panelists said. The data supporting any side’s conclusion might also be too narrow to appease other opinions.
“We obviously try to seek protection. Not all brands are so clearly differentiated, and they all tap into the same loyalty programs,” Wilmes said.
“There is not always perfect information. … And for some chains, it is worth having another brand in a market as it adds to the equity of that brand and chain across the overall market,” BDRC Continental’s Costin said.