In the lodging business, it’s almost impossible to be all things to all people. In theory, management companies can operate hotels across a wide variety of chain scales as well as hotels that are branded, independent and soft branded. However, I contend that hotel operating companies that specialize in well-defined segments are better positioned to deliver superior results for their investors. The problem is that very few management companies can maintain the discipline to decline new business that is outside their area of specialization. This can lead to an operating company trying to be all things to all people and thus dilute the operator’s potential to deliver superior results. Three of the benefits to maintaining a selective focus on a limited number of hotel segments are as follows.
Reduced Labor Costs
Most hotel management companies play an active role in staffing and determining compensation. When that management company is determining compensation, they have to keep in mind that different segments offer different levels of pay and benefits. The select-service segment, for example, typically has more modest compensation packages than a full-service or luxury properties and resorts. If an operator is not purely select-service, then the management company’s compensation plan for a select service hotel may partially be defined by compensation programs offered at the operator’s full-service or resort hotels. This can unnecessarily increase the labor costs at a select-service hotel which is now receiving benefits offered at the operator’s full-service or resort hotels. Thus, an operator that stays within the select service and extended stay segments can more effectively control labor costs which represent the biggest P&L expense.
Better Regional Support
Hotel operators assign their regional teams, whether they be sales, revenue management or operations, a portfolio of hotels for which the regional is directly responsible. Typically, the larger the operator, the larger the number of hotels assigned to a particular regional. Often the mix of hotels within a regional’s portfolio is based upon geography or other factors that creates a mixed bag of hotels from branded select service hotels to large full-service hotels. Compare this to an operator that only operates within narrow segments of the industry. An operator that only focuses on extended stay and select service is more likely to create regional portfolios of similarly sized hotels. One can clearly see that as an owner of a select service or extended stay hotel you would prefer your regional to have like-kind hotels rather than have the potential of the operator spending a disproportionate amount of time on the challenges associated with a big full-service hotel. When regional management operators are assigned both like-kind hotels and fewer hotels, the property-level staff receives more attention and guidance.
Maximized Brand Systems & Tools
An area related to the regional support topic above is the use of brand provided systems and tools. The level of sophistication of the brand provided systems and tools is correlated with the complexity of the hotels from full service down to economy or budget hotels. The regionals must have a strong command of these tools and the more systems they are responsible for means the less likely they are to be a specialist. Operators that focus on a limited product type enable their teams to gain experience and focus on maximizing brand-provided tools for their hotels. The one-size-fits-all approach just doesn’t work in this instance.
Therefore, a management company that offers a focus or specializes in one segment often offers hotel owners distinct advantages. When selecting or re-evaluating an operator, it’s worth digging into the business model of the management companies to consider whether they can deliver these benefits.
About the Author
Gary Gray is chief investment officer at Twenty Four Seven Hotels.