RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
Email: rickswig@rsbaswig.com
Web site: http://www.rsbaswig.com
 
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 CapEx Discussions Require Balancing
Brand, Owner Needs
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The current fervor of standard compliance may simply be a reasonable
process to catch up on postponed necessities
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by Rick Swig, June 2007

When all the costs are considered, are hotel brand standards affordable, effective and efficient in supporting an individual hotel’s asset value? Although the answer is not simple, the real issue lies in finding the appropriate balance between brand and owner needs, both competitive and financial.

Standards discussions are quite contentious, as they naturally pit brand companies against hotel owners.  Owners claim that hotel brands arbitrarily require them to spend money on capital improvements whose value is unproven, but they are shackled to long-term franchise or management agreements with no choice but to comply.

Owners further claim that the brands are enriching the value of their own companies through these mandates while not equally enhancing the individual hotel assets.  The dynamic that has emerged between brands and owners is quite interesting. Hotel owners will be the first to claim that brands are significantly important to development, acquisition financing, competitive market penetration and exit sale values, among a myriad other benefits. Yet they will also claim that franchisers require spending activities that inhibit net cash flow, expose them to inappropriate capital investment and reduce net sales proceeds.

Brands, meanwhile, argue that strength is sustained through product evolution based on customer lifestyle and expectation trends. They rightfully claim that customers expect at least a comparable experience from one- or twonight hotel stays versus the creature comforts of their own homes. This would follow logically with new requirements for such product improvements as flat panel televisions, comfortable mattresses and high-speed connectivity.  Although the independent hotel segment is important, fertile and substantial, the brand segment still maintains the heaviest leverage in hotel real estate. Brands have developed solid equity with customers to stimulate swift stabilization of a new hotel or the solid positioning of a newly converted or legacy asset.

The debate becomes even more complex when market forces are at odds with business goals. While this current hotel cycle surges with continuing, albeit slowing, demand growth and aggressive room rate increases, the threat of new supply is once again on the horizon.  When supply increases overcome demand escalation, then that market force will strain and stretch the brand/owner dynamic, since it threatens to tear away both profitability and asset values.

Any branded or independent hotel asset’s competitive positioning lies with its product differentiation and integrity.  This does not come without significant reinvestment, whether it is a brand standard requirement or a competitive need. Customers are more fashion-driven and product aware than ever before, as evidenced by the trendy new decors of both leading edge independent hotels and even some big brand affiliates.

The International Society of Hospitality Consultants, in conjunction with the Hospitality Asset Managers Association and the American Hotel & Lodging Association, has released another definitive capital expenditure report, “Capex 2007.” Its general findings reiterate that successful hotels require ongoing and growing capital investment for product improvements to stay competitive. The report illustrates that there was a dearth of capital improvement between 2001 and 2003, as hotels suffered from terrible income declines and cash flow shortages. There is a clear implication that hotel owners then fell behind the capital expenditure curve, while brands were less stringent in requiring either new brand standards or universal compliance.  As a result, the current fervor of standard compliance may simply be a reasonable and customary process to catch up on postponed necessities.

It is still arguable whether every new brand standard is appropriate for each affiliated asset, but there is strong evidence that consistency supports the brands’ ability to deliver customers andmarket share. Unfortunately, this concept may be contrary to the needs or expectations of some owners and their quarterly earnings buzzards. 

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The views expressed in this article are those of the author and not Real Estate Media or its publications.

Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be contacted at rickswig@rsbaswig.com.

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Contact:
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
E:mail:   rickswig@rsbaswig.com
Website: www.rsbaswig.com
Tel:  (415) 541-7722
Fax: (415) 541-5333

 
Rick Swig Article Index:
Lack of Human Capital Is Becoming Serious Issue for Hotel Owners, Operators / Rick Swig / December 2006
Successful Hotel Brand Differentiation Means Connecting With Customers / Rick Swig / RSBA Associates / June 2006
Shortage of Sites, Rising Expenses Should Keep Hotel Development in Check / Rick Swig / RSBA Associates / February 2006
In Today’s Hotel Acquisition Market, How Much Do Cap Rates Matter? / Rick Swig / RSBA Associates / January 2006
Lodging Business in Transitional Year, But Challenges Will Remain After ’05; A Hotel with Truly Unique Attributes Is Worth a Premium / Rick Swig / October 2005
Despite Lack of Long-Term Data, Hotel Developers Favor Hybrid Projects; The Fractional and Condominium Component Not a Proven Solution to Development Prosperity / Rick Swig / June 2005
Travelers Prefer Innovation, Creativity Over Predictability, Discount Pricing / Rick Swig / March 2005
Recent Occupancy, ADR Growth Still Do Not Spell Post-9/11 Relief; Total 2% revenue growth over four years has not kept up with national annual average inflation growth of 2.5% / Rick Swig / RSBA Associates / November 2004
Hotel Success Hinges on Relationship Between Owner, Asset Manager, GM / Rick Swig / August 2004
Hotel Operators Can Gain Market Share Through Distinctive Brand Images; A 100-room boutique hotel can develop more identity within a market than its 1,000-room competitor  through customer impact points / Rick Swig / May 2004
Hotel Operators Must Share Blame with the Economy for Stagnant Performance / Rick Swig / RSBA Associates / January 2004
Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed  / November 2003
Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003
Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003
New Business Practices Essential to Lodging Companies’ Success / February 2003
Unreliable Market Trends Yield an Uncertain Direction / October 2002
The Bigger They Are, The Harder They Fall / September 2002
News of Boutiques’ Demise Is Greatly Exaggerated  / May 2002
Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002
Hotel Lenders Face Challenges In Tough Climate / October 2001
Where We Are Now Depends on Starting Point / Summer 2001
Solid Management Practices Can Improve Franchise Value / May 2001
Hotel Market Stagnation To Continue / January 2001
Here Today…but Tomorrow? / November 2000
Ready, Willing, and Unable? / August 2000
Independent Hotels: The New Brand Alternative / June 2000
Ankle Biter Syndrome / January 2000
Redefining a Mature Hotel Sector / November 1999
Focus On Operations Is Not Enough / August 1999
What’s Next?? / May 1999
Growth Through Management  / Feb 1999
Expect a Subdued Market in 1999 / Feb 1999
Hotel Real Estate: Back to Fundamentals / Nov 1998
The Hotel Investment Barometer For Institutional Investors / 1998
The State of Independents / 1998
Success (or Survival) of Boutique Hotels and Resorts / 1998



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