Since their inception, soft brands have become a profitable way for hoteliers to enjoy a best-of-both-worlds strategy. Independent-minded hotel owners can take advantage of creative and business decision freedom to chart their own destiny, while simultaneously gaining access to a major hotel company’s reservation system.
Soft branding creates a win-win partnership for both hotel owners and major brands, yielding positive results for both groups. Based on the data compiled from the LW Hospitality Advisors proprietary database, I was able to derive that soft-brand hotels command an 8% to 12% average daily rate premium over full-service branded hotels. In addition, the analysis concluded that soft-branded NOI per guest room runs 50% higher than full-service branded hotels.
Soft branding a hotel, which should provide extremely wide spread distribution at a significantly reduced cost, might represent a smart choice for independent hotel owners. It enhances the ability to reduce a property’s dependence on online travel agencies while retaining the personality and feel of an independent hotel.
Independent hoteliers who are forced to deal with an OTA to fill upwards of 50% of their rooms have little, if any, leverage, as the owner is typically negotiating commission fees to feature one hotel or a small portfolio of properties. The end result is paying up to 25% commission for each reservation. Joining a soft brand can reduce fees by approximately half, restoring a large amount of income previously lost to outrageously high OTA fees.
When a property aligns with a soft brand rather than going it alone as an independent, reliance on OTAs can be limited to a modest amount of room inventory and the need to surrender rights for last room availability is eliminated with a soft brand affiliation. OTAs become just another instrument in the marketing toolbox, rather than the predominant means of attracting guests.
During the course of my work, I have found that soft brands significantly reduce reliance of OTAs, in many cases to lower than 10% of reservations. For example, a hotel with $10 million in annual room revenue using OTAs for 75% of its reservations at a 25% commission rate pays out $1.875 million in commission fees. If it costs a property $1 million to join a soft brand, but reduces reliance on OTAs to say 25% of reservations, then profits significantly increase as OTA costs dramatically decline to $312,500, or a savings of more than $500,000 even after factoring in soft-brand fees.
Becoming part of a branded reservation system also results in an additional layer of confidence to reserve a room backed by a major hotel company. Brand hotel company reservation systems typically attract less-price-sensitive guests and provide licensees economic benefits of negotiated bulk pricing on goods and services, such as credit card commissions, and national vendor account pricing. Soft brands facilitate hoteliers to remain current and relevant as travelers typically seek strong brands to simplify their decision making, while also pursuing specialized experiences. Rather than selecting cookie cutter norms when booking a specific flag, today’s travelers are desirous to stay in properties designed to offer a heightened sense of place reflective of a hotels surrounding neighborhood.
Mainstream soft brands made their debut in 2008, with the launch of the Ascend Hotel Collection by Choice Hotels. Soon after, nearly every major hotel brand family introduced a soft brand concept, such as Autograph Collection by Marriott International, Hilton Worldwide Holding’s introduction of the Curio Collection, Starwood Hotels & Resorts Worldwide’s debut of the Tribute Portfolio, and most recently Unbound by Hyatt. I am intrigued to see if Tribute will remain or be incorporated into the Autograph Collection once the Marriott-Starwood acquisition is complete. My guess is that Tribute will remain separate from Autograph; Marriott is the master of fragmenting brands and fragmenting soft brands seems to be the next logical step.
Hotel collections such as Preferred Hotels and Resorts, Leading Hotels of the World, and Starwood’s Luxury Collection were the original attempt to offer travelers seeking new discoveries through varied styles of architecture and design and distinct cultural experiences. The new iteration of soft brands developed by large hotel brand families provides owners greater flexibility and freedom, as well as a deeper pool of potential customers and access to additional marketing opportunities and loyalty programs.
As the hotel market appears to be peaking after seven years of growth, smart hoteliers are tying up soft brand opportunities. Joining one of these groups is a strategic way to protect one’s investment while also increasing profits. The number of soft branded hotels grew an astounding 17.8% between 2011 and 2014 alone.
Today, hoteliers can have it both ways by keeping their independent spirit alive while tapping into big brand resources. There is no doubt when looking at the numbers, affiliating with a soft brand puts more money into the owner’s pocket by saving customer acquisition costs and lower monthly expenses while maximizing rate and visibility to a wider customer base.
Gary Isenberg serves as president of asset and property management services for LW Hospitality Advisors (LWHA). Isenberg’s more than 30 years of diversified hospitality experience in management, asset management and finance experience resulting in a demonstrable track record of creating and enhancing hotel property values and maximizing return for owners and investors. Previously, Isenberg served as chief operating officer for Field Hotel Associates (FHA), a privately held hotel development, ownership and management company. During his tenure with FHA, Isenberg led the development of several hotels from conceptualization through opening and responsibility for day to day management. Isenberg spearheaded multiple re-organization and repositioning initiatives and cultivated numerous revenue enhancement and cost containment programs. During 16 years with ITT Sheraton (predecessor of Starwood Hotels and Resorts Worldwide) Isenberg held a variety of positions, involving mergers and acquisitions, finance and operational disciplines. Isenberg earned a bachelor of science in business management with minors in corporate finance and information systems from Fairleigh Dickinson University. Isenberg can be reached at 212.300.6684 ext.108 and/or gary.isenberg@lwhadvisors.com
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