News for the Hospitality Executive
CANADIAN LODGING OUTLOOK
The Canadian Lodging Outlook is a joint monthly publication
of Smith Travel Research and HVS,
Vancouver and Toronto, Canada
|By Chase Melnychyn -HVS - Canada
You're staying where? What's a NYLO Hotel? These days, travellers are being given many more options for where to stay on that next business trip or holiday with the family. A staggering, 38 new hotel brands have been introduced into the market since early 2006. Of these new brands, 20 target the luxury segment, 12 the upscale segment, three the extendedstay segment, and three the mid-scale segment.1 Currently, the top five hotel companies-Choice Hotels, Hilton Hotels, InterContinental Hotels Group, Marriott International, Wyndham Worldwiderepresent 50 individual hotel brands.2 With all this recent activity in the hotel market, the nature and benefits of branding need to be addressed.
The Role of a Brand
Branding is more than just the Super 8 logo you pass on a roadside sign everyday. Within the hotel industry, branding involves an experience created through customer contact, online booking systems and resources, guestroom products and amenities, hotel employees, and loyalty programs. A recognized brand provides comfort to travellers as well as investors.3 Ahotel offers both a tangible product in its guestrooms and amenities and an intangible product in the service it provides. Branding creates customer trust in both the tangible and intangible aspects of a hotel stay. A strong brand strategy helps customers and potential customers visualize the intangibles, which contributes to the creation of brand equity.4 From a lodging standpoint, brand equity is the "value that consumers and hotel property owners associate with a hotel brand, and the impacts of these associations on their behaviour."5 Research shows that strong brand equity can cause significant increases in profitability and that poor brand equity can have negative effects on future cash flows.5
The Power of Branding
The value that a brand can bring to a hotel largely depends on the customer's perception of the brand's quality. Does the customer know what to expect when staying at a Courtyard by Marriott as opposed to a Hilton Garden Inn? Both are focussed-service brands that often compete for the same customer, but what does each brand offer that is distinctive? One brand may provide a more traditional product, while another may be contemporary in its design and amenities offered. Competing hotels brands will also differentiate themselves through the reward programs, and experiences created for their guests.
From an investment standpoint, brands add value to a hotel property in and above the traditional contributors, such as net operating income and revenue per available room. A brand can be one of the most important assets of a company. To be able to gain brand value, the first step is to make the customer aware of what your brand offers and demonstrate that this level of quality and commitment is uniform for all the properties that carry the brand. By achieving this, a sense of brand loyalty is created. Brand loyalty allows the management to charge higher prices without encountering as much resistance, as the customer will become less sensitive to price. The various reward programs offered by hotel brands reinforce repeat demand, creating less price-elastic customers. Loyalty may also contribute to a reduction in marketing costs once a strong demand base is created. Once brand loyalty has been achieved, the market share can increase and the brand can expand. With a successful growing brand, shareholder value increases. 6
Franchising is one of the most effective ways to increase brand recognition for a hotel. Historically, the percentage of hotels in Canada that are franchised has lagged far behind the United States, although this gap has been narrowing over the last few years. In the United States, over 70% of hotels are franchised. Of the hotels in Canada with room counts between 30 and 100 guestrooms, less than half (41%) are franchised. 7 With hotels in 160 locations, Choice Hotels maintains the highest number of franchised hotels in Canada.5
The Bottom Line
With the ever-growing presence of brands in the Canadian lodging market, branded hotels carry many advantages over independent properties. Branded hotels generally obtain penetration rates that are higher than independent properties. A strong brand will allow a hotel to capture more than its fair share of the market, stealing business away from lesser-known properties. From a financial standpoint, "brand affiliation, name recognition, and a good reputation for high quality service together can contribute as much as 20 to 25 percent of the going concern value of a successfully operating hotel."6 When obtaining financing, branded hotels often have an advantage over independent hotels, as they are able to obtain higher loan-to-value ratios and lower interest rates than un-flagged hotels.5 Franchise companies also provide assistance with operations, sales and marketing, human resources, and reservations. As much as 25 to 30 percent of the business for a branded hotel comes through reservations systems, marketing, and loyalty programs. 8
Know Your Market
Although the benefits of branding are significant, it is not as simple as picking a brand and waiting for the payoff. Choosing the right brand for your market and target segment is vital. One brand cannot meet the needs and expectations of all demand segments, which differ in their demographic and psychographic characteristics.
In selecting a brand, the amenities and service levels need to be what the target market desires and expects. A brand guarantees a minimum standard, creating reassurance for the customer. Hotel guests do not want to pay for certain amenities or levels of service that are not important to them. It is therefore important to know your customers and tailor your brand around their expectations.
In choosing a brand, one has to look at how the brand will be perceived to see how it will perform in the market. Research should be undertaken to see whether the rate premium generated by the brand will offset the management fees, capital expenditures, and potential franchise fees required. 9
Studies have shown that positive effects of branding on hotel values are most noticeable for hotels in the mid-market and upscale tiers, as opposed to the economy and luxury tiers. This is possibly because not only are the most active, innovative, and well-positioned brands found in these segments, but also the least active brands. Due to this, strategic brands in this segment are able to successfully distance and distinguish themselves. Less variation in brands is seen in the economy and luxury segments, as there are fewer areas to differentiate one product from another. 6
With the surge of new hotel brands over the past few years, some have wondered if the market is becoming too diluted with brands. With a sudden influx of choices, brand recognition may become more difficult for hotel companies to achieve, as consumers will not fully understand each brand.10 From the standpoint of a hotel operator, this leads to brand cannibalization, which can arise when a large brand, such as Hilton, tries to increase its market share in an area by introducing a new hotel flag, such as a Hampton Inn. In this situation, the new brand may cannibalize the demand base of an existing operator, such as a Hilton Garden Inn, when it has 10 to 15 years remaining on its franchise agreement.5
Capitalizing on a Trend
Branding has played a major role in the rise of Internet travel booking in recent years. If there is strong brand awareness, travellers will look for certain brands with which they are familiar, causing a reduction in perceived risk and search costs for the consumer. Internet users look for brands to help them distinguish what they want, as brands tell them what to expect in terms of quality and service. 8
An estimated 140 different hotel brands are in operation worldwide, up from 80 in 1995 and 110 in 2000.10 Based on these figures, more and more hotel operators are realizing the benefits created through branding and the different options available to target select segments in the industry. Over the past few years, some of the newest brands to enter the lodging market include aloft, Cambria, Indigo, Hyatt Place, NYLO, and Viceroy. Brands will continue to target ever more specific niche markets in an effort to gain more market share.
Branding has proven to be beneficial to both the customer, hotel company, and the investor. As previously stated, branding can influence the perception of a hotel and reinforce consumer expectations in a certain hotel brand. From an investment standpoint, branding has proven to strengthen the bottom-line by developing customer loyalty and a strong reputation.
The success of branding can be achieved in all segments, as long as a strategic effort is made to not only know your market, but also choose the most conducive brand for it.
HVS - CANADA
April 2008 YTD
© Smith Travel Research, 2005. Reproduction or quotation in whole or in part without permission is forbidden. *INS - Insufficient Data
|Also See:||Basic Concepts of Co-Branding, With Examples from the Hospitality Industry Could Co-branding Improve Your Bottomline? / Peggy Yip / Canadian Lodging Outlook - July 2005 Year-to-Date|
|Franchisees on the De-flagging Fence: A Gamble Or A Golden Goose? Former Franchisees Talk Specifics About Channel Loyalty and How They Leverage VIP International Channel Marketing to Succeed as Independents / March 2004|