The New Frontier: Understanding Rights and Responsibilities When Changing Hotel Brands

By William A. Brewer III Managing Partner, Bickel & Brewer | December 21, 2014

Tension between hotel owners and hotel management companies comes as no surprise during tough economic times. But even in times of improved economic prosperity, some hotel owners are intolerant of management companies that fail to manage assets in the most effective and profitable manner possible. This results in certain owners seeking, or being compelled, to convert their asset to a different brand, or in some cases no brand at all. They do so to protect their long-term economic interests in markets that have proven to be cyclical. In this piece, we explore important considerations regarding the respective rights and responsibilities of owners and managers in such circumstances.

Setting the Stage: The Shifting Dynamics of the Industry

Following the economic downturn in 2008, the hospitality industry rebounded to a renewed confidence in hotel investment. Significant improvements in lodging fundamentals exist throughout the industry. According to the American Hotel & Lodging Association, in 2013, the lodging industry witnessed pretax income growth of more than ten percent, with total industry revenue increasing nearly six percent. Notably, hotel investments are reported to be the best performers this year among U.S. real estate investment trusts.

Such positive financial trends may have eased tensions and softened certain impacts resulting from constrained capital budgets, but they have not deterred hotel owners from continuing to carefully analyze their relationships with the hotel management companies which manage their assets, and scrutinize the manger's performance of its duties and obligations. Finally, savvy owners are beginning to recognize the significance that hotel management providers have on the value and performance of their investments, and demanding a fidelity that chain-brand management companies do not provide. This is resulting in a sharp increase in property transfer activity and owner rebranding decisions even in these prosperous times.

For example, owners, as well as hotel management companies, are increasingly becoming the targets of shareholder activists seeking higher investment returns. In addition, traditional long-term investment "hold" strategies are less typical in the case of private equity vehicles and distressed asset funds that now flood the industry, which often limit specified asset hold periods to five-to-seven years. Furthermore, the advent of stiff and increasing competition among brand managers has caused even the most renowned brands to begin offering franchising as a way to incentivize owners to utilize their brand.

The Ties That Bind? Understanding the HMA

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Guest Service: A Culture of YES

In a recent global consumers report, 97% of the participants said that customer service is a major factor in their loyalty to a brand, and 76% said they view customer service as the true test of how much a company values them. And since there is no industry more reliant on customer satisfaction than the hotel industry, managers must be unrelenting in their determination to hire, train and empower the very best people, and to create a culture of exceptional customer service within their organization. Of course, this begins with hiring the right people. There are people who are naturally service-oriented; people who are warm, empathetic, enthusiastic, pleasant, thoughtful and optimistic; people who take pride in their ability to solve problems for the hotel guests they are serving. Then, those same employees must be empowered to solve problems using their own judgment, without having to track down a manager to do it. This is how seamless problem solving and conflict resolution are achieved in guest service. This willingness to empower employees is part of creating a Culture of Yes within an organization.  The goal is to create an environment in which everyone is striving to say “Yes”, rather than figuring out ways to say, “No”. It is essential that this attitude be instilled in all frontline, customer-facing, employees. Finally, in order to ensure that the hotel can generate a consistent level of performance across a wide variety of situations, management must also put in place well-defined systems and standards, and then educate their employees about them. Every employee must be aware of and responsible for every standard that applies in their department. The April issue of the Hotel Business Review will document what some leading hotels are doing to cultivate and manage guest satisfaction in their operations.