Are you at Odds with your Lodging Management Company?
Let’s face it there are a lot of lodging brands, lodging management companies and endless combinations thereof. Some small, some large, some effective and some not. With such abundant choices why do so many owners' feel their current relationship with your their management (and perhaps even their brand) is one of being at odds? Perhaps it's because often the goals of lodging property owners are not philosophically or financially fully aligned with the goals of their management or at times even their franchised brand. Owners, management companies and brands frequently have competing objectives that are in direct conflict with maximizing an owners’ return on an individual property. For example; franchise companies have a stake in maintaining brand standards and creating “brand equity”. No one is arguing a push away from brand standards here, however, there implementation and the aggressive push to create brand equity may not always be in the best economic interests of the individual property. Yes, it is true, companies focussed just on lodging management have a great interest in growing revenues… especially theirs. Therefore they often: compete against you by managing and/or owning other properties in the market; cannot commit the resources to target the best market position for an individual property; lack significant financial motivation to assist you in achieving your individual peak performance; have little incentive to maximize your hotel’s market penetration; lack a real desire to control costs or worse yet are deficient in an inducement to grow revenues. In today’s world of lodging management contracts there may be little real incentive for your management company to grow your hotel’s revenues. Read more below.
Consider that the current average management fee including any incentive fees is about 2.5% of a hotel’s overall gross revenues. This is significantly lower than fees of years gone by. So, in the last few years in an attempt to grow revenues management firms have focused on the low-risk strategy of creating “incremental revenues”. They do so by adding more properties to their roster at individually lower fees. In short, increasing the volume of hotels they serve while often retaining the same amount of personnel and resources spread over a greater amount of hote properties.
Consider a typical, select-service hotel with 100 guest rooms, an average daily rate of $70 and a 70% annual occupancy. The average annual management fees for this hotel would be around $45,000.00. At the current rate of fees, an additional $25,000 in monthly room revenue represents about $625 in fees to the management company. Realistically, from the viewpoint of the management firm that $625 is not a significant enough return on their additional efforts, staff time and resource allocations that would be required of them to generate the additional $25,000. Frequently, they say that such revenue generation is the responsibility of the property level staff either the sales team or general manager. Then for what do you need them? As the owner that $25,000 can make the difference between paying your mortgage from cash flow or out of your pocket. Isn’t it time to ask yourself if this antiquated lodging management model is a smart investment for your hotel?
Under a management contract you continue to pay all of your hotel’s expenses and even some of the management company’s. You’re paying the salary of the hotel’s general manager who in most cases is actually operating your hotel for you (not the management company) and their loyalties may lie more with the management firm that hired them than with you. Your management firm may even be adding expenses to your hotel through costs derived from their related travel, accounting services, co-operative advertising, marketing and more! It is not our intention to bash all management firms. If they want to take a real stake in the success of your hotel and put their own hard cash into the deal and become a partner/investor as well as manage it, then we say GREAT! You have a potential partner for success. But most firms simply do not work that way. We know: our president, Bradly Sax, was the Chief Operating Officer of two firms operating national brands as well as luxury independent hotels. We see both sides of the issue. Most importantly, we see that the old system is broken and does not allow for the maximization of your individual hotel’s success. If your “third party” management firm is also the owner and/or operator of other hotel assets, no matter where they are, can you realistically believe that your property is on equal footing for individual attention and expertise to the same degree as the hotels where they must pay the mortgage?
So what is an owner to do? Do you really need to continue to pay a third party a large percentage of your ongoing revenues to provide limited oversight of your hotel? Does your management company provide you with written analysis on their level of success (or failure) in maximizing your revenues and your return on investment? You have a professional manager in place, your hotel has been operating for some time, you remain active in your business, but do you do not have the lodging expertise, technological knowledge and/or time to thoroughly investigate where your opportunities lie? And frankly, no one controls operating expenses like the property owner. If this situation is one that hits home to you; we believe your next step is to investigate “STRATEGIC LEADERSHIP”.
To learn more contact Bradly Sax today via email at BSax@SHGOnline.com or telephone at 877.744.4744 extension 702.
