Owners of independent hotels may consider soft-brand collections a way to soften the blow of the coronavirus pandemic, but soft brands are not the answer for all, sources said.
REPORT FROM THE U.S.—The hotel industry faces a yearslong recovery once the coronavirus pandemic ends, and owners of independent hotels may see soft-brand collections as a viable option for maintaining some degree of independence while tapping into a brand’s loyalty program and distribution system.
While arguably an appealing proposition, it’s not necessarily that clear-cut. Though soft-brand collections were first founded during the last downturn and saw significant growth, both in number of collections and hotels that joined them, over the last 12 years, the current downturn challenging the industry is a different animal altogether.
The case for joining
In recent history, the traveling public has become more adventurous and better informed when choosing their travel destination and accommodations, said Robin Kirk, president of Maverick Hotels & Restaurants. Travelers have a wealth of information available to them thanks to online reviews, pictures and videos, which has changed the patterns of specifically leisure travelers.
When they choose, they’re choosing based on personal preferences about the destination itself and the accommodation, both in its specific location as well as the amenities provided, he said.
“To a certain amount, the question is, what role does the brand perform in that area?” Kirk said. “The answer is probably decreasing.”
There is some appeal in using honors or rewards programs for business travelers to convert those points for leisure travel, but the primary decision-making is driven by the needs of a family or extended-family group, he said. That has become more pronounced during the pandemic as people want to get away but also stay safe, so they are doing more research online to find places that will fulfill their needs.
While an association with a brand might not bring an immediate advantage, soft brands could make sense, particularly in the recovery stage, Kirk said. They can help drive nonpeak business to an appealing destination, he said.
“Whether it be in the mountains in Colorado, by the sea in California or Massachusetts, most of these properties can drive occupancy and, therefore, rate in peak periods: vacations, weekends, ski season, et cetera,” Kirk said. “The big difference in financial performance isn't the ability to maximize that but the ability to gain incremental business in non-traditional resort times.”
A soft-brand collection plays a potentially interesting support role for independent properties, especially as the post-COVID-19 recovery comes into play, he said.
The hotel industry has never realized it’s in a down cycle until it has begun, Kirk said. Conversely, it’s never realized it was in a recovery until the recovery has started. With that in mind, the timing to consider joining a soft-brand collection is probably now, he said. There are a lot of things to take into consideration when joining a collection, so this would be the time to start.
Given the current environment, this would also potentially be the best time to enter negotiations with the brands as there should be a great deal of flexibility, Kirk said.
“I think that to actually address the question of tomorrow, today is the time for that,” he said.
Pebblebrook Hotel Trust is unique in that it has a wide perspective on hotel performance through its portfolio of branded, soft-branded and independent properties, Pebblebrook EVP and CFO Raymond Martz said.
“To be candid, it’s been a pitch of the brands for some time there’s the safety of the brand and distribution, but the reality is in this environment, we don’t really see any difference,” he said.
The company’s eight independent resorts have been able to increase their rates compared to last year, Martz said. The demand is coming in through online travel agencies and they’re performing well in the environment without the additional costs and burdens of being part of a collection. Even among the portfolio’s urban properties, the hotels associated with a brand aren’t delivering any more than the independents, but they have all the additional costs.
“I think it really shows to a lot of owners why be burdened by a brand and all the costs and restrictions that come with it?” he said.
If the brands or soft brands were performing better, Pebblebrook would be opening more branded properties, Martz said. Instead, they have been more partial to the independents because they have a lower operating cost structure.
At the moment, the demand coming in is all leisure with no corporate or group business, Martz said. For this, Pebblebrook has been relying on OTAs, which do charge higher fees than the commissions from the brands, but OTAs are a light switch Pebblebrook can turn on and off when necessary, he said.
“The OTAs provide an effective way to essentially provide a pipeline without all the long-term encumbrances of a brand,” he said, adding that it’s not like an independent property can join a soft-brand collection for 90 days and then go back to being independent.
Being an independent property allows for more flexibility and creativity with operations, something particularly helpful during this pandemic, Martz said. Managers at branded properties are handcuffed by what they can do because they must operate within a box, he said.
Martz clarified that he’s not taking a swipe at the brands. Pebblebrook owns the 803-room Westin Copley Place in Boston, and that property needs a brand partner because of its size. However, for smaller independents, the cost benefit isn’t there to join a soft brand, he said.
What to consider
Many owners are now looking at different scenarios for their properties and whether new management deals or conversions to other hard brands or soft brands could create optionality for themselves to protect their investment and potentially add a little incremental value, CHMWarnick EVP Larry Trabulsi said.
When looking to join a soft-brand collection, the owners should do a cost-benefit analysis, he said. For a certain percentage of revenue, which can be substantial, the hotel would gain access to a pipeline and reservation system, he said. In pre-pandemic scenarios, independent hotels had a chance making it on their own without an affiliation, but given the current environment, an affiliation might be worth considering.
The first thing an owner of an independent hotel should look at when thinking about joining a soft-brand collection is how represented the overall brand company is in that market, said Tim Dick, senior director and co-head of the National Asset Management Practice, Atlanta Hotel Advisory at CBRE Hotel Advisory. The question to answer is whether joining the collection will be accretive and the recipient of a net gain from the distribution system or will it further dilute the other brand choices.
If the owner is interested in joining a collection but the franchisor has a large convention hotel along with several other full-service and limited-service properties in the market, it might not make sense to join the collection, Dick said. However, if there is something unique about the independent hotel that could give it an advantage, such as being a historical property, then it potentially could work, he said.
“Is there demand that's not coming to the market because your hotel is not affiliated with this branding system?” Dick asked.
In a market or submarket where occupancy was at 75% and the hotel was seeing 70%, 12 months ago the owner might have thought of joining a collection to help it meet the market occupancy, Trabulsi said. Right now, demand is extremely depressed, so it’s necessary to look at the different segments and demand pieces.
“If you’re in a submarket where business travel is the key, you may want to evaluate whether that affiliation is going to help you,” he said. “If business travel is down 90% of the market, by having that flag, you might get a little bit of incremental business, but you’re not going to drive 10 more points of occupancy because the business just isn’t there in the market to begin with.”