NEW YORK— With the emergence of new franchise brands, brand extensions and the finessing of older brands to fit a different slot following a merger or acquisition, the industry landscape has changed noticeably during the past 18 months. The variety of product crosses several segments, making for interesting positioning— and semantics— by franchisors to place their latest additions in the most favorable light for owners and developers. Observing the trend are industry consultants, advisors and analysts, who have the activity on their radar in terms of whether such movement helps or hinders overall. According to Robert Mandelbaum, director/research information services, at the Atlanta office of PKF Hospitality Research, several drivers are in play. “Some of it is for increased revenue and some of it is probably to meet new guest expectations. For the franchise companies, companies like Choice Hotels International, whose revenue stream is based on franchising— as well as to some degree, InterContinental Hotels Group, Starwood Hotels and Resorts Worldwide, etc.— their existing brands already have such distribution and representation geographically that if they really want to grow they need to have a new brand in order to sell,” he said. He noted there’s also impetus to capitalize on “hot, niche products.” “If you look at aloft and Cambria Suites, getting into extended stay; Hyatt with Hyatt Place going where they haven’t been before; if you look at InterContinental, Marriott, Hilton, they’ve already taken the tact of going from budget all the way up to luxury. Even Cendant. They were very much compacted into the mid-market and down, but now with Wyndham they can get up into upscale,” said Mandelbaum. Even at the high-end, brands are “extending” themselves by layering in residential and condominium components and leveraging their names. “We’re spending a lot of time with a number of the brands on the residential side of the business. Most of that inventory is on the high end, but we’re finding a premium on selling real estate where there is a brand attached,” said Scott Berman, U.S. advisory leader-hospitality and leisure, PricewaterhouseCoopers (PwC). “We’ve also been spending a lot of time in the vacation ownership space— it’s not so new but they’re continuing to expand their timeshare inventory. Clearly, the brand power, the brand equity, is significant.” “Overall it’s a good thing,” said Sean Hennessey, president, Lodging Investment Advisors. “You have to continually have some growth otherwise you’re stagnating.” “The brands are not staying put. They are strategically looking at new businesses or existing businesses to expand,” said PwC’s Berman. In terms of the franchise community, Mandelbaum said while construction costs may be a factor in pushing new brands— many do not easily allow for conversion opportunities— most major franchisors have a pocket of loyal developers whom they want to remain that way. “It’s a two-way street. As a franchisor, I need to have product to sell to the franchisees,” said Mandelbaum. Likewise, developers are looking to expand their portfolios into new segments and will look for new extensions or brands from their particular franchise family. How finely the brand pie can be sliced also remains a factor, with some descriptions of a new brand’s positioning— e.g., the upper lower half of the boutique extended-stay luxury midscale arena— serving to totally blur segment boundaries. “This works in an upmarket. When travel is good, guests are less discriminating. When their pocketbooks and travel budgets are a little bigger, they can make these choices. They’ll take the time to look at types of hotels and brands and niches— and we are in a very good market position right now. The downside is when we’re in a down cycle, at that point hotel rooms become more of a commodity and a room is a room is a room, and it becomes pretty much a pricing war,” Mandelbaum said. While Hennessey felt a cyclical downturn could signal some fallout for emerging brands, he expected brand growth to continue. “There are companies trying to introduce brands in anticipation of an acceleration of new hotel development. We’ve seen a slowdown in new hotel development following Sept. 11, and while there’s been some modest pick up recently, the level of construction is way below where it would typically be in this point of the cycle. If there are going to be a lot of people out there eventually building new hotels, then offering them a sexy, new option could be attractive. That’s why a number of the brands want to get out there and introduce new options so as the development cycle takes hold, they can get their fair share of these newly built, high-quality properties. ” Mandelbaum noted the good times allow developers to make a case for the new brands in that they appeal to a different kind of customer and allows the developer to enter into a market and mitigate reasons for impact on the developer’s existing hotels in the same marketplace. Hennessey said now that there’s cyclical recovery and plenty of capital flowing in the industry, it’s an appropriate time to review where brands are and what a new brand might do to invigorate the industry or meet consumers’ needs. He felt InterContinental Hotels’ Indigo brand and Starwood’s aloft brand were good examples of the latter. “Those represent a continuation of the trend started by the independent boutique hotels to give consumers or travelers not just a bed and a roof over their heads, but something with a sense of style, something that surprises and delights them and gives them something new and exciting to look forward to,” said Hennessey. “I think Starwood is going to be wildly successful, particularly with aloft,” said analyst John Arabia, principal of California-based Green Street Advisors. “It represents a new spin on a product that really is not serving a current customer base where I think there is demand for that product.” He likened the industry to American beer makers several years ago when they rolled out light beers without having “any real stance on taste in order to appeal to the masses…there’s a lot of hotel product out there that’s done the same thing; made it appeal to the masses and made it very much a commodity-like product. So while I don’t think that aloft, just like W, is going to play to all people, I think it will play strongly to a certain segment of the market and as a result, it’ll do very well.” Mandelbaum said only time would tell if there are too many brands. He pointed out, however, that existing brands do fade away and there also always will be new travelers who will embrace the new and the novel. “It’s rare that we see declines in absolute demand or rooms occupied from year to year; therefore, mathematically, there’s going to be continual need for more hotel rooms over the long term, and because of impact issues and distribution, you’ll need to have new brands,” he said. Still, Arabia noted: “There’s not a lot of differentiation among some of these brands and some of these segments; it’s incredibly crowded.” “There may be some further slicing of the pie when Marriott, Starwood or whomever adds new brands, but to my mind it all gets back to the consumer. If the traveler wants a certain style of hotel, and the hotel chain isn’t offering it now, it’s got to get in the market and get in the game,” commented Hennessey. Additionally, what truly qualifies as a new “brand” comes into question. “There’s generally a lag period between introducing a brand and having it really take hold; a lesser number ultimately survive as vibrant, stable brands. I wouldn’t be at all surprised if we found out there are certain brands that can only get up to 20 hotels,” Hennessey said. He noted franchisors may also be offering terms for new brands that “are a little more favorable to franchisees than a lot of the older style agreements because they’re trying to build membership…that will give franchisees more flexibility in the near term and down the road if the brand does not mature as they envisioned.” ”A brand isn’t really a brand until it reaches some sort of critical mass. [A franchisor] needs to have a certain amount of properties developed across the country so it can afford to do national advertising so you can be attractive to a franchisees— Why am I buying into a brand with only three hotels?…A lot of chains will build the first 20 to get the brand rolling, then eventually flip them and sell them off…they’re putting their money where their mouth is,” said Mandelbaum. “It makes it easier to sell the 21st property.”
