The obvious way that hotel chains make money is from their operations – letting rooms and selling food, beverages and events. But there is another way – by increasing the value of the asset i.e. the hotel property itself. The hotel industry is a capital intensive industry, so managing this investment is just as important as managing the operations. However these two aspects of the business may have very different business cycles and may respond very differently to external forces such as economic downturns, consumer trends, and government legislation. It is for this reason that hotel chains may choose not to own the asset, and even sometimes not even operate the hotel….
This is because hotel chains are predominantly brands, supported by a marketing infrastructure that delivers reservations and a loyalty programme. Everything else – ownership of the property, management of the property, and employment of the hotel staff – can be done by a third party (a specific kind of outsourcing), if the chain so decides. Hence there are a multitude of ways in which an hotel can be owned and managed, including:
- hotel is owned by the branded chain, managed by the chain, and chain employs all the staff
- hotel is owned by a property developer or asset management company, chain manages it and employs all the staff (this is known as a hotel management contract)
- hotel is owned by a property developer or asset management company, chain employs the management team but owner employs the staff (also a hotel management contract, tends to be in overseas markets due to local employment regulations)
- hotel is owned by the property developer or asset management company, managed by the owner who employs all the staff (typically known as a franchise agreement)
- hotel is owned by a property developer or asset management company, it is managed by a third party hotel management company who employs all the staff (for instance Aimbridge Hospitality manages 400 hotels across a number of different brands and owned by a number of different owners)
Some chains choose to invest in and manage their own properties, whereas others choose to be ‘asset light’. Most have a mixed portfolio depending on the geographical areas they operate in and the market their brands are aimed at. In addition, most chains would not have sufficient capital and/or access to suitable sites to invest in property development during periods of high demand – such as that being experienced in the USA right now (see previous blog). So hotels get built by developers with a deal in place with a specific chain, or not. Moreover, established hotels get bought and sold, so ownership can change; or management contracts expire, so new operators can be brought in – both of which may lead to the hotel being rebranded.