Download Check Your Knowledge, p. 136

Chapter Four
The Hotel Business
Chapter 4 Notes and Questions
Hotel Development and Ownership
Page
Object.
Franchising
Franchising in the hospitality industry is a concept that allows a company to expand
more quickly by using other people’s money, rather than acquiring its own financing.
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Under a franchise agreement, the company or franchiser grants certain rights – for
example, the right to use the company trademark, operating procedures, reservation
systems, marketing know-how, purchasing discounts, etc. – for a fee. In return, the
franchisee agrees to operate the restaurant, hotel, etc., within guidelines set by the
franchiser.
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Holiday Inn, Ritz-Carlton, and Howard Johnson’s all grew in the 1950s and 1960s
through franchising. One of the key factors that led to the success of Holiday Inn was
that they were the first company to enter the midprice range and that they were located
near important freeway intersections and in the suburbs. Budget hotel properties (Motel
6, Days Inn) grew during this time period.
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Franchising was the primary growth and development strategy of hotels and motels
during the 1960s through the 1980s. Challenges to the franchise arrangement include the
maintenance of quality standards and the financial stability of the franchisee. Franchise
fees can vary tremendously and are often negotiated between the franchiser and the
franchisee. The average agreement is 3% to 4% of room revenue.
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Franchising presents both benefits and drawbacks. Careful consideration should be given
to these factors.
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Management contracts have helped stimulate the growth of the hotel industry since the
1970s. They are popular because little or no up-front financing or equity is involved.
Even if the hotel corporation is involved in the construction of the hotel, ownership
generally reverts to a large insurance company. This has been the case for several hotels.
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The management contract usually allows for the hotel company to manage the property
for a period of years. In return, the company receives a management fee determined as a
percentage of gross or net operating profits.
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Is There a Franchise in Your Future?
It is predicted that more than half of retail sales in the U.S. (including restaurants) will
soon be transacted through franchised units. There are jobs working directly for a
franchiser, a franchisee, or you might buy a franchise yourself.
Management Contracts
Hotel companies have increasingly entered into management contracts because less
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capital is “tied up” in managing the properties than is required in owning properties.
Current trends seek to increase the equity commitment on the part of the management
company and an increase in their operational decision-making options. This is in
response to threats from falling real estate values, the high cost of debt service, and the
economic downturn.
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Real Estate Investment Trust (REIT)
REITs are companies that own properties for the purpose of generating profits for their
stockholders. Patriot American Hospitality and Starwood Lodging are the two leasing
REIT corporations in the hospitality industry.
Classification of Hotels
Page Object.
According to the American Hotel and Motel Association (AHMA), the U.S. lodging industry
consists of 46,000 hotels and motels, with a total of 3.3 million rooms.
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There is no formal government classification of hotels in the U.S. However, the American
Automobile Association (AAA) and the Mobile Travel Guide have both established rating
guides.
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Hotels may be classified by location, price, and services provided. Hotels may also be
segmented according to price.
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City center hotels meet the needs of business and leisure travelers. They offer a range of
accommodations and services.
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Often city hotels were constructed with support and assistance from city governments
seeking to stimulate urban renewal.
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Resort hotels developed initially with the growth of rail travel, which enabled the “city folk”
to travel to vacation areas conveniently and at a reasonable expense.
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Many resorts began as seasonal ventures, but with the increase of air and automobile travel,
many resorts have become year-round destinations.
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Today, there are numerous resort hotel properties that cater to the needs of many segments
of the population. Some resorts are family friendly, whereas others seek to create a quiet
get-away for the adult. Many resorts actively work to attract conventions and conferences to
increase occupancy, especially in the off-season.
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City Center Hotels
Resort Hotels
Vacation Ownership
Vacation ownership is the fastest growing segment of the US travel and tourism industry.
A variation of the “time share” model is the vacation club.
Consumers earn points toward vacation benefits. Flexibility is a key advantage of this type
of program. Hotel companies have found this segment of the industry to be extremely
lucrative. As a result, many leading hoteliers are entering into it.
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Fees such as yearly maintenance fees are required in addition to vacation ownership charges.
Time share ownership lets owners save on the rising costs of vacation accommodations over
the long term, while providing the space and flexibility to meet the needs of any size family
or group.
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Airport Hotels
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In general, airport hotels have high occupancy rates because of the large number of travelers
arriving and departing from major airports. Some properties have added meeting space to
cater to business people who need to fly in, meet, and then fly out on a very tight schedule.
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These hotels are usually full service and have 200 to 600 rooms.
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The casino hotel industry is a significant segment of the entertainment industry because the
fastest growing sector of the entertainment field is gaming.
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Casino hotels are becoming increasingly family-friendly and are also marketing themselves
as business hotels to attract conventions.
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Hotels may be classified by the degree of service offered: full-service, economy, extendedstay, and all-suite hotels. Full-service hotels offer a wide range of facilities, services, and
amenities for both the business and pleasure traveler. Examples: Hilton, Hyatt, Four
Seasons.
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The full-service market may also be subdivided into upscale and midpriced properties.
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Time shares also provide the possibility of worldwide travel by means of ownership
exchange.
Freeway Hotels and Motels
Freeway hotels and motels grew most quickly in the 1950s and 1960s. They provided a
convenient place to stay that was reasonably priced with few frills.
Casino Hotels
Convention Hotels
Convention hotels offer facilities that meet the needs of groups attending and holding
conventions. These facilities may include large public areas and banquet facilities, a business
center, a travel desk, and an airport shuttle, as well as other amenities.
Full-Service Hotels
Economy/Budget Hotels
These properties provide clean, reasonably sized and furnished rooms without “frills.”
Economy hotels focus on selling beds. They do not offer meals or meeting rooms, as a
general rule.
Extended-Stay Hotels
These hotels provide accommodations to guests staying longer than 5 days. Rates are
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usually decreased based on the length of the stay. Guests are usually a mix – professionals,
business people, and families that are relocating.
Extended-stay hotels offer full kitchen facilities and shopping services or a convenience
store on the premises.
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All-suite hotels usually offer more space per room, for the same rate as a regular hotel in the
same price range. The additional space is usually dedicated as a lounge or kitchenette, or
both, within the room.
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These hotels are attractive to guests who may be relocating, attending training seminars, or
are on work-related projects.
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All-Suite Extended-Stay Hotels
Bed and Breakfast Inns
Bed and breakfast operations offer variety in accommodation and in cost. Although not all
B&Bs are owner occupied, they provide an alternative to the traditional lodging experience.
Hotel Integration
Page
Object.
Vertical Integration
Vertical integration is a relatively new trend. Companies realized that guests have needs at
various levels. By offering more than one type of accommodation, hotel companies can serve
guests within various segments.
Marketing Consortium (Referral Organizations)
Page Object.
A marketing consortium or referral organization is a group of
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independent properties that refer businesses to one another. The benefit of this arrangement is that independent
hotel operations are able to compete with chain operations.
Best, Biggest, and Most Unusual Hotels and Chains
The Best Hotel Chains
The Ritz-Carlton and Canadian-owned Four Seasons are rated the highest quality chain hotels.
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The Most Unusual Hotels
Unusual hotels include The Treetops in Kenya, the Ice Hotel in Swedish Lapland, and the
underwater hotel at Great Barrier Reef.
International Perspective
Page Object.
The global economy is segmented into large trading blocks such as the European
Economic Community (EEC) and the North American Free Trade Agreement
(NAFTA). Such agreements reduce limitations on the transfer of goods and labor. This
can lead to increased travel, tourism, commerce, and industry.
Growth is expected to continue under the EEC and NAFTA. The Pacific Rim is also
growing dramatically in the realm of tourism.
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In developing countries, once political stability has been established and maintained,
hotel and tourism development follows closely.
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Trends in Hotel Development
Topics include capacity control, safety and security, technology, new management,
globalization, consolidation, diversification, spas, and gaming.
Check Your Knowledge, p. 136
1) Question: What main factor changed the nature of the hotel industry? What impact does it have today?
Answer: Improved transportation has changed the nature of the hotel industry from small, independently
owned inns to big hotels and lodging chains operations by such concepts as franchising and management
contracts.
2) Question: In your own words, define franchising and management contracts.
Answer: Answers will vary but should be similar to text’s definitions.
Franchising: A concept that allows a company to expand quickly by allowing qualified people to use the
systems, marketing, and purchasing power of the franchiser.
Management contracts: Written agreements between an owner and an operator of a hotel or motor inn by
which the owner employs the operator as an agent (employee) to assume full responsibility for operating
and managing the property.
Check Your Knowledge, p. 136
1) Question: Give reasons why you would like to build, manage, and own your own hotel. According to
the book, what are the reasons people build, manage, and own hotel properties?
Answer: Answers for this will vary with the main reasons being:
 Pride of ownership or ego
 Profit from building, promoting, financing
 Appreciation in property value
Check Your Knowledge, p. 155
1) Question: What characteristics do the following hotel segments encompass?
a. City center hotels
b. Resort hotels
c. Airport hotels
d. Freeway hotels and motels
e. Full-service hotels
f. Economy/budget hotels
g. Extended-stay hotels
h. Bed and breakfast inns
Answer:
a. Location is key; hotels provide a range of accommodations and service to leisure and business
travelers.
b. Fast transportation to formerly remote destinations allows these hotels to provide leisure and
recreational activities.
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c. Large numbers of arriving and departing visitors who need accommodations, saving a trip to
downtown.
d. Reasonable, convenient, few frills.
e. A wide range of facilities, services, and amenities, especially in the luxury category.
f. Clean, no frills, no restaurants.
g. Cater to business travelers and relocating families.
h. Simple processes, homelike atmosphere.
IV. Answers to Chapter 4 Review Questions
1) a) Management contracts have the advantage of requiring little up-front financing and usually allow the hotel
company to manage the property for several years, whereby the company receives a percentage of the net
operating profit as a management fee. This allows for the rapid expansion of the hotel market, especially
since increased competition among management companies has decreased the management contract fees.
b) The concept of franchising allowed for the rapid expansion of hotels and motels. Franchising allows
franchisees to use the brand names and services of a franchiser in exchange for a fee. This has the
advantages of involving less up-front capital, a centralized reservation system, national advertising, and
increased market recognition, but it also includes the challenges of maintenance of quality standards and
avoidance of financial failure on the part of the franchisee.
2) a) Resorts are usually located at exotic places with spectacular scenery, offering relaxation and recreational
activities. The Treetop hotel located in one of Kenya's wild animal parks is architecturally built on the tops
of trees, whereas the Cocoon Hotel in Japan offers guests an affordable alternative space of about seven feet
by four feet with just a bed and television.
b) Airport hotels offer extended room service and restaurant hours to accommodate early and late arriving and
departing guests.
c) Vertical Integration is the trend of having properties in all segments of the market: luxury, mid-scale, and
economy.
3) Vacation ownership is more commonly known as time-sharing. Vacationers buy the "right" to use a hotel
room/condominium/cabin/apartment, etc., for a given amount of time each year. The destination and the
"unit" may be fixed or may be flexible. Vacation clubs provide the greatest amount of flexibility as
members can choose from various member destinations.
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