Understanding the concept of owner spend
The hotel business is unique with owners, brands and assets all vying for their individual needs and attention. All the while this delicate balance has some interesting business characteristics that are essential for hospitality financial leaders to understand. It’s not terribly complicated, quite the opposite. It hides out in plain sight, so it can be easy to miss if you’re not looking for it. I can remember an old boss telling me his thoughts on what I call “owner spend.” I thought at the time he was full of whatever, yet the concept was bold and incredibly clear. It also struck me in that moment that no one else had ever spoken of this, in exactly this way in my many years working inside a large brand. Owner spend is the key to understanding the relationship between the owner and the brands and it plays out inside each individual asset on a daily and annual basis in a managed hotel.
When I talk about owner spend, I’m referring to hotels that have a full-blown management contract with a brand. Not franchised properties, as the concept does not literally work the same way due to the smaller size of the teeth inside the franchise agreement. With hotels that have full-scale management agreements in place, that agreement and how it is executed is the key to the brand’s success or failure and it all revolves around the concept of owner spend. I wrote a similar article titled “The Secret to Great Financial Expertise – What the Brands Don’t Know” – http://hotelfinancialcoach.com/what-hotel-brands-dont-know-the-secret-to-creating-great-financial-expertise/. In that article I point to the owner spend concept when it comes to training and establishing brand expertise, but it stops short of exposing the full concept.
Here it is and, like I said, it’s not a secret; it’s as plain as the nose on your face, but I believe most people can’t see it for what it really is. That’s a business concept that if properly executed gives the brand a large upper hand in its dealings with the asset’s owner. Brand spend means the owner spends 100% of what’s required to run the hotel. That’s right the owner,never the brand.
The owner writes all the checks for absolutely everything that the hotel needs. Every dollar of: operating payroll, expense, executive compensation, capital spend, advertising cost, promotion cost, severance cost, employee benefits and even service length of tenure gifts. I could fill this page and the next one with what the hotel spends its money on and the owner pays every penny, never the brand.
The brand by way of the HMA gets to tell the owner exactly what needs to be spent in operating costs on an annual basis. Yes, there can be owner push back on some items, but overall the brand has license visa vie the HMA to get the owner to spend money on anything and everything and it is usually in support of maintaining the standard. The standard, the nebulous what’s new this year in the way of training, service, technology, administration, you name it and the brand creates it, charges the owner for it and the owner pays.
All of this points to the obvious fact that the brand decides what’s necessary to maintain the brand standards and they deliver the news via the annual budget. Once the budget is approved the invoices start flying to the property and the owner pays. This means quite simply the brand creates the concept of the brand’s standards, something that is constantly and forever evolving, and the owner pays. The owner pays 100% of these “brand standard” costs and the reason they do is that’s what they signed up for in the first place with their HMA. Simple, pervasive, and if properly executed - it’s a powerful way to build a brand.
Having high brand standards is an excellent way to grow the brand, but it also comes with some hurdles. It can be a stumbling block for owners when the assets are not performing. Brands face incredible pressure from owners in times of economic turmoil. Owners want brands to trim the sails and throw as much off the sinking ship as possible, so to speak. Most brands help in these circumstances by way of CCP’s, “cost containment plans.” These are the plans that the brands develop to stem the bleeding when the occupancy and rates plummet as they do on an infrequent basis.
We have been off the need for these cost containment plans for almost 10 years but when they are needed the brands will get into action. That is most of them will. It’s important to point out that even when the hotel faces an economic disaster that always ensures it’s the owner that still pays 100% of the freight.
David Lund – The hotel financial coach
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