Jim Luchars, Stonebridge Companies

In Boston and New England, we are benefiting from a variety of new hotel product opening as the construction pipeline reaches a peak not seen since before the Great Recession of 2008/2009. This results in more and better lodging options for the average hotel guest but it creates confusion as well. What is the difference between a Hilton Garden Inn and a Marriott Courtyard hotel? What is boutique, independent and extended-stay? Is an Aloft the same as a W hotel? What is an Indigo and do you know what “AC” stands for? These are just some of the questions that I get from friends who travel for business that are not hoteliers. Frankly, even hoteliers can get confused.

Many travelers are overwhelmed by all of the hotel brands available and confused as more and more brands are introduced, not to mention other new lodging options such as Airbnb and VRBO.

First, it is important to understand the difference between hotel companies and their multiple brands. The big five companies are Marriott, Hilton, Starwood, Intercontinental Hotel Group (IHG) and Hyatt. All of these companies have numerous brands under their respective business platforms. Generally, the brands are delineated by price point with select (Marriott = Fairfield Inn) being the lowest and luxury (Marriott = Ritz Carlton or JW Marriott) being the highest.

Hotel companies make the majority of their revenue and profit not through management of hotels but rather through fees from franchising their various brands to owners and hotel operators. In fact, most hotels are owned and operated by third parties, not the hotel companies. Typically, an owner will pay 10% or more of revenue generated from room sales for the license to use a premium brand. In return, they have access to the brand reservation system, benefit from guest loyalty programs, and are subject to strict brand standards. Hotel franchise agreements are long term commitments that run from ten to over twenty years and hotel companies invest heavily in their franchise sales efforts.

Why are these details important and what do they have to do with keeping track of all the hotel brands out there? Well, when business is good with high occupancies and an abundance of capital available for new hotel projects, the hotel companies push for growth and this leads to launching new brands to franchise – where we are now!

Furthermore, hotel companies are usually restricted from adding new hotels in a sub-market if that particular brand already exists in the market. When a developer builds and opens a hotel, they negotiate a provision in their franchise agreement that restricts the franchisor (hotel company) from approving the development of the same brand within an area of protection (AOP) for several years. However, if the hotel company launches a new brand, then usually the AOP is not applicable and the owner of the existing hotel has limited grounds for protesting a new project. Owners and hotel companies often battle over this issue as their interests can be misaligned. The owner wants no new competition and hotel companies want to grow revenue and market share, a recurring juxtaposition results in the introduction of new brands. Unfortunately, this can create confusion and sometimes frustration for the average hotel guest.

Marriott is great company and renown for the loyalty of its customers and consistency of its product. That said, through strategic alliances and new development initiatives, it has recently added several new brands bringing the total under the Marriott umbrella to fifteen for the customer to sort through. Specifically, targeting millennials and Gen Y, Marriott has four relatively new brands alone in its “Lifestyle” category: Autograph, Edition, AC Hotels, and Moxy. Each is targeting a different price point and offering but the lines start to blur for the average customer that is trying to make an online booking decision, not to mention choosing between a traditional Marriott brand like “Marriott Courtyard” and one of the new ones.

To further complicate things, many of the traditional brands have upgraded their product significantly, evidenced by the stark contrast between an older 1985 vintage Marriott Courtyard and the new urban prototype. Fortunately, we have the Internet as our infinite resource of information, although Yelp and Trip Advisor can only take us so far, and the onus is on the traveler to fully research his options more carefully to really understand what he is purchasing. The hotel companies are a little coy in regards to how much information they provide comparing one brand to another to avoid cannibalization among business lines and it is up to the customer to figure a lot of this out on their own. Many new brands are selling the brand “experience” in addition to price point/value and the hotel companies are banking on connections to social media to help deliver that experience.

Locally, Boston has its share of new brand additions. Several that are under construction fall in Marriot’s “lifestyle” category. Until they are all open, it is difficult to ascertain where they should fit for the customer. As with every hotel cycle, the market will eventually soften and not all new brands will thrive or even survive. A natural weeding out process will occur.

To further add confusion to today’s brand expansion, Marriott and Starwood are in the midst of finalizing a merger of the two companies. How will this impact the customer? Will some brands be rolled into others, thus improving the landscape for decision making? Probably not anytime soon as most hotels have long term franchise agreements that cannot be easily unwound. One benefit of the merger will be the ability to earn Marriott or Starwood points across a broader spectrum of hotels. This doesn’t make sorting through the new brands any easier but at least if you make the wrong choice on a Marriott/Starwood property you can bank the points.

Jim Luchars is chief investment officer for Stonebridge Companies, a hotel development and operating company. Prior to joining Stonebridge, Luchars was a principal at AEW Capital Management overseeing all hotel investments. Luchars has over 25 years of experience in the hotel business and commercial real estate.