|The Multi-branded Hotel: New Efficiencies Through Innovation.|
By Eric Wright
Tuesday, 10th December 2013
This article discusses multi-branded hotel developments and the potential efficiencies that these developments can create, given the ever-changing demands of both the consumer and the industry.
Hotel developers must evolve their development models to reflect the ever-changing demands of both the consumer and the industry, not only to stay competitive and increase yields but sometimes just to get shovels in the ground in the first place.
The competitive environment for hotel development has intensified over the last 30 years. Building a hotel is more difficult than ever, particularly for developers looking for long-term sustainable yields in primary locations. Available land is hard to find in primary locations, and land and building costs continue to increase while return requirements rise and new supply makes the hotel operating environment more aggressive. In the modern lodging market, new efficiencies found through innovation are the key to survival.
The multi-branded hotel was forged in the crucible of this demanding environment for development, reflecting a shift towards greater sophistication in tailoring guest experiences and targeting specific demand segments, thereby creating less overhead and greater cost efficiency. A multi-branded hotel essentially combines two hotels with separate brand identities on one parcel of land under a single roof. The two hotels share construction and operational expenses as well as facilities, resulting in attractive cost savings for developers. Moreover, the developer is uniquely able to tailor the product to the particular demand segmentation of a market.
The multi-brand trend began in the US but is gaining traction in other markets, including Canada. Although the concept is increasing in popularity, it comes with its own set of challenges that need to be carefully considered before proceeding to development. For the right market, however, the multi-brand hotel can be a cost-effective, high-return answer to the increasingly complex demands of the modern lodging market.
The Multi-brand Hotel Concept
The idea of multi-branded properties began with projects where two brands from the same franchise company were built on the same site but in separate buildings. While this allowed shared operating efficiencies, the initial construction costs and the building footprint were not combined, resulting in no additional cost savings. Now, combining two brands from the same brand family under one roof is the emerging trend for multi-brand development.
In order for a multi-branded hotel property to work, the combined brands must be able to mix and operate harmoniously. Most multi-branded developments today combine a select-service brand with an extended-stay brand from the same brand family. It is important for the different hotel components to maintain their own brand identity. Separate entrances and lobbies as well as different guestroom configurations and in-room amenities are needed to keep each brand identity distinct and un-muddled.
Hotel guests at each brand are generally able to benefit from the shared facilities and amenities, which can include on-site food and beverage facilities, fitness rooms, meeting rooms, and swimming pools.
For example, guests at the limited-service or extended-stay component have access to facilities that would otherwise not be available at a standalone property, such as a restaurant, and guests of the select-service component (or the higher-end product on the chain) can enjoy potentially larger facilities, such as more meeting space, a larger exercise room, or more restaurants.
The Multi-brand Supply Pipeline
The first dual-branded hotel came in the 1980s, when the owner of a 600-room hotel concluded that offering two brand names targeting separate price points was the only way to reposition the hotel economically. The multi-branded concept has taken off in the last five years, driven by the combined select-service/extended-stay concept, which has proven to be the most amenable model for development.
Hoteliers and brands alike continue to creatively tailor custom solutions for different markets across the globe. In the Calgary Airport market, the country’s first 3-branded development is currently under construction.
At completion, the project will feature Homewood Suites/Hampton Inn/Hilton which will be connected by exterior walkways but will feature shared public areas. In Chicago, an Aloft/Fairfield Inn/Hyatt Place opened in 2013 and is the first multi-brand development to feature properties from three separate brand families. The trend signals a move away from cookie cutter hotels towards a more modular hotel development concept where ground conditions determine what components to include.
The Advantages of Multi-branding
A multi-branded, one-building project is attractive because it maximizes the value of the land and the allotted development potential for a site, minimizes construction and operational expenses, and reduces risk by appealing to a broader range of potential guests. The cost of land is rising, and site availability is a significant challenge for developers, particularly in urban markets. Building more than one brand on a single, larger site can create more feasible economies-of-scale and increase the revenue potential of the project.
For example, a 300-room extended-stay or limited-service hotel may not be economically feasible for a market, but a 150-room limited-service hotel/150-room extended-stay hotel may well be the optimal use for the site. By appealing to more demand segments, the 300-room dual-branded hotel may maximize the RevPAR potential with two brands appealing to different segments, thereby creating the optimum revenue potential for the property.
Substantial economic and operational benefits come from having the hotels occupy the same building. Initial construction costs are diminished from sharing areas that would otherwise need to be duplicated for two stand-alone hotels, such as meeting space, recreation facilities, parking, food and beverage outlets, and back-of-the-house areas. In addition to the lower construction costs, shared services (such as housekeeping and maintenance) and a centralized staff under one general manager result in reduced operating costs and greater efficiency.
Hotels are a risky business, and savvy hotel developers and owners are always looking for new ways to minimize their exposure to risk. By accommodating two different brands that appeal to a greater number of demand segments, developers are offered a more flexible business operation that is more adaptable to changing market conditions.
Challenges Inherent to Multi-branded Hotel Properties
The incentives for building multi-branded developments are certainly attractive, but the concept should not be seen as a two-for-one special that will be the norm for all new hotel developments. Multi-branded hotels come with their own unique challenges that must be carefully considered, weighed, and answered.
The simple fact is that it is always difficult to mix brand families. Although there is currently a multi-brand development that contains Starwood, Marriott, and Hyatt brands, it is unlikely that there will be many similar projects in the future. Having more than one brand family under a single roof is very difficult to make work because of the competitive environment and the resulting confusion of identities.
Hoteliers need to be aware that a multi-branded hotel has more limited future branding options. Because brand families do not mix well, the operator only has the option of re-branding within the existing family when one component of a multi-branded property is struggling in the market. This restricts the possible strategies for repositioning the property in the market down the road.
Even within the same brand family, challenges arise when trying to create a harmonious operation between two brands. For example, shared amenities between a luxury brand and a limited-service brand would create problems because the guest profile differs, which could distort the perception of the luxury brand and degrade the individual brand identity. For this reason, brands will only consider allowing two brands that are fairly similar on the family chain scale. This is also why extended-stay and select-service developments are the most popular combination, as it is relatively easy to match class while targeting distinct demand segments.
A multi-branded property may also be more difficult to sell than a stand-alone hotel. If a developer is debating whether to build a multi-branded hotel or two stand-alone properties, the exit strategy must be taken into account. It is not possible to sell off one component of a multi-branded property; the property must be sold in its entirety. This could potentially limit the number of potential purchasers and create a difficult transaction environment, especially if one component significantly underperforms the other(s).
The rise of the multi-brand hotel is an innovative response to the demands of the increasingly complex—and unforgiving—hotel market environment. Land is expensive and not readily available in primary locations, building costs continue to rise, return requirements for hotel projects are on the increase, and the competitive hotel supply is ever growing. Multi-branded properties are a cost-effective, high-return solution that tailors a more personalized product to multiple demand segments.
As attractive as they sound, multi-brand developments will not work in every market. For a multi-brand hotel to work, it must be the best possible product for that particular market, and more traditional forms of hotel development must be given equal consideration in making the determination of the best possible product for a given location. When a multi-brand development is optimal, however, the finished product looks to be a win for the brand, a win for the owner, and a win for the consumer.
Eric Wright is a hotel Consulting and Valuation Senior Associate with the HVS Vancouver office in Canada. Eric received his bachelor’s degree from the Hotel Institute de Montreux, Switzerland, and has spent several years in various hospitality roles in Switzerland, Thailand, the United Kingdom, and Canada.