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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Social Media: Getting Personal

There Social media platforms have revolutionized the hotel industry. Popular sites such as Facebook, Twitter, Pinterest, Instagram, Snapchat, YouTube and Tumblr now account for 2.3 billion active users, and this phenomenon has forever transformed how businesses interact with consumers. Given that social media allows for two-way communication between businesses and consumers, the emphasis of any marketing strategy must be to positively and personally engage the customer, and there are innumerable ways to accomplish that goal. One popular strategy is to encourage hotel guests to create their own personal content - typically videos and photos -which can be shared via their personal social media networks, reaching a sizeable audience. In addition, geo-locational tags and brand hashtags can be embedded in such posts which allow them to be found via metadata searches, substantially enlarging their scope. Influencer marketing is another prevalent social media strategy. Some hotels are paying popular social media stars and bloggers to endorse their brand on social media platforms. These kinds of endorsements generally elicit a strong response because the influencers are perceived as being trustworthy by their followers, and because an influencer's followers are likely to share similar psychographic and demographic traits. Travel review sites have also become vitally important in reputation management. Travelers consistently use social media to express pleasure or frustration about their guest experiences, so it is essential that every review be attended to personally. Assuming the responsibility to address and correct customer service concerns quickly is a way to mitigate complaints and to build brand loyalty. Plus, whether reviews are favorable or unfavorable, they are a vital source of information to managers about a hotel's operational performance.  The February Hotel Business Review will document what some hotels are doing to effectively incorporate social media strategies into their businesses.