The recent rise of dual-brand hotels among the pipelines of the biggest hotel firms has been fueled by the ability of dual brands to share and reduce costs while simultaneously catering to different target markets.
Cost savings are particularly appealing to owners that can save by splitting costs among the two brands. However, sharing common structures and personnel can become challenging for operators as both the level of the structures and the level of service need to be up to standard with both brands. This challenge can seriously hurt hotels’ performance, and it cannot only be offset by the cost savings.
The main benefit of opening a dual-brand hotel is the possibility to cater to different target markets simultaneously. Most dual-brand hotels opt for a mix involving a transient and an extended-stay hotel, which guarantees them to attract both business customers and families. This division is specifically suitable for markets that attract very different demand, such as cities. To maximize the benefit of targeting multiple markets simultaneously, owners and operators must optimize their strategic decisions about how to enter the market based on incumbent competition.
Our study investigated best scale entry strategies for dual-brand hotels based on the level of incumbent competition. We analyzed anonymized data from 170 dual-brand hotels — with a total of 340 brands — that had opened as of December 2020. We also considered the performance and scale of other hotels in their submarkets, recognizing that each submarket has unique dynamics. We did so by comparing each dual-branded hotel with the most represented class among incumbent hotels at the time of market-entry — called market mode. Using a hierarchical linear model, we grouped the effects of each submarket to evaluate performance based on the difference between each brand's revenue per available room and the average RevPAR of same-scale locations in the same submarket.
- Click here for the full study, and here for a free, but unedited version.
For example, if a dual-brand hotel consists of an upscale and an upper-upscale hotel, we compared the RevPAR of the upscale hotel to the average RevPAR of other upscale hotels in the submarket, and likewise for the upper-upscale hotel. This comparison enabled us to assess whether dual-brand hotels could achieve a competitive advantage over direct competitors in the market.
In addition, we considered various control variables that may have affected our results, such as the number of rooms, scale and operation type (managed or franchised) of the hotels, as well as the number of same-scale, lower-scale and higher-scale competitors in the market.
Using anonymized historical data provided by STR — CoStar's hospitality analytics firm — we found that the best strategy to adopt is to enter the market with one brand above the market mode, and the other brand below the market mode, with a two-tier difference. This strategy allows the dual-brand hotel to differentiate itself from existing hotels in the market and compete in terms of quality, not price.
The second-best strategy involved the two brands being at the same level, both higher than the market mode. The third-best strategy was for the dual-brand hotel to have two different scales in the mix, but above the market mode. These strategies were more accepted by owners and were among the most commonly adopted.
Our analysis highlights the importance of strategic decision-making when entering a market with a dual-brand hotel, taking into account the level of competition and choosing a mix of brands that can maximize the hotel's potential to cater to multiple target markets simultaneously while maintaining a competitive advantage. Dual-brand hotels should not try to compete in terms of price with existing hotels in the market, but they should have at least one brand above the market mode and compete in terms of quality with existing market competition.
In conclusion, dual-brand hotels provide a unique opportunity for hoteliers to cater to different markets simultaneously while sharing and reducing costs. However, strategic decisions on how to enter the market are crucial for dual-brand success.
Our findings show that dual-brand hotels should differentiate themselves from existing hotels in the market, and that at least one brand should be above the market mode.
By adopting these strategies, hoteliers can increase their chances of success in the competitive hospitality industry. Additionally, it's important to carefully evaluate the location and target audience for each brand, as well as carefully consider operational efficiencies and staffing to ensure the smooth operation of both brands within the same property.
Ultimately, with the right approach and execution, dual-brand hotels have the potential to generate higher revenue and provide a unique and tailored experience for guests, making them a compelling option for hoteliers looking to expand their portfolio.
All authors are with the Howard Feiertag Department of Hospitality and Tourism Management, Pamplin College of Business, Virginia Tech.
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