|By M.A. Baumann H&MM Contributing Editor
Is bigger better? Do bulging portfolios, brand segmentation, globalization and unprecedented growth give some companies a distinct advantage over others? Critics claim that size affects quality and consistency. They believe midtier firms actually can outperform the megacompanies by using a more-focused approach. Super-players say it isn't so, arguing that combined resources, brand identity and sheer magnitude give them stronger hands in shaping the industry's future and creating a healthier bottom line.
Mark Mutkoski, industry analyst for BT Alex.Brown in New York, explained the "bigger is better" argument.
"There are a lot of advantages to being bigger," he said. "It's more efficient to have more assets and brands. You also have a greater revenue base over which to spread costs. Particularly in franchising, you have to have critical mass before you can generate invested returns on capital. If you're large, typically you have a greater asset base and have more opportunity to go in and focus efforts internally and focus on return."
Large companies also have better access to capital, more-liquid stocks, and can borrow unsecured debt at attractive prices, which provides a huge advantage over smaller outfits, Mutkoski said.
John Rohs, an analyst with Schroder and Co. in New York, said there's a case to be made on both sides of the "Is bigger better?" debate: the smaller company that has the highly focused approach versus the megacompany, which assembles a network of properties and a family of brand names that can address the globalization of the industry.
"Bigger is better in certain instances, yes," Rohs said. "Bigger is better in regard to the financial aspect and cost reductions. There certainly are cost reductions. [They] can save on overhead and generate a stronger balance sheet." Rohs said that while mergers and acquisitions should not compromise the quality at the property level, Rohs said that super-fast growth can raise several red flags.
"Any time a company is growing at a breakneck pace, there's always the opportunity of the service level deteriorating," Rohs said. "It's hard to keep all the balls in the air, when things are happening so quickly, without one hitting the ground."
Boasting about 5,800 hotels and 520,000 guestrooms, Parsippany, N.J.-based Cendant Corp. is a megacompany. John Russell, chairman and c.e.o. of the firm's Hotel Division, said company size is very relevant. Large companies have deep pockets for marketing programs, as well as new technologies and training, he said. They also enjoy brand loyalty, unified purchasing power and the ability to partner with other nationally known companies.
The pooling of all these resources allows more time to focus on long-term franchising growth, Russell said.
With systemwide occupancy at 60 percent and revenue per available room above average for each segment, Cendant is positioned well, with gross annual hotel room revenue of $4.7 billion, and calls to its reservation system for all its brands expected to top 33 million this year.
"You can look at occupancy and RevPAR, but that's not the answer," Russell said. "The real question is: 'How much money did you make and how much do you bring to the bottom line.' The most important thing is the bottom line."
Ray Sawyer, president of midsize Budget Host International, is pleased with the strategy and overall performance at the membership organization's collection of 176 properties. The Arlington, Texas-based organization is strategically positioned to compete in a marketplace led by megacompanies, Sawyer said.
"Basically, we don't have any problem competing with the big companies," he said. "It's like it's always been-a big, wide market and there's room for everyone." Sawyer said focusing on one product line gives his company a distinct advantage over the super players.
"For over 22 years, we've been focused," Sawyer said. "By focusing on that one area [the budget segment], we probably do as good a job as anybody.
"These huge companies with lots of chains and lots of levels- their motivation is, of course, the stockholder," Sawyer said. "We give our affiliated properties a greater priority in the scheme of things. They're getting their money's worth. We don't have new ownership every time you turn around." Sawyer said Budget Host members are proud of the organization's solid quality assurance program and their hotels' high service levels.
"We are lean and mean compared to a couple of years back," Sawyer said. "The quality assurance has always been there, but it is much stronger now." As a membership organization, Budget Host's overall occupancy figures are difficult to track, Sawyer said. A recent in-house survey revealed occupancy levels escalated an average of 20 percent in the first year after an independent hotel switches to the Budget Host flag. Additionally, a.d.r. rose $5.75 to $36.94, and properties enjoyed a 21-percent average increase in revenue, according to the group's president.
Shaner Hotel Group, in State College, Pa., also ranks in the mid-sized segment with 53 hotels across 23 states. Its portfolio carries a range of flags-Hampton Inn, Holiday Inn, Radisson, Comfort Inn, Hawthorn Suites, Marriott Residence Inn, Days Inn and New England Suites-totaling 13 extended-stay, 17 limited- service and 23 full-service properties.
J.B. Griffin, Shaner's c.f.o., said systemwide occupancy is 68 percent, with an a.d.r. of $68.75. RevPAR is up, which he attributed in part to the booming economy. Griffin said regardless of size, maintaining quality is a growing concern across the board.
"Even as we've grown, we find it more difficult to run the company the same way Lance and Fred Shaner [ran the company when it started]," he said. "It's a challenge. The hospitality industry changes."
Among the pack of big chains is Silver Spring, Md.-based Choice Hotels International, franchising more than 4,000 hotels, inns, all-suite hotels and resorts in 33 countries. Brands include Comfort Inns and Suites, Quality, Clarion, Sleep Inn, Roadway Inn, Econo Lodge and MainStay Suites, with 374,500 rooms across the brands.
"We have such a lead over other hotels companies because we have the massive numbers and the brand name recognition," said Brendan Ebbs, Choice Hotels' senior vice president, northeast market area. He said he believes a company can have quality and quantity if the proper quality assurance programs and customer-service standards are in place.
"We took a stance and made a commitment to weed out the properties that are underperforming and not meeting our quality assurance programs," Ebbs said. "We initiated quality assurance because of our size. We wanted to make a statement that we are serious about quality assurance and be sure it was carried out." The company currently enjoys 68 percent systemwide occupancy and $39 RevPAR. Cendant's Russell agrees that success hinges on quality.
"We mandate new standards to protect the brand," Russell said. "It is really up to the owner and manager to run a quality property. We have a system of checks- and-balances and inspections and we terminate properties that don't meet the [criteria]. The higher-quality property almost always has a higher occupancy and a higher rate."
Paul Kirwin, president of Country Inns & Suites by Carlson, said quality is the biggest challenge with which the huge brands must contend. Certain brands tend to achieve growth at the expense of a commitment to quality, he said. Sustaining quality is an issue Kirwin stays on top of at his 150 Country Inns and Suites.
"Today, as an emerging, growing brand, the challenge to maintain quality is the primary concern," Kirwin said. "It takes a lot of energy and focus." Mutkoski said it's tougher for large companies to sustain growth rates.
"Typically, smaller companies can have much-higher growth rates," Mutkoski said. "They might not be as liquid, but they could be growing faster because [they're] smaller.
"Smaller companies tend to be more niche players instead of following the same strategy as larger players," he said. "You also tend to see more interesting business strategies."
With Country Inns estimated to reach 300 hotels by 2000, and 500 properties by 2003, Kirwin said the chain must maintain consistency, quality and the personal attention for which the brand is known.
"We're growing today at 50 percent," Kirwin said. "Our chain is growing at this pace [in both] revenue and chain size. The chainwide RevPAR index is 110 percent."
With just more than 10 years in business, Country Inns' a.d.r. is at $65, slightly above the midtier average. Kirwin credited a winning concept and design, and appealing new construction as the chief contributors. "Our biggest challenge is to get more properties, to gain brand awareness and gain market share," Kirwin said.
Shaner's Griffin said growth can widen the gap between the general manager and owner, making training and empowering employees even more critical to the overall success of the company.
"We always go back to the core values of [the company]," he said. "We also give [our properties] the tools to make them more competitive." In the past three years, Shaner invested $80 million across the board to maintain positioning.
Brand awareness and product integrity are powerful tools to attract and sustain business. Operating or franchising more than 2,600 hotels and a 450,000-room inventory, Bass Hotels & Resorts is one of the world's largest hotel companies with some of the most recognizable brands. The recent acquisition of Inter- Continental Hotels and Resorts boosted the company's international presence to 95 countries.
Bass Hotels & Resorts' lodging family includes Holiday Inn, Crowne Plaza Hotels and Resorts, Holiday Inn Express, Staybridge Suites by Holiday Inn and Inter- Continental. According to Thomas Oliver, chairman and c.e.o of Atlanta-based Bass Hotels & Resorts, high brand awareness and high satisfaction double the power of the brand name.
"It's not so much about size as it is resolve," Oliver said. "Setting clear-cut standards, qualitative standards and setting up the right process and meeting numeric qualifications [is important]. Also taking strong steps when properties aren't performing and being willing to remove properties that aren't committed and not in the game [also is critical]."
Bass Hotels & Resorts recently reported an operating profit of $133 million in the first half of 1998, against $130 million in the same period last year. The a.d.r. and RevPAR were up for the Holiday Inn and Crowne Plaza brands, respectively.
"Most importantly, we're improving our share of occupancy, [which is] directly driven by the quality program," Oliver said.
"While consolidation and mergers have been driving the industry the
past few years, under no circumstances do I see the rise in megacompanies
jeopardizing the smaller-focused niche players- providing they know
how to run their businesses and they do it well," Rohs said.