Consolidation has been one of the buzzwords in the lodging industry during the 1990s.  Mergers and acquisitions have filled the headlines of trade magazines and the Wall Street Journal.  Industry pundits believe that eventually the lodging business will be owned and operated by just a few large national companies. 

Within any industry, a major reason for the merger of two companies is the economies of scale that are expected at the corporate level after combining the two operations.  In the hotel industry, two hotel companies can potentially become more efficient by combining such corporate functions as accounting, reservations, sales and marketing, and human resources.  In addition, by becoming larger, the new company expects to gain greater purchasing power for such items as supplies, furniture, fixtures, and insurance. 

Recently, we decided to challenge the conventional wisdom that "bigger is better … and more efficient, too" by taking a close look at the actual operations of large versus mid-size hotel companies.  The question we asked was this: "While operating efficiencies are generally achieved at the corporate level, do these efficiencies trickle down and benefit the operation of hotels at the property level?" 

Is The Emperor Fully Clothed? 

To analyze the influence of management company size on performance at the property level, we turned to our Trends in the Hotel Industry database and pulled 1998 financial information for properties that were managed by either large or mid-sized management companies. 

For the purposes of this analysis, large management companies were those that managed 40 or more properties.  Included in this grouping were several companies that also possess a national chain name.  Approximately half of these properties were also owned by the management entity. 

We defined mid-sized management companies as those operating between 10 and 40 properties.  In our sample, only a few of these companies possess a regional chain name, and more often than not, they act solely as third-party managers. 

In comparing the two samples, we find minimal differences in the market performance of those properties managed by the larger management companies versus mid-size operators (Table 1).  Therefore, any variances in financial performance between the two groups are not attributable to differences in size, occupancy, average daily rate, and total revenue.  It should be noted that this market comparison was made in an effort to compare those factors that might impact financial performance, not to measure the effectiveness of large or mid-size management companies on local market penetration. 

Where Are The Efficiencies? 

In our sample, those hotels operated by large management companies pulled more dollars to the bottom line than those operated by mid-size operators by a factor of nearly 6.0 percentage points (Tables 2 & 3).  However, the operating efficiencies achieved by the larger management companies frequently occurred in some unexpected places. 

Most operating efficiencies appear to occur in the operating departments.  Properties operated by the large management companies achieved anywhere from a 1.0 to 2.4 percent profit premium in the rooms department, and a 3.0 percent premium in food and beverage (Tables 4 & 5).  In these departments, personnel and the costs of goods and supplies are the largest expense items.  It is doubtful that the size of the management companies significantly influences personnel costs at the property level.  Therefore, it can be assumed that the enhanced purchasing power of the larger companies does indeed have a positive impact on the cost of supplies and goods sold. 

On a percentage basis, we found virtually no difference between the undistributed operating expense ratios achieved for the two samples (Tables 2 & 3).  Interestingly, any efficiencies that did exist in the undistributed expenses were found in the maintenance and utility departments, as opposed to administrative and general, and sales and marketing. 
 
 

In addition, you would expect that the greater national representation of the larger companies would have allowed for greater marketing exposure at a lower cost.  This was somewhat true at the limited-service hotels managed by the large companies.  However, it was not the case at full-service properties (Table 4). 
 

One area of fixed expenses that also did not follow conventional thinking was in the area of insurance (Tables 4 & 5).  With larger resources and national buying power, the large management companies would be expected to be able to negotiate better insurance premiums.  However, when measured on both a dollar-per-available room basis, and as a percent of revenue, the insurance costs paid by hotels operated by the mid-size management companies were less than those paid by hotels managed by the larger companies. 

Be Diligent As An Owner 

The hotel industry is full of thumb rules and conventional wisdom.  In this case, our financial comparison found that, while hotels managed by large companies do achieve greater profit margins, the route to achieving the enhanced profitability is somewhat surprising.  Operating efficiencies were found in departments where logic would lead you to believe that size would have the least impact.  Conversely, they were not found in departments where you would think size matters. 

As asset managers, we at PKF Consulting know the importance of properly monitoring management on behalf of ownership interests.  Those owners who have contracted larger management companies should continually examine how much of a benefit they are getting from their bulk purchasing power and national marketing prowess.  Owners engaging a mid-size company to manage their hotel assets should be alert for areas of cost control that may be lax, despite the supposed greater degree of personal attention.  No matter the size of the operating entity, one last piece of conventional wisdom would seem to apply - "the Devil, indeed, is in the details." 

Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.