By Jim Butler and the Global Hospitality Group® Hotel Lawyers | Author of www.HotelLawBlog.com
Have you noticed the explosion of new brands from hotel companies over the past few years? At JMBM, we do a lot of work with branding through license agreements, management agreements and other arrangements. So we asked my partner Bob Braun to give us some insights on what this is all about and what significance it has.
Here are Bob’s thoughts, along with some practical advice on what owners and developers should do in this situation.
Hotels – Brand Expansion or Brand Explosion? by Bob Braun, Hotel Lawyer
Consumer oriented companies commonly use “brand extension” to launch a new product by using an existing brand name on a new or related product, often in a different category. These companies use brand extension to leverage their existing customer base and brand loyalty to increase profits with a new product offering.
We see brand extension with all kinds of products – sodas, automobiles, cereal, clothing, and, of course, with hotels. But hotels not only use existing brand names to identify new types of products (for example, non-hotel properties such as residential condos, fractional units, clubs, and vacation ownership); they also do something else. Hotel companies use a new brand name (often containing the brand’s base name or identifier with some modification) to identify other products (hotel, residential, club, spa) in the same category, but a different market segment. For example, new and possibly related brand names for economy, extended stay, full service and luxury hotel product.
The hospitality industry is notable for the breathtaking rate at which new hotel brands have proliferated in recent years. Today, 90 different brands are held by just seven different corporate groups: Wyndham (15), Choice (11), Marriott (19), Starwood (13), IHG (8, including 3 Holiday Inn varieties alone), Hyatt (11) and Hilton (13). And this does not even address the tremendous number of new brands being formed by other established companies and the flurry of new hotel companies creating one, two or more brands.
Why are there so many brands?
The key reason for new hotel brands is to leverage an existing customer base or to appeal to a broader customer base with new product offerings; hotel companies can offer alternatives to guests that reinforce their loyalty to a brand. With multiple brands, hotel companies can more effectively compete for more market segments and tailor their offerings to specific demographics and local preferences. New brands also open expansion opportunities in existing markets that might otherwise be blocked by non-compete provisions in franchise or management agreements with the existing hotels. A bigger brand family may also allow a hotel company to retain licensees who would otherwise be unable to meet brand standards by allowing them to convert to a lower-status brand that does not require significant improvement plans.
Online travel agencies are also a factor in brand expansion. It was not too long ago that major hotel chains had developed extensive marketing and reservation systems allowing them a near monopoly on reaching guests. In comparison, potential guests can shop a variety of sites to book a room, reducing the power of existing chains’ reservation systems. In fact, many guests have as much or more loyalty to an online site, especially one that offers a loyalty program, than they do to the hotel brand of their stay. At the same time, expanding brand offerings permits hotel companies to enhance their loyalty programs with more flags within their brand family.
Finally, major hotel companies have become “asset light,” as evidenced by, among other things, Hilton’s decision to spin off its hotel holdings into a REIT. Expanding licensing opportunities allows hotel companies to replace cash flow from owned hotels with franchise fees.
Will the New Brands Succeed?
Along with new opportunities, brand expansion creates potential pitfalls for hotel companies. One of the byproducts of brand expansion has been to divide the hotel market into more pieces without meaningful differentiation and confusing the market. Alternatively, some brands may be so specialized as to alienate population segments and limiting their appeal. It is unclear whether all the new brands will survive a fallout, with some brands being phased out when another downturn hits. Consolidation also looms as the ultimate end-game as brands winnow out those flags that lack true staying power.
Impact on Hotel Owners
Owners often look at brand expansion by hotel companies with a jaundiced eye. First and foremost, owners are concerned that the new brands will compete with existing brands, particularly where ostensibly different brands appeal to the same demographic or consumer. Typical provisions protecting a hotel from competition by brands generally protect only against direct competitors – hotels operating under the exact same brand name. A new brand name or sub-brand, even if similar, generally is not prohibited by the typical non-complete clause.
Moreover, owners are concerned that with brand expansion comes a dilution in the attention paid by a hotel company to its existing brands. Hotel owners are concerned that the hotel companies will be distracted by new brand launches and support efforts. This can leave existing brands with diminished resources and support.
What Should Owners Do?
Owners cannot stop hotel companies from expanding their offerings. There are, however, some steps that owners can take to protect themselves and even take advantage of the explosion of brands.
- Address the new brands issue in non-competition provisions of your management or franchise agreement. If a new brand cannot be prohibited from being opened, it may be possible to require the hotel company to demonstrate that the new hotel will not adversely impact the existing property.
- Owners can also address marketing of new brands to ensure that the hotel company does not market the new brand to the exclusion of existing properties.
- For new hotels and relicensing of existing properties, consider whether a new or different brand is a better fit. In many cases — particularly with older properties — it may be wiser to convert to a different brand rather than to make expensive improvements to maintain the property in the existing brand.
The Global Hospitality Group of Jeffer Mangels Butler & Mitchell has counseled hundreds of hotel owners in their rights and alternatives with hotel companies, and is ready to assist you in your negotiations or discussions with hotel brands.
For more information on hotel management agreements
You will find a lot more information related to this topic on the Hotel Law Blog under the topic Hotel Management Agreements and many will also want to look at Hotel Franchise & License Agreements
The following are only a few of the resources you will find there:
Hotel Management Agreement & Franchise Agreement Handbook 3rd edition is released for free download
The importance of Comfort Letters in financing franchised hotels
Hotel Lawyer with insights on “How to get a great hotel operator”
The 5 questions every owner should ask before selecting a hotel brand
When should you choose a brand for your hotel? And when should the brand manage your hotel?
Dual-branded hotels — What every owner or developer should know
Hotel Franchise Agreements and the 5 biggest mistakes a hotel owner can make
Hotel Lawyer on Repositioning: The New York Times reports 39 percent increase in reflagging
