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Chapter Two

 

The Hotel Business

 

I.     Chapter Objectives

After reading and studying this chapter, the student should be able to do the following: 1. Describe hotel ownership and development via hotel franchising and management contracts.

2. Explain the diamond rating classification of hotels.
3. Classify hotels by rating system type, location, and price. 3. Discuss the concept and growth of vacation ownership
4. Discuss sustainable/green lodging.
5. Identify trends influencing the hotel business.

 

II.     Key Teaching Elements/Chapter Outline/Lecture Suggestions

 

Hotel Development and Ownership                                Page      Object.

 

The lodging industry is a more than $155 billion industry that                      54             1

includes approximately 53,000 properties with almost five million

guestrooms. Franchising and management contracts are the two main

driving forces in the development and operation of the hotel business.

         

Franchising

Franchising in the hospitality industry is a concept that allows a                  56             1

company to expand more quickly by using other people’s money,

rather than acquiring its own financing.

 

Under a franchise agreement, the company or franchisor grants                   56             1

certain rights – for example, the right to use the company trademark,

operating procedures, reservation systems, marketing know-how,

purchasing discounts, etc. – for a fee. In return, the franchisee agrees

to operate the restaurant, hotel, etc., within guidelines set by the

franchisor.

 

Holiday Inn, Ritz-Carlton, and Howard Johnson’s all grew in the                56             1

1950s and 1960s through franchising.   One of the key factors that led

to the success of Holiday Inn was that they were the first company to

enter the mid-price range and that they were located near important

freeway intersections and in the suburbs.  Budget hotel properties

(Motel 6, Days Inn) grew during this time period.

 

Franchising was the primary growth and development strategy of                57           1, 2

hotels and motels during the 1960s through the 1980s.  Challenges to

the franchise arrangement include the maintenance of quality

standards and the financial stability of the franchisee.  Franchise fees can vary tremendously and are often negotiated between the franchiser and the franchisee.  The average agreement is 3% to 4% of room revenue.

 

Franchising presents both benefits and drawbacks.  Careful                       57, 58          1

consideration should be given to these factors.

 

Is There a Franchise in Your Future?

It is predicted that more than half of retail sales in the U.S. (including         58             1

restaurants) will soon be transacted through franchised units.  There

are jobs working directly for a franchiser, a franchisee, or you might

buy a franchise yourself.

 

Many franchisors own their own units that they use to test new                    59             1

operational or marketing ideas and to demonstrate the viability of the

business to potential franchisees.

 

Many of the mistakes that a new entrepreneur may make have already        59             1

been overcome by your franchisor. The company might provide cash

flow. The company might also provide other support services at little

or no cost, such as marketing and advertising, site selection,

construction plans, assistance with financing, and so on. All this

assistance leads to a second key reason for buying a franchise—

reducing your risk of failure.

 

Franchising does have some disadvantages. As a franchisee, your                59             1

freedom is somewhat restricted. You must operate within the

constraints set out by your franchise agreement and the operational

standards manual.

 

Referral Associations                                  61             1

A marketing consortium or referral organization is a group of

independent properties that refer businesses to one another. The

benefit of this arrangement is that independent hotel operations are

able to compete with chain operations.  Hotels with a referral

association share a centralized reservation system (CRS) and a

common image, logo, or advertising slogan.

 

Management Contracts

Management contracts have helped stimulate the growth of the hotel           62             1

industry since the 1970s.  They are popular because little or no up-

front financing or equity is involved.

 

The management contract usually allows for the hotel company to              62             1

manage the property for a period of years.  In return, the company

receives a management fee determined as a percentage of gross or net operating profits. Today, many contracts are for a percentage of sales and a percentage of operating profit. This is normally 2 + 2 percent.

 

Hotel companies have increasingly entered into management                       63             1

contracts because less capital is “tied up” in managing the properties

than is required in owning properties.

 

Today, hotel management companies exist in an extremely                          63             1

competitive environment. They have discovered that the hotel

business, like most others, has changed and they are adapting

accordingly. Today’s hotel owners are demanding better bottom-line

results and reduced fees. Management companies are seeking

sustainability and a bigger share of the business.

 

Real Estate Investment Trust (REIT)                        

A REIT must have at least 75 percent of its assets in real estate.                  63             1

Today, about 300 REITs, with a combined market value of $70

billion, are publicly traded. Investors like them because they do not

pay corporate income tax and instead are required to distribute at

least 95 percent of net income to shareholders. In addition, because

they trade as stocks, they are much easier to get into or out of than are

limited partnerships or the direct ownership of properties.

 

Hotel Development

Hotel ownership and development is very capital intensive. New                 65             1

hotels are built as a business venture by a developer, and because the

developer expects to make a fair return on the (substantial)

investment, a feasibility study is done to assess the viability of the

project. The feasibility study determines the degree to which the

proposed hotel project would be financially successful.

 

One of the most important documents is a Summary Operating                    65             1

Statement, which details revenues and expenses for a period.

 

Close to 70 percent of a hotel’s revenue and most of the profit comes          65             1

from the sale of rooms. About 26 percent of revenue comes from

food and beverage sales.

 

There are two views on new hotels versus remodeled hotels as far as           65             1

room rates and profits are concerned. It is often difficult for a new

property to make a profit for a few years because of the higher cost of

construction and the need to become known and to gain a good

market share. On the other hand, a remodeled hotel has the cost of

remodeling to pay for plus higher operating costs for energy and

maintenance, so the two options tend to cancel each other out.

 

Older hotels are generally renovated about every seven years. This is because they become dated and would otherwise lose market share, which equals profit. Older hotels have an advantage over new ones— or should have an advantage as a result of positive recognition in the market.	65	1
The Economic Impact of Hotels  Hotels provide substantial direct and indirect economic impact to the communities in which they are located. For direct impact, consider a hotel that has an average of 240 guests a night who spend $250 at the hotel and in restaurants and stores in the community. That would mean $240 x $250 x 365 days = $21.9 million a year infused into the local economy.	67	1
The indirect impact comes from the ripple effect, which we describe in the tourism chapter; this is where money is spent by the employees (wages and salaries) of the hotel in the community. It is also money used by the hotel to purchase all the items to service the guests. Communities also benefit from the Transient Occupancy Tax (TOT), otherwise known as the bed tax.	68	1
Classification of Hotels and Lodging Properties
According to the American Hotel and Lodging Association (AHLA), in 2013 the U.S. lodging industry consists of 52,887 hotels and motels, with a total of 4,926,543 million rooms and $163 billion in sales.   The Lodging Industry	69	1
Hotels may be classified in several ways and may have one or more affiliations. For instance, hotels may be classified using the Smith Travel Research (STR) hotel classification system, the Forbes Travel Guide Five-Star rating process, and the American Automobile Association (AAA) Five-Diamond award system. Smith Travel, Forbes, and AAA have all expanded their rating practices outside the United States.	69	2
Hotel Affiliations
A hotel may have multiple affiliations including being part of a chain, parent company, operation (such as corporation, franchise, or independent), management company, owner, asset management company, and/or a member of a membership or marketing group.	69	3

 

Hotels may also be classified as corporate, franchise, or independent. A corporate hotel is a chain hotel owned or managed by the chain or parent company. A franchise hotel is a chain hotel run by a third party, where the chain receives some sort of franchise fee. An independent hotel is not affiliated with a chain or parent company.   Hotels may also be affiliated with a management company that operates the hotel on behalf of another party.   Hotels may also be affiliated with one or more membership and marketing groups that provide various benefits, such as marketing assistance and reservation services.   Hotels may now be classified as a quasi-chain. Quasi-chains have recently come into existence and are basically a cross between a chain and a marketing group for independent hotels.	70	3
Hotel Classification by Rating System: AAA and Forbes
The AAA has been inspecting and rating the nation’s hotels since 1977. About three percent of the 59,000 (29,000 hotels and 30,000 restaurants) properties inspected annually throughout the United States, Canada, and Mexico earn the five-diamond award, which is the association’s highest award for excellence. In 2013, the fivediamond award was bestowed on 124 lodging establishments in the United States, Canada, the Caribbean, and Mexico	71	2
Similar to the system used by AAA, Forbes Travel Guide classifies hotels using a five-star rating system. Out of the 50,000 hotels in the United States, Forbes rates and recommends about 8,000 properties a year. Of those, only a few dozen earn the five-star rating.   The hotel industry also classifies hotels by location or features and benefits. A hotel may be located in an urban or city center, suburban, airport, interstate or freeway, resort, small town/rural, casino, full-service, extended-stay, all-suite, convention, or bed and breakfast.	72	2
City center and Suburban Hotels
City center hotels meet the needs of business and leisure travelers.  They offer a range of accommodations and services.	75	3
They offer a signature restaurant, coffee shop, or an equivalent recognized name restaurant; a lounge; a named bar; meeting and convention rooms; a ballroom; and possibly a fancy night spot.	75	3

 

 

Resort Hotels                                                         

Resort hotels developed initially with the growth of rail travel, In the          75             3

late 1800s, luxury resort hotels were developed to accommodate the

clientele that the railways brought.

 

Many resorts began as seasonal ventures, but with the increase of air           77             3

and automobile travel, many resorts have become year-round

destinations.

 

Today, there are numerous resort hotel properties that cater to the               77             3

needs of many segments of the population.  Some resorts are family

friendly, whereas others seek to create a quiet get-away for the adult.

Many resorts actively work to attract conventions and conferences to

increase occupancy, especially in the off-season.

 

To increase occupancies, resorts have diversified their marketing mix

to include conventions, business meetings, sales meetings, incentive

groups, sporting events, additional sporting and recreational facilities,

spas, adventure tourism, ecotourism, and more.

 

Because guests are cocooned in the resort, they expect to be

pampered. This requires an attentive, well-trained staff; hiring,

training, and retaining a competent staff present a challenge in some

remote areas and in developing countries.

 

 

Airport Hotels                                         

In general, airport hotels have high occupancy rates because of the              79             3

large number of travelers arriving and departing from major airports.

Some properties have added meeting space to cater to business people

who need to fly in, meet, and then fly out on a very tight schedule.

 

These hotels are usually full service and have 200 to 600 rooms.                 79             3

 

Freeway and Interstate Hotels and Motels

Freeway hotels and motels grew most quickly in the 1950s and                   80             3

1960s.  They provided a convenient place to stay that was reasonably

priced with few frills.

 

They are smaller than most hotels—usually fewer than fifty rooms—          80             3

and are frequently mom-and-pop establishments or franchised (such

as Motel 6).

 

Casino Hotels

The casino hotel industry is now coming into the financial                           80             3

mainstream, to the point that, as a significant segment of the

entertainment industry, it is reshaping the U.S. economy. The entertainment and recreation sector has become a very important engine for U.S. economic growth, providing a boost to consumer spending, and thus creating tremendous prosperity for the industry. One of the fastest-growing sectors of the entertainment field is gaming

 

Larger casino hotels also attract conventions, which represent a lucrative business. There are now more than 150 hotels on Native American tribal land.	80	3
Conference and Convention Hotels Convention hotels offer facilities that meet the needs of groups attending and holding conventions. These facilities may include large public areas and banquet facilities, a business center, a travel desk, and an airport shuttle, as well as other amenities.   Convention hotels usually have a minimum of 300 guest rooms and a minimum of 20,000 square feet of meeting space and larger public areas to accommodate hundreds of people at any given time. Convention hotels have many banquet areas within and around the hotel complex.   Full-Service Hotels	81	3
Hotels may be classified by the degree of service offered: full-service, economy, extended-stay, and all-suite hotels.  Full-service hotels offer a wide range of facilities, services, and amenities for both the business and pleasure traveler.  Examples:  Hilton, Hyatt, Four Seasons.   Most of the major North American cities have hotel chain representation, such as Four Seasons, Hilton, InterContinental, Choice, Hyatt, Marriott, Omni, Wyndham, Radisson, Loews, and Starwood.	81	3
Economy/Budget Hotels
These properties provide clean, reasonably sized and furnished rooms without “frills.”  Economy hotels focus on selling beds.  They do not offer meals or meeting rooms, as a general rule.	82	3
Boutique Hotels
These hotels offer a different experience.  They have a unique architecture, style, décor, size, usually 25-125 rooms offering a high level of personal service.	82	3

Extended-Stay Hotels and All-Suite Extended-Stay Hotels

These hotels provide accommodations to guests staying longer than 5         83             3

days.  Rates are usually decreased based on the length of the stay.

Guests are usually a mix – professionals, business people, and

families that are relocating.

 

Extended-stay hotels offer full kitchen facilities and shopping                     84             3

services or a convenience store on the premises.

 

All-suite hotels usually offer more space per room, for the same rate           84             3

as a regular hotel in the same price range.   The additional space is

usually dedicated as a lounge or kitchenette, or both, within the room.

These hotels are attractive to guests who may be relocating, attending

training seminars, or are on work-related projects.

 

Condotels, Timeshare, and Mixed-Use Hotels                 84           3, 4

A combination of a hotel and condominium.  Developers build a hotel

and sell it as condo units.

 

This means that a hotel may also have residences; condos that people         85           3, 4

use rather than renting like a condotel.  They have spas and sports

facilities.  Can be part of urban or resort development that might

include office buildings, etc.

 

Bed and Breakfast Inns                                  

Bed and breakfast operations offer variety in accommodation and in           85             3

cost. Although not all B&Bs are owner occupied, they provide an

alternative to the traditional lodging experience.

 

A true B&B is an accommodation with the owner, who lives on the            85             3

premises or nearby, providing a clean, attractive accommodation and

breakfast, usually a memorable one. There are an estimated 25,000

bed and breakfast places in the United States alone.

 

 

Best, Biggest, and Most Unusual Hotels and Chains

 

The largest hotel in the world is the Izmailovo Hotel in Moscow with         ₈₆           3, 6

7,500 rooms, followed by the 7,372-room MGM Grand in Las Vegas

and the Venetian Hotel, also in Las Vegas, which has 7,117 rooms.

 

The Best Hotel Chains

The Ritz-Carlton and Canadian-owned Four Seasons are rated the               86           3, 6

highest quality chain hotels. The Ritz-Carlton Hotel Company has

received all the major awards the hospitality industry and leading

consumer organizations can bestow. It has received the Malcolm Baldrige National Quality Award from the U.S. Department of Commerce.

 

The Most Unusual Hotels
Unusual hotels include The Treetops in Kenya, the Ice Hotel in Swedish Lapland, and the underwater hotel at Great Barrier Reef.	88	3, 6
Timeshare, Vacation Ownership, and Fractional Ownership
Vacation ownership is the fastest growing segment of the US travel and tourism industry. A variation of the “time share” model is the vacation club. Consumers earn points toward vacation benefits. Flexibility is a key advantage of this type of program.  Hotel companies have found this segment of the industry to be extremely lucrative. As a result, many leading hoteliers are entering into it. Fees such as yearly maintenance fees are required in addition to vacation ownership charges.	88	3, 4
Time share ownership lets owners save on the rising costs of vacation accommodations over the long term, while providing the space and flexibility to meet the needs of any size family or group. Vacation or fractional ownership is a form of real estate ownership or right to use a property in part. These types of properties are often resort or urban condominiums, town homes, or single family homes, in which multiple parties own and have rights to the property and amenities.	89	3, 4
Time shares also provide the possibility of worldwide travel by means of ownership exchange. By locking in the purchase price of accommodations, vacation ownership helps ensure future vacations at today’s prices at luxurious resorts with amenities, service, and ambience that rival any of the world’s top-rated vacation destinations.   Travel the World Through Exchange Vacations	90	3, 4
Through the international vacation exchange networks, owners can trade their timeshare intervals for vacation time at comparable resorts around the world. Most resorts are affiliated with an exchange company that administers the exchange service for its members. Typically, the exchange company directly solicits annual membership. Owners individually elect to become members of the affiliated exchange company. To exchange, the owner places his or her interval into the exchange company’s pool of resorts and weeks available for exchange and, in turn, chooses an available resort and week from that pool.	90	4, 6

International Perspective

The global economy is segmented into large trading blocks such as the European Economic Community (EEC) and the North American Free Trade Agreement (NAFTA).  Such agreements reduce limitations on the transfer of goods and labor.  This can lead to increased travel, tourism, commerce, and industry.	91	1, 6
Growth is expected to continue under the EEC and NAFTA.  The Pacific Rim is also growing dramatically in the realm of tourism. In Asia, Hong Kong’s growth has been encouraged by booming economies throughout Southeast Asia and the kind of tax system for which supply-siders hunger. The Hong Kong government levies a flat 16.5 percent corporate tax, a 15 percent individual income tax, and no tax on capital gains or dividends.	91	1, 6
In developing countries, once political stability has been established and maintained, hotel and tourism development follows closely.	92	1, 6
Sustainable or Green Lodging
Developers are more environmentally conscious because it can cost far more not only to build a lodging facility but also to run it if it is not sustainable.	92	5
The cost of energy has increased so much in recent years that lodging construction now incorporates ways of using natural lighting and building energy efficient buildings.	92	5
Lighting can account for 30 to 40 percent of commercial electricity consumption.	92	5
Water conservation is another method that can greatly reduce waste. Today, many hotels are replacing showerheads, toilets, and faucets with low-flow water devices.	93	5
Career Information	93
There area  variety of options related to hotel development and classification. Some examples would be working in corporate offices or consulting firms. In any case, a variety of positions in hotels will benefit the person wanting to go into management.
Trends in Hotel Development and Management
Topics include capacity control, safety and security, technology, assets and capital, new management, globalization, consolidation, diversification within segments of the lodging industry, rapid growth in vacation ownership, increase in the number of spas and treatments,	94-95