CBRE Research: Hotel Brand Performance - Rachael Rothman & Christine Bang

Josiah: Can you tell me a little bit about the origin of this report, Brands and Brand Families Matter? How did it get started?

Rachael: So CBRE Hotels Research is part of the advisory function. And so, of course, if you're looking to either acquire a hotel or you're a developer or you're purchasing a hotel, you really want to have a strong sense for what the profit potential of that hotel is. and what the brand contribution is. And so I think one of the things that Christine and I were looking to highlight is it's not just about the brand, it's about the entire brand family and the contribution that you get from the network effect that you get from being part of that brand family in terms of driving occupancy and profitability ultimately for your hotel.

Josiah: Maybe for people who are brand new to the industry at a very, very high level, what is the promise of becoming part of a brand in general? How do they communicate to developers, to investors, what they're bringing to the table?

Rachael: I can say from the outside, when I was in hotel school they used to refer to them as occupancy insurance. One of the pitches is that when times are tough, they're going to be able to help fill your hotel. Today, so that was 35 years ago, today they come with loyalty points, training programs, brand standards, they help you with site selection, they help you with customer segmentation, they can help you set the pricing of the hotel. But oftentimes, particularly in limited or select service, it might be for people that are familiar with franchising in other businesses, for example, a McDonald's or a Subway or any other type of franchise. And they want to get into hospitality because they own a piece of real estate or they've seen other people be successful with operational real estate. And this is sort of a leg in, right? It gives them guideposts. That would be my thought. Christine?

Christine: Yeah, I mean loyalty points and training and brand standards are the big ones that come to mind for me. Just that operational intelligence that you're getting.

Josiah: Hotels are really interesting real estate investments, I think, because, as you alluded to, Rachel, the operational nature of them. And if you kind of think about, as you mentioned, Christine, the loyalty points, that can be a demand driver, but it's everything you do, right? It's kind of the people you hire. It's not just the pricing or the distribution, it's the whole experience creates this. So there's so much that goes into a brand. I want to get into some of the findings, but I just wonder if you could help us understand a little bit more about the methodology of the research. How did you go about studying this?

Rachael: I'll let Christine take that one, but I'll say one other thing, which is that the really interesting thing is often the person charged with delivering on the brand promise is not actually somebody that came up with the brand, right? And so it is more complex than you might think. For somebody to actually execute on somebody else's vision and do so in a way that's consistent with guest expectations when they've already had that brand promise delivered to them 10 other times in 10 other locations. So I think it can be tricky. But in terms of methodology, Christine can take that one.

Christine: I mean, one of the great things about public companies is that they have to publicly report information about their businesses. And so what we did was we endeavored to look at some of the larger publicly traded hotel C corps, and they report they report all of their property count and room count information. So we have we looked at about 100 I think 118 or so brands that are owned by those publicly traded C-Corps. And then we tracked those. We decided to look back on a time series. And so we tracked them going back. Our data series goes back to about 2000. But obviously, since 2000, the world has changed dramatically. Even in the last couple of years, the world's changed dramatically. And so we went back about 9 or 10 years to 20. sort of tracked the performance over the past nine or 10 years to see sort of how room count, property count has changed, how brand count has changed, meaning the actual number of brands that are under one brand family, not the room count or the property count within each brand. And then we also, the other thing that large public C-Corp report is for those brands that are above a certain threshold, reporting threshold, they report overall key performance indicators, things like Revpar. For some companies, they report occupancy in ADR. And so what we did was we took a look at those key performance indicators, which as Rachel has said, is just one piece of information that someone would use when considering brand selection. And we wanted to look and see how things had changed looking at a variety of different measures. So we looked at chain scales, how that we grouped them all into chain scales, we grouped them by whether they were select service or full service, all inclusive, soft brands, things like that, just to kind of see if there were any interesting things that we could glean from those kinds of categorizations across all of those brands across all of those companies. So this is kind of a we took a step back and looked at things in big groupings to sort of see if there were any interesting pieces of information or trends that we could see looking at it over that time series.

Josiah: So that kind of gave me- What an incredible data set. It seems like an incredible data set. I love kind of the approach that you took. I'll include a link to the report in the show notes where people can learn more. But I wonder if we could spend a couple of minutes just talking through some of the things that you found. You both spend all day long in research, looking at transit analysis. You look at this incredible data set. What are some of the things that stood out to you from it?

Rachael: I mean for me it's the wide divergence in performance. You really do have to choose carefully. You can find brand families in the same essentially chain scale performing very differently and you can find individual brands or even averages within a brand family dramatically out or underperforming. And I think you just have to really be careful how you select not just your brand but of course your brand family which is what we're saying. Yeah.

Josiah: What do you think are some of the factors that go into that wide range of outcomes in terms of performance?

Rachael: Well, it could be something as simple as luxury had not recovered in 2022 just because of post-COVID. So using that as an endpoint might have skewed results in certain instances. But when you're comparing chain scale to chain scale, that normalizes for something like that. I think the network effect, the power of the network effect, like if you log into one of these globally recognized brand family web portals and you see that all the properties in the region are getting 3.4, 3.6, that might influence your purchasing decision even if the one property that you're looking to stay at has a higher rating. So truly, what is the power of that brand family? Or if you have a negative experience at three or four properties at that brand family, even though it's not in your brand, is the person less likely to go and stay at your property because they've already had either a positive or negative experience at another? If you love your experience so far, you're more likely, for example, last night, I was driving with my son from Indiana to Chattanooga. It should take six hours. It took 19. The highway was shut down. It's snowing everywhere. What we try to pull off, and they've got every variety of hotel. The first thing I look at is, where do I have the most status? Which one's the highest ranked? Which one is most likely to be clean? So that the power of the network effect, even though it was in some city that I'd never even heard of, I whip open the app and immediately I'm scrolling for that information. So when you choose your brand and your brand family, that's really what you're choosing, the power of that network effect.

Josiah: To me, it just underscores the importance of thinking holistically about what these brands or these brand families bring to the table. You mentioned starting with loyalty programs or kind of where you have status, but the operational nature of this is also standing out to me, right? Because these have to be run really well. This is a big piece. It sounds like not only in satisfaction scores, but also revenue performance and ultimately profit performance.

Rachael: And I think one of the things that we don't address in this piece, but so many people get focused on REVPAR and they forget that we don't take REVPAR to the bank, right? We take gross operating profit dollars to the bank. So that's really where people need to go once they've decided they need to do diligence. Does, is everything as good as it looks on the top line? Is that going to translate into gross operating profit dollars? And then what's going to happen after I have to do my renovation, right? My PIP improvement. What's going to happen on the five and seven year recycle? What are the brand standards going to require? So you don't just want to stop at the top line. It's just one point of the due diligence process.

Josiah: One thing I'm curious about is it seems that the way that these brand families operate could lead to some benefits across the chain scales or across all these brands that they have. But did you notice in the study some cases where there was a lot of variability between brands within the same family? Did that come up at all?

Rachael: It did. I'm sure Christine can give you a few specifics, but you're right, that's super important. You know, is your brand, the one you select, likely to outperform the brand average or underperform the brand average? The variability matters.

Christine: Yeah, I mean, we looked at within brand families, we looked at standard deviations across entire brand families to sort of look and see how big of a variance is there between the top performing and lowest performing. And there is a difference depending on which brand you're looking at. But that same is true. If you look at it, you know, when we looked at chain scales, we looked at that standard deviation piece across chain scales and across whether something was grown organically within the brand or, you know, through an M&A acquisition. So, you know, that deviation can be wide. And so, again, it's another piece of information that, you know, you can look to to help with that selection process or to help analyze which is the best choice.

Rachael: Yeah, not just what do you expect, but how likely are you to get that?

Christine: Are you to get what you expect, exactly.

Josiah: I mean, just to follow up on that a little bit, this notion of kind of creating a new brand in-house versus acquiring it, did anything stand out in the research with regards to that?

Rachael: I mean, I would say absolutely that brands grown in-house appear to perform better on a number of metrics than acquired brands. And Christine and I both, you know, we're finance wonks coming from Wall Street. So maybe it just goes with the Buddhist saying, you know, when you're a hammer, everything you see is a nail. But when you think about M&A, often it's pitched as, right, it's going to grow our market share. And really, it just brings to mind that there are so many other reasons to do it, right? DNA leverage, loyalty points, the network effect. But oftentimes, you'll find overlapping brands. targeting the same customer in the same price point or very similar. And so you'll see the acquiring company double down on what they view as the best of the overlapping brands. And you'll see some obsolescence or less capital investment in what they might consider the underperforming of the exact match.

Josiah: That's fascinating. The other thing I'm curious about is, Christine, you mentioned chance scales, and I'm curious if you saw anything interesting with regards to performance up and down the chain scale. Are we seeing kind of over or under-performance in general on the economy side versus luxury or vice versa? Anything around that?

Christine: I mean, in terms of room count, you know, over the past 10 years, we've seen sort of a pullback in room count, economy room count, whereas the number of total brands that there are have stayed the same, which is, you know, kind of, we were a little bit surprised, I think, when we initially kind of took a look at that. I think, as Rachel mentioned before, you know, sort of the more recent performance in some of the luxury brands, we looked at a couple different we kind of thought about some of the different reasons that we might have seen the performance, the results that we did in luxury. And as Rachel mentioned, some of it could just be in some of these cases, some of it could be just where we ended, meaning that we ended in 2022, which is, you know, we're still in that upward trajectory towards recovery, which could have impacted some of the results that we got, which is why I think this study is more interesting. One of the beauties of this study is that we can redo this again when the 2023 data comes out and reassess and reevaluate as time goes on. So continue to build that time series to see if any of those results change because we are in such a bit of a transition coming out of something that was unprecedented. And now looking at this data, it's not like we were, we didn't go right from 2019 back to normalcy, we've kind of had to come back out from the pandemic.

Rachael: From when Christine and I were at Cornell, you know, 100 years ago, they used to say the industry is not overbuilt, it's under bulldozed. And I think, you know, coming out of COVID and just the trends that we've seen in the economy segment over the last few years, the period that we analyzed, you do see contraction in the number of economy units, I think. It's interesting that now some of these big brands are going into this premium economy segment, maybe led by the demand trends that they saw during COVID and led by the success of, for example, True. I'm sure there are many other brands that have been hugely successful. So it will be interesting to see how those new brands impact the existing supply, right? Is the market share, is the pie big enough? Is it going to grow or is it just going to intensify competition in a segment that already is somewhat competitive?

Josiah: Before we go, I wonder if we could give some advice to maybe people who are both, well, two sets of people, people who are responsible for brands at some of these big companies, and then for the developers and the investors. I guess first for the brands, I'm thinking back to some of the things that you both mentioned around, I think when there's acquisitions, sometimes those have underperformed a brand that's created in-house. It's an interesting observation. Any other advice or things that come to mind for either of you with regards to speaking to people responsible for brands at these big companies?

Rachael: I listen to a lot of your podcasts and I you know I heard Dorothy and I heard the gentleman that spoke about you know what Hyatt and Marriott are doing wrong these days. For me, I think there has been tremendous market share gain in this short-term rental space. And I think that signals people's desire for uniqueness and differentiated experiences and intergenerational or group travel. So if I were to give a piece of advice and, you know, far be it from the finance wonk to give a piece of advice, I would say that really shows that people want some sort of group. I don't know if it's a pod with a kitchen in the middle or like a dorm, right, where you have the common room and three or four rooms around the side. I think people want unique environments, which is maybe a reason why we're seeing this proliferation of brands in the luxury space, because they want something new and different. They want a high level of service because if they don't want any services, they'll go to short-term rental or a premium select service product. So if you're in a higher price point, you better have great differentiated service, differentiated experiences, preferably something for group. And I think I would suggest that they continue. Christine and I and a couple of our colleagues just wrote another piece about convergence. And back when we were on Wall Street, right, everybody spun off all of their senior living and their corporate housing and their timeshare and their food and beverage or their restaurant affiliations. Now, I feel like in order to grow your total addressable market in a mature industry, you're going to have to capture your customers either more frequently or outside of that traditional leisure or business day. And so I think I would suggest more brand alliances and take a page out of what you see some of the other lodging providers doing that's taking share from traditional hotels.

Christine: Yeah, I think keeping an eye on this idea of convergence is really going to be important going forward, and just seeing where those alliances and partnerships can be built. It will be interesting to see how things progress on that front going forward.

Josiah: Amazing. And then before we go, I wonder if we could speak to the developers or the investors that are potentially the people who will benefit most from this study. Again, we'll link to it in the show notes where people can go check that out and buy it. But for those people from the research, what are some things that come to mind in terms of how you advise they be thinking about which brands or which brand families to be working with?

Rachael: I think you really need to consider, as you brought up earlier, right, all the fee structure, the gross operating profits, the revenue. I think the name of the game in risk mitigation, if you're developing something or investing in something, is to build a mosaic of all of the data points and then look at where there's a weak spot and examine that. so you can make sure that you're comfortable with any downside risk. There's always a risk, and hotels are cyclical. But have you looked at all of the publicly available information to make the best-informed decision? If I were going to give a piece of advice to a developer, again, which I am not, which is outside of the scope of this piece, and it probably just comes from the fact that I'm 100, would be, Think about what the younger generation, maybe that's you, Josiah, or some of your listeners, is something that I'm building today going to be relevant 20, 30 years from now? Because as the cost of capital has gotten more expensive, you're really going to need a longer payback period. And so before you just go fully into maybe a standardized product, I have not seen consumer research, but I would love to see, you know, how does a 24-year-old feel about this? How does a 22-year-old, how do my teenagers feel about this, right? How is this going to stand the test of time and what are the risks? And I think we see a really good example of that from, you know, Las Vegas reinventing itself four and five times, right? Is what you're building going to stay fresh? How do you stay relevant? What are the next frequent consumers looking for?

Christine: Christine, anything else come to mind? No, just to use all the data that you can possibly get your hands on to make that decision, meaning don't rely on one data source, don't rely on one piece of advice from one developer or one designer, sort of really look at your range of options before narrowing into sort of your final four or your final, you know, before you land on the ultimate decision to use all the publicly available as well as any information that you might be getting through advisors, et cetera.

Rachael: Steam's right, the game show, right, where you pull the crowd or whatever, the wisdom of the crowd, and they're most likely to get it right. It's like the phone: the friend is only right, I don't know, 30 or 50% of the time, but a poll of a hundred people, right, is right 80% of the time. Get all the data you can, and take all the input you can. Investing a small amount of money on the front end for the due diligence relative to the total capital investment will help you be successful over the long fall.