LOOKING FOR A HOTEL AFFILIATION?

Portfolio diversification is the leading reason for hotel investment money flowing in and out of the world’s various regions. Even when in possession of high financial and bargaining power, investors need the right hotel chains to help enhance their marke

Hotel affiliations bring a package of useful tools for any aspiring business operator in the hotel industry. The large operators develop and maintain central reservations systems, yield/revenue management programs, cumulative purchasing power, loyalty programs, global distribution systems code, brand awareness and sales and marketing activities that independent business operators may not be able to match. However, these benefits come at a cost, and this cost can be considerable. Affiliation may include: (1) Management Contract; (2) Franchise Contract; (3) Consortium Contract.

Management contract

A hotel management contract is a commercial agreement, between the hotels owners/investors and a third-party company - the operator - to run the hotel on behalf of the owner/investor. The owner/investor retains most of the risks and rewards of ownership, including the full benefit of the revenue. The operator, commonly known as the management company, will supply the owner/investor with a full range of hospitality services paid for through a fee structure. A successful management contract aligns the interest of the owner/investor and the operator. The owners/investors will look to achieve solid returns on investment and cash flow, without having to become involved in the hotel’s operations, and the management company will want to earn an acceptable fee and have assurances regarding the longevity of the continuation of the contract without investing in the hotel real estate. The owner/investor is mainly in charge of financing the wages of the hotel’s employees and capitalizing on the hotel’s assets. The general manager of the hotel is appointed directly by the operator.

Examples

Intercontinental Hotels and Resorts: with Intercontinental Hotels, Crown Plaza, Hotel Indigo, Holiday Inn, Staybridge, and others.

Accor Hotels: Sofitel, Novotel, Adagio, Mercure, Ibis, Formula One, and others.

Starwood: Marriott, Ritz-carlton, Residence Inn, Protea Hotels, Hyatt Hotels Corporation Louvre Hotels

Franchise contract

A franchise operation is a contractual relationship between the franchisor (i.e. hotel chain) and franchisee (i.e. investor) in which the franchisor maintains a continuing interest in the business of the

franchisee in such areas as knowhow, operational manuals and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in the business from their own resources. The owner/investor (or franchisee) is in charge of recruiting the hotel general manager and other hotel employees, financing their wages and capitalizing on the hotel’s assets. Franchising has come a long way, from feudal roots to one of the fastest-growing sectors of the economy. With many more people now looking to take charge of their careers and family life by running their own business, franchising looks set to go much further in the years to come. Some major management contract operators offers franchise contracts with some of their brands.

Examples

Wyndham Hotels and Resorts: Some brands Hilton Hotels and Resorts: Some brands Choice Hotels International Louvre Hotels: Some brands Best Western

Consortium contract

A hotel consortium is an organization of hotels which combine resources in order to establish joint purchasing/ trading arrangements and operate marketing services. These aims will often be achieved through the setting up of a centralized office whose activities will be financed through a subscription on member hotels. A consortium can help the hotel in many ways, in areas such as technology, marketing and operations. Consortium is seen as offering the highest level of independence for hotels within a chain, with the investor assigning the general manager of the facility and the latter recruiting the employees. A managed hotel can also be part of a consortia program.

Examples

Preferred Hotels and Resorts Worldhotels Leading Hotels of the World Design Hotels

Independent or self-managed

In this scenario, the investor is the manager of the hotel. The independent business could actually be a less effective business format, since decision-making, employee-selection process and managerial incentives are hindered by the fact that most of the power and knowledge lie within a small ownership structure. However, operating independently presents advantages over and above money saved on franchise royalty and marketing fees, such as the owner being given the freedom to operate differently and to promote the property’s individuality.

The owners/investors should evaluate their abilities to enter into a particular contract, where certain limitations on their operational freedom could be raised. The experience and skills of a hotel’s managers will have a key part to play in the type of affiliation selected, since they will provide the professional attitude and expertise in establishing and maintaining good relations between investors and the hotel chain, as well as in fully implementing a chain’s standards and requirements. An investor may sometimes reach out to professional companies to evaluate the best choice in moving forward with the investment.