Hotels: News

Owners vs. loyalty programs: Time for transparency, shared risk?

By Guest Contributor on 9/23/2020

In a swift move in April, early in the coronavirus lockdown, Hilton raised funds for working capital and general corporate purposes by selling US$1 billion in loyalty points to American Express. As one commentator pointed out, that filled the coffers but would be a cost to the brand when the points were redeemed. Little mention has been made of the cost to hotel owners.

Felicity Jones is partner and global real estate sector head, based in London, for Watson Farley & Williams LLP; Alan Polivnick is a partner in the firm’s Bangkok office.

Loyalty programs at their best should deliver bookings and profit to an owner. Most brands trumpet the huge numbers signed up to their loyalty schemes (Jinjiang has in excess of 170 million members, and Marriott International has around 140 million) but in reality, they take on little risk if their systems fail to generate demand or the costs impact the profit.

If brands were to genuinely share the risk of their loyalty schemes and direct booking initiatives, and to reduce the owner’s distribution costs, it would give the owner assurance that they are working with the right brand. | Getty Images

Prior to the pandemic, both OTAs and other well-resourced online providers already were seeking to own their customers’ loyalty, and several researchers were suggesting that drivers for loyalty included location and price but not necessarily brand. In the current environment and for the foreseeable future, most owners will be driven to manage costs to stay in business but have little visibility as to the real costs to them of a brand loyalty scheme.

Minor International’s case against Marriott in Thailand points to a number of concerns that the loyalty scheme actually damaged the hotel’s profitability (a view no doubt shared by some owners of branded hotels). It would seem that the lost room revenue alleged in that case – due to redemptions at a newly adjusted low base redemption rate – could amount to as much as 60% of room revenue. Minor’s case also highlights the tension between local and global. Having multiple brands in the same location will necessarily limit loyalty members' demand across hotels there.

While the brands will say the loyalty scheme is a take-it-or-leave-it deal breaker, that they share the risk in terms of fees, and provide a huge proportion of room nights (with certain adjustment and blackouts to protect the popular redemption destinations), the owners are rarely given a clear explanation of the costs to them of redemption stays.

Are loyalty programs really cost-neutral?

We have heard the argument that the loyalty schemes are cost-neutral but the owner is not given the option or information to enable it to assess the potential costs. Each guest signed to a brand loyalty scheme while at a hotel is likely to cost the property owner a fee of around 5% of the guest’s total spend. Going forward, the owner will usually bear the cost of additional benefits offered and a payment for the room based on a reimbursement formula that offers less than market rate even when a hotel has high occupancy. It is worth noting that OTAs’ loyalty schemes usually offer full price redemptions (no doubt the cost being built into their rates).

Loyalty programs play a large part in brand strategy and the direct bookings drive. If the brands were to genuinely share the risk of their loyalty schemes and direct booking initiatives failing to deliver pre-agreed minimum levels of occupancy, and to take steps to reduce the owner’s distribution costs (e.g. reducing brand reservation fees on top of OTA fees), it would go some way to giving the owner genuine comfort that they are working with the right brand.

All too often we have heard owners expressing concerns at the costs of the brand in the context of the lack of delivery from the system. The owner’s termination rights are limited to performance tests often designed to be difficult and costly to enforce (not to mention cure rights and the lengthy period over which failure is judged). Added to this, the term of the brand management or franchise agreement is long and termination rights are drafted to allow a brand, but not the owner, to terminate.

Options going forward

In reality an owner is going to think very hard before bearing the costs of rebranding but the brands remain unwilling to show the confidence that an owner will voluntarily renew if offered a shorter term or to grant territorial exclusivity that will give the owner comfort that it will be the relevant brand’s main focus in that location and category.

It has been clear for a long time that for best delivery by a brand, asset managers or a very savvy owner are required. As next year’s budgets are issued, owners will be reviewing both the figures and the approach the brands have taken to support them over the immediate and longer term as well as the concessions they are offering in terms of cap ex and costs.

Owners and their funders should be asking what longer-term concessions are needed to secure their recovery. The values will already have been hard hit and an unsympathetic or costly brand will hit the top and bottom line. There will no doubt be some very difficult discussions, and the owners have every right to expect the brands to be swift and flexible and to have repurposed or retained sufficient senior management to be able to deal with the owners on a site by site basis.

The brands have a lot to offer in both regional and international markets – and with a transparent, collaborative approach (and possibly an adjustment in the risk stack), we hope to see all benefit in the longer term.

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