1. HOTEL MANAGEMENT
A N D O P E R AT I O N S
f o u r t h e d i t i o n
Edited by
Denney G. Rutherford, Ph.D.
Endowed Chair Emeritus
School of Hospitality Business Management
Washington State University
Michael J. O’Fallon, Ph.D.
Hospitality and Tourism Management
College of Business
James Madison University
JOHN WILEY & SONS, INC.
2.
3. HOTEL MANAGEMENT
A N D O P E R AT I O N S
f o u r t h e d i t i o n
Edited by
Denney G. Rutherford, Ph.D.
Endowed Chair Emeritus
School of Hospitality Business Management
Washington State University
Michael J. O’Fallon, Ph.D.
Hospitality and Tourism Management
College of Business
James Madison University
JOHN WILEY & SONS, INC.
5. D E D I C AT I O N
The fourth edition of Hotel Management
and Operations is hereby dedicated to all of
those hospitality students who have enriched
the lives of their guests by continuing to
learn beyond their formal education. It is
these professionals who constantly strive
to find even better ways to give the gift of
friendship. All the best to you.
D.G.R. and M.J.O’F 2005
6.
7. CONTENTS
Preface xi
Contributors xiii
Acknowledgments xv
chapter 1 O V E R V I E W I
1.1 Introduction 1 1.6 Customer Relationship Management—A
1.2 The Hotel Development Process 5 Driver for Change in the Structure of the
John Dew U.S. Lodging Industry 36
Gabriele Piccoli, Peter O’Connor,
1.3 How Well Does the Branded Distribution
Claudio Capaccioli, and Roy Alvarez
Company Allow Independent Hotels to
Compete with the Chains? 14 1.7 Spas and the Lodging Industry 50
Peter Cass Peter C. Anderson
1.4 The Art and Science of Opening References 67
Suggested Readings 68
a Hotel 21
Source Notes 68
Tom Dupar
1.5 On-line Pricing: An Analysis of
Hotel-Company Practices 26
Peter O’Connor
v
8. vi Contents
chapter 2 O R G A N I Z AT I O N 69
2.1 Introduction 69 References 88
Suggested Readings 88
2.2 Organizational Design 73
Source Notes 88
Eddystone C. Nebel III
2.3 As I See It: Hotel Organization
Structure 86
Mark Conklin
chapter 3 G E N E R A L M A N A G E R S : A V I E W
AT T H E T O P 89
3.1 Introduction 89 3.5 A Day in the Life of a Hilton Hotel
3.2 A Conceptual Framework of the Hotel General Manager 113
General Manager’s Job 91 Robert O. Balmer, CHA
Eddystone C. Nebel III and Ajay Ghei 3.6 A Day in the General Manager’s Life 115
3.3 Grooming Future Hospitality Leaders: Bob Peckenpaugh
A Competencies Model 101 3.7 Mini Case: Sunset Hotels and Suites 118
Beth G. Chung-Herrera, Cathy A. Enz, References 118
and Melenie J. Lankau Suggested Readings 120
3.4 As I See It: What I Do 111 Source Notes 120
Emilio Fabico
chapter 4 O P E R AT I O N S : R O O M S 121
4.1 Introduction 121 4.5 Concierge (cone-see-air-j) 143
4.2 The Electrifying Job of the Front Office Mario Arnaldo
Manager 124 4.6 As I See It: Management of the
James A. Bardi Front Office 149
4.3 A Day in the Life of the Front Office Oliver Meinzer
Manager 127 4.7 Mini Case: The New FOM 161
Garry Dickover 4.8 To Change or Not to Change:
4.4 Yield Management: Choosing the Most A Case Study at the Front Desk 162
Profitable Reservations 131 Nancy Swanger
William J. Quain and Stephen M. LeBruto References 163
Suggested Readings 164
Source Notes 164
9. Contents vii
chapter 5 O P E R AT I O N S : H O U S E K E E P I N G ,
ENGINEERING, AND SECURITY 167
5.1 Introduction 167 5.6 The Engineering Department and
5.2 A Day in the Life of a Director Financial Information 199
of Rooms 173 Agnes Lee DeFranco and
Kurt Englund Susan B. Sheridan
5.3 Housekeeping Organizations: Their 5.7 The Legal Environment of Lodging
History, Purpose, Structures, and Operations 205
Personnel 175 Melissa Dallas
Thomas Jones 5.8 Asphalt Jungle 217
5.4 On Being an Executive Housekeeper 188 Je’anna Abbott and Gil B. Fried
John Lagazo 5.9 Workplace Violence in Hotels 227
5.5 The Hotel Engineering Function: Mark Beattie and Jacinta Gau
Organization, People, and Issues in the 5.10 Case Study: Housekeeping,
Modern Era 191 Engineering, and Security 230
Denney G. Rutherford References 231
Suggested Readings 233
Source Notes 234
chapter 6 F O O D A N D B E V E R A G E D I V I S I O N 235
6.1 Introduction 235 6.7 A Day in the Life of an Executive
6.2 Managing Food and Beverage Director of Catering Sales and
Operations in Lodging Organizations 239 Convention Services 287
Robert H. Bosselman Rich Benninger
6.3 As I See It: Hotel Director of Food and 6.8 The Organization and Management of
Beverage 251 Hotel Beverage Operations 291
Dominic Provenzano Valentino Luciani
6.4 Best Practices in Food and Beverage 6.9 Case Study: Crisis in the Food Court 298
Management 253 Nancy Swanger
Judy A. Siguaw and Cathy A. Enz 6.10 Case Study: Outside the Box in the Food
6.5 Strategic Alliances Between Hotels and and Beverage Division 299
Restaurants 265 References 300
Robert W. Strate and Clinton L. Rappole Suggested Readings 301
Source Notes 302
6.6 Contemporary Hotel Catering 282
Patti J. Shock and John M. Stefanelli
10. viii Contents
chapter 7 M A R K E T I N G A N D A S S O C I AT E D
ACTIVITIES 303
7.1 Introduction 303 7.6 Hotel Sales Organization and
7.2 Building Market Leadership: Marketing Operations 348
as Process 305 Margaret Shaw and Susan V. Morris
Fletch Waller 7.7 Putting the Public in Public Relations:
7.3 Consumer Decision Rules and Implica- The Case of the Seattle Sheraton Hotel
tions for Hotel Choice 321 and Towers 353
Bianca Grohmann and Eric Spangenberg Louis B. Richmond
7.4 Hotel Pricing 334 7.8 Mini Case: Revamping the Marketing Re-
Marta Sinclair and Carl R. Sinclair search Department 360
7.5 A Day in the Life of a Regional Revenue References 361
Suggested Readings 362
Manager 345
Source Notes 362
Paul Chappelle
chapter 8 F I N A N C I A L C O N T R O L A N D
I N F O R M AT I O N M A N A G E M E N T 365
8.1 Introduction 365 8.5 The Hotel Purchasing Function 391
8.2 The Lodging Chief Financial C. Lee Evans
Executive 368 8.6 Data Mining for Hotel Firms: Use and
Raymond S. Schmidgall Limitations 399
8.3 Budgeting and Forecasting: Current Vincent P. Magnini, Earl D. Honeycutt Jr.,
Practice in the Lodging Industry 377 and Sharon K. Hodge
Raymond S. Schmidgall and References 412
Agnes Lee DeFranco Suggested Readings 414
Source Notes 414
8.4 As I See It: The Hotel Controller 387
Michael J. Draeger
11. Contents ix
chapter 9 H U M A N R E S O U R C E S P O L I C Y
MANAGEMENT 415
9.1 Introduction 415 9.5 The Strategic and Operational Roles
9.2 Driving Hospitality Into the Future 417 of Human Resources—An Emerging
Christian Hardigree, Ellis Norman, Gail Model 446
Sammons, Vince Eade, William Werner, J. Bruce Tracey and Arthur E. Nathan
Robert H. Woods, and Cheri Young References 457
9.3 The Causes and Consequences of
Turnover in the Hospitality Industry 429
Carl D. Riegel
9.4 Current Issues in Hospitality
Employment Law 436
Suzanne K. Murrmann and Cherylynn
Becker
INDEX 461
12.
13. P R E FA C E
As Denney would tell you, the first edition of mote the idea of critical thinking among stu-
this textbook project was originally born out dents of hotel administration. Critical think-
of a range of frustrations. While there are ing refers to that process whereby the student
many outstanding textbooks in the hotel man- is exposed to a number of different view-
agement field that dealt with significant por- points within a theoretical structure, and from
tions of operations, particularly housekeeping, analysis of those viewpoints, becomes better
front office, and food and beverage, there are able to synthesize a viewpoint about hotel op-
very few that try to treat, in a balanced and in- erations that will enable them to intelligently
depth way, each department in the hotel. One approach whatever practical situations they
frustration was that some texts that dealt with may find themselves confronted with in the
these departments spent an inordinate “real world.”
amount of time focused on one aspect of the There is a conventional wisdom that goes,
hotel operations—usually either front of the “something may be okay in theory but it
house, food and beverage or marketing. Other doesn’t work in practice.” Like economist
departments, for better or worse, were treated Milton Friedman, we reject that statement. If
as minor players. Consequently, students and theory doesn’t work in practice, it is lousy the-
readers of such texts were given only a cursory ory. What professors need to guide students in
introduction to the intricacies of these “mi- understanding is that theory, (in the word of
nor” departments, their management, their Friedman) explains, predicts, or controls, and
people, and their interactive functions in the does this in different ways given different
overall hotel organization. variables in different organizations. This is an-
Another frustration he encountered was other issue or frustration that subsequent edi-
using then currently available material to pro- tions have been designed to further address.
xi
14. xii Preface
As we went about planning and designing think about a topic, in this case, a hotel de-
the fourth edition of Hotel Management and partment, a student or hotel professional can
Operations (HMO IV), we felt the need to feel better prepared to find ways to apply the-
continue to remind ourselves of the lessons of ory in a practical setting or situation. In the fi-
the frustrations listed above. We wanted to nal analysis, it is up to you to make the best
make sure the original idea behind this book use of HMO IV, because like we state above,
did not get lost. By helping the reader gain an none of us knows it all. Good luck, it is our
appreciation of what a variety of observers, pleasure to do this work for you.
thinkers, researchers, and commentators
15. CONTRIBUTORS
Je’anna Abbott, University of Houston Peter Cass, Crystal River, Florida
Roy Alvarez, Senior Lecturer, Cornell Uni- Paul Chappelle, Brand Revenue Manager,
versity School of Hotel Administration Red Lion Hotel and Inns, Vancouver,
Peter C. Anderson, Anderson and Associates Washington
Mario Arnaldo, Instructor, Travel Industry Beth G. Chung-Herrera, Associate Professor,
Management, Hawaii Pacific University, College of Business, San Diego State Uni-
Honolulu, HI versity
Robert O. Balmer, General Manager, Dou- Mark Conklin, Area Vice President, Western
bletree Hotel, Bakersfield, California Europe, Marriott Hotels, Resorts, and
James A. Bardi, Penn State Berks–Lehigh Suites, Frankfort, Germany
Valley College Melissa Dallas, Florida Atlantic University,
Mark Beattie, Doctoral Student, Gonzaga College of Business
University, Liberty Lake, WA Agnes Lee DeFranco, University of Houston,
Cherylynn Becker, Richmond, Virginia Conrad N. Hilton College
Rich Benninger, CMP, Executive Director of John Dew, Executive Consultant, Bellevue,
Catering of Catering and Convention Washington
Services, Caesar’s Palace Garry Dickover, General Manager, Conven-
Robert H. Bosselman, Dedman Chair of Hos- tion Center Courtyard by Marriott, Las
pitality Administration, Florida State Vegas, Nevada
University, Dedman Department of Hos- Michael J. Draeger, Controller, Dayton De-
pitality Administration pot Casino, Dayton, Nevada
Claudio Capaccioli, Deloitte and Touche Tom Dupar, Dupar Dynamics, Bellevue,
Business Consulting Manager, Milan, Italy Washington
xiii
16. xiv Contributors
Vince Eade, University of Nevada, Las Vegas Vincent P. Magnini, Ph.D. candidate, Old Do-
Harrah School of Hotel Administration, minion University
Las Vegas, NV Oliver Meinzer, Director of Operations, New-
Kurt Englund, Resort Manager, Four Seasons port Beach Marriott Suites, Newport
Resort Costa Rica at Peninsula Papagayo Beach, CA
Cathy A. Enz, Louis G. Shaeneman Professor Susan V. Morris, Vice President, HQ Global
of Innovation and Dynamic Management, Workplaces, Dallas, Texas
Cornell University School of Hotel Ad- Suzanne K. Murrmann, Virginia Polytechnic
ministration Institute and State University, Department
C. Lee Evans, Director of Purchasing, The of Hospitality and Tourism Management
Oasis Resort; Casa Blanca Spa and Golf Arthur E. Nathan, New Product Thought
and Virgin River Hotel and Casino Leader, Mellon HR Solutions
Emilio Fabico, Walt Disney World, Orlando, Eddystone C. Nebel III, Purdue University,
Florida Emeritus
Gil B. Fried, Gil B. Fried and Associates, Ellis Norman, University of Nevada, Las Ve-
Risk Management Consultants, New gas Harrah School of Hotel Administra-
Haven, CT tion, Las Vegas, NV
Jacinta Gau, Doctoral Student in Criminal Peter O’Connor, Associate Professor,
Justice, Washington State University, Pull- France’s Institute de Management Hote-
man, WA lier International, Essec Business School,
Ajay Ghei, The World Bank Group France
Bianca Grohmann, Assistant Professor of Bob Peckenpaugh, Hotel Manager, Rancho
Marketing, Concordia University Bernardo Inn, San Diego, California
Christian Hardigree, University of Nevada, Gabriele Piccoli, Assistant Professor, Cornell
Las Vegas Harrah School of Hotel Ad- University School of Hotel Adminstra-
ministration, Las Vegas, NV tion
Sharon K. Hodge, Assistant Professor, Love Dominic Provenzano, Director of Opera-
School of Business, Elon University tions, Cleveland Marriott Downtown at
Earl D. Honeycutt Jr., Professor, Love School Key Center, Cleveland, Ohio
of Business, Elon University William J. Quain, Florida International Uni-
Thomas Jones, University of Nevada, Las versity, School of Hospitality Manage-
Vegas ment
John Lagazo, Director of Operations, The Clinton L. Rappole, University of Houston,
Madison Hotel, Rockville, MD Conrad N. Hilton College
Melenie J. Lankau, Assistant Professor, Terry Louis B. Richmond, President, Richmond
College of Business, University of Geor- Public Relations
gia Carl D. Riegel, Florida Atlantic University,
Stephen M. LeBruto, University of Central Graduate School of Business
Florida Gail Sammons, University of Nevada, Las Ve-
Valentino Luciani, Instructor, University of gas Harrah School of Hotel Administra-
Nevada, Las Vegas tion, Las Vegas, NV
17. Contributors xv
Raymond S. Schmidgall, Michigan State Uni- Robert W. Strate, National Aeronautics and
versity, School of Hospitality Business Space Administration
Margaret Shaw, University of Guelph, School Nancy Swanger, Washington State University
of Hotel & Food Admin., Guelph, ON J. Bruce Tracey, Associate Professor of Man-
N1G 2W1 CANADA agement, Cornell University School of
Susan B. Sheridan, Owner, Taughannock Hotel Administration
Farms Inn, Trumansburg, New York Fletch Waller, Principal, FCW Consulting,
Patti J. Shock, University of Nevada, Las Seattle, Washington
Vegas William Werner, University of Nevada, Las
Judy A. Siguaw, Cornell University, School of Vegas Harrah School of Hotel Adminis-
Hotel Administration tration, Las Vegas, NV
Marta Sinclair and Carl R. Sinclair, Griffin Robert H. Woods, University of Nevada, Las
University, Toowong, QLD 4066 Australia Vegas
Eric Spangenberg, Associate Dean, College Cheri Young, University of Nevada, Las Ve-
of Business, Washington State University gas Harrah School of Hotel Administra-
John M. Stefanelli, University of Nevada, Las tion, Las Vegas, NV
Vegas
18.
19. ACKNOWLEDGMENTS
I sort of thought that by the time I reached friends, colleagues, and former students could
the fourth edition, the project would have be- devote the time they did to contribute to this
come easier. Well, it hasn’t. The challenges of project. My badgering, cajoling, begging, and
continual improvement—finding challenging bribing aside, I think we’re all still friends.
and interesting material, presenting it in in- I want to particularly salute those who
teresting ways, and trying to choose material crafted custom pieces for this edition and
that will transcend unanticipated events—get those professionals who contributed “Day in
harder, not easier. While making the book the Life” and “As I See It” pieces. They have
was a team effort involving a wide range of made this edition a richer and more user-
professionals, all of its flaws, and there proba- friendly book. They also add a view of the real
bly are more than a few, are solely my world that has been missing.
responsibility. The support and encouragement of my
First of all, the authors of the various colleagues at Washington State University
pieces included here who knowingly or un- was critical. Terry Umbreit, Director of the
knowingly have contributed their thoughts, School of Hospitality Business Management,
research, ideas, opinions, and expertise to this and a whole bunch of students all contributed
exercise in critical thinking about hotel de- to the success of this project with advice,
partmental operations deserve recognition. counsel, and suggestions.
Without the rich mixture of interest and tal- My good friend, colleague, and production
ent extant in the hospitality profession and its assistant, Lillian Sugahara Jesse, helped me
educational establishment today, this collec- tremendously. Her magic with the computer
tion of readings would not have been possi- literally saved this project by translating many
ble. It is my great good fortune that my files created in Adobe PDF or PageMaker for
xvii
20. xviii Acknowledgments
Macintosh to something I could edit in Word. University after 26 years in May 2004. We are
Because she kept accurate files of the manu- in the process of building our retirement
script of previous editions, we were able to home in Port Townsend, Washington, and will
overcome the problems attendant to the be moving in July 2005, shortly after the book
transfer of the project from Van Nostrand is due at the publisher. Building a house long
Rinehold to John Wiley & Sons. Lillian, you distance has its own challenges, and with “the
are the greatest. book,” we have had to rely on Sandy for a lot
Melissa Oliver, my editor at Wiley, pro- of decisions. I love you, Sandy.
vided needed support regarding material pre- I also want to acknowledge the capable
viously published by Wiley, and her assistance of my colleague and former stu-
willingness to discuss some of my off-the-wall dent, Michael O’Fallon. He is the author of
ideas have truly made this a better project. the instructor’s manual. Michael will co-au-
Thanks, Melissa. thor this and the next edition, after which the
My wife and best friend, Sandy Sweeney, project will be all his.
continues to provide the encouragement, sup-
port, and understanding she always does on Denney G. Rutherford
big writing projects. Her understanding is par-
Spokane/Port Townsend, Washington
ticularly important when I disappear to work
2005
on “the book” when we could be doing other,
more fun things. As with past editions, she
does understand the rhythms of an author’s
life and endures losing me to “the book” with
style and grace. The last two times I did this,
we were moving—and surprise—it is happen-
ing again. I retired from Washington State
21. c h a p t e r o n e
OVERVIEW
1.1 I N T R O D U C T I O N
The vast majority of research articles and es- among the country’s living patterns. People
says in this book deal with one or more as- and industry have moved from the so-called
pects of what has been called the art and rust belt to the sun belt. The hotel business
science of modern hotel management. It has been active in reborn and reconstructed
should be noted that the word modern can be central cities. The explosion of technology
loaded with the potential of much misunder- and information-based companies has con-
standing. Hotels are changing and will con- centrated human endeavor in technological
tinue to change. As a result, the techniques of corridors in California, Massachusetts, Wash-
management of modern hotels must adapt to ington, Texas, and North Carolina, to name a
changing circumstances. Subsequent sections few such places. It can be safely said that
of this book are designed to help the student where jobs are and major concentrations of
and practitioner discover information, meth- economic activity occur, hotels will follow.
ods, and techniques for dealing with these Among other current and ongoing influ-
changing circumstances. encers of hotel design, construction, market-
ing, and operation are the following. Note:
This list is neither exhaustive nor exclusive.
᭤ INFLUENCES
• Demographics play a major role and will
Like many other American businesses, hotels continue to be influential in the foresee-
have been affected by shifts in emphasis able future. As the baby boom generation
1
22. 2 Chapter 1 Overview
and its children mature, the population of sorts—a modern incarnation of the time-
the country will for many years be older, share properties of several decades ago.
healthier, and better educated than previ- Because these are being developed and
ous generations. These facts will present operated by name hotel companies and
new challenges and opportunities to all are marketed to the affluent, healthy,
business managers. well-educated population segment, resort
• Technology—in the form of computers, managers have had to absorb new mana-
communication, personal devices, and gerial realities.
laborsaving mechanical equipment—has • The well-documented change in the com-
had and will have a major effect on the plexion of the national economy from one
way in which hotels are managed and op- that emphasizes goods and, to a lesser ex-
erated. The speed with which information tent, natural resources to one that empha-
is accumulated, stored, manipulated, and sizes services has kindled new ideas about
transferred is such that today most travel- the way in which we manage the design
ers expect that the hotel rooms they rent and delivery of these services. Hotels,
will allow them to be as productive as restaurants, and travel services are now
they are in the office or at home. Increas- seen as unique entities that dictate special
ingly, with portable computing, personal kinds of managerial techniques and
data assistants (PDAs), wireless commu- strategies.
nication, and virtually everything some- • Changes in people’s travel patterns have
how connected to the Internet, hotels altered the way we manage our hotel
must provide services and access that al- properties. Deregulation of the airlines
low guests seamless transition from the has driven a change in the way millions of
business, travel, or home environment to people travel each year, given the hub-
that of the hotel. Increasingly, entertain- and-spoke design of airline services.
ment must be fused with communication Many hotel companies are now locating
and productive processes. major hotel properties adjacent to hub air
• The concept of market segmentation, or transport facilities, taking advantage of
ever-increasingly finely tuned market def- the fact that business travelers may not
initions, will dictate hotel structures and need to travel to a central business district
organizations, and management tactics (CBD) to accomplish their purpose in a
designed to address those market seg- given area. Meetings and conferences can
ments have become even more important now be scheduled within a five-minute
to the management of hospitality service limousine ride from the air terminal, and
businesses. With the increased power in the business traveler can be headed for
the information and data manipulation his or her next destination before the day
realm, hotels have available to them ever- is over without having to stay overnight in
expanding databases about guests and are a CBD hotel.
creating new products to attract those • New patterns of investment in hotel facili-
markets. ties have emerged in the last two decades,
• One of the effects of the aging demo- and more attention is now paid to achiev-
graphic is the emergence of vacation re- ing optimum return on investment. Be-
23. Section 1.1 Introduction 3
cause people from outside the hotel in- stable, consumer spending patterns and high
dustry are now participating in its finan- employment growth had not materialized,
cial structuring, hotel operations are no particularly in light of corporate layoffs and
longer dependent on the vision of a single the ongoing nervousness of consumers about
entrepreneur. Managers now must design whether or not their financial wherewithal
tactics and strategies to achieve hereto- was safe.
fore unanticipated financial goals. The Now consider late 2000, when the third
same trend has also altered the complex- edition of this book was being written. Unem-
ion of management and organization of ployment was at an all-time low; the Dow
the modern hotel. This is especially true Jones Industrial Average was between 10,000
of publicly owned hotel firms, where Wall and 11,000; hotel occupancies had stabilized
Street stock analysts heavily influence nationally in excess of 70 percent; and the fed-
stock prices through expectations of eral government was running a surplus for the
quarterly revenues and profits. This puts first time in the memory of most.
pressure on hotel companies and their Then what happened? The terrorist at-
operations managers to perform, on a tacks in New York and Washington, D.C., in
quarterly basis, in a way contrary to many 2001 changed the face of all business and
managers’ instincts. travel, immediately and probably for the fore-
seeable future as well. Major airlines are in
Most of the foregoing issues and influ- bankruptcy; hotels are struggling to achieve
ences still operate (to a greater or lesser ex- profitable occupancies; business travel is
tent) on the organizational structures and down; the high-tech stock market bubble
strategies of the modern hotel. Since the last burst; the country is at war in a number of lo-
edition of this book, however, other phenom- cations; security has made travel more diffi-
ena of an economic, cultural, and social na- cult, if not actually annoying; and people are
ture have come to the fore, complicating our nervous. Join this with an imbalance of trade,
view of hotel management. This furthers the the outsourcing of jobs, and the largest federal
argument that the hotel industry is a part of deficits in history, and the face of the economy
the greater economy and at the mercy of ele- is challenging. This translates directly not only
ments often completely out of its control. to business travel but personal and recre-
The cyclical nature of the U.S. and inter- ational travel as well. Finding ways to operate
national economies has recently affected profitably in such an environment is the job of
significantly hotels’ ability to respond to the next generation of hotel operators.
changing circumstances. In early 1993, for in- Among the predictions I made in the pre-
stance, employment growth was stagnant; cor- ceding edition was that cultural diversity will
porate profits were low; the expansion of the play a role in the management and organiza-
gross national product (GNP) was only a mar- tional structure of the modern hotel in the
ginal percentage above previous years; and United States. As surely as living patterns,
travel in most segments was down due to cor- economic cycles, and market segmentation
porate restructuring, downsizing, or reorgan- have influenced the hotel industry, so will the
izing. Vast layoffs in the hundreds of change in ethnicity of the workforce. The cul-
thousands had been announced every month. tural backgrounds that an increasingly diver-
While fuel prices continued to be relatively sified workforce will bring to hotel operations
24. 4 Chapter 1 Overview
may be seen as a problem or a challenge—or John Dew, formerly president of Inn Ven-
both. To most operators, it will be seen as an tures, a regional hotel management and de-
opportunity to demonstrate to an increasingly velopment company that has built and
diverse clientele that hotel companies are operated many Marriott products, in addition
committed to hiring and training a workforce to a proprietary hotel product, provides an in-
structure that mirrors society. I see no reason sider’s view of the steps needed to bring a ho-
to change that prediction now; if anything, ac- tel from conception to construction and
culturation of the hospitality business will operation. This unique view of hotel opera-
accelerate. tions connects the concept of hotel develop-
The legal and regulatory environments ment with the realities of day-to-day
are increasingly important to all business operation. It should help aspiring managers
managers, and hotel operators are no excep- understand how the intricacies of the devel-
tion. Increasingly, operators must be aware of opment process may influence the marketing
and alert to realms of risk that can engender and management of the hotel.
lawsuits against them. Several articles and es- Peter Cass offers the reader insights,
says in this edition highlight these threats to heretofore unavailable in books of this nature,
hotels and their guests. It should be noted that into independently branded hotels that associ-
present-day security concerns also have sig- ate to provide market strength. He makes the
nificantly affected the ways in which hotels case that the future success of independent
are operated. Awareness of the risk environ- hotels is linked to their ability to find ways to
ment and the regulatory realm are factors maintain their independence while sustaining
that affect a hotel’s ability to compete in the competitive advantage in the luxury segment.
early part of the twenty-first century. Essays Because new construction of hotels di-
and articles in the security section and the hu- minished greatly after 9/11 but firms still
man resources section address this issue. needed to grow, rebranding existing proper-
ties generated a lot of growth activity. Re-
branding is a complicated process that must
be accomplished within critical time frames to
᭤ INTRODUCTORY coincide with marketing, financial, and opera-
READINGS tional variables. Tom Dupar is a seasoned vet-
eran at this fascinating and important activity
I have attempted in this edition to present and has participated in rebranding operations
new and (sometimes) different takes on the around the world. His essay on the intricacies
hotel business. This section is also used to ex- of rebranding was a mainstay in the previous
plore ideas that are new to the management edition of this book. Today’s economic cir-
process, and that—who knows?—may never cumstances are different, and Dupar’s busi-
completely catch on. Rather than focus exclu- ness has changed its focus to opening new
sively on the operations of the major chains, major projects. His piece serves as a useful
the readings here are from the perspectives of companion to that of John Dew, and the two
operators, leaders, and experts such as re- should be read together, with an eye toward
gional operators, major industry consultants, comparing Dew’s smaller project focus and
and independent branded hotels. Dupar’s large projects.
25. Section 1.2 The Hotel Development Process 5
Perhaps proving the axiom that “every- suggested readings for the student who would
thing old is new again,” the concept of health like to gain more in-depth knowledge about
and wellness spas as a hotel and resort prod- the hospitality industry as a whole and spe-
uct has enjoyed a resurgence. Once the cific historical antecedents. In particular, the
province of high-end hotels and resorts, the books by Hilton and Jarman look closely at
idea of being pampered in a spa has been the intermachinations of the establishment by
added to the service mix in many more mod- two early pioneers of the industry, one of
est hotels and resorts. While the big-name whom, Conrad Hilton, lives on in an interna-
spas at five-star properties still set the stan- tional, publicly traded company operated by
dard for pampering and pricing, the comfort one of his sons. E.M. Statler’s contributions to
of personal service in less lavish spas seems to the modern hotel business are legendary in
appeal to the modern traveler as well. Peter that he is generally credited with founding
Anderson’s overview of the spa industry pro- and operating the first commercial hotel con-
vides insights into this fascinating service cept that recognized the realities of the early
product. business traveler at the beginning of the twen-
In addition to products, building, and re- tieth century. The suggested articles are
branding, I have also chosen to include in the drawn from recently published historic
section two recently reviewed and studied overviews of the hotel side of the hospitality
ideas that may or may not be adopted across industry in the United States. They also high-
the industry. light other major forces in the development of
At the end of this section are a number of the modern hotel business.
1.2 T H E H O T E L D E V E L O P M E N T P R O C E S S
John Dew
• Who owns it?
᭤ INTRODUCTION
• Where did they get the money to build it?
The bulldozers are working and a construction • How long does the process take from idea
crane is being erected on that vacant lot you to grand opening day?
pass each day going to and from home. The • Who selects the architect, the engineers,
sign on the fence states that a new hotel is be- and the interior designer?
ing built with a planned opening date of spring
2007. If you have ever wondered just how that • Who manages the myriad details that go
hotel was created, you may have wondered into the development of a new hotel?
about some or all of the following questions: • Who will manage the hotel once it’s
open?
• How did someone select that particular
vacant lot? We hope to address these and other ques-
• Who actually creates a new hotel? tions you may have in this chapter.
26. 6 Chapter 1 Overview
analysis of the site by an objective third party.
᭤ THE DEVELOPMENT Companies offer hotel feasibility studies for a
COMPANY fee and are experts in a particular market, or
developers may use the consulting group of
The developer is the entrepreneur, the risk one of the major public accounting firms.
taker, who originates the idea for the hotel. De- The company retained to do the feasibil-
pending on the business structure selected, the ity study can spend up to several months gath-
developer often puts his or her personal wealth ering detailed data to see if, in their opinion, it
at risk when engaging in a hotel project. The makes economic sense to build the hotel.
developer, along with a small staff of people, Their conclusion offers an objective third-
networks with commercial real estate agents party opinion as to whether the project is
on the lookout for a suitable hotel site. De- feasible, hence the term feasibility study. Gen-
pending on the type of hotel to be developed, a erally, the feasibility study considers, evalu-
site of at least two to four acres is required (for ates, and makes recommendations about the
comparison, an acre is roughly the size of a project based on the following variables:
football field). This property must be zoned by
the city for a hotel, be visible from a freeway or
The Site
major street arterial, and have city approval for
such construction activities as curb cuts, left- • Proper zoning
hand turn lanes, and delivery truck access. • Size in square feet/acres
Commercial realtors offer sites for the devel- • Visibility from arterials/freeways
oper’s consideration that include maps, aerial • Traffic counts/patterns
photos, and proof of hotel zoning.
Sometimes the developer views potential • Accessibility from streets, freeways, air-
sites by driving around the neighborhood ports, train stations, etc.
within five miles of the site or touring multi- • Proximity to where potential guests live,
ple sites by helicopter, noting where the po- travel, or work
tential guests live and work and where • Barriers that discourage competition
potential competing hotels are located. coming into the market, if any
The price per square foot of the land is • How adjacent property and businesses
considered. The higher the cost of land, the are utilized
higher the rates the hotel will need to charge.
Is the price too high for the average daily rate • Master area development plans
(ADR) in this particular market? Is it too • Local permitting process and the degree
low? Or is it acceptable? This is determined of difficulty for that particular city
when the hotel financial pro forma budget • Impact fees charged by the city
document is created.
The Economy of the Area
• Major employers, government agencies
᭤ THE FEASIBILITY STUDY • Business trends for each employer/agency
When the developer selects a site, a feasibil- • Hotel needs and the demand for each
ity study is often commissioned to obtain an • Leisure travel demand in the area
27. Section 1.2 The Hotel Development Process 7
• Nearby tourist attractions Ten-year Projection
• Visitor counts • Occupancy projection by year
• Conventions, trade shows, and meetings • ADR by year
history • Estimated cash generated for debt
• Estimated cash generated for distribution
The Hotel Market to investors
• The competitors, both existing and • Estimated cash-on-cash return (after-tax
planned income divided by equity invested)
• Historical occupancy of hotels in the area • Overall projected yield
• Historical average rate • Projected internal rate of return
• Proprietary data on area travel • Net present value of the project over each
of the next ten years
Identification of Which Hotel Market
Once the feasibility study is completed,
Segment to Serve
the developer is prepared to move forward
• Full service with the project. Often, at this stage of the
• Limited service process, the developer purchases an option on
• Extended stay the land to tie it up until the remaining devel-
• Luxury opment steps can be completed—and to pre-
vent the competition from purchasing it.
• Midprice
• Economy
• Budget
᭤ CREATION OF THE
Selection of Appropriate Hotel Design OWNERSHIP ENTITY
• High-rise
• Midrise
An ownership entity (note that this is differ-
ent than and separate from the development
• Garden apartment style company) must be created to hold title to the
• Hybrid design land—and the hotel, once it’s built. Consider-
ing the limitation of liability to the investors,
Selection of Appropriate Hotel Brand tax consequences, estate implications for the
investors, and potential requirements of the
• Franchised (Marriott, Sheraton, Hyatt,
mortgage lender, a business structure is se-
etc.)
lected, normally in one of the following forms:
• Licensed (Best Western, Guest Suites,
etc.) • Limited liability company (LLC)
• Independent • Limited partnership (LP)
• Independent with strategic market affilia- • S corporation (formerly known as a
tion (Luxury Hotels of America, Historic Sub-S corporation)
Hotels of America, etc.) • C corporation
28. 8 Chapter 1 Overview
franchise fees, royalty fees, and marketing/
᭤ THE DEVELOPMENT miscellaneous fees as part of its agreement
AGREEMENT structure with the operating company. Con-
sideration must also be given to the brands al-
The newly formed entity now enters into a ready represented in the target market that
development contract with the development may be available for franchise. The franchise
company to take the project to completion. company is approached and a franchise is re-
The development company charges a fee, ap- quested, with the feasibility study offered as
proximately 3 percent of the total project backup for the request.
cost, for this service. The agreement generally The next step is for the franchise com-
covers such variables as: pany to conduct an impact study of the mar-
• Selection of architect/engineers ket. This considers such matters as possible
• Selection and supervision of a general negative impact on existing hotels that carry
contractor the franchiser’s flag. If the impact is judged to
be insignificant, a franchise is usually granted
• Processing all building and occupancy to the ownership entity for a one-time fee of
permits about $400 per room, depending on the fran-
• Raising all the equity money from in- chise selected, with continuing royalty and
vestors marketing, usually based on a percentage of
• Securing a construction mortgage loan hotel revenue.
• Selecting a franchise company
• Securing the franchise
• Selecting an interior designer that meets ᭤ SELECTING AN
franchise company requirements
ARCHITECT
• Purchasing all opening furniture, fixtures,
equipment Because the final product of this process is a
• Selecting a management company to op- building the operator has to run as a hotel,
erate the hotel the architect’s experience in designing hotels,
his or her experience with the prototypical
• Liability for cost overruns
drawings of the franchise selected, the fee,
and his or her on-time record must be con-
sidered. Architect fees can run up to 5 per-
᭤ SELECTING A FRANCHISE cent of the total project cost but are often
negotiated down, if the project is big enough.
Depending on the type of hotel to be built The firm’s experience and record on similar
(based on the feasibility study), the developer projects are critical. The architect does not
recommends a franchise company to the ho- have to operate the hotel when it is com-
tel owner. A major consideration is the best pleted. The developer wants the architect to
franchise brand for the market segment to be design a hotel that will be easy to operate and
served. Each franchise company has different maintain.
29. Section 1.2 The Hotel Development Process 9
and conditions of a construction loan can vary
᭤ SELECTING A GENERAL widely depending on the individual lender.
CONTRACTOR Important terms that can affect the cost of the
loan include:
Major consideration are the quality and reli-
ability record of the general contractor and • Personal guarantees by developers and/or
the firm’s use of and relationships with the equity partners/investors
many subcontractors needed for a project as • Loan origination fees
complex as a hotel. Again, experience in • Interest rate
building the hotel type is important. It is
• Required loan-to-value ratio
hoped that the general contractor has learned
from any mistakes made in building similar • Terms of repayment
hotels. The general contractor and architect • A requirement that interest/taxes be held
often bid the project as a team; this helps the in reserve
developer determine the final cost. Often, up • Required debt service coverage ratios
to a 10 percent contingency cost that allows • Length of the construction loan; length
for unforeseen circumstances is built into the and costs of extensions
project bidding process.
These are only a few of the considerations
that must be analyzed when selecting a
᭤ FINANCING THE lender. The developer, on behalf of the own-
ing entity, then approaches a number of lend-
PROJECT ing institutions. The lending institutions
The following variables must be determined analyze the deal and offer a proposed term
to qualify for financing: sheet that answers all of the borrowers’ ques-
tions. This allows the borrowers to select the
• The cost of the land lending institution with which they wish to
• Design and construction cost of the work. The lender then commissions an ap-
building praisal of the project by an independent
• The cost of furniture, fixtures, equipment, appraisal company such as Hospitality Valua-
and opening supplies tion Services (HVS). Based on the appraisal,
the lender issues a loan commitment for the
• Pre-opening marketing and labor costs project that usually offers up to 60 percent of
• A six-month operating capital cash the project cost. The balance must be raised as
reserve equity from investors.
The sum of these constitutes the total
cost of the project for purposes of securing
financing. ᭤ RAISING THE EQUITY
With this information, the ten-year oper- INVESTMENT FUNDS
ating pro forma budget is updated to reflect
actual costs. It’s now time to go to the money With the bank committed to about 60 per-
markets for construction financing. The terms cent of the cost, the remaining 40 percent
30. 10 Chapter 1 Overview
must be raised in equity commitments by in-
᭤ SELECTING THE
vestors. To pursue these, the developer pre-
pares an offering solicitation document that MANAGEMENT
meets current securities and exchange law.
The nature of this document depends on the
COMPANY
type of business entity that was formed. For Often even before the construction activity
limited partnerships or limited liability com- commences, the owning entity selects an ap-
panies, a private placement offering circular propriate management company to manage
and project description is prepared. For S or the pre-opening, marketing and sales, selec-
C corporations, stock offerings are prepared tion and training of the opening staff, prepara-
for sale consistent with applicable federal and tion of the operating budget, and day-to-day
state securities laws. operations once the hotel is opened. Manage-
The developer now contacts money ment companies charge 3–5 percent of rev-
sources that have risk capital available to in- enue for this service. In recent years,
vest. These can include: management companies have charged 3–4
percent of revenue and 2–3 percent of gross
• Individual investors operating profit so they can be measured and
• Private asset managers evaluated on both sales and profitability.
• Opportunity fund managers The franchise company may offer to pro-
vide management services to franchisees.
• Venture capital fund managers
Marriott International, Inc., for example,
These potential investment sources are manages about 50 percent of all hotels that
offered the opportunity to invest in the hotel. carry the Marriott flag under 20-year con-
Based on their study and evaluation of the re- tracts. Independent management companies
ports, documents, and studies detailed above, manage the remaining hotels under long-term
management contracts of up to ten years’ du-
they decide whether or not to offer funding to
ration, often with several five-year renewal
the developer.
options.
Once the loan is secured, the equity
raised, and the building permit issued by the
city, the land purchase option is exercised and
the purchase is completed. Then the 12–16- ᭤ CONCLUSION
month construction process begins. If the ar-
chitect’s plans work as intended, if the general This is a largely linear explanation of the
contractor has no problems with subcontrac- complicated process that a developer goes
tors, unions, or permits, if all the furnishings, through in order to create a hotel. It has been
fixtures, and equipment arrive on time, if the described in a step-by-step process, but in re-
weather cooperates, and if the employment ality, many of the steps are carried out con-
market is such that human resources are suf- currently to save time (and money).
ficient to open a hotel, then congratulations! Nevertheless, the hotel development process
The hotel will open on time. takes about three years from original concep-
31. Section 1.2 The Hotel Development Process 11
tion to first guest. It is important to remember the area. The RFP was sent to many major ho-
that during the initial stages of the process, tel companies and commercial real estate
the developer can have as much as $1 million brokers, asking prospective buyers to submit
(U.S.) or more at risk in the process before a a purchase price bid along with a statement of
final go/no-go decision is reached. Only after the buyer’s development history and ability to
the project is approved and all financing is in develop a hotel of the type envisioned by the
place can the developer start to recover up- Commission. It listed a closing date by which
front costs and collect development fees. all bids had to be submitted.
Hotel development with its component An area commercial real estate broker
parts of hotel feasibility studies, hotel ap- contacted a hotel development and manage-
praisal, hotel real estate finance, and hotel ment company with a long history of devel-
management are all among the career oppor- oping and managing extended-stay hotels in
tunities available to hotel and restaurant ad- the Pacific Northwest, including a property
ministration graduates. located in a similar setting to that being of-
fered for sale. The commercial realtor offered
to represent the developer in negotiations
᭤ PUTTING IT ALL with the City Development Commission,
which would be paying the real estate com-
TOGETHER—THE STORY mission on the sale. An agreement was
OF AN EXTENDED-STAY reached with the commercial real estate bro-
ker to represent the buyer to the seller, and
HOTEL DEVELOPMENT the developer went to work in preparing a
PROJECT proposal.
The developer conducted a feasibility
The City Development Commission in a Pa- study to see all of the conditions in the mar-
cific Northwest community purchased a 1.55- ketplace that would be encouraging or dis-
acre parcel of riverfront land in the couraging to this development project.
downtown area. The land was previously con- Studies were conducted to estimate how
taminated with industrial pollutants that many room-nights were being sold within a
made the parcel unsafe for habitation and five-mile radius, how many extended-stay
construction. The City Development Com- room-nights were available in the market,
mission used state, local, and federal grants to how many hotel rooms existed, and how
have the land decontaminated, created a mas- many were being planned over the following
ter plan for the area, and then offered the par- five years. From this, the developer was able
cel for sale and development. to estimate the number of extended-stay
The City Development Commission is- room-nights available needed to produce an
sued a request for proposal (RFP) that out- 82 percent occupancy with an average daily
lined the asking price of $2,076,240 ($30/sq. room rate of $141 when the hotel achieved
ft.) for the land and the design requirements stabilization three years after opening. That
set down by the Commission for a building provided the basis for a ten-year revenue
that would fit the intended look and feel of estimate.
32. 12 Chapter 1 Overview
The developer proposed a nine-floor, 258- day operation of the hotel once it was
suite extended-stay hotel with an indoor pool, opened. The arrangements called for the man-
spa, and exercise facility, a guest laundry, of- agement company to be paid 3 percent of rev-
fices, meeting facilities, and a three-floor enue and 2 percent of the net operating
parking garage with parking for 193 automo- income for management services.
biles, all at a total cost of $38 million, or The ownership LLC then contacted a ma-
$147,286 per suite. jor hotel company and applied for a franchise
The $38 million construction budget was to allow the development and operation of an
broken down as follows: extended-stay hotel. A 20-year franchise was
Land 6.0% granted with a fee of $400 per suite or,
Construction 66.0% $102,800. This was to be followed by a 5 per-
Office Equipment 1.4% cent royalty and a 3 percent advertising fee
Furniture, Fixtures, Equipment 7.4% once the hotel was open and operating.
Architecture/Engineering 2.8% The developer, acting as agent for the
Permits/Fees/Environmental 2.8% owner, prepared a private placement memo-
Appraisal/Legal/Tax/Insurance 1.3% randum document seeking investments from
Pre-Opening Expenses 1.3% accredited investors. These investors were pri-
Construction Loan Fee 1.1% marily defined as people with a net worth of
Developer Fee 2.8% $1 million, or those with an income in excess
Construction Interest 2.8% of $200,000 over the previous two years and
Working Capital 2.1% expecting an income in excess of $200,000 in
Contingency 2.2% the current year. (Note: Additional entities
Total 100% may also be defined as accredited investors by
the Securities and Exchange Commission.)
The opening date for the hotel was pro-
jected at 27 months from the date of proposal The private placement memorandum of-
acceptance. fered $100,000 units of ownership to accred-
The City Development Commission ited investors, guaranteeing a 9 percent priority
awarded the project to the developer, and return on the investment and a combined 50
work began. percent ownership in the hotel. A group of ini-
First, an ownership limited liability com- tial investors retained the other 50 percent in
pany (LLC) was formed as the ownership en- exchange for putting the project together. This
tity that would hold title to the hotel. effort was successful in raising 40 percent of
The LLC, in turn, entered into a develop- the total cost of the hotel in anticipation that a
ment and construction management agree- lender would provide the remaining 60 percent
ment with the development company to in the form of a construction loan. In addition
manage the arrangements for financing and to the priority return, investors could expect to
construction of the hotel. participate in any future capital gain realized
The developer, as agent for the ownership should the hotel be sold.
LLC, also entered into a hotel management The development company, continuing
contract with a management company to to function as agent for the owner, then
manage the pre-opening marketing, pre- sought a commercial bank to provide three-
opening hiring and training, and the day-to- year construction financing for the project.
33. Section 1.2 The Hotel Development Process 13
As $22,800,000, or 60 percent, of the $38 mil-
᭤ POSTSCRIPT
lion development cost was to be borrowed,
only major banks were considered as Three years after the hotel opened, the own-
prospective lenders. The size of the construc- ership LLC had the obligation to secure per-
tion loan was above the lending limits of manent financing on the hotel to replace the
most small regional banks. After a precon- construction loan. The September 11, 2001,
struction appraisal by a third-party appraisal terrorist attacks on the World Trade Center
firm chosen by the lender confirmed the
and the Pentagon slowed travel throughout
value at $38 million upon completion of con-
the United States. As a result, the hotel did
struction, and for an origination fee of
not achieve the projected occupancy or av-
$400,000, a three-year construction loan was
erage daily rate during the three-year con-
secured. The terms allowed the developer, as
struction loan period. An appraisal that was
agent for the owner, to draw down the loan
primarily based on the hotel’s trailing 12-
every 30 days after providing proof that
month net operating income produced a
funds had been properly disbursed in the
value about $2 million below the original
construction process. The loan documents set
an interest rate and also required that the construction cost. The bank that had pro-
ownership LLC seek a permanent mortgage vided the construction loan notified the
prior to the three-year expiration date on owners that they did not wish to provide
the construction loan. permanent financing under these circum-
The development company then negoti- stances. The owners were forced to conduct
ated with and selected a general contractor a search for a new mortgage bank. They
with significant hotel construction experience were able to find a mortgage, but only after
who acted on behalf of the developer, as buying down the loan by $2 million to bring
agent for the owner. The general contractor the loan-to-value ratio back to 40 percent
then selected design-build subcontractors and equity and a loan at 60 percent of the ap-
an interior designer to select colors, fabrics, praised. This illustrates the risk that devel-
furniture, fixtures, and equipment to meet the opers face when entering into a hotel
hotel franchise design requirements. project.
Building permits were applied for, and However, as hotel values historically peak
the building design was presented to the City and decline on about a ten-year cycle, the
Development Commission for its approval, owners look forward to the option of selling
along with other groups with a stake in the the hotel on the next peak, which will allow
appearance of the finished building in rela- them to capture the original projected return
tion to the area and neighborhood. With all of through capital appreciation. Hotel develop-
these approvals in place, construction com- ment and ownership is a high-risk, high-
menced, and the hotel opened two years later. reward enterprise.
34. 14 Chapter 1 Overview
1.3 H O W W E L L D O E S T H E B R A N D E D
D I S T R I B U T I O N C O M PA N Y A L L O W
INDEPENDENT HOTELS TO COMPETE
WITH THE CHAINS?
Peter Cass
Dramatic changes have affected the hotel in- • The rapid advancement and availability of
dustry over the past 30 years. These changes technology. This includes internal hotel
have had a disproportionately high bearing operating systems, revenue management,
on the independent hotel owner, who, in the direct-to-consumer communications and
face of increasing pressure from large, well- booking technology (Internet), marketing
funded chains, struggles to maintain inde- technology (customer databases), and
pendence and to compete on the basis of telecommunications and automated sales
distinctive hospitality and character. systems that enable central sales offices to
Several organizations provide indepen- become revenue producers.
dent hotels and resorts with reservations and • The growth and importance of global
sales services. As competition has evolved and brands. Recognized brand names and
intensified, some of these organizations have brand attributes are important in reach-
modified their structure and enhanced their ing diverse customer segments and in cre-
services to meet the changing needs of inde- ating customer loyalty.
pendent hotels and competitive market dy- • Consolidation of multiple brands under a
namics. Today, independent hotels may choose single global management. The manage-
from among more than 20 such organizations ment and leveraging of multiple brands
delivering varying degrees of competitive ad- use similar technology platforms and
vantage and ownership independence. shared sales and marketing infrastruc-
tures to consolidate and direct consumer
demand.
᭤ A NEW MARKET MODEL Some established ways of doing busi-
In the new millennium, the face of the global ness—long-term, high-fee management con-
hospitality market continues to change at a tracts and franchises, a focus on traditional
distribution channels, and traditional hospital-
rate never before seen. Four factors con-
ity industry marketing techniques—are no
tribute to this rapidly changing environment:
longer effective in the new consumer-focused
• The broadening and diversification of the market. More and more hospitality marketing
global consumer market. Both the demo- budgets are being directed toward technology-
graphic and psychographic characteristics enabled customer booking and communica-
of the global consumer market are grow- tion; this shift away from traditional hospitality
ing and changing radically. marketing techniques is expected to evolve
35. Section 1.3 How Well Does the Branded Distribution Company Allow Independent Hotels to Compete? 15
over several years and involve millions of U.S. brand name and established facility and ser-
dollars in telecommunication, e-commerce, vice standards as well as trained operations
data warehousing, and one-to-one marketing management and reservation and marketing
investment. The independent hotel or resort services—for a significant fee, usually a per-
and many small branded management compa- centage of gross sales. The pressure to grow
nies may not be able to fund this requirement. also fostered the development of the fran-
However, this shift will not affect all inde- chise concept and franchise system in North
pendent hotels and resorts simultaneously. America. The franchise differs from the man-
The first wave of change will hit the global agement contract in that the owner is respon-
business and city hotel market. This is prima- sible for operations, including meeting the
rily because of brand competition and the fact franchise standards.
that the business travel distribution network The growth of management and franchise
is more structured and driven by multina- contracts has been remarkable, and today, ac-
tional corporations desiring lower and more cording to a recent study, 75 percent of the
predictable costs. The second wave will affect hotel rooms in North America are covered by
the leisure market, and the changes could fol- some form of branded franchise or profes-
low quickly. Leisure travel content, including sional management agreement (Travel Re-
packaging on the Internet, will increase rap- search International, 1999).
idly as the presently fragmented leisure travel These new business structures continued
distribution network becomes more unified
to threaten the traditional independent owner
and efficient through consolidation.
by accelerating the growth of the chains’ share
The emergence of e-commerce modes in
of the lodging market. In response, the mar-
the hospitality industry is not eliminating the
keting/referral organizations formed in the
intermediary and empowering the individual
1960s began to offer a wider range of services.
property, as once thought; instead, it is creat-
ing new, more powerful intermediaries. Some While these additional offerings leveraged
of these evolve from the hospitality industry, linkages to the global distribution systems and
while others are opportunistic e-commerce led to strong relationships with travel agents,
companies. the consumer was largely ignored, and the or-
ganizations did little to generate consumer
brand awareness.
In the United States, strong consumer
᭤ MANAGEMENT branded operators are attracting increasing
COMPANIES AND amounts of capital to fund their growth at the
FRANCHISES expense of unbranded operators (Pricewater-
houseCoopers, 2000).
In the 1970s, hotel chains continued to evolve
as the need for capital to invest in additional
properties restricted growth opportunities. ᭤ BRAND DEVELOPMENT
This pressure bolstered the proliferation of
the management contract, whereby the chain As the consumer market became more
offers the hotel owner the rights to use its diverse and the hospitality product more
36. 16 Chapter 1 Overview
segmented, branding became increasingly im- ships operated best in a market environment
portant. By the late 1980s, without a recog- that was stable, somewhat homogeneous in
nized brand affiliation or a close relationship terms of demographic market segmentation,
with the lending community, owners/develop- and where travel influencers played a domi-
ers found it difficult to obtain permanent fi- nant role in transient business, group, and
nancing on a new hotel or resort. Lenders, leisure travel. Reservation affiliations are
believing that an established brand provided most effective in regional hospitality markets
greater economies of scale and established in- that do not have multiple brand competition
frastructure, opted for the lower-risk alterna- and when the goals and objectives of the
tive. In this brand-driven environment, the reservation organization are in alignment
independent hotels’ distinctive style and char- with the goals of the independent hotel own-
acter became a competitive advantage, but ers. A contributing element to the attractive-
only if they were able to meet recognized stan- ness of reservation affiliations has always
dards. As a result, the need for independent been the networking and camaraderie oppor-
hotels to be associated with a clearly defined, tunities for the professional management at
trusted brand became more critical than ever. independent hotels.
In the late 1990s, independent hotels, par- Reservation affiliations focus on tradi-
ticularly those in Europe, began to face the tional channels of distribution. Access to the
daunting costs of upgrading their technologi- Global Distribution Systems (GDS) is no
cal infrastructure and facilities to accommo- longer a competitive advantage; the GDS is a
date changing consumer needs. Such upgrades universal pipeline. The new competitive play-
as new property management systems, high- ing field is proprietary distribution channels
speed Internet access, two-line phones, in- leveraged by consumer segmentation, e-com-
room faxes, and leisure and health facilities merce technology and partners, and innova-
became critical to maintaining competitive- tive customer management programs.
ness. When coupled with ever-increasing costs In the new technology-driven and con-
of consumer marketing, these costs put un- sumer-empowered global market, the strength
precedented strains on independent hotels’ fi- and effectiveness of reservation affiliations
nances. As a result, these hotels became are challenged by new market and operating
increasingly focused on leveraging greater re- imperatives. The cost to compete against
turns from their reservation affiliation. chains will grow exponentially. As competition
intensifies, it is probable that local and re-
gional market share at independent hotels and
᭤ RESERVATION resorts will be drawn off by local and regional
AFFILIATIONS—A licensees of strong global brands. Independent
hotels, therefore, need to draw more national
CHALLENGE TO and international business to fill occupancy
EFFECTIVENESS gaps. This requirement runs counter to the es-
tablished business model and capabilities of
The relationship of independent hotels and reservation affiliations.
resorts to reservation affiliations has been The average room-night contribution of
long and generally successful. These relation- reservations companies to affiliated inde-
37. Section 1.3 How Well Does the Branded Distribution Company Allow Independent Hotels to Compete? 17
pendent hotels is less than 5 percent of avail- necessary to increase average room-night
able rooms (Preferred Research). contribution to affiliated independent hotels
At least four emerging factors are chal- to 15 percent—an average growth per mem-
lenging the effectiveness of traditional reser- ber hotel of at least 200 percent over present
vation organizations: performance levels (Preferred Research).
In response to this competitive environ-
1. The growing demographic and psycho- ment and the need for more cooperative and
graphic complexity of the global con- focused business relationships, a new hospi-
sumer market requires significant new tality business structure is evolving for all
expertise and resources in the area of seg- scales of hotels: the branded distribution
mentation and analysis. company.
2. The emergence of consumer direct-book-
ing Internet technology requires signifi-
cant new and ongoing investment. ᭤ CHARACTERISTICS OF A
3. The new marketplace requires innovative
global brand management together with BRANDED DISTRIBUTION
resources to establish and maintain a COMPANY
brand in the face of intense competition.
To be competitive, a brand must attract The ideal branded distribution organization is
new development and must therefore be a conventional equity company with owner-
strong enough to convince lenders to ship shared (in some cases) by the individual
commit to permanent financing. Brand hotel owners, who have direct input into the
management also includes loyalty pro- corporation through an elected board of di-
gram management and the development rectors. This ownership structure creates a
of regional and global partners to true operating partnership and a sharing of
strengthen and extend the effectiveness energies toward the common goal of creating
of the brand. value through increased brand awareness and
4. The corporate objectives and governance room sales. Corporate profits must be ade-
policies of traditional reservation organi- quate to maintain technical and managerial
zations are influenced by the need to grow leadership and to support the shareholders’
and meet shareholder profit require- investment.
ments. These goals for growth can be at Unlike a reservations and representation
odds with the goals and expectations of in- company, a branded distribution corporation
dependent hotel and resort members. owns and builds a branded distribution net-
work asset that, in turn, provides services as
The traditional reservation affiliations set out in the diagram below. The sole focus is
must change not only their focus but also performance for the affiliated independent
their structure if they want to succeed in this hotels and resorts.
new competitive world. Joining such an organization is appropri-
The traditional reservation organization ate for independently owned and managed
must be prepared to respond to competitive hotels and resorts that want to keep owner
challenges by expanding resources and skills control but require effective and low-cost
38. Table 1.1 Hospitality Structures and Corresponding Brands
Flagged and
Types of Representation Reservation Reservation/ Branded Franchise
Business Firms (Group Services Sales Distribution Management
Structure Meetings Only) Only Affiliations Companies Companies
General • Primarily Trade-Focused • Consumer & Trade-Focused
Attributes • Primary Reservation Technology • Performance Focused
• Disparate range of abilities in: • Brand Management
• —Management Expertise and Depth • Quality Standards and Assurance
• —Marketing, Sales, and Reservation Support • Multiple Technologies
• Integrated Marketing and
• Technology Solutions
• Customer Recognition and
• Loyalty Programs
• Full-Service Provider
• —Purchasing, Technology
• —Recruitment, Training
• —Consultative & Design Services
• Management Expertise and Depth
Examples of ALHI Utell Flag Int’l Concorde Preferred Hotels Accor brands
Organizations, David Green Lexington Golden Tulip and Resorts Bass brands
Brands, and Helms Briscoe Pegasus/ Historic Hotels Worldwide Carlson brands
Management Hinton/Grusich Rezsolutions Leading Hotels (for profit) Cendant brands
Companies Krisam Supranational of the World Best Western Choice brands
TRUST Relais and Chateaux (not for profit) Four Seasons
Small Luxury Hotels Summit Hilton brands
Sterling Hyatt
SRS Hotels Mandarin
Steigenberger Marriott brands
Starwood brands
Wyndham
Relationship Client Client Member (some Member-Owner Licensee
of Hotel are Owners)
Owner to
Structure
Owner High High High High Low
Control
Room-Night Low Low Low-Medium High High
Production
Consumer Low Low Low High High
Focus
Overall Low Low Low Low High
Fees
18
39. Section 1.3 How Well Does the Branded Distribution Company Allow Independent Hotels to Compete? 19
distribution, global consumer brand aware- livery of an exceptional hospitality
ness, and group purchasing benefits without experience.
the encumbrances and costs of a traditional • Common objectives: Both the owner and
hotel chain franchise or management con- the branded distribution company enter
tract. Above all, it promises the independent into the agreement with the same primary
hotel awareness of, and access to, their target objective: revenue. The branded distribu-
consumer and rapidly emerging technology tion company receives no revenue if it
through cooperative ownership.
does not deliver to the hotel or resort.
Table 1.1 shows a summary of the key
This shared goal strengthens and ener-
characteristics of the various marketing busi-
gizes the relationship between the two
ness structures and suggests examples of cor-
partners.
responding brands.
From a branded distribution company’s
standpoint, this structure allows the brand to
᭤ THE BENEFITS OF A expand faster because capital is not used to
subsidize additional construction or to sup-
BRANDED DISTRIBUTION port an older business model. Instead, funds
COMPANY are used to build and maintain an up-to-
date global distribution network and infra-
This new business structure is attractive from structure composed of telecommunications,
an owner’s or a developer’s standpoint for a e-commerce functions, reservations software,
number of reasons, including: data warehousing capability, and sales and
• Costs: First, it requires less up-front cash; marketing. The efficiency of the operation is
second, ongoing fees and reservation assured by a focus that is almost entirely on
commissions are significantly lower than the most important part of this business rela-
with either a pure franchise or manage- tionship—the generation of brand awareness
ment agreement. For example, a 9 or 10 and measurable room-night revenue for each
percent franchise fee in many cases affiliated hotel or resort.
equals 50 percent of gross profits. Unlike hard flags, which focus primarily
• Contract terms: The terms are typically on hotel operations and asset management
shorter, easier to negotiate, and allow for such as the Marriott or the Westin, and reser-
substantial owner control over the opera- vation affiliations, which focus on professional
tion, style, and character of the hotel. As a camaraderie and traditional distribution chan-
result, conflicts can be avoided, and the nels such as the Best Western, the branded dis-
branded distribution contract can be tribution company is primarily market-
completed and signed in as few as 45 days. focused; its full attention is on customer and
• Marketing: It frees hotel management travel influencer communication, relationship
from the daunting and increasingly ex- technology, and revenue streams. (Note: Travel
pensive task of acquiring profitable new influencers are the intermediaries between
customers and allows them to focus their consumers and the travel product and include
attention and operating skills on the de- travel agents, etc.)
