As a hotel owner/investor with maybe a hotel property or two, you have invested your hard-earned capital and risked having to draw on your loans to run a profitable lodging business. Additionally, given your limited experience in the hotel industry, you may have chosen a professional management company to run your hotel. Perhaps a ‘first’ management company, a company that not only franchises hotels but also provides management services. Alternatively, you may have selected a “second level” company. This is a hotel owner/franchisee with dozens, maybe even hundreds of hotels managing their own assets and those of others. Or maybe you’ve decided to join a smaller boutique company, with possibly a hotel or two of its own, looking to expand its management portfolio. No matter who you’ve chosen, you expect them to have your best interests in mind in every decision they make. Well, that can’t exactly be the case.
The goals of property owners and investors are rarely fully aligned philosophically or financially with the goals of their appointed management, or sometimes even their brand. Operators and brands often have competing goals that are in direct conflict with maximizing owners’ returns. For example, brands have an interest in maintaining brand standards and creating “brand equity,” which may not always be in the best economic interest of an individual lodging asset. Safe brands will argue that what’s good for the brand will have some effect on you, but if you change your brand new wallpaper behind the reception desk from a shade of beige to a shade that the brand plans to feature in all of their hotels ( what I’ve been asked of a major brand – who shall remain nameless) is really just a poor use of capital that will not impact either sales or guest satisfaction.
Management companies, on the other hand, have an interest in growing their portfolios and their revenues (usually a percentage of your own), but may not be motivated to help your lodging business achieve its individual peak performance in the short-term, or worse, long-term term. They may also lack the expertise or incentive to control costs, seek the best market position for an individual hotel, maximize a hotel’s market penetration, or have the knowledge to navigate the myriad of distribution channels, old and new.
Given that average management fees, which are currently around 2.5% of a hotel’s total gross revenue (including any incentive fees), are well below yesterday’s fees, it’s no wonder. In recent years, management firms have focused on generating additional revenue by adding lower-fee properties to their list in an attempt to increase their revenues. Many of these companies keep the same amount of staff and resources on-site and spread them across more assets.
Take the example below. At the current fee rate, an additional $25,000 in hotel revenue equates to approximately $500 in fees. Let’s face it, $500 is not a large enough return for the additional effort, staff time, and resource allocations that would be required by the management company to generate that additional $25,000. However, as a homeowner, paying your mortgage out of cash flow or out of your pocket can make all the difference.
The economic facts just don’t add up. Imagine a typical select service hotel with 100 guest rooms, an average daily rate of $70, and an annual occupancy rate of 70%. Average charges for this hotel would be around $35,000. What can an owner really expect from them when the management companies’ earnings per hotel are at this low level? While your hotel can benefit from purchasing power, it also takes on all expenses incurred through travel, accounting services, cooperative marketing, etc. of the management company. This is often an area where some revenue has been lost in recent years – gained by some less unscrupulous management companies.
When fees are at this low level, play becomes volume. It’s not my intention to hit any management company. I have served as Chief Operating Officer of three small to mid-sized companies operating both national brands and independent luxury hotels and I currently represent many hotel owners through our consulting practice. I see both sides of the problem. But…there are few companies that focus on volume sales in any industry that are known for providing excellent service to their customers.
So what should an owner do? Become an informed owner who will monitor their hotel’s performance (or hire someone to do it for them). Note that for $35,000 per year in fees, your services may be limited to limited oversight of a property manager. hopefully a good one. If you are now hiring a management company or are about to be interviewed, ask yourself a few questions about your relationship and how you will be informed of the success of your hotel. You may not need all of the information suggested below, but you certainly need some. Are you wondering if you…
o Receive a report from a company representative who is on site for a day or two each month detailing the results of the physical facility, operations and sales efforts of the personnel they oversee? Does your finding agree with yours?
or get timely monthly statements comparing results to budget and last year?
oReceive monthly reports on the hotel’s performance as measured by third-party companies such as
1) Smith Travel Research’s STAR report to review your REVPAR performance against an accurate competitive rate and market profile;
2) TravelClick’s Hotelligence reports to measure your GDS penetration;
3) Distribution channel contribution reports to check your brand, internet, wholesaler, GDS and other contributions to your earnings?
oReceive monthly booking pace reports to check where your earnings are compared to the same time last year, along with an action plan to improve?
or get monthly sales reports like; Top Client Report, showing the productivity of the hotel’s top 20 clients and the year-on-year changes in their productivity; reports on revenue from advertising spend in pay-per-click, GDS, print and other advertising media; and productivity reports for sales reps to determine who is selling and producing in your hotel?
or receive reports on the effectiveness of your reservations department (e.g. turndown and conversion reports) and a guest’s quality of stay through secret customer visits or visits?
o receive monthly reports on the satisfaction of your guests and staff compared to your brand or similar hotels?
oReceive at least annual reports on your hotel’s industry performance in the areas of profitability, expenses, labor costs, REVPAR generation and market penetration to compare the performance of your management company?
or receive annual reports on market changes, such as E.g. more or fewer competitors, new or closed companies or branches in the region?
oYou will receive an annual marketing plan with monthly or quarterly progress updates?
o Receive support in the planning and implementation of investment projects?
orreceive an annual report on the state of the property and franchise compliance?
As the owner, the ball is in your hands and often you hire a management company because you are too busy to go into the details needed to ensure your return on your hotel investment is maximized. Maybe it’s time you took a little time to investigate if this is happening?