Management Renaissance
Expansion of big-name brands and a new crop of contenders is heating up the management contract race worldwide.
By Mary Scoviak, Contributing Editor -- HOTELS Magazine, 10/1/2005
|
Every management company is looking over its shoulder. “The hotel industry is large and diverse, with room for all sorts of owners, many different kinds of brands and several forms of management companies. But that does not mean there is room for everyone,” says Thomas Murray, COO, the Americas, InterContinental Hotels Group. “Up-and-comers have to prove their worth to sustain themselves in the marketplace. Established companies have to prove they are a better investment than the newcomers. If they do not, new competitors who deliver more for their owners will win—as they should.”
With a broader range of management companies on the short list for any given project, owners are micro-matching the brand to the asset. “Best” no longer assumes “biggest.” It comes down to getting the right flag at the right price for the right length of time. Owners are using the advantages afforded them by a larger menu of management options to put downward pressure on fees and to mandate greater flexibility on terms.
The New Deals
More and more, general managers will be aiming at fees based on profits, not sales. In the United States and the Caribbean, owners are shifting to below-the-line incentives rather than negotiating management fees from revenues, says Raul Neal, president of Tecton Hospitality, Miami. They want contracts that ensure general managers will improve flow-through as revenues increase. “Owners are not looking for specific numbers. They want to see more performance upside in the flow-through from gross operating profit (GOP) margins,” says Jeffrey Senior,
senior vice president, sales and marketing,
Fairmont Hotels & Resorts, Toronto. “In the up cycle, operators have to be sensitive to owners’ fee envy. Management has to expect to be pro-active in proving it is worth its fees—both base and incentive.” The definition of proactive
generally means meeting internal rate of return (IRR) hurdles of 15% to 18% for institutions, and more like 20% for opportunity funds.
Watch for movement toward this model in Asia as well. With owners “being pressured by the banks and advised by industry consultants,” the trend is to base scaled operator incentives on percentages of GOP, says Martin Waechter, chief marketing officer, Shangri-La Hotels & Resorts, Hong Kong. Michael Shindler, senior vice president, Hyatt International, Chicago, sees fees in Asia as “fairly static.” General managers in China and Southeast Asia can expect 2% to 3% of GOP as a base fee and 7% to 10% of GOP as incentives; in Japan, the numbers will be “slightly lower,” according to Shindler.
Different ownership structures, different views on what constitutes acceptable risk and different hold periods make management fees more negotiable in Europe and the Middle East. The leased contracts preferred by Western European financial institutions and investment funds create a higher obligation on the operator and a greater impact on the operator’s off-balance sheet commitment. Financial institutions and funds looking for a guaranteed return are more willing to counterbalance the lease burden by enabling operators to retain “a much higher upside potential,” says Kurt Ritter, president and CEO, Rezidor SAS Hospitality, Brussels. General managers looking to protect performance need to make sure lease level expectations are not based on inflated development costs that assume the project will sell at a higher multiple.
Europe’s owners may be taking a closer look at what operators are doing, but they have yet to take the entrepreneurial role of owners in the Middle East—another reason European contracts can justify higher management fees. Overall, fees in the Middle East remain “competitive,” says Daniel Hajjar, vice president, sales and marketing, Rotana Hotels, Abu Dhabi. “Owners understand the need to have logical (fee) levels to secure a long-term relationship with the management company.”
While fees in the Middle East are typically 3% of gross as a base and 10% to 12% of GOP as an incentive, Shindler predicts “a back-up toward the Chinese fee schedules.” Alaeddin Babaoglu, Mövenpick Hotels & Resorts’ director of development, agrees. “Owners have become more attuned to every detail of operators’ management fee structure. They have the tools to compare results. That is producing more varied management contracts. Ultimately, it is driving contracts toward more incentive fees and lower base fees,” Babaoglu says.
Guarantees have emerged as another hot topic at negotiating tables. Waechter estimates that one-third of Asia Pacific’s operators include performance guarantees in their contracts. Thus far, Shangri-La has bucked that trend. “As we attempt to enter the more markets of Europe and North America, we have to revisit this policy (of not giving financial guarantees) selectively,” he says.
If interest rates stay low, performance guarantees may become less onerous. “Prevailing low interest rates are helping operators structure contracts with lower guaranteed returns. At the same time, they are shifting a part of the return to investors through variable components,” Ritter says.
Value For Money
Owners are giving much closer scrutiny to the payback for fees. “It is all about value,” says Sam Winterbottom, executive vice president of development for the Americas, Carlson Hotels Worldwide, Minneapolis. “Owners want to know how many ‘mouths’ need to be fed by the system; how many flags the brand can sustain in a given market; how the brand can build not only frequency but yield.
Not much has changed. Owners are looking for the highest return on capital as they always have.”
|
Loyalty programs are one of the key points in value-for-money discussions. How likely they are to sway the management contract decision depends on the asset. “During the week, we expect frequency programs to generate at least 50% occupancy. The major brands, including Hilton, Marriott and Starwood, outperform the other brands,” says Mike Marshall, CEO and president, Marshall Management Inc., Salisbury, Maryland. It is not just the numbers that make big brands’ fees worthwhile. Marshall supports brands’ contention that frequency program guests spend more at the hotel and cause less wear and tear.
Mark Rafuse, CFO, Noble Investment Group, Atlanta, says loyalty programs “are important,” rating Marriott’s and Hilton’s as the best programs because of their flexibility, ease of use and ability to collect points. However, loyalty numbers alone will not win the contract. That is an asset-by-asset decision. “Brands work best for big box hotels with 700 rooms or more,” Rafuse says. “Independent management companies tend to do a better job on smaller hotels. The lack of flexibility in management agreements with big brands is a disincentive to investors/owners. They require us to give up too much control.”
However, clearly positioned secondary brands offered under big-chain umbrellas are drawing renewed interest. Not only do they differentiate the asset, they also may come with more flexible terms and more customization options. “There is an economic advantage to being involved in a rollout,” says Michael George, president and CEO, Crescent Hospitality, Fairfax, Virginia. “Brands are more responsive in the ramp-up phase. There is greater risk for the owner and operator, but the potential reward mitigates that risk.”
The definition of what constitutes value is getting broader. Winterbottom says Carlson Hotels Worldwide is looking at developing a residence club or residence management offer to meet the demand for the residential/hotel management required in most mixed-use developments. “It is something that would work not only for mixed use, but for condo hotels as well,” he says.
In-house spas, expertise in outsourcing and high technology all can figure into the value-add category. Flexibility also ranks as a selling point, particularly with opportunity funds. As Babaoglu points out, most funds have a short-term investment horizon of five to seven years. Long-term contracts are out of the question for planning a quick exit. Some operators will not compromise; those that will may find themselves comfortably aligned with a growing player.
The Challengers
If there is a place where big brands could lose traction, it is at the top of the resort sector and in the city center boutique segment. “Big brands may be necessary for large hotels in certain markets or in secondary markets where you need a major flag to drive business,” says John Arnett, president, Kor Hotel Group, Los Angeles. “But there are a lot of owners who are laser-focused on an individual asset. They want a management company that is less costly, less restrictive, more flexible and more personalized.”
Groups such as Kor are not just selling concept and design. They are taking away management contracts from bigger brands by developing skill sets that range from in-house reservations and multimillion-dollar training programs to condo-hotel management programs and more transparent reporting to owners.
Growing companies such as ALiLa Hotels and Resorts, Singapore, are adding to their attractions by offering developers help with conceptual input, assessment of development choices and the finer points of resort development. “Many developers understand the need for flexibility, uniqueness and innovation in creating 5-star resorts,” says Mark Edleson, ALiLa’s president and CEO. “Niche players have fewer corporate mandates on how they do business. They can be more attentive to owners’ needs and the ultimate financial return.”
Boutique operators are using these skills to right-size the due diligence numbers for city-center developments, as well. “If you can deliver a young, hip, trendy hotel, you do not have to be on the equivalent of Fifth Avenue,” says Rafael Micha, partner, Grupo Habita, Mexico City.
In return for personalized service, niche players often expect personalized contracts. “The typical management contract structure is designed for big, corporate city hotels. It does not work for small, highly differentiated, top-of-the-market resorts,” says Sonu Shivdasani, chairman and CEO, Six Senses Resorts & Spas, Bangkok. “The operator has to spend much more time and effort with these kinds of properties. We need to take an entrepreneurial approach.”
To be competitive, niche players are putting new emphasis on bringing down reservation costs. As Frederic Flageat-Simon, ALiLa’s managing director and COO, points out, lower corporate overhead and more narrowly defined channel solutions translate to lower costs per reservation and less waste. Six Senses stresses public relations-based marketing. “People at the niche luxury level would not be tempted to visit us based on mileage programs. They come because of the unique experience, and they come back (40% of the occupancy is repeat business),” Shivdasani says.
Market Watch: Europe
While lease contracts continued to be the preferred business model in Western Europe,
management contracts are becoming increasingly popular in the UK and Central and
Eastern Europe (CEE). Overall, Europe is experiencing a
renaissance as regional and international players home in.
- Big chains to watch: Rezidor SAS Hospitality, which is aggressively expanding its Radisson and Park Inn portfolios; Four Seasons, which has new openings both in the UK and CEE; Marriott International, which has made it clear it will buy hotels to secure strategic destinations; and Starwood Hotels & Resorts, which identified Europe as a priority for expansion.
- New names on the region’s radar: Mandarin Oriental Hotel Group, which recently boosted its presence with management contracts in Paris and Prague; Corinthia Hotels International, which hopes to grow its management business, especially in Libya and Tunisia; Spanish chains such Sol Meliá and NH Hoteles and Italian groups including Boscolo and Baglioni, which are looking to expand beyond their domestic markets.
- Key markets: London, Prague, Moscow, St. Petersburg, Budapest and Warsaw, all of which have developers looking for operators.
Market Watch: Middle East
Development is taking place so fast that rankings by total rooms are outdated in a matter of weeks. Some 31 chains will be opening 87 new hotels, totaling nearly 26,000 rooms in the Gulf Cooperation Council (GCC).
- Big chains to watch: Accor, which lost its management contracts in Oman but now counts almost 3,000 rooms under planning or construction; and Le Méridien Hotels & Resorts and Mövenpick Hotels & Resorts, both of which have announced hotels with more than 1,000 rooms in Makkah. Marriott International and Taj Hotels, Resorts and Palaces also are on the expansion track as are Hilton International, Hyatt International, Millennium & Copthorne, Rezidor SAS, Shangri-La Hotels & Resorts, Raffles International and Fairmont Hotels & Resorts.
- Newcomers and regional players on the radar: Rotana, which is opening no less than four hotels in Dubai; Kerzner International, which is planning the 2,000-room Atlantis, The Palm; IFA Hotels & Resorts; Safir International; Habtoor Hospitality; and the Chedi Group. New properties will be launched under the Armani and Versace brands. A Cerruti designer hotel will now fly a Radisson SAS flag because of questions “over the future of the brand.”
- Key markets: Dubai, Doha.
Market Watch: Asia
Management companies are all having a good run in Asia, particularly in China. Other interesting moves include Hilton’s deal with Oberoi. Taj Hotels, Resorts and Palaces’ acquisition of The Pierre, New York City, signals its global intentions. Accor Asia Pacific continues to be aggressive.
- Regional chains and newcomers on the radar: Six Senses Resorts & Spas, which has been a trendsetter with its properties in Thailand and Vietnam; ANA, which is launching “Strings” as a lifestyle brand; Banyan Tree Hotels & Resorts; Amanresorts; Como Hotels & Resorts; General Hotels Management; ALiLa Hotels & Resorts; Furama Hotels & Resorts; Fullerton Hotels/Sino Land; Dusit Hotels & Resorts.
- Key markets: Beyond China’s major markets, Gyalthang and Quangdong; in other parts of Asia, resort areas such as Koh Samui, Thailand; Hoi An and Nha Trang, Vietnam; Bhutan and Sri Lanka. New resorts are being developed up and down Vietnam’s coast from Phan Thiet to Hue. Among the most-anticipated projects is the luxury 60- guesthouse/23-villa Nam Hai Resort near Hoi An.
View All Blogs
