The 5 hidden costs of being branded (Part 2)
Expedia once stated that “Of all the consumers searching Hotels.com, less than 0.5% is searching for specific large brands.” If the impact of the brands’ name and associated brand value was so important to a consumer, why would they choose to book on an OTA, and why would so few OTA consumers search for a specific brand name when using the site? While we will never know the true power of a brand’s name, the fact that OTA customers search for brands so infrequently. calls into question why brands are charging owners royalty fees for OTA bookings.
If a 5% royalty fee seems harmless enough, consider this example: a 150-room major branded property operating at 75% occupancy, a $175 ADR and 11% annual OTA share will pay a whopping $39,000 in annual royalty fees. We must ask – where is the brand providing value for this $39,000 fee?
Who’s really paying OTA commissions? The major brands have made a lot of noise about OTA commissions over the years. In April 2018, Marriott’s CEO Arne Sorenson publicly stated that his goal in upcoming negotiations with Expedia was to “pay less.” But what do brand headquarters actually pay? The big brands only own a small fraction of their portfolio5; the vast majority of their properties are franchised or leased to owners. Through franchise and management agreements, all fees are passed onto owners, including OTA commissions.
And while OTA commissions have been steadily decreasing over the past few years, brand franchise fees are rising across the board. One study found that the upscale segment’s franchise fees rose a staggering 81% from 2016 to 2017. It seems that OTA commission fees are the least of owners’ worries, and the rapidly diluting value proposition of operating a branded property is.
Simply put, brands cost more than you think! The long-held idea that brands are cheap is just not true. For years, brands have touted their low franchisee fees and how they are lower than OTA commissions. However, franchisee fees are only one piece of the revenue that brands collect from owners. Most brands charge Loyalty Fees and Performance Marketing Fees and require Loyalty Discounts, and these additional fees leave owners paying sometimes more than they would have paid to OTAs alone.
An interesting article has surfaced a new concept that helps calculate the additional fees that come from brands “double charging” on OTA bookings – Brand Contribution Penalty (BCP)7. Essentially, this theory states that the less contribution a brand produces, the higher its Brand Contribution Penalty is because that property will have to use OTAs to fill more of its rooms – thus incurring the “double charge” penalty. As the article mentions, a brand’s BCP can add up to a 20% fee! Adding the Brand Contribution Penalty to all the other fees owners must pay is a hard pill to swallow.
So, why are so many hotel projects branded? A common hotel industry perception is that it’s much easier to finance a branded hotel purchase than a non-branded purchase. While there may be some merit to this belief, owners may still have an opportunity to avoid going with a big brand when financing their property and thus avoid all the hassles mentioned above.
If you’re considering going without a brand, here are some tips to remember.
First, consider what OTAs can do for you. If you drop your brand flag, you will have to find another way to market your property and message your value to customers. Enter OTAs. Online Travel Agencies like Hotels.com, Booking.com and Expedia do not charge up-front costs for marketing and, instead, only charge a commission percentage. Bundled in this commission is the marketing power that OTAs provide, exposing your property to millions of customers who are mostly brand agnostic. Strong sort placement on OTA sites as well as lots of positive reviews can counteract the lost marketing from dropping your brand flag.
Second, consider that lending organizations may be more inclined to fund a hotel with cash flow. If you can prove “concept success” for a hotel – that it serves a need in the market – you may have an easier time securing financing for the purchase.
Third, owners looking to finance a non-branded hotel project should do their due diligence before looking for financing. Can the market support a new hotel of this size, ADR, and star tier? Which types of demand will the property attract? Which properties will be its major competitors and what competitive advantages does the property offer? If your concept satisfies a strong need, your lending organization may be more inclined to fund.
With a booming economy and increased competition across the globe, owners must examine their partnerships to ensure they position themselves to be financially successful. It’s no longer necessary to work with a brand to achieve financial success in your hotel. Remember to lean on OTAs and to consider what lending organizations are looking for in financing agreements, and you can avoid pain points that the big brands bring.
David Lund – The hotel Financial Coach.
Email: david@hotelfinancialcoach.com
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