Unchained melody

In the face of competition, more and more hotels are affiliating to a brand name to leverage the advantage of a chain, all to further their ambitious growth plans. In this scenario, what does the future hold for standalone properties? By Dinkar Farwaha

Worldwide, industry trends indicate the domination of chains across the board, especially the service industry. These industries, which require direct contact between a customer and an organisation, are dominated by a brand name and its affiliates. Be it banking, insurance, retailing, business services, auto services, food services or for that matter the hospitality industry. Even professions, characterised primarily by partnerships and proprietary firms, are following the same path - accountants, doctors, tutors and lawyers are increasingly likely to be associated with a chain. Today chain affiliations and brand franchisees have made significant advances in these industries.

The hospitality sector today across the country is expanding through this way, with standalone hotels either opting for franchises, or the hotel owners inking management contracts.

However, if one looks at the hospitality industry with a wide-angle lens, a standalone property vis-à-vis an established brand with a wide network of hotels might seem to pale in strength. Then again, there are standalone properties which are thriving in their respective domains and dominating the occupancies and RevPars of that region. Instances are The Imperial New Delhi or for that matter The Grand New Delhi or Cidade de Goa, which have managed to counter challenges, especially those faced on the sales and marketing side. Despite the testing times faced as being one of a kind, they have carved a niche for themselves. But each situation has its own pros and cons. This scenario brings about an integral question - what does a hotel gain by being part of a chain? Consequently, what does it lose out by not being part of one?

Chain guarantee

A standalone hotel can opt for a chain affiliation in three ways. The first way is by making its presence in different cities through brand extensions and establishing more properties under its own brand name. Alternately, it can opt for a franchise (that allows the hotel to operate under a specific brand - a technique used by Choice Hospitality India, the master franchisee of Choice Hotels International that sets up first class and midmarket franchised and managed hotels across India, or as the case might be, a marketing franchise as with ITC and Starwood's The Luxury Collection). The third way is through a management contract a strategy followed by most international chains in India. Now however, some including Starwood opt for investing up to 26 per cent in a property on a case to case basis.

The most obvious profit that a property generates because of chain affiliation is instant brand awareness, on a domestic and an international scale - a veritable brand guarantee, and a solid reputation to back it up that translates into better sales opportunities. Delyse Braganza, vice president, Sales and Marketing, The Orchid, cites an example to substantiate the advantage of brand guarantee associated with a chain-affiliated property. "If a person visits our property in Mumbai and is happy with the experience, he can be secure in the knowledge of receiving the same standards of hospitality at our Delhi property too. Therefore, automatically the chances of him staying in our Delhi property is far higher than in him opting for any other property."

Further, it's a natural phenomenon that by expanding the scale of operation, a firm can decrease its average cost in the long run. Through economies of scale, hotel chains can standardise their services, reservations, operating procedures, equipment purchase, hotel design and leverage on its marketing network. Chains can buy ingredients, subcontract security and staff and other inputs cheaper, thus keeping their production costs low. Also, the average marketing spend on one chain property that is a part of a chain affiliation is much lesser than the average marketing spend on a stand-alone property. As Ravi Wazir, principal consultant, Phoenix Solutions, puts forth his view, "A chain can clearly afford a greater amount of marketing spend, the costs of which can be shared by its units."

Another advantage associated with a chain is the 'de-risk' factor, given the vagaries of this industry. Patu Keswani, chairman and managing director, Lemon Tree Hotels, explains, "Chain properties have an inherent ability to geographically de-risk, i.e. if you have many hotels in different cities, you are never too dependant on the performance of only one hotel and can take advantage of even subsidising poorly performing hotels with better performing ones." It is possible that when one of the hotels is facing a slump due to a dip in tourists in the off-season and other factors, another link in the chain in another region might be buoyed by a boom. Thus, if a hotel enjoys high occupancies and RevPars in a particular chain, these resources can be distributed to other hotels in the same chain, which are in the red - with this form of insurance against economic fluctuations. Extending the point further, Sanjay Sethi, managing director and CEO, Berggruen Hotels, says, "Chains may acquire geographically distributed units to implement a portfolio strategy, which can be advantageous to them."

An interesting point of this debate is that a chain comes to the rescue while addressing the crisis that looms over the hospitality industry as a Damocles Sword - the shortage of trained manpower. Placement cells of colleges worldwide prefer to cater to hotels that are a part of a big chain, which ultimately leads to chains absorbing the best talent in the industry. Says BP Sahni, principal of Anjuman-I-Islam's AK Hafizka College of Hotel and Tourism Management Studies and Research, "Most companies that come for hiring students to our college or for that matter other colleges are a part of a big chain."

Keswani attributes this to brighter career prospects saying, "A chain offers growth opportunities, vertically and horizontally, and is therefore in a better position to attract and retain talent in an increasingly more competitive market." Adds Wazir, "Clearly, chains are in a better position and can afford to spend high amounts on a core team of managers since costs can be spread over multiple units. This enhances the chances of success through better strategic direction."

Even play?

Looking at the other side, a factor that can possibly work in favour of standalone properties is that they have the liberty to experiment. Though standardisation as a strategy generates benefits for hotel chains, it is disadvantageous too. If we look closely, the same standardisation strategy can create a sort of liability, reducing the degree of freedom and flexibility that a chain has due to centralised decision making. This creates a lag time while responding to its dynamic local environment, be it an emergency, an upturn, or a downswing.

Anju Timblo, managing director, Cidade de Goa, throws light on this. "Cidade de Goa offers a unique blend of Portuguese architecture and a Goan ambience because of our strong focus on the local environment. If we had a set of standardised strategies and had not responded to the local environment in this manner, it would have been practically impossible to build a property like Cidade de Goa," she asserts.

Ray McShane, general manager, The Grand New Delhi (a standalone property) further elaborates, "Because of rigidity and the need to follow a specific brand identity, a chain property may not suit the local market or culture." Timblo sums up this limitation by saying, "Chain properties can become homogeneous in look and feel, so they may not represent the ambience and the feel of a particular destination."

From the point of view of operations, properties that are a part of a chain don't necessarily have a distinct advantage over their standalone counterparts. Wazir explains, "Even if we assume that a chain is able to compile standard operating procedures in a manual better than a standalone property can, the truth is that operational success lies in its execution. So both have an equal chance to deliver." He continues, "At best, a chain might be able to invest in enhanced software and training programs that a standalone property might not be able to. Each unit of the chain will eventually have to bear costs of these enhancements individually." Thus, one can't discount the fact that if a standalone property executes its operational activities systematically and consistently, it can overcome any functional limitation.

Another limitation obfuscating the chain advantage is the management or franchise fees that a property has to pay even at the time of fluctuations. Says Keswani, "Payment of management fees to the management company even in tough times is mandatory. Sometimes, the property itself is actually superior to other properties in the chain. Therefore, in that sense, the property is downgraded in the customers' eyes due to this mismatch in perception between the brand and the property." Further, if a standalone property chooses to be a part of a chain, by going the franchise way, according to the HVS International's survey of franchise and other costs, approximately eight percent to ten percent of the room revenue of its property will be earned by the franchisor. Thus, standalone properties can avoid such expenses.

Standalone properties can also circumvent the negative of not having an extensive sales and marketing network to rely on, by joining an organisation which takes up the cudgels on their behalf. For instance, The Imperial New Delhi is a member of Preferred Hotels & Resorts that represents independently owned luxury hotels and resorts.

Reckoning the future

According to the US Census of Business, multi-unit organisations accounted for 25 per cent of all service revenue in 1955. Over two decades later, their share was more than 40 per cent. The figures are growing. Surveys like these suggest that the future seems very promising for chains.

What is the future of standalones? Says Timblo, "The only way for standalone properties to continue growing is to be representative of the destination and keep giving the guest what he looks for. Whether it is personalised services and more consistency in services, than in any other property." She adds, "Moreover, they will have to constantly redefine and evolve to keep up with the needs of a contemporary traveller."

Rishi Kapoor, director, strategic planning, The Imperial New Delhi, believes that as long as a standalone property has historic value and an iconic status, coupled with an efficient management team, the future is bright. As he puts it, "If you are successful, no matter whether it is on your own steam or with the support of a group, the best thing is to be yourself."

Wazir and McShane are of the opinion that the traveller of the future might give a platform for the standalone properties to carve a niche for themselves. Says Wazir, "Consumers may gradually get tired of cookie-cutter products and lean towards a more personalised and unique one. Herein lies the opportunity for standalones to shine. The timeframe in which this change in consumer preference will unravel itself and the size of the market section which opts for this indigenisation will determine the extent to which standalones may experience challenges in survival." Reiterates McShane, "Trends worldwide have shown that standalone properties are attractive to guests who don't want to take the 'Big Mac' approach. Namely, those avoiding the same burger which is available in all restaurants. Further, because of the boom in the industry, there is immense potential for properties which can deliver a unique and a better product."

Keswani, on the contrary, feels that with more supply coming in the industry, it will most certainly affect the standalone properties. Says Keswani "As more and more room supply comes in to play in high demand areas, standalone properties will be most affected. The weakest performers will get acquired. There will be some consolidation in the market over time." However, he adds that by offering a value proposition which is unique, by combining product-service-feel features, standalone properties will be able to survive.

It will ultimately boil down to whether a standalone property can build brand loyalty and constantly reinvent the brand. Else it will perish or fall in the vortex of consolidation. After all, the golden rule holds true for hospitality too only the fittest survive.