HOSP 4040 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.
This assignment is due via the Assignment Link by 11: 59 PM Eastern, on the due date.
This assignment will be graded based on the rubic. You may view the rubric by clicking
on the assignment link.
Late work will not be accepted.
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 whether to remain independant or affiliate with a
major global brand as 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.
Historical Hotels is a marketing affiliation group that provides very limited
marketing, and no reservations presence.
• 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”.
For the past 5 years, the hotel has had a mix of businesss that is 60% Transient
and 40% Group.
The current Financial Data for the hotel is given below. You should prepare your
financial projection using this same format.
Hotel Financial Data:
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 as a “soft brand” or remain independent. Your decision is
based entirely on the financial projections and the related costs for the rooms department
and the marketing costs. Everything else is assumed to remain the same in both
scenarios.
What is a Soft Brand?
A Soft Brand is the term used that allows a hotel with a unique “iconic” identity to retain
that identity, and yet affiliate with a major global brand company and enjoy the benefits
thereof. It lets a hotel enjoy affiliating with Hilton, or Hyatt, or Marriott but without
being a Hilton or a Hyatt, or a Marriott. Soft brands are typically much “lower key” on
the hotel logo, etc. Here are some Examples.
In the three examples above, each of the hotels prominately feature (and keep) their
iconic identities, but “softly” announce their affiliation with a major global brand. The
Autograph Collection is a Marriott soft brand. The Tribute Portfolio and the Luxury
Collection are both Starwood (now Marriott) soft brands.
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.
• 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 brand it will be required to install the brand
directed PMS and guest room locking systems. The estimated cost of this
is $650,000 and would be considered a capital expense – not an income
statement expense.
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 Currently, only 5% of the transient reservations are made through the hotel
online reservations site. Of the remaining transient resevations, 80% are
made through third party Online Travel Agents (Expedia, Booking.com,
etc). The average commission rate for these is 23%.
o For a Soft Brand Affiliation, 80% of transient reservations come through
the brand website (Marriott, Hyatt, Hilton, etc). 5% come through the OTA
channels,and the brands have negotiated a 12% Commission with the
OTAs.
o If the hotel soft brands , the estimated total fees are expected to be 13% of
hotel revenue based on the fee schedules the major global brands in the other
hotels they brand. This includes franchise (6%), reservations (3%),
marketing (2%) and frequent traveler program fees (2%).
Market Share:
o The average ADR market share Index of this hotel in the competitive set
has been 101.
o The average Occupancy market share Index 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 ADR indexes of 105 and occupancy indexes
of 108 in markets similar to yours for soft brands. If the hotel remains
independent, you project that you could gain only 1 point in Market Share
for both Occupancy and ADR.
o These indexes would apply to both group and transient segements
Your deliverable for this project:
In the form of a memo to your due diligence 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. You must provide the financial projection that
supports your position.
Your paper needs to consider the following:
• The impact of a change in ownership, given the strong local ties of the existing
owners, and how this impact could be mitigated.
•
The impact of improved market share, and other cost changes as a result of moving
to a soft brand.
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 3 pages.
• You may use Excel for your financial projection(s), but you must copy into your
word document.
Affiliation Case Study Financial Data
Financial
Rooms
Available
Occupied Transient
Occupancy % Transient
Occupied Group
Occupancy % Group
Total Occupied Rooms
Occupancy % Total
350
127,750
55,188
43.2%
36,792
28.8%
91,980
72.0%
Index
81
81
ADR Transient
ADR Group
ADR Total
REVPAR
$
$
$
$
185.00
163.00
176.20
126.86
Transient Room Revnue
Group Room Revenue
Total Room Revenue
$
$
$
10,209,780
5,997,096
16,206,876
Rooms Dept Expenses
OTA Commission Expense
Rooms Systems
All Other Rooms Dept Expenses
Total Rooms Dept Expenses
$
$
$
$
1,878,600
500,000
3,565,513
5,944,112
18.4%
3.1%
22.0%
36.7%
Rooms Department Profit
$
10,262,764
63.3%
$
$
162,069
97,241
$
259,310
Net Profit from Considered Items
$
10,003,454
All Other Items Not Considered
$
8,814,631
Net Profit
$
1,188,822
Marketing Fees
Reservations/Hotel Website
Marketing Affiliation
Brand Marketing
Brand Franchise Fee
Brand Frequent Traveler Fee
Total Marketing Fees
101
101
Cap Rate
Hotel Valuation
Hotel Valuation Increase
6.0%
$
19,813,707
Purchase answer to see full
attachment