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Hotel management


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Hotel management

  1. 1. HOTEL MANAGEMENT A N D O P E R AT I O N S f o u r t h e d i t i o n Edited by Denney G. Rutherford, Ph.D. Endowed Chair Emeritus School of Hospitality Business Management Washington State University Michael J. O’Fallon, Ph.D. Hospitality and Tourism Management College of Business James Madison University JOHN WILEY & SONS, INC.
  2. 2. HOTEL MANAGEMENT A N D O P E R AT I O N S f o u r t h e d i t i o n Edited by Denney G. Rutherford, Ph.D. Endowed Chair Emeritus School of Hospitality Business Management Washington State University Michael J. O’Fallon, Ph.D. Hospitality and Tourism Management College of Business James Madison University JOHN WILEY & SONS, INC.
  3. 3. This book is printed on acid-free paper. ᭺ ϱCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedPublished by John Wiley & Sons, Inc., Hoboken, New JerseyPublished simultaneously in CanadaNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as per-mitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior writ-ten permission of the Publisher, or authorization through payment of the appropriate per-copy fee tothe Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax(978) 750-4470, or on the web at Requests to the Publisher for permission shouldbe addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ07030, (201) 748-6011, fax (201) 748-6008, e-mail: of Liability/Disclaimer of Warranty: While the publisher and author have used their best effortsin preparing this book, they make no representations or warranties with respect to the accuracy orcompleteness of the contents of this book and specifically disclaim any implied warranties of mer-chantability or fitness for a particular purpose. No warranty may be created or extended by sales repre-sentatives or written sales materials. The advice and strategies contained herein may not be suitable foryour situation. You should consult with a professional where appropriate. Neither the publisher nor au-thor shall be liable for any loss of profit or any other commercial damages, including but not limited tospecial, incidental, consequential, or other damages.For general information on our other products and services or for technical support, please contact ourCustomer Care Department within the United States at (800) 762-2974, outside the United States at(317) 572-3993 or fax (317) 572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears in printmay not be available in electronic books. For more information about Wiley products, visit our web siteat of Congress Cataloging-in-Publication Data:Hotel management and operations / edited by Denney G. Rutherford, Ivar Haglund, and Michael J. O’Fallon. — 4th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0471-47065-6 ISBN-10: 0-471-47065-1 (pbk.) 1. Hotel management. I. Rutherford, Denney G., 1942– II. Haglund, Ivar. TX911.3.M27H663 2007 647.94Ј068—dc22 2005011811Printed in the United States of America10 9 8 7 6 5 4 3 2 1
  4. 4. D E D I C AT I O N The fourth edition of Hotel Managementand Operations is hereby dedicated to all ofthose hospitality students who have enrichedthe lives of their guests by continuing tolearn beyond their formal education. It isthese professionals who constantly striveto find even better ways to give the gift offriendship. All the best to you. D.G.R. and M.J.O’F 2005
  5. 5. CONTENTS Preface xi Contributors xiii Acknowledgments xv chapter 1 O V E R V I E W I1.1 Introduction 1 1.6 Customer Relationship Management—A1.2 The Hotel Development Process 5 Driver for Change in the Structure of the John Dew U.S. Lodging Industry 36 Gabriele Piccoli, Peter O’Connor,1.3 How Well Does the Branded Distribution Claudio Capaccioli, and Roy Alvarez Company Allow Independent Hotels to Compete with the Chains? 14 1.7 Spas and the Lodging Industry 50 Peter Cass Peter C. Anderson1.4 The Art and Science of Opening References 67 Suggested Readings 68 a Hotel 21 Source Notes 68 Tom Dupar1.5 On-line Pricing: An Analysis of Hotel-Company Practices 26 Peter O’Connor v
  6. 6. vi Contents chapter 2 O R G A N I Z AT I O N 692.1 Introduction 69 References 88 Suggested Readings 882.2 Organizational Design 73 Source Notes 88 Eddystone C. Nebel III2.3 As I See It: Hotel Organization Structure 86 Mark Conklin chapter 3 G E N E R A L M A N A G E R S : A V I E W AT T H E T O P 893.1 Introduction 89 3.5 A Day in the Life of a Hilton Hotel3.2 A Conceptual Framework of the Hotel General Manager 113 General Manager’s Job 91 Robert O. Balmer, CHA Eddystone C. Nebel III and Ajay Ghei 3.6 A Day in the General Manager’s Life 1153.3 Grooming Future Hospitality Leaders: Bob Peckenpaugh A Competencies Model 101 3.7 Mini Case: Sunset Hotels and Suites 118 Beth G. Chung-Herrera, Cathy A. Enz, References 118 and Melenie J. Lankau Suggested Readings 1203.4 As I See It: What I Do 111 Source Notes 120 Emilio Fabico chapter 4 O P E R AT I O N S : R O O M S 1214.1 Introduction 121 4.5 Concierge (cone-see-air-j) 1434.2 The Electrifying Job of the Front Office Mario Arnaldo Manager 124 4.6 As I See It: Management of the James A. Bardi Front Office 1494.3 A Day in the Life of the Front Office Oliver Meinzer Manager 127 4.7 Mini Case: The New FOM 161 Garry Dickover 4.8 To Change or Not to Change:4.4 Yield Management: Choosing the Most A Case Study at the Front Desk 162 Profitable Reservations 131 Nancy Swanger William J. Quain and Stephen M. LeBruto References 163 Suggested Readings 164 Source Notes 164
  7. 7. Contents vii chapter 5 O P E R AT I O N S : H O U S E K E E P I N G , ENGINEERING, AND SECURITY 1675.1 Introduction 167 5.6 The Engineering Department and5.2 A Day in the Life of a Director Financial Information 199 of Rooms 173 Agnes Lee DeFranco and Kurt Englund Susan B. Sheridan5.3 Housekeeping Organizations: Their 5.7 The Legal Environment of Lodging History, Purpose, Structures, and Operations 205 Personnel 175 Melissa Dallas Thomas Jones 5.8 Asphalt Jungle 2175.4 On Being an Executive Housekeeper 188 Je’anna Abbott and Gil B. Fried John Lagazo 5.9 Workplace Violence in Hotels 2275.5 The Hotel Engineering Function: Mark Beattie and Jacinta Gau Organization, People, and Issues in the 5.10 Case Study: Housekeeping, Modern Era 191 Engineering, and Security 230 Denney G. Rutherford References 231 Suggested Readings 233 Source Notes 234 chapter 6 F O O D A N D B E V E R A G E D I V I S I O N 2356.1 Introduction 235 6.7 A Day in the Life of an Executive6.2 Managing Food and Beverage Director of Catering Sales and Operations in Lodging Organizations 239 Convention Services 287 Robert H. Bosselman Rich Benninger6.3 As I See It: Hotel Director of Food and 6.8 The Organization and Management of Beverage 251 Hotel Beverage Operations 291 Dominic Provenzano Valentino Luciani6.4 Best Practices in Food and Beverage 6.9 Case Study: Crisis in the Food Court 298 Management 253 Nancy Swanger Judy A. Siguaw and Cathy A. Enz 6.10 Case Study: Outside the Box in the Food6.5 Strategic Alliances Between Hotels and and Beverage Division 299 Restaurants 265 References 300 Robert W. Strate and Clinton L. Rappole Suggested Readings 301 Source Notes 3026.6 Contemporary Hotel Catering 282 Patti J. Shock and John M. Stefanelli
  8. 8. viii Contents chapter 7 M A R K E T I N G A N D A S S O C I AT E D ACTIVITIES 3037.1 Introduction 303 7.6 Hotel Sales Organization and7.2 Building Market Leadership: Marketing Operations 348 as Process 305 Margaret Shaw and Susan V. Morris Fletch Waller 7.7 Putting the Public in Public Relations:7.3 Consumer Decision Rules and Implica- The Case of the Seattle Sheraton Hotel tions for Hotel Choice 321 and Towers 353 Bianca Grohmann and Eric Spangenberg Louis B. Richmond7.4 Hotel Pricing 334 7.8 Mini Case: Revamping the Marketing Re- Marta Sinclair and Carl R. Sinclair search Department 3607.5 A Day in the Life of a Regional Revenue References 361 Suggested Readings 362 Manager 345 Source Notes 362 Paul Chappelle chapter 8 F I N A N C I A L C O N T R O L A N D I N F O R M AT I O N M A N A G E M E N T 3658.1 Introduction 365 8.5 The Hotel Purchasing Function 3918.2 The Lodging Chief Financial C. Lee Evans Executive 368 8.6 Data Mining for Hotel Firms: Use and Raymond S. Schmidgall Limitations 3998.3 Budgeting and Forecasting: Current Vincent P. Magnini, Earl D. Honeycutt Jr., Practice in the Lodging Industry 377 and Sharon K. Hodge Raymond S. Schmidgall and References 412 Agnes Lee DeFranco Suggested Readings 414 Source Notes 4148.4 As I See It: The Hotel Controller 387 Michael J. Draeger
  9. 9. Contents ix chapter 9 H U M A N R E S O U R C E S P O L I C Y MANAGEMENT 4159.1 Introduction 415 9.5 The Strategic and Operational Roles9.2 Driving Hospitality Into the Future 417 of Human Resources—An Emerging Christian Hardigree, Ellis Norman, Gail Model 446 Sammons, Vince Eade, William Werner, J. Bruce Tracey and Arthur E. Nathan Robert H. Woods, and Cheri Young References 4579.3 The Causes and Consequences of Turnover in the Hospitality Industry 429 Carl D. Riegel9.4 Current Issues in Hospitality Employment Law 436 Suzanne K. Murrmann and Cherylynn Becker INDEX 461
  10. 10. P R E FA C EAs Denney would tell you, the first edition of mote the idea of critical thinking among stu-this textbook project was originally born out dents of hotel administration. Critical think-of a range of frustrations. While there are ing refers to that process whereby the studentmany outstanding textbooks in the hotel man- is exposed to a number of different view-agement field that dealt with significant por- points within a theoretical structure, and fromtions of operations, particularly housekeeping, analysis of those viewpoints, becomes betterfront office, and food and beverage, there are able to synthesize a viewpoint about hotel op-very few that try to treat, in a balanced and in- erations that will enable them to intelligentlydepth way, each department in the hotel. One approach whatever practical situations theyfrustration was that some texts that dealt with may find themselves confronted with in thethese departments spent an inordinate “real world.”amount of time focused on one aspect of the There is a conventional wisdom that goes,hotel operations—usually either front of the “something may be okay in theory but ithouse, food and beverage or marketing. Other doesn’t work in practice.” Like economistdepartments, for better or worse, were treated Milton Friedman, we reject that statement. Ifas minor players. Consequently, students and theory doesn’t work in practice, it is lousy the-readers of such texts were given only a cursory ory. What professors need to guide students inintroduction to the intricacies of these “mi- understanding is that theory, (in the word ofnor” departments, their management, their Friedman) explains, predicts, or controls, andpeople, and their interactive functions in the does this in different ways given differentoverall hotel organization. variables in different organizations. This is an- Another frustration he encountered was other issue or frustration that subsequent edi-using then currently available material to pro- tions have been designed to further address. xi
  11. 11. xii Preface As we went about planning and designing think about a topic, in this case, a hotel de-the fourth edition of Hotel Management and partment, a student or hotel professional canOperations (HMO IV), we felt the need to feel better prepared to find ways to apply the-continue to remind ourselves of the lessons of ory in a practical setting or situation. In the fi-the frustrations listed above. We wanted to nal analysis, it is up to you to make the bestmake sure the original idea behind this book use of HMO IV, because like we state above,did not get lost. By helping the reader gain an none of us knows it all. Good luck, it is ourappreciation of what a variety of observers, pleasure to do this work for you.thinkers, researchers, and commentators
  12. 12. CONTRIBUTORSJe’anna Abbott, University of Houston Peter Cass, Crystal River, FloridaRoy Alvarez, Senior Lecturer, Cornell Uni- Paul Chappelle, Brand Revenue Manager, versity School of Hotel Administration Red Lion Hotel and Inns, Vancouver,Peter C. Anderson, Anderson and Associates WashingtonMario Arnaldo, Instructor, Travel Industry Beth G. Chung-Herrera, Associate Professor, Management, Hawaii Pacific University, College of Business, San Diego State Uni- Honolulu, HI versityRobert O. Balmer, General Manager, Dou- Mark Conklin, Area Vice President, Western bletree Hotel, Bakersfield, California Europe, Marriott Hotels, Resorts, andJames A. Bardi, Penn State Berks–Lehigh Suites, Frankfort, Germany Valley College Melissa Dallas, Florida Atlantic University,Mark Beattie, Doctoral Student, Gonzaga College of Business University, Liberty Lake, WA Agnes Lee DeFranco, University of Houston,Cherylynn Becker, Richmond, Virginia Conrad N. Hilton CollegeRich Benninger, CMP, Executive Director of John Dew, Executive Consultant, Bellevue, Catering of Catering and Convention Washington Services, Caesar’s Palace Garry Dickover, General Manager, Conven-Robert H. Bosselman, Dedman Chair of Hos- tion Center Courtyard by Marriott, Las pitality Administration, Florida State Vegas, Nevada University, Dedman Department of Hos- Michael J. Draeger, Controller, Dayton De- pitality Administration pot Casino, Dayton, NevadaClaudio Capaccioli, Deloitte and Touche Tom Dupar, Dupar Dynamics, Bellevue, Business Consulting Manager, Milan, Italy Washington xiii
  13. 13. xiv ContributorsVince Eade, University of Nevada, Las Vegas Vincent P. Magnini, Ph.D. candidate, Old Do- Harrah School of Hotel Administration, minion University Las Vegas, NV Oliver Meinzer, Director of Operations, New-Kurt Englund, Resort Manager, Four Seasons port Beach Marriott Suites, Newport Resort Costa Rica at Peninsula Papagayo Beach, CACathy A. Enz, Louis G. Shaeneman Professor Susan V. Morris, Vice President, HQ Global of Innovation and Dynamic Management, Workplaces, Dallas, Texas Cornell University School of Hotel Ad- Suzanne K. Murrmann, Virginia Polytechnic ministration Institute and State University, DepartmentC. Lee Evans, Director of Purchasing, The of Hospitality and Tourism Management Oasis Resort; Casa Blanca Spa and Golf Arthur E. Nathan, New Product Thought and Virgin River Hotel and Casino Leader, Mellon HR SolutionsEmilio Fabico, Walt Disney World, Orlando, Eddystone C. Nebel III, Purdue University, Florida EmeritusGil B. Fried, Gil B. Fried and Associates, Ellis Norman, University of Nevada, Las Ve- Risk Management Consultants, New gas Harrah School of Hotel Administra- Haven, CT tion, Las Vegas, NVJacinta Gau, Doctoral Student in Criminal Peter O’Connor, Associate Professor, Justice, Washington State University, Pull- France’s Institute de Management Hote- man, WA lier International, Essec Business School,Ajay Ghei, The World Bank Group FranceBianca Grohmann, Assistant Professor of Bob Peckenpaugh, Hotel Manager, Rancho Marketing, Concordia University Bernardo Inn, San Diego, CaliforniaChristian Hardigree, University of Nevada, Gabriele Piccoli, Assistant Professor, Cornell Las Vegas Harrah School of Hotel Ad- University School of Hotel Adminstra- ministration, Las Vegas, NV tionSharon K. Hodge, Assistant Professor, Love Dominic Provenzano, Director of Opera- School of Business, Elon University tions, Cleveland Marriott Downtown atEarl D. Honeycutt Jr., Professor, Love School Key Center, Cleveland, Ohio of Business, Elon University William J. Quain, Florida International Uni-Thomas Jones, University of Nevada, Las versity, School of Hospitality Manage- Vegas mentJohn Lagazo, Director of Operations, The Clinton L. Rappole, University of Houston, Madison Hotel, Rockville, MD Conrad N. Hilton CollegeMelenie J. Lankau, Assistant Professor, Terry Louis B. Richmond, President, Richmond College of Business, University of Geor- Public Relations gia Carl D. Riegel, Florida Atlantic University,Stephen M. LeBruto, University of Central Graduate School of Business Florida Gail Sammons, University of Nevada, Las Ve-Valentino Luciani, Instructor, University of gas Harrah School of Hotel Administra- Nevada, Las Vegas tion, Las Vegas, NV
  14. 14. Contributors xvRaymond S. Schmidgall, Michigan State Uni- Robert W. Strate, National Aeronautics and versity, School of Hospitality Business Space AdministrationMargaret Shaw, University of Guelph, School Nancy Swanger, Washington State University of Hotel & Food Admin., Guelph, ON J. Bruce Tracey, Associate Professor of Man- N1G 2W1 CANADA agement, Cornell University School ofSusan B. Sheridan, Owner, Taughannock Hotel Administration Farms Inn, Trumansburg, New York Fletch Waller, Principal, FCW Consulting,Patti J. Shock, University of Nevada, Las Seattle, Washington Vegas William Werner, University of Nevada, LasJudy A. Siguaw, Cornell University, School of Vegas Harrah School of Hotel Adminis- Hotel Administration tration, Las Vegas, NVMarta Sinclair and Carl R. Sinclair, Griffin Robert H. Woods, University of Nevada, Las University, Toowong, QLD 4066 Australia VegasEric Spangenberg, Associate Dean, College Cheri Young, University of Nevada, Las Ve- of Business, Washington State University gas Harrah School of Hotel Administra-John M. Stefanelli, University of Nevada, Las tion, Las Vegas, NV Vegas
  15. 15. ACKNOWLEDGMENTSI sort of thought that by the time I reached friends, colleagues, and former students couldthe fourth edition, the project would have be- devote the time they did to contribute to thiscome easier. Well, it hasn’t. The challenges of project. My badgering, cajoling, begging, andcontinual improvement—finding challenging bribing aside, I think we’re all still friends.and interesting material, presenting it in in- I want to particularly salute those whoteresting ways, and trying to choose material crafted custom pieces for this edition andthat will transcend unanticipated events—get those professionals who contributed “Day inharder, not easier. While making the book the Life” and “As I See It” pieces. They havewas a team effort involving a wide range of made this edition a richer and more user-professionals, all of its flaws, and there proba- friendly book. They also add a view of the realbly are more than a few, are solely my world that has been missing.responsibility. The support and encouragement of my First of all, the authors of the various colleagues at Washington State Universitypieces included here who knowingly or un- was critical. Terry Umbreit, Director of theknowingly have contributed their thoughts, School of Hospitality Business Management,research, ideas, opinions, and expertise to this and a whole bunch of students all contributedexercise in critical thinking about hotel de- to the success of this project with advice,partmental operations deserve recognition. counsel, and suggestions.Without the rich mixture of interest and tal- My good friend, colleague, and productionent extant in the hospitality profession and its assistant, Lillian Sugahara Jesse, helped meeducational establishment today, this collec- tremendously. Her magic with the computertion of readings would not have been possi- literally saved this project by translating manyble. It is my great good fortune that my files created in Adobe PDF or PageMaker for xvii
  16. 16. xviii AcknowledgmentsMacintosh to something I could edit in Word. University after 26 years in May 2004. We areBecause she kept accurate files of the manu- in the process of building our retirementscript of previous editions, we were able to home in Port Townsend, Washington, and willovercome the problems attendant to the be moving in July 2005, shortly after the booktransfer of the project from Van Nostrand is due at the publisher. Building a house longRinehold to John Wiley & Sons. Lillian, you distance has its own challenges, and with “theare the greatest. book,” we have had to rely on Sandy for a lot Melissa Oliver, my editor at Wiley, pro- of decisions. I love you, Sandy.vided needed support regarding material pre- I also want to acknowledge the capableviously published by Wiley, and her assistance of my colleague and former stu-willingness to discuss some of my off-the-wall dent, Michael O’Fallon. He is the author ofideas have truly made this a better project. the instructor’s manual. Michael will co-au-Thanks, Melissa. thor this and the next edition, after which the My wife and best friend, Sandy Sweeney, project will be all his.continues to provide the encouragement, sup-port, and understanding she always does on Denney G. Rutherfordbig writing projects. Her understanding is par- Spokane/Port Townsend, Washingtonticularly important when I disappear to work 2005on “the book” when we could be doing other,more fun things. As with past editions, shedoes understand the rhythms of an author’slife and endures losing me to “the book” withstyle and grace. The last two times I did this,we were moving—and surprise—it is happen-ing again. I retired from Washington State
  17. 17. c h a p t e r o n e OVERVIEW 1.1 I N T R O D U C T I O NThe vast majority of research articles and es- among the country’s living patterns. Peoplesays in this book deal with one or more as- and industry have moved from the so-calledpects of what has been called the art and rust belt to the sun belt. The hotel businessscience of modern hotel management. It has been active in reborn and reconstructedshould be noted that the word modern can be central cities. The explosion of technologyloaded with the potential of much misunder- and information-based companies has con-standing. Hotels are changing and will con- centrated human endeavor in technologicaltinue to change. As a result, the techniques of corridors in California, Massachusetts, Wash-management of modern hotels must adapt to ington, Texas, and North Carolina, to name achanging circumstances. Subsequent sections few such places. It can be safely said thatof this book are designed to help the student where jobs are and major concentrations ofand practitioner discover information, meth- economic activity occur, hotels will follow.ods, and techniques for dealing with these Among other current and ongoing influ-changing circumstances. encers of hotel design, construction, market- ing, and operation are the following. Note: This list is neither exhaustive nor exclusive.᭤ INFLUENCES • Demographics play a major role and willLike many other American businesses, hotels continue to be influential in the foresee-have been affected by shifts in emphasis able future. As the baby boom generation 1
  18. 18. 2 Chapter 1 ᭿ Overview and its children mature, the population of sorts—a modern incarnation of the time- the country will for many years be older, share properties of several decades ago. healthier, and better educated than previ- Because these are being developed and ous generations. These facts will present operated by name hotel companies and new challenges and opportunities to all are marketed to the affluent, healthy, business managers. well-educated population segment, resort• Technology—in the form of computers, managers have had to absorb new mana- communication, personal devices, and gerial realities. laborsaving mechanical equipment—has • The well-documented change in the com- had and will have a major effect on the plexion of the national economy from one way in which hotels are managed and op- that emphasizes goods and, to a lesser ex- erated. The speed with which information tent, natural resources to one that empha- is accumulated, stored, manipulated, and sizes services has kindled new ideas about transferred is such that today most travel- the way in which we manage the design ers expect that the hotel rooms they rent and delivery of these services. Hotels, will allow them to be as productive as restaurants, and travel services are now they are in the office or at home. Increas- seen as unique entities that dictate special ingly, with portable computing, personal kinds of managerial techniques and data assistants (PDAs), wireless commu- strategies. nication, and virtually everything some- • Changes in people’s travel patterns have how connected to the Internet, hotels altered the way we manage our hotel must provide services and access that al- properties. Deregulation of the airlines low guests seamless transition from the has driven a change in the way millions of business, travel, or home environment to people travel each year, given the hub- that of the hotel. Increasingly, entertain- and-spoke design of airline services. ment must be fused with communication Many hotel companies are now locating and productive processes. major hotel properties adjacent to hub air• The concept of market segmentation, or transport facilities, taking advantage of ever-increasingly finely tuned market def- the fact that business travelers may not initions, will dictate hotel structures and need to travel to a central business district organizations, and management tactics (CBD) to accomplish their purpose in a designed to address those market seg- given area. Meetings and conferences can ments have become even more important now be scheduled within a five-minute to the management of hospitality service limousine ride from the air terminal, and businesses. With the increased power in the business traveler can be headed for the information and data manipulation his or her next destination before the day realm, hotels have available to them ever- is over without having to stay overnight in expanding databases about guests and are a CBD hotel. creating new products to attract those • New patterns of investment in hotel facili- markets. ties have emerged in the last two decades,• One of the effects of the aging demo- and more attention is now paid to achiev- graphic is the emergence of vacation re- ing optimum return on investment. Be-
  19. 19. Section 1.1 ᭿ Introduction 3 cause people from outside the hotel in- stable, consumer spending patterns and high dustry are now participating in its finan- employment growth had not materialized, cial structuring, hotel operations are no particularly in light of corporate layoffs and longer dependent on the vision of a single the ongoing nervousness of consumers about entrepreneur. Managers now must design whether or not their financial wherewithal tactics and strategies to achieve hereto- was safe. fore unanticipated financial goals. The Now consider late 2000, when the third same trend has also altered the complex- edition of this book was being written. Unem- ion of management and organization of ployment was at an all-time low; the Dow the modern hotel. This is especially true Jones Industrial Average was between 10,000 of publicly owned hotel firms, where Wall and 11,000; hotel occupancies had stabilized Street stock analysts heavily influence nationally in excess of 70 percent; and the fed- stock prices through expectations of eral government was running a surplus for the quarterly revenues and profits. This puts first time in the memory of most. pressure on hotel companies and their Then what happened? The terrorist at- operations managers to perform, on a tacks in New York and Washington, D.C., in quarterly basis, in a way contrary to many 2001 changed the face of all business and managers’ instincts. travel, immediately and probably for the fore- seeable future as well. Major airlines are in Most of the foregoing issues and influ- bankruptcy; hotels are struggling to achieveences still operate (to a greater or lesser ex- profitable occupancies; business travel istent) on the organizational structures and down; the high-tech stock market bubblestrategies of the modern hotel. Since the last burst; the country is at war in a number of lo-edition of this book, however, other phenom- cations; security has made travel more diffi-ena of an economic, cultural, and social na- cult, if not actually annoying; and people areture have come to the fore, complicating our nervous. Join this with an imbalance of trade,view of hotel management. This furthers the the outsourcing of jobs, and the largest federalargument that the hotel industry is a part of deficits in history, and the face of the economythe greater economy and at the mercy of ele- is challenging. This translates directly not onlyments often completely out of its control. to business travel but personal and recre- The cyclical nature of the U.S. and inter- ational travel as well. Finding ways to operatenational economies has recently affected profitably in such an environment is the job ofsignificantly hotels’ ability to respond to the next generation of hotel operators.changing circumstances. In early 1993, for in- Among the predictions I made in the pre-stance, employment growth was stagnant; cor- ceding edition was that cultural diversity willporate profits were low; the expansion of the play a role in the management and organiza-gross national product (GNP) was only a mar- tional structure of the modern hotel in theginal percentage above previous years; and United States. As surely as living patterns,travel in most segments was down due to cor- economic cycles, and market segmentationporate restructuring, downsizing, or reorgan- have influenced the hotel industry, so will theizing. Vast layoffs in the hundreds of change in ethnicity of the workforce. The cul-thousands had been announced every month. tural backgrounds that an increasingly diver-While fuel prices continued to be relatively sified workforce will bring to hotel operations
  20. 20. 4 Chapter 1 ᭿ Overviewmay be seen as a problem or a challenge—or John Dew, formerly president of Inn Ven-both. To most operators, it will be seen as an tures, a regional hotel management and de-opportunity to demonstrate to an increasingly velopment company that has built anddiverse clientele that hotel companies are operated many Marriott products, in additioncommitted to hiring and training a workforce to a proprietary hotel product, provides an in-structure that mirrors society. I see no reason sider’s view of the steps needed to bring a ho-to change that prediction now; if anything, ac- tel from conception to construction andculturation of the hospitality business will operation. This unique view of hotel opera-accelerate. tions connects the concept of hotel develop- The legal and regulatory environments ment with the realities of day-to-dayare increasingly important to all business operation. It should help aspiring managersmanagers, and hotel operators are no excep- understand how the intricacies of the devel-tion. Increasingly, operators must be aware of opment process may influence the marketingand alert to realms of risk that can engender and management of the hotel.lawsuits against them. Several articles and es- Peter Cass offers the reader insights,says in this edition highlight these threats to heretofore unavailable in books of this nature,hotels and their guests. It should be noted that into independently branded hotels that associ-present-day security concerns also have sig- ate to provide market strength. He makes thenificantly affected the ways in which hotels case that the future success of independentare operated. Awareness of the risk environ- hotels is linked to their ability to find ways toment and the regulatory realm are factors maintain their independence while sustainingthat affect a hotel’s ability to compete in the competitive advantage in the luxury segment.early part of the twenty-first century. Essays Because new construction of hotels di-and articles in the security section and the hu- minished greatly after 9/11 but firms stillman resources section address this issue. needed to grow, rebranding existing proper- ties generated a lot of growth activity. Re- branding is a complicated process that must be accomplished within critical time frames to᭤ INTRODUCTORY coincide with marketing, financial, and opera- READINGS tional variables. Tom Dupar is a seasoned vet- eran at this fascinating and important activityI have attempted in this edition to present and has participated in rebranding operationsnew and (sometimes) different takes on the around the world. His essay on the intricacieshotel business. This section is also used to ex- of rebranding was a mainstay in the previousplore ideas that are new to the management edition of this book. Today’s economic cir-process, and that—who knows?—may never cumstances are different, and Dupar’s busi-completely catch on. Rather than focus exclu- ness has changed its focus to opening newsively on the operations of the major chains, major projects. His piece serves as a usefulthe readings here are from the perspectives of companion to that of John Dew, and the twooperators, leaders, and experts such as re- should be read together, with an eye towardgional operators, major industry consultants, comparing Dew’s smaller project focus andand independent branded hotels. Dupar’s large projects.
  21. 21. Section 1.2 ᭿ The Hotel Development Process 5 Perhaps proving the axiom that “every- suggested readings for the student who wouldthing old is new again,” the concept of health like to gain more in-depth knowledge aboutand wellness spas as a hotel and resort prod- the hospitality industry as a whole and spe-uct has enjoyed a resurgence. Once the cific historical antecedents. In particular, theprovince of high-end hotels and resorts, the books by Hilton and Jarman look closely atidea of being pampered in a spa has been the intermachinations of the establishment byadded to the service mix in many more mod- two early pioneers of the industry, one ofest hotels and resorts. While the big-name whom, Conrad Hilton, lives on in an interna-spas at five-star properties still set the stan- tional, publicly traded company operated bydard for pampering and pricing, the comfort one of his sons. E.M. Statler’s contributions toof personal service in less lavish spas seems to the modern hotel business are legendary inappeal to the modern traveler as well. Peter that he is generally credited with foundingAnderson’s overview of the spa industry pro- and operating the first commercial hotel con-vides insights into this fascinating service cept that recognized the realities of the earlyproduct. business traveler at the beginning of the twen- In addition to products, building, and re- tieth century. The suggested articles arebranding, I have also chosen to include in the drawn from recently published historicsection two recently reviewed and studied overviews of the hotel side of the hospitalityideas that may or may not be adopted across industry in the United States. They also high-the industry. light other major forces in the development of At the end of this section are a number of the modern hotel business. 1.2 T H E H O T E L D E V E L O P M E N T P R O C E S S John Dew • Who owns it?᭤ INTRODUCTION • Where did they get the money to build it?The bulldozers are working and a construction • How long does the process take from ideacrane is being erected on that vacant lot you to grand opening day?pass each day going to and from home. The • Who selects the architect, the engineers,sign on the fence states that a new hotel is be- and the interior designer?ing built with a planned opening date of spring2007. If you have ever wondered just how that • Who manages the myriad details that gohotel was created, you may have wondered into the development of a new hotel?about some or all of the following questions: • Who will manage the hotel once it’s open?• How did someone select that particular vacant lot? We hope to address these and other ques-• Who actually creates a new hotel? tions you may have in this chapter.
  22. 22. 6 Chapter 1 ᭿ Overview analysis of the site by an objective third party.᭤ THE DEVELOPMENT Companies offer hotel feasibility studies for a COMPANY fee and are experts in a particular market, or developers may use the consulting group ofThe developer is the entrepreneur, the risk one of the major public accounting firms.taker, who originates the idea for the hotel. De- The company retained to do the feasibil-pending on the business structure selected, the ity study can spend up to several months gath-developer often puts his or her personal wealth ering detailed data to see if, in their opinion, itat risk when engaging in a hotel project. The makes economic sense to build the hotel.developer, along with a small staff of people, Their conclusion offers an objective third-networks with commercial real estate agents party opinion as to whether the project ison the lookout for a suitable hotel site. De- feasible, hence the term feasibility study. Gen-pending on the type of hotel to be developed, a erally, the feasibility study considers, evalu-site of at least two to four acres is required (for ates, and makes recommendations about thecomparison, an acre is roughly the size of a project based on the following variables:football field). This property must be zoned bythe city for a hotel, be visible from a freeway or The Sitemajor street arterial, and have city approval forsuch construction activities as curb cuts, left- • Proper zoninghand turn lanes, and delivery truck access. • Size in square feet/acresCommercial realtors offer sites for the devel- • Visibility from arterials/freewaysoper’s consideration that include maps, aerial • Traffic counts/patternsphotos, and proof of hotel zoning. Sometimes the developer views potential • Accessibility from streets, freeways, air-sites by driving around the neighborhood ports, train stations, etc.within five miles of the site or touring multi- • Proximity to where potential guests live,ple sites by helicopter, noting where the po- travel, or worktential guests live and work and where • Barriers that discourage competitionpotential competing hotels are located. coming into the market, if any The price per square foot of the land is • How adjacent property and businessesconsidered. The higher the cost of land, the are utilizedhigher the rates the hotel will need to charge.Is the price too high for the average daily rate • Master area development plans(ADR) in this particular market? Is it too • Local permitting process and the degreelow? Or is it acceptable? This is determined of difficulty for that particular citywhen the hotel financial pro forma budget • Impact fees charged by the citydocument is created. The Economy of the Area • Major employers, government agencies᭤ THE FEASIBILITY STUDY • Business trends for each employer/agencyWhen the developer selects a site, a feasibil- • Hotel needs and the demand for eachity study is often commissioned to obtain an • Leisure travel demand in the area
  23. 23. Section 1.2 ᭿ The Hotel Development Process 7• Nearby tourist attractions Ten-year Projection• Visitor counts • Occupancy projection by year• Conventions, trade shows, and meetings • ADR by year history • Estimated cash generated for debt • Estimated cash generated for distributionThe Hotel Market to investors• The competitors, both existing and • Estimated cash-on-cash return (after-tax planned income divided by equity invested)• Historical occupancy of hotels in the area • Overall projected yield• Historical average rate • Projected internal rate of return• Proprietary data on area travel • Net present value of the project over each of the next ten yearsIdentification of Which Hotel Market Once the feasibility study is completed,Segment to Serve the developer is prepared to move forward• Full service with the project. Often, at this stage of the• Limited service process, the developer purchases an option on• Extended stay the land to tie it up until the remaining devel-• Luxury opment steps can be completed—and to pre- vent the competition from purchasing it.• Midprice• Economy• Budget ᭤ CREATION OF THESelection of Appropriate Hotel Design OWNERSHIP ENTITY• High-rise• Midrise An ownership entity (note that this is differ- ent than and separate from the development• Garden apartment style company) must be created to hold title to the• Hybrid design land—and the hotel, once it’s built. Consider- ing the limitation of liability to the investors,Selection of Appropriate Hotel Brand tax consequences, estate implications for the investors, and potential requirements of the• Franchised (Marriott, Sheraton, Hyatt, mortgage lender, a business structure is se- etc.) lected, normally in one of the following forms:• Licensed (Best Western, Guest Suites, etc.) • Limited liability company (LLC)• Independent • Limited partnership (LP)• Independent with strategic market affilia- • S corporation (formerly known as a tion (Luxury Hotels of America, Historic Sub-S corporation) Hotels of America, etc.) • C corporation
  24. 24. 8 Chapter 1 ᭿ Overview franchise fees, royalty fees, and marketing/᭤ THE DEVELOPMENT miscellaneous fees as part of its agreement AGREEMENT structure with the operating company. Con- sideration must also be given to the brands al-The newly formed entity now enters into a ready represented in the target market thatdevelopment contract with the development may be available for franchise. The franchisecompany to take the project to completion. company is approached and a franchise is re-The development company charges a fee, ap- quested, with the feasibility study offered asproximately 3 percent of the total project backup for the request.cost, for this service. The agreement generally The next step is for the franchise com-covers such variables as: pany to conduct an impact study of the mar-• Selection of architect/engineers ket. This considers such matters as possible• Selection and supervision of a general negative impact on existing hotels that carry contractor the franchiser’s flag. If the impact is judged to be insignificant, a franchise is usually granted• Processing all building and occupancy to the ownership entity for a one-time fee of permits about $400 per room, depending on the fran-• Raising all the equity money from in- chise selected, with continuing royalty and vestors marketing, usually based on a percentage of• Securing a construction mortgage loan hotel revenue.• Selecting a franchise company• Securing the franchise• Selecting an interior designer that meets ᭤ SELECTING AN franchise company requirements ARCHITECT• Purchasing all opening furniture, fixtures, equipment Because the final product of this process is a• Selecting a management company to op- building the operator has to run as a hotel, erate the hotel the architect’s experience in designing hotels, his or her experience with the prototypical• Liability for cost overruns drawings of the franchise selected, the fee, and his or her on-time record must be con- sidered. Architect fees can run up to 5 per-᭤ SELECTING A FRANCHISE cent of the total project cost but are often negotiated down, if the project is big enough.Depending on the type of hotel to be built The firm’s experience and record on similar(based on the feasibility study), the developer projects are critical. The architect does notrecommends a franchise company to the ho- have to operate the hotel when it is com-tel owner. A major consideration is the best pleted. The developer wants the architect tofranchise brand for the market segment to be design a hotel that will be easy to operate andserved. Each franchise company has different maintain.
  25. 25. Section 1.2 ᭿ The Hotel Development Process 9 and conditions of a construction loan can vary᭤ SELECTING A GENERAL widely depending on the individual lender. CONTRACTOR Important terms that can affect the cost of the loan include:Major consideration are the quality and reli-ability record of the general contractor and • Personal guarantees by developers and/orthe firm’s use of and relationships with the equity partners/investorsmany subcontractors needed for a project as • Loan origination feescomplex as a hotel. Again, experience in • Interest ratebuilding the hotel type is important. It is • Required loan-to-value ratiohoped that the general contractor has learnedfrom any mistakes made in building similar • Terms of repaymenthotels. The general contractor and architect • A requirement that interest/taxes be heldoften bid the project as a team; this helps the in reservedeveloper determine the final cost. Often, up • Required debt service coverage ratiosto a 10 percent contingency cost that allows • Length of the construction loan; lengthfor unforeseen circumstances is built into the and costs of extensionsproject bidding process. These are only a few of the considerations that must be analyzed when selecting a᭤ FINANCING THE lender. The developer, on behalf of the own- ing entity, then approaches a number of lend- PROJECT ing institutions. The lending institutionsThe following variables must be determined analyze the deal and offer a proposed termto qualify for financing: sheet that answers all of the borrowers’ ques- tions. This allows the borrowers to select the• The cost of the land lending institution with which they wish to• Design and construction cost of the work. The lender then commissions an ap- building praisal of the project by an independent• The cost of furniture, fixtures, equipment, appraisal company such as Hospitality Valua- and opening supplies tion Services (HVS). Based on the appraisal, the lender issues a loan commitment for the• Pre-opening marketing and labor costs project that usually offers up to 60 percent of• A six-month operating capital cash the project cost. The balance must be raised as reserve equity from investors. The sum of these constitutes the totalcost of the project for purposes of securingfinancing. ᭤ RAISING THE EQUITY With this information, the ten-year oper- INVESTMENT FUNDSating pro forma budget is updated to reflectactual costs. It’s now time to go to the money With the bank committed to about 60 per-markets for construction financing. The terms cent of the cost, the remaining 40 percent
  26. 26. 10 Chapter 1 ᭿ Overviewmust be raised in equity commitments by in- ᭤ SELECTING THEvestors. To pursue these, the developer pre-pares an offering solicitation document that MANAGEMENTmeets current securities and exchange law.The nature of this document depends on the COMPANYtype of business entity that was formed. For Often even before the construction activitylimited partnerships or limited liability com- commences, the owning entity selects an ap-panies, a private placement offering circular propriate management company to manageand project description is prepared. For S or the pre-opening, marketing and sales, selec-C corporations, stock offerings are prepared tion and training of the opening staff, prepara-for sale consistent with applicable federal and tion of the operating budget, and day-to-daystate securities laws. operations once the hotel is opened. Manage- The developer now contacts money ment companies charge 3–5 percent of rev-sources that have risk capital available to in- enue for this service. In recent years,vest. These can include: management companies have charged 3–4 percent of revenue and 2–3 percent of gross• Individual investors operating profit so they can be measured and• Private asset managers evaluated on both sales and profitability.• Opportunity fund managers The franchise company may offer to pro- vide management services to franchisees.• Venture capital fund managers Marriott International, Inc., for example, These potential investment sources are manages about 50 percent of all hotels thatoffered the opportunity to invest in the hotel. carry the Marriott flag under 20-year con-Based on their study and evaluation of the re- tracts. Independent management companiesports, documents, and studies detailed above, manage the remaining hotels under long-term management contracts of up to ten years’ du-they decide whether or not to offer funding to ration, often with several five-year renewalthe developer. options. Once the loan is secured, the equityraised, and the building permit issued by thecity, the land purchase option is exercised andthe purchase is completed. Then the 12–16- ᭤ CONCLUSIONmonth construction process begins. If the ar-chitect’s plans work as intended, if the general This is a largely linear explanation of thecontractor has no problems with subcontrac- complicated process that a developer goestors, unions, or permits, if all the furnishings, through in order to create a hotel. It has beenfixtures, and equipment arrive on time, if the described in a step-by-step process, but in re-weather cooperates, and if the employment ality, many of the steps are carried out con-market is such that human resources are suf- currently to save time (and money).ficient to open a hotel, then congratulations! Nevertheless, the hotel development processThe hotel will open on time. takes about three years from original concep-
  27. 27. Section 1.2 ᭿ The Hotel Development Process 11tion to first guest. It is important to remember the area. The RFP was sent to many major ho-that during the initial stages of the process, tel companies and commercial real estatethe developer can have as much as $1 million brokers, asking prospective buyers to submit(U.S.) or more at risk in the process before a a purchase price bid along with a statement offinal go/no-go decision is reached. Only after the buyer’s development history and ability tothe project is approved and all financing is in develop a hotel of the type envisioned by theplace can the developer start to recover up- Commission. It listed a closing date by whichfront costs and collect development fees. all bids had to be submitted. Hotel development with its component An area commercial real estate brokerparts of hotel feasibility studies, hotel ap- contacted a hotel development and manage-praisal, hotel real estate finance, and hotel ment company with a long history of devel-management are all among the career oppor- oping and managing extended-stay hotels intunities available to hotel and restaurant ad- the Pacific Northwest, including a propertyministration graduates. located in a similar setting to that being of- fered for sale. The commercial realtor offered to represent the developer in negotiations᭤ PUTTING IT ALL with the City Development Commission, which would be paying the real estate com- TOGETHER—THE STORY mission on the sale. An agreement was OF AN EXTENDED-STAY reached with the commercial real estate bro- ker to represent the buyer to the seller, and HOTEL DEVELOPMENT the developer went to work in preparing a PROJECT proposal. The developer conducted a feasibilityThe City Development Commission in a Pa- study to see all of the conditions in the mar-cific Northwest community purchased a 1.55- ketplace that would be encouraging or dis-acre parcel of riverfront land in the couraging to this development project.downtown area. The land was previously con- Studies were conducted to estimate howtaminated with industrial pollutants that many room-nights were being sold within amade the parcel unsafe for habitation and five-mile radius, how many extended-stayconstruction. The City Development Com- room-nights were available in the market,mission used state, local, and federal grants to how many hotel rooms existed, and howhave the land decontaminated, created a mas- many were being planned over the followingter plan for the area, and then offered the par- five years. From this, the developer was ablecel for sale and development. to estimate the number of extended-stay The City Development Commission is- room-nights available needed to produce ansued a request for proposal (RFP) that out- 82 percent occupancy with an average dailylined the asking price of $2,076,240 ($30/sq. room rate of $141 when the hotel achievedft.) for the land and the design requirements stabilization three years after opening. Thatset down by the Commission for a building provided the basis for a ten-year revenuethat would fit the intended look and feel of estimate.
  28. 28. 12 Chapter 1 ᭿ Overview The developer proposed a nine-floor, 258- day operation of the hotel once it wassuite extended-stay hotel with an indoor pool, opened. The arrangements called for the man-spa, and exercise facility, a guest laundry, of- agement company to be paid 3 percent of rev-fices, meeting facilities, and a three-floor enue and 2 percent of the net operatingparking garage with parking for 193 automo- income for management services.biles, all at a total cost of $38 million, or The ownership LLC then contacted a ma-$147,286 per suite. jor hotel company and applied for a franchise The $38 million construction budget was to allow the development and operation of anbroken down as follows: extended-stay hotel. A 20-year franchise wasLand 6.0% granted with a fee of $400 per suite or,Construction 66.0% $102,800. This was to be followed by a 5 per-Office Equipment 1.4% cent royalty and a 3 percent advertising feeFurniture, Fixtures, Equipment 7.4% once the hotel was open and operating.Architecture/Engineering 2.8% The developer, acting as agent for thePermits/Fees/Environmental 2.8% owner, prepared a private placement memo-Appraisal/Legal/Tax/Insurance 1.3% randum document seeking investments fromPre-Opening Expenses 1.3% accredited investors. These investors were pri-Construction Loan Fee 1.1% marily defined as people with a net worth ofDeveloper Fee 2.8% $1 million, or those with an income in excessConstruction Interest 2.8% of $200,000 over the previous two years andWorking Capital 2.1% expecting an income in excess of $200,000 inContingency 2.2% the current year. (Note: Additional entities Total 100% may also be defined as accredited investors by the Securities and Exchange Commission.) The opening date for the hotel was pro-jected at 27 months from the date of proposal The private placement memorandum of-acceptance. fered $100,000 units of ownership to accred- The City Development Commission ited investors, guaranteeing a 9 percent priorityawarded the project to the developer, and return on the investment and a combined 50work began. percent ownership in the hotel. A group of ini- First, an ownership limited liability com- tial investors retained the other 50 percent inpany (LLC) was formed as the ownership en- exchange for putting the project together. Thistity that would hold title to the hotel. effort was successful in raising 40 percent of The LLC, in turn, entered into a develop- the total cost of the hotel in anticipation that ament and construction management agree- lender would provide the remaining 60 percentment with the development company to in the form of a construction loan. In additionmanage the arrangements for financing and to the priority return, investors could expect toconstruction of the hotel. participate in any future capital gain realized The developer, as agent for the ownership should the hotel be sold.LLC, also entered into a hotel management The development company, continuingcontract with a management company to to function as agent for the owner, thenmanage the pre-opening marketing, pre- sought a commercial bank to provide three-opening hiring and training, and the day-to- year construction financing for the project.
  29. 29. Section 1.2 ᭿ The Hotel Development Process 13As $22,800,000, or 60 percent, of the $38 mil- ᭤ POSTSCRIPTlion development cost was to be borrowed,only major banks were considered as Three years after the hotel opened, the own-prospective lenders. The size of the construc- ership LLC had the obligation to secure per-tion loan was above the lending limits of manent financing on the hotel to replace themost small regional banks. After a precon- construction loan. The September 11, 2001,struction appraisal by a third-party appraisal terrorist attacks on the World Trade Centerfirm chosen by the lender confirmed the and the Pentagon slowed travel throughoutvalue at $38 million upon completion of con- the United States. As a result, the hotel didstruction, and for an origination fee of not achieve the projected occupancy or av-$400,000, a three-year construction loan was erage daily rate during the three-year con-secured. The terms allowed the developer, as struction loan period. An appraisal that wasagent for the owner, to draw down the loan primarily based on the hotel’s trailing 12-every 30 days after providing proof that month net operating income produced afunds had been properly disbursed in the value about $2 million below the originalconstruction process. The loan documents setan interest rate and also required that the construction cost. The bank that had pro-ownership LLC seek a permanent mortgage vided the construction loan notified theprior to the three-year expiration date on owners that they did not wish to providethe construction loan. permanent financing under these circum- The development company then negoti- stances. The owners were forced to conductated with and selected a general contractor a search for a new mortgage bank. Theywith significant hotel construction experience were able to find a mortgage, but only afterwho acted on behalf of the developer, as buying down the loan by $2 million to bringagent for the owner. The general contractor the loan-to-value ratio back to 40 percentthen selected design-build subcontractors and equity and a loan at 60 percent of the ap-an interior designer to select colors, fabrics, praised. This illustrates the risk that devel-furniture, fixtures, and equipment to meet the opers face when entering into a hotelhotel franchise design requirements. project. Building permits were applied for, and However, as hotel values historically peakthe building design was presented to the City and decline on about a ten-year cycle, theDevelopment Commission for its approval, owners look forward to the option of sellingalong with other groups with a stake in the the hotel on the next peak, which will allowappearance of the finished building in rela- them to capture the original projected returntion to the area and neighborhood. With all of through capital appreciation. Hotel develop-these approvals in place, construction com- ment and ownership is a high-risk, high-menced, and the hotel opened two years later. reward enterprise.
  30. 30. 14 Chapter 1 ᭿ Overview1.3 H O W W E L L D O E S T H E B R A N D E DD I S T R I B U T I O N C O M PA N Y A L L O WINDEPENDENT HOTELS TO COMPETEWITH THE CHAINS? Peter CassDramatic changes have affected the hotel in- • The rapid advancement and availability ofdustry over the past 30 years. These changes technology. This includes internal hotelhave had a disproportionately high bearing operating systems, revenue management,on the independent hotel owner, who, in the direct-to-consumer communications andface of increasing pressure from large, well- booking technology (Internet), marketingfunded chains, struggles to maintain inde- technology (customer databases), andpendence and to compete on the basis of telecommunications and automated salesdistinctive hospitality and character. systems that enable central sales offices to Several organizations provide indepen- become revenue producers.dent hotels and resorts with reservations and • The growth and importance of globalsales services. As competition has evolved and brands. Recognized brand names andintensified, some of these organizations have brand attributes are important in reach-modified their structure and enhanced their ing diverse customer segments and in cre-services to meet the changing needs of inde- ating customer loyalty.pendent hotels and competitive market dy- • Consolidation of multiple brands under anamics. Today, independent hotels may choose single global management. The manage-from among more than 20 such organizations ment and leveraging of multiple brandsdelivering varying degrees of competitive ad- use similar technology platforms andvantage and ownership independence. shared sales and marketing infrastruc- tures to consolidate and direct consumer demand.᭤ A NEW MARKET MODEL Some established ways of doing busi-In the new millennium, the face of the global ness—long-term, high-fee management con-hospitality market continues to change at a tracts and franchises, a focus on traditional distribution channels, and traditional hospital-rate never before seen. Four factors con- ity industry marketing techniques—are notribute to this rapidly changing environment: longer effective in the new consumer-focused• The broadening and diversification of the market. More and more hospitality marketing global consumer market. Both the demo- budgets are being directed toward technology- graphic and psychographic characteristics enabled customer booking and communica- of the global consumer market are grow- tion; this shift away from traditional hospitality ing and changing radically. marketing techniques is expected to evolve
  31. 31. Section 1.3 ᭿ How Well Does the Branded Distribution Company Allow Independent Hotels to Compete? 15over several years and involve millions of U.S. brand name and established facility and ser-dollars in telecommunication, e-commerce, vice standards as well as trained operationsdata warehousing, and one-to-one marketing management and reservation and marketinginvestment. The independent hotel or resort services—for a significant fee, usually a per-and many small branded management compa- centage of gross sales. The pressure to grownies may not be able to fund this requirement. also fostered the development of the fran- However, this shift will not affect all inde- chise concept and franchise system in Northpendent hotels and resorts simultaneously. America. The franchise differs from the man-The first wave of change will hit the global agement contract in that the owner is respon-business and city hotel market. This is prima- sible for operations, including meeting therily because of brand competition and the fact franchise standards.that the business travel distribution network The growth of management and franchiseis more structured and driven by multina- contracts has been remarkable, and today, ac-tional corporations desiring lower and more cording to a recent study, 75 percent of thepredictable costs. The second wave will affect hotel rooms in North America are covered bythe leisure market, and the changes could fol- some form of branded franchise or profes-low quickly. Leisure travel content, including sional management agreement (Travel Re-packaging on the Internet, will increase rap- search International, 1999).idly as the presently fragmented leisure travel These new business structures continueddistribution network becomes more unified to threaten the traditional independent ownerand efficient through consolidation. by accelerating the growth of the chains’ share The emergence of e-commerce modes in of the lodging market. In response, the mar-the hospitality industry is not eliminating the keting/referral organizations formed in theintermediary and empowering the individual 1960s began to offer a wider range of, as once thought; instead, it is creat-ing new, more powerful intermediaries. Some While these additional offerings leveragedof these evolve from the hospitality industry, linkages to the global distribution systems andwhile others are opportunistic e-commerce led to strong relationships with travel agents,companies. the consumer was largely ignored, and the or- ganizations did little to generate consumer brand awareness. In the United States, strong consumer᭤ MANAGEMENT branded operators are attracting increasing COMPANIES AND amounts of capital to fund their growth at the FRANCHISES expense of unbranded operators (Pricewater- houseCoopers, 2000).In the 1970s, hotel chains continued to evolveas the need for capital to invest in additionalproperties restricted growth opportunities. ᭤ BRAND DEVELOPMENTThis pressure bolstered the proliferation ofthe management contract, whereby the chain As the consumer market became moreoffers the hotel owner the rights to use its diverse and the hospitality product more
  32. 32. 16 Chapter 1 ᭿ Overviewsegmented, branding became increasingly im- ships operated best in a market environmentportant. By the late 1980s, without a recog- that was stable, somewhat homogeneous innized brand affiliation or a close relationship terms of demographic market segmentation,with the lending community, owners/develop- and where travel influencers played a domi-ers found it difficult to obtain permanent fi- nant role in transient business, group, andnancing on a new hotel or resort. Lenders, leisure travel. Reservation affiliations arebelieving that an established brand provided most effective in regional hospitality marketsgreater economies of scale and established in- that do not have multiple brand competitionfrastructure, opted for the lower-risk alterna- and when the goals and objectives of thetive. In this brand-driven environment, the reservation organization are in alignmentindependent hotels’ distinctive style and char- with the goals of the independent hotel own-acter became a competitive advantage, but ers. A contributing element to the attractive-only if they were able to meet recognized stan- ness of reservation affiliations has alwaysdards. As a result, the need for independent been the networking and camaraderie oppor-hotels to be associated with a clearly defined, tunities for the professional management attrusted brand became more critical than ever. independent hotels. In the late 1990s, independent hotels, par- Reservation affiliations focus on tradi-ticularly those in Europe, began to face the tional channels of distribution. Access to thedaunting costs of upgrading their technologi- Global Distribution Systems (GDS) is nocal infrastructure and facilities to accommo- longer a competitive advantage; the GDS is adate changing consumer needs. Such upgrades universal pipeline. The new competitive play-as new property management systems, high- ing field is proprietary distribution channelsspeed Internet access, two-line phones, in- leveraged by consumer segmentation, e-com-room faxes, and leisure and health facilities merce technology and partners, and innova-became critical to maintaining competitive- tive customer management programs.ness. When coupled with ever-increasing costs In the new technology-driven and con-of consumer marketing, these costs put un- sumer-empowered global market, the strengthprecedented strains on independent hotels’ fi- and effectiveness of reservation affiliationsnances. As a result, these hotels became are challenged by new market and operatingincreasingly focused on leveraging greater re- imperatives. The cost to compete againstturns from their reservation affiliation. chains will grow exponentially. As competition intensifies, it is probable that local and re- gional market share at independent hotels and᭤ RESERVATION resorts will be drawn off by local and regional AFFILIATIONS—A licensees of strong global brands. Independent hotels, therefore, need to draw more national CHALLENGE TO and international business to fill occupancy EFFECTIVENESS gaps. This requirement runs counter to the es- tablished business model and capabilities ofThe relationship of independent hotels and reservation affiliations.resorts to reservation affiliations has been The average room-night contribution oflong and generally successful. These relation- reservations companies to affiliated inde-
  33. 33. Section 1.3 ᭿ How Well Does the Branded Distribution Company Allow Independent Hotels to Compete? 17pendent hotels is less than 5 percent of avail- necessary to increase average room-nightable rooms (Preferred Research). contribution to affiliated independent hotels At least four emerging factors are chal- to 15 percent—an average growth per mem-lenging the effectiveness of traditional reser- ber hotel of at least 200 percent over presentvation organizations: performance levels (Preferred Research). In response to this competitive environ-1. The growing demographic and psycho- ment and the need for more cooperative and graphic complexity of the global con- focused business relationships, a new hospi- sumer market requires significant new tality business structure is evolving for all expertise and resources in the area of seg- scales of hotels: the branded distribution mentation and analysis. company.2. The emergence of consumer direct-book- ing Internet technology requires signifi- cant new and ongoing investment. ᭤ CHARACTERISTICS OF A3. The new marketplace requires innovative global brand management together with BRANDED DISTRIBUTION resources to establish and maintain a COMPANY brand in the face of intense competition. To be competitive, a brand must attract The ideal branded distribution organization is new development and must therefore be a conventional equity company with owner- strong enough to convince lenders to ship shared (in some cases) by the individual commit to permanent financing. Brand hotel owners, who have direct input into the management also includes loyalty pro- corporation through an elected board of di- gram management and the development rectors. This ownership structure creates a of regional and global partners to true operating partnership and a sharing of strengthen and extend the effectiveness energies toward the common goal of creating of the brand. value through increased brand awareness and4. The corporate objectives and governance room sales. Corporate profits must be ade- policies of traditional reservation organi- quate to maintain technical and managerial zations are influenced by the need to grow leadership and to support the shareholders’ and meet shareholder profit require- investment. ments. These goals for growth can be at Unlike a reservations and representation odds with the goals and expectations of in- company, a branded distribution corporation dependent hotel and resort members. owns and builds a branded distribution net- work asset that, in turn, provides services as The traditional reservation affiliations set out in the diagram below. The sole focus ismust change not only their focus but also performance for the affiliated independenttheir structure if they want to succeed in this hotels and competitive world. Joining such an organization is appropri- The traditional reservation organization ate for independently owned and managedmust be prepared to respond to competitive hotels and resorts that want to keep ownerchallenges by expanding resources and skills control but require effective and low-cost
  34. 34. Table 1.1 Hospitality Structures and Corresponding Brands Flagged andTypes of Representation Reservation Reservation/ Branded FranchiseBusiness Firms (Group Services Sales Distribution ManagementStructure Meetings Only) Only Affiliations Companies CompaniesGeneral • Primarily Trade-Focused • Consumer & Trade-FocusedAttributes • Primary Reservation Technology • Performance Focused • Disparate range of abilities in: • Brand Management • —Management Expertise and Depth • Quality Standards and Assurance • —Marketing, Sales, and Reservation Support • Multiple Technologies • Integrated Marketing and • Technology Solutions • Customer Recognition and • Loyalty Programs • Full-Service Provider • —Purchasing, Technology • —Recruitment, Training • —Consultative & Design Services • Management Expertise and DepthExamples of ALHI Utell Flag Int’l Concorde Preferred Hotels Accor brandsOrganizations, David Green Lexington Golden Tulip and Resorts Bass brandsBrands, and Helms Briscoe Pegasus/ Historic Hotels Worldwide Carlson brandsManagement Hinton/Grusich Rezsolutions Leading Hotels (for profit) Cendant brandsCompanies Krisam Supranational of the World Best Western Choice brands TRUST Relais and Chateaux (not for profit) Four Seasons Small Luxury Hotels Summit Hilton brands Sterling Hyatt SRS Hotels Mandarin Steigenberger Marriott brands Starwood brands WyndhamRelationship Client Client Member (some Member-Owner Licenseeof Hotel are Owners)Owner toStructureOwner High High High High LowControlRoom-Night Low Low Low-Medium High HighProductionConsumer Low Low Low High HighFocusOverall Low Low Low Low HighFees18