For years, global hotel management companies offered a fairly standard management agreement to owners, taking 3 per cent of revenues (the so-called base fee) and a 10 per cent incentive fee, which was based on profit calculated before many costs incurred by the owners such as property and profit tax, insurance, interest, and replacement of fixtures and fittings.
This was supplemented by charges covering various aspects of the operation such as sales, distribution and training. It was possible that a hotel brand/operator could take between 12-14 per cent of a hotel’s revenues in fees and charges in a year when the property owner made a loss. Moreover, contracts were long — 20-30 years — and hard for an owner to terminate, however badly a management company performed.
The manager also had almost total discretion over the hotel’s operation.
This model has gradually changed. Owners demanded lower base fees and changes to the incentive fee so that it is based on certain levels of performance being reached or subordinated to an owner’s return. Owners have also wrested more control over key decisions, such as the appointment of the hotel’s general manager and approval over the annual operating budget.
However, over the past decade, two noticeable changes have upset that balance. The first being the rise of the online travel agents (OTAs) — firms like Booking.com and Expedia. These companies have invested millions in marketing strategies and built enormous customer bases. They allow users to compare multiple hotels from all brands and with easy-to-use filters so that once you are registered, you can complete a booking in a handful of clicks.
Unfortunately, the big brands sat back and missed the boat while their lunch got eaten by these new firms. With these OTAs giving hotels anything from 20-70 per cent of their business, their power over both the brands and the hotel owners has risen inexorably.
For an independent property, their fees can be 20 per cent of the room booking. For hotels managed by the big chains this falls to between 12 and 15 per cent. The hotel management companies are trying to drive bookings through their systems by offering small discounts to their loyal customer base, but it is having a limited impact.
Secondly, and at the same time, most of the big brand companies have sold off their hotels. As a result, they have become fee-generating machines, who drive profits from three sources; signing up new management contracts and franchises (where they take a fee for branding and sales but don’t actually run the hotel); buying other management companies to achieve economies of scale; and identifying and creating new fees and charges to replace the lower base and incentive fees paid by owners.
They are also attempting to reduce owners’ approval rights over annual budgets.
Needless to say, owners are unhappy. They are paying the OTAs 12-20 per cent on reservations, but are still paying fees to the brands on bookings derived from the OTAs. The brands have achieved massive economies of scale by merging — Marriott has apparently exceeded its estimate of $300 million per annum of savings from the merger with Starwood.
But these savings are not being passed on to the hotel owners in the form of lower charges. Moreover, when the big brand companies buy other groups, they acquire new brands that compete with the hotels they manage already. All of this is happening in markets where new hotel supply is putting huge pressure on performance.
Partly as a result, many experienced owners in the region like Aldar, Habtoor, Abu Dhabi National Hotels and The First Group are starting to replace their traditional management contracts with franchises, giving them a greater say over how their hotels are run.
Being faced with such issues, I believe brands need to take the following on the board in order to become more attractive:
* Offer much lower base fees with more focus on incentive fees;
* Respect the underlying hotel owners by giving them full budget approval rights — after all, it is the owner’s money at stake here not the operator’s;
* Offer franchises to competent owners;
* Be more transparent in their fees and charges so that owners fully understand what they are paying for; and pass on to owners the cost savings they are getting from their scale economies;
* Adjust their fees so that they don’t earn sales and marketing fees or loyalty programme fees from bookings that come through the OTAs; and
* Agree that areas of exclusivity (where they won’t run a competing hotel) will also apply to hotels run by groups they acquire.
Brands that can offer this flexibility and rationality will appeal far greater to owners in today’s hard-pressed markets.
Simon Allison is CEO of the hotel owners’ alliance Hoftel and organiser of the upcoming Gulf and Indian Ocean Hotel Investors’ Summit.