Dual-Branded Hotels: Do Operating Efficiencies Exist?
The pace of new hotel construction is picking up. According to STR, Inc. there were 1,003 hotels under construction in the United States as of January 2015. This is up 31.8 percent from January 2014.
Of the current hotels under construction, the most active chain-scales for developers are upper-midscale (37.9% of total projects) and upscale (34.5%). These segments are also very popular with consumers.
One way developers are taking advantage of the popularity of these segments is to build dual-branded hotels. The majority of dual-branded properties in the U.S. consist of affiliations within the upper-midscale and upscale segments. For the purpose of this article and analysis, we are defining dual-branded hotels as single buildings that contain two distinctly branded operations. More often than not, the dual-branded properties contain separate entrances, front desks, and elevators for each brand, but share back-of-the-house operations and guest amenities such as meeting space and pools.
According to Kallenberger Jones & Company, there were 30 dual-branded hotels in the U.S. as of year-end 2014, offering a total of 12,193 rooms. Another 24 projects with a total of 10,284 rooms were under construction as of January 2015.
In theory, dual-branded hotels not only allow the developer to benefit from the marketing advantage of two brands, but financial benefits as well. By combining back-of-the-house and guest amenity spaces, construction costs can be lowered. In addition, by sharing personnel and overhead expenses, operating efficiencies should be achieved.
To examine the operating performance of dual-branded hotels we analyzed the 2013 operating statements for seven dual-branded hotels. The data came from the Trends in the Hotel Industry database of PKF Hospitality Research, a CBRE Company. The seven properties were selected because they represent the most frequently found combination of two of the following property types: select-service, extended-stay and limited-service.
We performed a comparability analysis to assess the operating performance of dual-branded hotels. For each of the two brands within the seven subject properties, we selected operating statements from comparable properties. Comparability was based on affiliation, property-type, room count, occupancy, average daily rate (ADR), and location. The aggregate financial performance of each set of comparable properties was added together on a proportional basis to establish the financial benchmarks for each of the seven subject properties.
As stated before, it is assumed that one benefit of a dual-branded hotel is the operating efficiencies achieved by sharing personnel and overhead costs between the two brands. To analyze operating efficiency, we compared the Gross Operating Profit (GOP) margins of the subject dual-branded properties to their respective comparable hotels. GOP accounts for all the expenses in the operated and undistributed departments, but comes before any deductions for management fees, property taxes, and insurance.
Out of the seven dual-branded properties analyzed, three of them achieved a GOP margin greater than the comparable properties in 2013, indicating that operating efficiencies do exist. However, for three other dual-branded hotels, the GOP margin was less than the GOP margin of their respective comparables. The remaining subject property achieved a GOP margin virtually equal to its comparable hotels.
To identify the factors that might influence the ability to achieve operating efficiencies at dual-branded hotels we separated the seven subject properties by occupancy level, age of property, and the combination of property types that comprise the dual-branded property.
Occupancy Is an Indicator
Of the three factors we analyzed, occupancy level appears to have the greatest influence on the ability of a dual-branded property to achieve operating efficiencies. The three subject dual-branded hotels that achieved a GOP margin greater than their respective comparables were also the hotels that achieved the three highest levels of occupancy. On average, these three hotels achieved an occupancy level of 82 percent, versus an aggregate occupancy level of 68.3 percent for the remaining four subject properties.
At a high level of occupancy, hotels have already covered their fixed expenses, and are only incurring variable expenses as the business volume rises. It is assumed that breakeven level for fixed expenses would be lower at a dual-branded hotel because undistributed costs (management, accounting, marketing, maintenance) can be shared between the two entities.
A property's age does not appear to be an indicator of a dual-branded property's ability to achieve operating efficiencies. The only observation of a one year-old property found a GOP margin less than its comparables. This is to be expected given the initial operating inefficiencies of any new hotel. However, properties that were four years or older had mixed results. Only half of these had a GOP margin greater than their comparable hotels.
Like age, we found mixed results with analyzing the data by the property type components. Two out of the five select-service/extended-stay dual-branded hotels achieved an operating efficiency, but the other three properties in this category did not. We only had one subject property that was a limited-service/extended-stay combination, and one that was select-service/limited-service.
Earn Your Efficiencies
While the sample size was small, and our analysis was limited, it does provide some insights into the operating performance of dual-branded hotels. Based on our analysis of the seven subject properties, it appears that operating efficiencies do not come automatically for all dual-branded properties. Throughout all facets of the lodging industry, attention must be paid to the fundamentals. Dual-branded hotels provide the opportunity to achieve operating efficiencies, but management still needs to optimize shared resources to earn their efficiencies.
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Written by Robert Mandelbaum and Gary McDade, who are located in the Atlanta office of PKF Hospitality Research, a CBRE Company. To purchase a copy of Trends® in the Hotel Industry, please visit store.pkfc.com. This article was published in the April 2015 edition of Lodging.