Professors Chekitan Dev (Cornell), Pradeep Chintagunta (Chicago) and Yi-Lin Tsai (Delaware) prepared this article based on Professor Tsai’s doctoral dissertation completed at the University of Chicago’s Booth School of Business and share findings from the study, “What’s in a Name? Assessing the Impact of Rebranding in the Hospitality Industry.”
Imagine checking into a hotel you’ve stayed at before and noticing something strange: the building looks the same, staff look familiar, rooms are the same as are the restaurants and other service areas. In fact, nothing seems to have changed except the name of the hotel. Why does this happen? And, does the brand name on the door really matter? We decided to find out.
Businesses change names all the time. One of us lives in a small upstate New York town where the Holiday Inn changed its name to Ramada Inn, the Ramada Inn changed its name to Holiday Inn which changed its name to Hotel Ithaca, and the Sheraton changed its name to Clarion which changed its name to the Trip hotel. Believe it or not, this happens to thousands of hotels a year. Mark Lomanno, ex-President of the travel research firm Smith Travel Research, reports that one third of all hotels have changed brand names since they opened. With 5 million hotel rooms in the US, and an average replacement value of $122,000 per room, this amounts to approximately $200 billion worth of hotel assets in the US alone that have changed brand names since they opened for business. And this phenomenon is not limited to hotels. Other sectors of the economy experiencing this name change include gas stations, department stores, pharmacies, grocery stores, restaurants, physician practices, law firms, dry cleaners, and convenience stores and many more.
The business concept underlying this phenomenon was described by Clayton Christensen in his 2001 Harvard Business Review article as “decoupling of the value chain” where individual functions of the business model are organized, capitalized and performed by different entities. For example, a hotel could be owned by one entity e.g., an investment fund (e.g., Fidelity), “asset managed” by another e.g., a real estate advisory firm (e.g., Jones Lang LaSalle), operated by a third company e.g., a “private label” hotel management company (Meristar), and branded by a fourth (e.g., Marriott). Other sectors of the economy experiencing this decoupling include gas stations (BP to Marathon, same oil delivery and store management entities), department stores (Mays to Macy's, same supply chain and labor force), pharmacies (Eckerd to RiteAid, same physicians and health plans), grocery stores (Grand Union to Tops, maintaining its supplier and employee relationships. This "decoupling" of functions makes it easier to study the performance correlates of individual components of the value chain, e.g., the brand name, by holding all others components of the value chain constant, what economists refer to as a ceteris paribus condition, for a kind of field experiment to test the research question: do brand names really matter?
Firms spend a lot of money to rebrand for many reasons including the evolution of business activities (e.g., Philip Morris to Altria to reflect its businesses in finance, wines, etc.), to change negative associations with the current brand name (e.g., Valujet after its crash to AirTran), due to mergers (Amoco to BP), and franchisor-franchisee disagreements (e.g., Holiday Inn to Ramada Inn) etc. This rebranding can be expensive. For example, when Amoco rebranded to the BP name, the company spent £4.6 million to design the logo and invested £132 million over two years to just rebrand its stationery, van liveries and manufacturing plants.
Given the potential upsides of rebranding and its associated costs, quantifying the performance impact of rebranding will enhance our understanding of this marketing practice. We developed and tested a novel method to analyze the link between brand name change and performance. We studied rebranding in the context of the US hotel industry because it represents a business where tens of thousands of hotels have changed names and not much else besides allowing us to “control” for other factors that could influence performance. We empirically examined the effect of rebranding on performance using a dataset of 19,775 detailed annual profit and loss (P&L) statements from 3010 hotels over an 18 year period (1994-2012) by studying multiple instances of when: 1. a brand is added to a business which was unbranded, 2. a brand is removed from a business which was branded, or 3. a brand replaces another brand, all generally referred to as rebranding. Studying rebranding in this way offered us a novel and promising way to measure the link between brand names and performance.
After controlling for all other factors, we find that rebranding results in a 6.31% increase in occupancy rate, a 4.43% increase in revenue per room, and a 2.85% increase in gross operating profits per room. The American Hotel and Lodging Association's website reports that the average US hotel occupancy is 62% and the average US hotel’s daily occupied room rate is $110. Based on these data, a 6.3% increase in occupancy of rebranded hotels would result in an annual room revenue increase of $590 million.
Naturally, this effect is not uniform across all the brands in the study. The use of some brands increased performance in excess of 6%, while the use of other brands actually led to a drop in performance. In this way we were able to rate the strength of different brands in terms of their ability to increase performance of the underlying asset, in this case the hotel. In addition we reveal some insights about what kinds of rebranding boosts performance the most. For instance, hotels that rebrand to a lower price tier do better than those that rebrand to a higher price tier. In doing this study it became clear to us that, over time, the impact of rebranding can translate into billions of dollars of enhanced value for a business if done correctly, or diminished value if done incorrectly.
Firms spend large amounts of money building, sustaining and rejuvenating brands. In fact, a large part of the market capitalization of firms is attributed to the value of its brand(s). Despite its importance, measuring brand strength still remains as much an art as a science. The type of empirical analysis we present here can be used to derive the performance effects of rebranding in any business where decoupling is becoming the norm as well as to measure brand strength by analyzing the performance effects of different brands.