Selecting a Hotel Brand: Why House Profit Margins Can Vary by Brand

/Selecting a Hotel Brand: Why House Profit Margins Can Vary by Brand

Selecting a Hotel Brand: Why House Profit Margins Can Vary by Brand

|2015-09-25T09:31:01+00:00September 25th, 2015|

By Hans Detlefsen, MPP, MAI

Contributors: Emiliia Gordiienko, Yoshihiro Kanno, Devanjali Luthra, and Anjali Peterson

Introduction

Does hotel brand selection significantly affect your investment returns? Do different brands within the same chain scale produce different profit results? These questions were the focus of a recent hotel brand comparison study conducted by Hotel Appraisers & Advisors (HA&A).

Researchers at HA&A analyzed more than 500 hotel financial statements from across the United States. Our research focused on evaluating the importance of brand selection for hotel investors and developers. We studied the profitability of four U.S. hotel brands at various revenue levels. Specifically, we measured each hotel’s profit¹ per available room (ProPAR) and compared this to each hotel’s revenue per available room (RevPAR). Using these two sets of data, we then created a profitability trend line for each brand. Finally, we compared the four brands based on their respective profitability trend lines.

Brand Selection Matters

Our research revealed substantial profitability differences between brands, even when comparing popular, national brands within the same chain scale. The following figure illustrates RevPAR versus ProPAR for each of the four brands evaluated in our analysis.

Based on this simple comparison, it appears that brand selection is a very important factor for investors to consider during the hotel development process. Especially at higher RevPAR levels, brand profitability levels appear to diverge significantly. For example, in markets with RevPAR levels exceeding $125, even the four widely known brands included in our study could produce profitability differences of roundly $5,000 per available room, or $750,000 annually for a 150-room hotel. Based on our review of a broader set of hotels, the profitability discrepancies could be even larger if additional brands were considered. So, it is not difficult to see how the developer’s branding decision could have a multi-million-dollar impact on value, even on a mid-sized hotel investment.

Why Do Brand Profit Margins Differ?

Readers may wonder whether the profitability discrepancies between brands could be explained by the fact that some brands have an average hotel age that is newer than the other brands or an average location that is superior to the other brands included in our study. For this reason, we have standardized our comparison to look at profit levels for any given RevPAR level. This should go a long way towards removing these factors as potential explanations for the discrepancies in profitability between brands. That is, if a hotel in Brand A and a hotel in Brand B both have RevPARs of $125, then we would expect the aggregate impact of any differences in effective age, property condition, and location attributes to balance out roughly because they both achieved the same RevPAR. So, these factors likely do not account for the differences in profitability between brands.

Another possible explanation is that certain brands could be aligned with more experienced operators, thereby leading to higher profitability margins for such brands, on average. This may explain part of the profit discrepancies between brands. However, because we selected four widely distributed, national brands, we determined they have significant overlap in hotel management companies who operate all or many of the brands included in our study. So, this factor probably does not explain the discrepancies fully either.

Based on our research, we conclude that specific brand-related factors are more likely to explain the discrepancies in profitability between the selected brands. What are some of these brand-related factors that could be contributing to discrepancies in profit levels between brands?

  • Labor Models – Different hotel brands have different labor models and staffing requirements. Even when comparing brands within the same chain scales, staffing requirements and protocols can differ significantly. These differences can affect labor expenses, thereby affecting hotel profit margins.
  • Food & Beverage Operations – Different brands have different menus at their food outlets and different policies pertaining to how much they charge for food and beverage services. Even within the same chain scale, some brands may offer complimentary breakfast to certain guests, or all guests, affecting food-related revenue line items. Furthermore, with different menus, the cost of food-related goods can vary significantly between brands, affecting operating expense ratios and profit margins.
  • Brand Requirements – Every hotel brand has its own set of required amenities, including guestroom amenities, toiletries, and common area furnishings and amenities. And every hotel brand has its own set of required services, which could include a wide range of guest services as well as administrative, accounting, and training requirements that are needed to comply with brand standards. These differences can affect operating expenses and profitability.
  • Franchise Fees – Each franchised hotel brand has a specific set of fees that must be paid by the franchisee to the franchisor. These fees can include a range of royalty fees, marketing fees, loyalty program fees, reservation fees, application fees, and other fees. Based on our research, the sum of these fees can vary substantially between two differently branded hotels, even when they are within the same chain scale and achieve roughly the same RevPAR levels.

While this list is not intended to be comprehensive, our research indicates that these differences are significant factors that help to explain profit discrepancies between brands.

Concluding Thoughts

This article is intended to invite further discussion among industry professionals about the factors that affect hotel profit margins and values. Our research shows significant differences in profitability between different hotel brands. When selecting a hotel brand, developers and investors should carefully evaluate the labor models, food and beverage operations, franchise fees, and other brand requirements of available brands before making a selection. These evaluations should be weighed against each brand’s expected reservation contribution and RevPAR potential in a given market. Franchisors spend a lot of time and money evaluating these factors when designing, creating, or repositioning their brands. These strategic decisions about brand requirements and design have significant implications for hotel profitability and value.

The selection of a hotel brand is a complex decision and other factors are important to consider as well. There can be good reasons for selecting a brand that does not have the highest ProPAR trend line based on aggregated data. Although these reasons are not the focus of this article, we welcome feedback and further industry research to evaluate issues related to brand selection and hotel profitability. We also welcome participation from additional hotel companies who are interested in receiving confidential benchmarking feedback.²

¹For the purpose of this article, we use the term “profit” to mean gross operating profit, which is also sometimes referred to as house profit.

²Please contact Hans Detlefsen at (312) 526-3885 or hdetlefsen@hotelappraisers.com if you represent a hotel company and would like to be included in this benchmarking analysis. All participating companies remain anonymous and receive a confidential copy of their hotel portfolio’s ProPAR trend lines versus the national average trend lines for other brands included in this study.

About Hans Detlefsen, MPP, MAI

Hans Detlefsen, MPP, MAI is President of Hotel Appraisers & Advisors, a national hotel consulting company based in Chicago. He holds a Master’s Degree in Public Policy from the University of Chicago, where he was a recipient of the Harris Fellowship. He graduated magna cum laude from the University of Notre Dame with a Bachelor of Arts degree in Government and Economics. Mr. Detlefsen is a licensed and certified general appraiser. He is a designated member (MAI) of the Appraisal Institute. Hans can be reached at (312) 526-3885 or by e-mail at hdetlefsen@hotelappraisers.com

The author would like to thank the following contributors to this article: Emiliia Gordiienko; Yoshihiro Kanno; Devanjali Luthra; and Anjali Peterson.

Contact: Hans Detlefsen

hdetlefsen@hotelappraisers.com/(312) 526-3885

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