The number of soft-branded hotels grew quickly after they debuted 12 years ago, and the factors that made them popular with owners and guests could hold true through the pandemic.
HENDERSONVILLE, Tennessee—Soft-brand collections have been a popular option for owners of both independent and hard-brand hotels, and the coronavirus pandemic could have an interesting effect on the growth of soft brands.
During the “Soft brands. Strong performance?” webinar presented as part of the Hotel Data Conference, Kelsey Fenerty, research analyst at STR, said soft brands have enticed hotel owners with the idea of melding the attraction for unique independent properties with the distribution channels and support from large brand companies. STR is the parent company of HNN.
The soft-brand collection concept entered the hotel industry in 2008 with Choice Hotels International’s Ascend Collection. Soft brands flourished over the following 12 years, both in number of collections and room count. STR tracks 16 soft brands that operate in the U.S. across five of its six chain scales. There is one soft brand in its economy segment, none in midscale, four soft brands in upper midscale, three in upscale, five in upper upscale and three soft brands in luxury.
In terms of percentage of supply, hard brands tend to fall mostly in the select-service midtier segments, Fenerty said. STR’s pipeline data has shown for a long time that owners and developers have been heavily building the select-service brands, she said. Independents have a heavy presence in the economy segment, mostly “mom and pop” hotels, as well as some in the higher-end segments.
Eighty-eight percent of soft-brand hotel supply falls in the top three segments: upscale, upper upscale and luxury, she said.
When looking at the room counts alone, soft brands aren’t close to independent numbers and can’t compare to hard brands, Fenerty said. There are about 64,000 soft-brand rooms in the three top segments, or 73,000 rooms in total across the U.S. The main reason for this is the soft-brand concept is only 12 years old, she said.
“So it’s still very much in ramp-up as a brand, and of course, that leads to an overall smaller room footprint,” she said.
However, soft brands have shown stellar growth over the last 10 years, speaking to their popularity, she said. Supply growth stayed around the 20% mark even after the Great Recession when supply growth slowed down.
Growth through conversions
Conversions played a significant role in the growth of the soft-brand footprint, Fenerty said. Almost 80% of total soft-brand supply in the U.S. was a conversion from an independent or hard-brand hotel, she said. Conversions decrease the time to open, grow the overall soft-brand supply faster and are easier than relying solely on new-builds.
“Conversions are such an inherent part of the soft-brand strategy,” she said.
More than 60% of the conversions came from independent hotels, Fenerty said. Independent hotels tend to be unique, local and authentic to their community. Joining a soft-brand collection allows these hotels to hold onto those qualities while accessing a massive distribution network as well as support from a major parent company, she said.
“You can see where, especially in a downturn, an independent operator might be tempted to convert to a soft brand,” she said.
In looking at performance of independent hotels that converted to a soft brand, STR data from 2007 to 2019 shows that, on average, they broke even with no major swings either way, Fenerty said. Compared to their class, which includes hard brands, these conversions had lower occupancies but slightly outperformed on average daily rate.
Hard brands made up the remaining 40% of conversions to soft brands, Fenerty said. Almost 45% of the conversions stayed within the same chain scale during the conversion while 41% moved up a scale. This may be because soft brands are mostly in the top three segments in the chain scale and it’s easier to move up than down where there are fewer soft brands, she said. It’s also possibly because of physical property attributes limiting how much work can be done during the conversion.
When a hard-brand hotel converts to a soft brand, a majority of those properties stay with the same parent company, she said. One reason owners would change to a different parent company is if the franchisor they were with didn’t have a soft brand in their brand portfolio.
Effects of the pandemic
Comparing pipeline numbers from June 2019 and June 2020, there are now more rooms in construction and planning in a conversion, Fenerty said.
Pipeline data lags compared to performance data, she said. When the pandemic began in the U.S. and states started locking down, demand immediately plummeted, and performance data reflected that a week later. In terms of pipeline data, there’s more bureaucracy and red tape involved with these projects, slowing down changes in the planning, in planning and in-construction room counts, and it’s difficult to just stop in the middle of construction, she said.
“It's possible that this time next year, once the pipeline catches up to all the changes happening right now, we will see fewer properties and construction due to the economic contraction,” she said.
However, it’s possible owners of independent properties might see this downturn as the time to join a soft-brand collection to take advantage of the safety net a brand parent company can provide. It’s too early now to see whether that is the case, she said.
Data from 2019 shows independents on average reported the highest revenue per available room at $135, Fenerty said. Soft brands came in second at $132, with hard brands finishing in third at $130. Soft brands have a lower occupancy while having a higher rate while hard brands are the opposite.
By 2019, the industry was 10 years into an economic recovery, and rate growth had slowed and was low everywhere, she said. Independents were the standout here as they were growing occupancy, giving them some pricing power, resulting in 2.1% RevPAR growth. Soft brands and hard brands had fairly equal RevPAR growth as both were pretty flat, thanks largely to the high growth of supply in both compared to independents.
The week ending 11 April was the worst week in STR history for soft-brand, hard-brand and independent hotel performance, Fenerty said. RevPAR has grown since then, but for the week ending 18 July, RevPAR was $49 for soft brands, $44 for hard brands and $75 for independents.
Independents have pulled away somewhat in terms of performance during the pandemic, and that’s probably a function of their size, she said. Higher-end independent properties averaged about 105 rooms per property compared to 159 rooms on average for soft brands and 187 for hard brands.
“It could just be that as people have concerns about physical distancing and isolating being around other people, travelers are moving into these smaller hotels to try to minimize their exposure and stay safer, and that's reflected in the stronger than average independent performance,” she said.
At the beginning of the year, soft-brand and independent hotel ADR was comparable and both had a decent premium of about $30 over hard-brand ADR, Fenerty said. When the pandemic hit, demand dropped and ADR declined for all hotels, but hard-brand ADR exceeded soft-brand ADR. As the recovery started, soft-brand ADR rose.
“The really exciting news is that $30 premium is back,” she said. “It’s a small sign, but it’s a pretty refreshingly normal sign, and that’s always something great to see.”