Soft Branding Decision

Assignment:  Soft Branding Decision

This assignment is a short case study in which you assume the role of a hotel development/ownership company that has just completed the purchase of a hotel asset in a secondary, but rapidly growing Midwest market.  Using the information provided in the case, you will take a position on how to brand (or if to brand) this asset.

The Case

You are working as the asset manager for a large Hotel REIT. In your role, you oversee a portfolio of 9 assets in the Midwest.  Your REIT is performing due diligence for the potential purchase of a 350 room full service hotel in Indianapolis, Indiana.  As a part of the due diligence you are exploring how or if to associate your hotel with a major hotel brand as either a core brand or a soft brand.

The Hotel:

• Opened as an independent luxury hotel in 1968, the hotel has operated as an independent hotel and is currently affiliated with Historic Hotels of America.
• The hotel has been owned by a prominent local family since its opening. The family are leaders in the community and very actively involved in local charities and other business ventures. The hotel enjoys a strong reputation for excellence in service and has been host to high profile events for decades.
• 340 Guest Rooms and 10 Suites.
• 25,000 Square Feet of flexible meeting space
• A Business Center that is leased and operated by FedEX.
• 2 restaurants and 1 lobby bar. One of the restaurants is leased and operated by a third party (well known regional chef).
• A 2,000 square foot day spa that is leased and operated by a third party.
• Located in the downtown business core, within 1 block of the city convention center.
• The physical plant has been well maintained, and the building is up to local code requirements for life safety, energy consumption, and guest security. Your company is planning a multimillion dollar guest room and public space refurbishment project following the acquisition of the hotel.
• The design of the hotel is “mid century modern” and contains several iconic design elements in the public space consistent with the original design.
• The guest rooms are 300 square feet, slightly smaller than the current design requirements for the major global “core” brands.

Hotel management case study about Soft Branding.

Hotel Financial Data:

The Market:

• The city has a population of 1 million. The surrounding county has an additional 250,000.
• The city has a modern airport served by 11 major domestic airlines. Presently there are 150 daily departures. There is non-stop international service to Canada and Mexico.
• The city has a 600,000 square foot convention center that recently completed an expansion. The center serves the National and Regional Association markets primarily.
• The city has regional offices for 100 Fortune 500 companies. This is a desirable regional location for these companies because of the moderate cost of living, the good educational system, and the regional airport.  Last year, this segment generated a significant portion of the total demand into the market. The hotel has strong relationships with the majority of these companies
• The city has a modern 70,000 seat stadium that is host to an NFL team. In addition the venue is host to a number of concerts throuout the year.  The stadium is located downtown.
• The market has over 9,000 hotel rooms. There are 4 hotels downtown between 300 and 450 rooms that are within the same proximity to the convention center as your hotel.  The other hotels are branded with Hilton, Marriott, Hyatt, and Crowne Plaza.  There are existing “area of protection” agreements with these franchisors which prohibit the branding of another hotel within the physical geography of the downtown area – however, the brands would be able to brand your hotel with another brand they control, for example Renaissance (Marriott) or Doubletree (Hilton) or with one of their downscale brands.

Market Projections:

• The market has enjoyed robust growth. Over the past 7 years the demand has grown by over 6% per year (REVPAR) and supply has grown by only 3%.  The majority of the growth occurred immediately after the convention center opened.
• Based on the most recent STR pipeline report, there is no new product planned for this market, but several hotels are planning renovations within the next 3 years.

The Decision:

As a part of the acquisition decision process, you must decide first if the hotel should affiliate with a major brand or remain independent.  If you do decide to affiliate, you must decide whether you would affiliate with a core brand or a soft brand.

Financial Considerations:

• Renovation:
  • If independent, the renovation requirement would be simply to bring the hotel up to a competitive state. Your company wants to keep the hotel in the upper upscale segment, and competitive with the local market.
  • If a soft brand is selected, the renovation requirement would be similar to that of remaining independent.
  • If a core brand is selected, the hotel would be required to replace all guest room FFE and renovate the bathrooms to brand standard. Your internal estimates are that regardless of the brand selected, this would result in a 30% increase in the renovation cost.
• Systems:
  • If an independent the hotel will keep it’s current reservations, front desk PMS, and guest room locking systems – each of which is in good condition.
  • If the hotel brands with a soft or core brand it will be required to install the brand directed PMS and guest room locking systems. The estimated cost of this is $650,000.
• Uniforms:
  • The hotel has iconic unique uniforms that have been used since the opening. The uniforms are considered an integral part of both marketing and the guest experience.  A change in uniforms would be instantly noticed by repeat guests and would likely not be a positive.
  • If the hotel affiliates as a core brand, they would need to comply with the brand standard uniform. If they affiliated with a soft brand, they would be allowed to keep their unique uniforms.
• Fees:
  • If the hotel remains independent, it will continue its marketing and affiliation agreement with Historic Hotels of America at a cost of 0.6% of rooms revenue. This covers both marketing and reservations – though the majority of the reservations do not come through that channel.
  • If the hotel brands either soft or core, the estimated total fees are expected to be 13% of hotel revenue based on your company’s experience with the major global brands in the other hotels they own. This includes franchise, reservations, marketing and frequent traveler program fees.
• Market Share:
  • The average ADR market share of this hotel in the competitive set has been 101.
  • The average Occupancy Share of this hotel in the competitive set has been 81.
  • Based on your companies experience with the global brands in other markets, they typically deliver fair share ADR and occupancy shares of between 102 and 115 for both core and soft brands.

Your deliverable for this project:

In the form of a memo to your team, you will recommend whether the hotel should remain independent, affiliate as a core brand with a global franchisor, or affiliate as a soft brand with a global franchisor.

Your paper needs to consider the following:

• The impact of a change in ownership, given the strong local ties of the existing owners.
• The impact of the cost of renovation, systems, fees, and uniforms on a change in affiliation.
• The impact of improved market share if affiliated.

Format requirements:

• Microsoft Word
• 12 Point Font
• Margins 1.5 inch top and bottom, 1 inch left and right.
• No grammatical nor spelling errors
• Minimum 2 pages.

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Last Updated on February 18, 2019