SYgle>Industry Information>Hotel execs delve into dramatic rise of soft brands

Hotel execs delve into dramatic rise of soft brands

Column: industry Tag: hotel soft branding,soft branding,soft brand Published: 2017-07-19 10:58 Source: Author:

Hyatt’s Steve Haggerty (center) focused many comments during last week’s ALIS Summer Update in Chicago on the importance of learning consumers’ spending habits and hotel preferences when it comes to soft brands. Also on the panel were David Kong (right) of Best Western and Scott Berman of PwC. (Photo: Jeff Higley)

CHICAGO—Hotel executives speaking about the dramatic rise of soft branding in the hotel industry needed to look no further than the hotel in which they were seated to make their cases for forging ahead with plans to grow in the sub-segment.

Participating in a panel discussion as part of the ALIS Summer Update event at the LondonHouse Chicago, Curio Collection by Hilton, several industry leaders said they expect the concept to continue to grow as hotel chains, owners and customers look for more flexibility. Scott Berman, panel moderator of PwC, said the number of soft-brand rooms in the U.S. is approaching 50,000.

“Soft branding is really in vogue now because it’s a win-win situation,” said David Kong, president and CEO of Best Western Hotels & Resorts, which launched its Premier Collection soft brand?in 2014. “The hotel that’s independent would benefit greatly from being able to tap into a reservation system (and) a loyalty program. On top of that, you don’t have the straight branding requirements. For the brand, any scale is important to gain distribution. When you have more options that you offer up, you make the brand more relevant.”

Steve Haggerty, global head of capital strategy, franchising and select service for Hyatt Hotels Corporation, said the consideration of a soft brand “starts with the customer and ends with the customer—always.”

“Our customer decided to enjoy travel differently and hotel companies are responding,” he added.

The LondonHouse Chicago, Curio Collection by Hilton, which opened in 2016, is a prime example of the role soft branding is playing in the industry. Oxford Capital Group reportedly sold the hotel for a Windy City record of $697,000 per room ($315 million total), to Hamburg, Germany-based investment manager Union Investment Real Estate, according to Crain’s Chicago Business.

John Rutledge, founder, president and CEO of Oxford, said the company never considered a hard brand for the property. Before the soft-branding concept took root, he said, the plan was to open it as an independent hotel.

“Our base case plan was to create a brand of one,” he said. “We are big believers that the independent lifestyle/boutique hotel is here to stay. The internet has democratized access to the consumer and leveled the playing field.”

Oxford Capital’s John Rutledge talked during the ALIS Summer Update in Chicago about the many factors a developer must consider to determine whether a soft brand is the right direction for a hotel. (Photo: Jeff Higley)

The soft-branding phenomenon has led to Oxford exploring it as an option for other independent properties in its portfolio, Rutledge said. Making that decision, he said, boils down to the top line of a property’s P&L statement.

“How much additional rate would we have to get to pay for those extra (soft-branding) fees?” Rutledge said. “Usually it’s a meaningful bump in rate you have to get to justify paying anywhere from 8% to 12% on top-line (revenue) to the big chains. Sometimes it makes sense.”

Oxford attained better debt proceeds and better pricing on senior debt as a result of affiliating with a soft brand, and its joint-venture partner felt better with the project being affiliated with a big distribution engine like Hilton, Rutledge said.

“We felt we could get enough rate premium to justify the incremental costs,” he said. “We analyzed it in a very quantitative, zero-based way, and in the end, it’s a judgment call.

“We’re very comfortable, particularly in an urban market with a lot of deep, latent demand,” he added.

The hotel is housed in the London Guarantee & Accident Building, a 100-year-old, 23-story structure located in the heart of Chicago. Oxford also developed a new 22-story modernist glass tower to create the 452-room hotel. After the sale to Union, Oxford leased back the hotel, which allows it to stay on as owner of the operating business and hold a management contract for 25 years, Rutledge said.

Brand proliferation: Fact or fiction?

Executives agreed the addition of soft brands to the hotel landscape hasn’t led to an overload of brands.

“This notion of brand proliferation—people get exhausted by it … it’s really not that stressful to the customer,” Haggerty said. “It’s really just a reaction to serving a particular need. … It is really mindset we’re marketing to, and not an individual.”

Rutledge agreed, but he noted that the Hilton portfolio of brands continues to add properties, and soft brands can be looked at as competing with a company’s core brands.

“As an owner, I’m also sensitive to the fact they’re slicing and dicing the customer that’s coming to Chicago even more closely, and they’re spreading out that demand across even more competitive assets,” he said. “Thankfully the engine is so chock-full of demand that we still—knock on wood—are exceeding our expectations. But overall, brand proliferation really doesn’t concern me.”

Hotel chains must continue to dig deeper into customer demographics and psychographics to offer consumers the experiences they’re seeking, the executives said.

“What is incumbent upon us is to dive deeply—and we have the ability to do that now with data and technology—and really figure out in order of priority what that customer needs in each purpose of travel, and then deliver it,” Haggerty said. “That brought us to soft brands.

“From a customer’s point of view, choice is great and innovation is wonderful and having more competition in the marketplace is a good thing,” he added. “We have to work harder to win the wallet, the heart and the mind of the consumer.”

More growth is coming

Because of that competition for customers, the growth in the soft-brand arena won’t slow, the speakers said.

“Soft branding will grow exponentially,” Kong said. “If you can add hotels by increasing the number of options ... you are more relevant to those customers.”

Gaining a critical mass in the soft-brand sub-segment is an important goal, the Best Western leader added.

“Most people are looking at it as one hotel at a time,” Kong said. “There’s going to come to a point in time where some hotel companies are going to have to think about how they can grow this scale dramatically. If you grow one at a time, it’s too slow.

“If you don’t have scale, you can’t make the necessary investments in technology, sales or marketing,” he added.

Rutledge said the soft-brand concept has grown because big brands are reacting to the re-emergence of the independent lifestyle sector, and the publicly traded hotel companies have earnings per share growth expectations that they have to meet.

“It’s super important,” Haggerty said of scale. “But scale itself isn’t entirely sufficient.”

Delivering what the customer wants, in the manner they want is essential to soft-brand success, he added.

“Nothing is black and white. It’s not binary, and if you take a reasonable approach to the target market you’re going after, your location, where you’re positioning this hotel from a pricing point of view and which customer base best matches up, it’s going to work,” Haggerty said.

Kong said hotel companies are learning how to better use their websites as distribution platforms—and that means more scale.

“Why not try to grow our company exponentially through thinking about it as a distribution platform and ramping it up through scale?” Kong said. “There are opportunities for brands like Best Western to be thinking that way. Instead of one hotel at a time, think about it en masse.”

Despite the drive for growth coming from branding companies, it’s the development community that holds the cards, speakers said.

“There’s always room for a nimble entrepreneur—the David vs. Goliath,” Rutledge said. “Despite the proliferation of brands, there will always be smart, local and nimble players that can succeed.”

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