Ms. Gorman

Hospitality Law

How Retail Offerings Can Enhance the Guest Experience and the Bottom Line

By Tara K. Gorman, Attorney, Greenberg Traurig LLP

From the kiosk at the limited-service, select-service hotels, and extended-stay properties to the full scale “shopping centers” at the convention and resort hotels, retail operations are a critical component of the hospitality industry. Clearly, retail operations can be beneficial to the bottom line, but savvy hotel owners look beyond percentage rent and thoroughly analyze how the retail offerings at their hospitality product enhance the entire programmatic experience, and the competitive market position of their hotel.

Before we look beyond percentage rent, let’s start by examining the bottom line. In a typical retail lease the tenant pays a flat rent or minimum rent, as well as a “percentage rent”. Percentage rent typically requires the tenant to pay a percentage of its gross sales above an agree-upon breakpoint, after deducting the flat rent and certain other expenses. If the tenant’s gross sales never reach that breakpoint, the tenant pays no percentage rent. If the tenant’s gross sales exceed the breakpoint, both the tenant and the landlord walk away with money in their respective pockets. The bottom line shakes out based on the type of hospitality product. For example, at resort hotels retail revenue can be almost 2% of total hotel revenue, whereas for other hospitality products the retail revenue to total revenue ranges from .4% to .7%.

The choice of whether to self-operate the retail offerings at the hotel or to lease the retail space or enter into a management agreement with a third party operator turns on the extent of the retail offerings at the hotel and whether the hotel owner or operator has the skills and desire to manage the same. While leasing or entering into a management agreement in connection with the retail offerings shifts the burden of the day-to-day operations from the hotel owner to a third party, it also takes away some of the control over how the retail offerings are operated, and cuts into the hotel operator’s share of the profits. Granted, that much of the control over the standards of operation, the hours of operation, and the type of retail establishment can be baked into the lease or the management agreement; however, the control over ins and outs of the operation are taken from the hotel owner and squarely placed in the hands of the third party vendor.

A critical consideration for hotel owners is how well the retail facilities will be integrated into the rest of the hotel. Hotel owners want to provide a seamless guest experience through out all components of the hotel. A management agreement provides the hotel owner the mechanisms to hold the reins and control that experience. A management agreement sets forth the requirements of the day-to-day operations of the retail facility, and provides the hotel owner with the right to change its mind as to how the retail facility is operated, to terminate the retail operator for poor performance, and in the case of a termination for convenience, the right to kick out the retail operator “just because”. Overall, the management agreement provides the hotel owner with a great deal of control. A lease provides the hotel owner with a modicum of control over the retail facility. For example, a lease may provide rules and regulations as to what sorts of activities are allowed in the retail premises and in the property as a whole. However, more often than not the rules and regulations do not reach the level of detail as the oversight set forth in a management agreement and the rules and regulation must be applied to all tenants in a non-discriminatory manner. Therefore, the rules must be one size fits all so that the sundry shop operator and the food and beverage operator must comply with the same set of rules. For those who like to hold tight control over their retail operations at their hotels, management agreements or self- operating are the way to go.

Typically the larger the retail operations the more often the retail operations are turned over to a third party operator. Clearly, it’s easier to tack on to the hotel operator’s responsibility the management of the kiosk which sells magazines, snacks, drinks, and microwavable food, than to task the hotel manager with the operations of a full scale shopping centers found in many resort hotels. The decision to self operate or engage a third party operator in connection with the retail offerings is primarily based on management capacity and need for control over the guest experience.

Looking beyond percentage rent and the direct bottom line, to how the retail offerings at the hospitality product enhance the guest experience, repeat business, and the overall programmatic experience is the more interesting discussion. The first few questions to consider are: What do people do inside the confines of your hospitality establishment? What will people forget to bring with them that they could purchase at the hotel? What do they want to bring home? How will the retail options enhance the overall guest experience? What can you put in front of the guests that they will buy, that will remind them of their visit to your hotel, and encourage repeat visits? In answering all of these questions, it’s important to consider the age of the consumer and the make up of your customer base. For example parents are more free spending on behalf of children than they would be of themselves. So along with the lovely cashmere sweaters, you may consider offering something that would create intergenerational brand awareness. For example, a cute and cuddly stuffed animal with brand identification that the parents can take home to their child would be a nice gift for the child and would be a nice reminder of the parent’s visit to your hotel. Beyond increasing the gross sales of the retail establishment the greater point is to create positive memories and increase the probability that the customer will come back to your establishment. Just remember that one of the best forms of advertisement is word of mouth. This sort of branded item creates intergenerational brand awareness and solidifies the brand experience in the mind of the consumers and can spark that conversation about your hotel - and repeat business.

The fit is critical. The retail options should fit the overall look and feel of the hospitality product. A five star hotel with a fast food chain in the lobby does not necessarily create a good fit. Clearly, a five-star hotel will offer upscale retail, and a limited service hotel will not. Hotel owners must carefully consider the make up of their customer base and what sort of “shopping” and retail entertainment will enhance the overall programmatic experience. A family oriented hotel may offer arcades, and other types of child centered entertainment, whereas a business hotel will offer fine dining, upscale and practical shopping and a lobby bar. The hotel owner, or in the branded arena, the licensor, will have control over which sorts of retail establishments best fit into the hospitality product. Creating an environment to enhance the overall guest experience through the retail establishments offered at the hospitality product, is not only good for the guest experience, but it does wonders for the bottom line.

When making decisions as to what sort of retail establishments to provide at your hospitality product, it is critical to look beyond percentage rent and to examine how retail can enhance the overall guest experience, and in turn your bottom line.

Tara K. Gorman is a shareholder with the law firm of Greenberg Traurig. She focuses her practice on hotel acquisitions, operations, development and finance, condo hotels, hotel management agreements, and license agreement, general commercial real estate transactions, commercial leasing, various financing transactions involving lender and borrower representation. Ms. Gorman can be contacted at 202-530-8519 or gormant@gtlaw.com Extended Bio...

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