HOSP4040 Asset Management
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 businesss 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 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.
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•
•
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:
o 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.
o If a soft brand is selected, the renovation requirement would be similar to
that of remaining independent.
o 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:
o 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.
•
•
•
o 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:
o 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.
o 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:
o 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.
o 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:
o The average ADR market share of this hotel in the competitive set has been
101.
o The average Occupancy Share of this hotel in the competitive set has been
81.
o 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.
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•
No grammatical nor spelling errors
Minimum 2 pages.
Summary Operating Statement
Current
Proposed
Proposed
Independent
Soft Brand
Core Brand
Current
Proposed
Proposed
Independent
Soft Brand
Core Brand
Rooms Available
127,750
Rooms Sold
91,980
Occupancy %
72%
ADR
185.00
Rooms RevPAR
133.20
Total RevPAR
222.00
Operating Revenue
Rooms
17,016,300
Food & Beverage
9,926,175
Other Operated Departments
1,418,025
Total Operating Revenue
28,360,500
Departmental Expenses
Rooms
3,403,260
Food & Beverage
7,146,848
Other Operated Departments
141,802
Total Departmental Expenses
10,691,908
Total Departmental Profit
17,668,592
Undistibuted Operating Expenses
Administrative and General
1,701,630
Property Operation and Maintenance
1,418,025
Sales & Marketing
1,418,025
Frequency Program
Utilities
Total Undistributed Operating Expenses
Gross Operating Profit
Mangement Fees
Income Before Non-Operating Income and Expenses (NOI)
0
1,418,025
5,955,705
11,712,887
0
11,712,887
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