From an owner and investor perspective, are independent or branded hotels best? As expected, the answer is not straightforward, with various factors to consider, including size of the property, location, and market.
In the US, 72 per cent of hotels are branded, according to STR. In Europe, although the ‘chainification’ of hotels has increased over the years, there are large variations from country to country. According to 2022 research, Spain has 58 per cent chain hotels while Italy has only 17 per cent.
It is not uncommon for independent European hotels to have been owned by the same family for generations. “They’re established, and they just don’t see the need to give up on their margin for a brand,” commented Mary Beth Cutshall, CEO, Amara Capital Group. Paying the fees to operate under a brand typically costs 10-11 per cent of revenue.
Advantages of being independent include greater freedom to decide how the property looks and how often it is renovated.
PIPs squeeze
In contrast, Property Improvement Plans (PIPs) mandated by brands usually follow a seven-year cycle. Paul Novak, partner, Whitman Peterson, noted that brands have been flexible in stretching the length of the cycle because hotels had almost two years during Covid with reduced wear-and-tear. However, Cutshall said she found PIPs generally costly and demanding.
Being independent often works for properties up to 150 rooms, but the bigger you get, the more you’re going to need the distribution that comes through the brands, said Novak. It is often easier for branded hotels to secure financing, he added, due to the perceived stability and recognition of the brand.
With advantages and disadvantages to both staying independent and taking on a brand, one of the most interesting developments of the past 15 years has been the rise of soft brands, which offer a middle ground, said Scott Rosenberg, president, Nehmer.
Soft brands allow independent hotels to join brand families while maintaining their unique identity. This approach has been particularly effective in integrating historically independent hotels into larger brand ecosystems, offering a blend of autonomy and brand benefits.
Market specifics
Again, however, the decision to adopt a soft brand is entirely down to market specifics. Barry Bloom, president, Xenia Hotels & Resorts, said his company has an independent hotel on a university campus: “We wanted to soft brand it because we thought it would help position it better and attract extra business. But the brands wanted us to pay top dollar and we already had an unbelievable amount of business we were going to get no matter what. It just didn’t make sense for us to do it.”
Novak described a successful soft branding initiative. His company acquired a 50-year-old DoubleTree hotel in King of Prussia, Philadelphia, and invested in renovations at a cost of $55,000 a key. By negotiating a soft brand agreement, they rebranded the hotel as “The Alloy,” a DoubleTree by Hilton. This allowed them to leverage the DoubleTree brand’s distribution network while positioning the property as a premium offering within the market, resulting in ADR $15-$20 higher than a typical DoubleTree.
Another route, recently opened by Hilton, is for a brand to simply offer its distribution services to an affiliated business. Speaking at IHIF in Berlin earlier this year president and CEO Chris Nassetta said Hilton intends to establish “many more partnerships” with independent travel and hospitality businesses. He said: “You will see many more partnerships on the experiential side. Why? Because our Hilton Honors members, particularly, want more experiences, and the more we can offer them those adjacencies, the more we think they will remain loyal and we’ll get an incremental share of wallet.”
Outdoor experiences
One of these partnerships is the recent distribution deal between Hilton and AutoCamp, a provider of luxury camping experiences. Novak, who was directly involved, explained the reason for seeking a distribution solution from a global brand.
“We were relying very heavily on OTAs and everybody who went to an AutoCamp loved it, but trying get word-of-mouth out, trying to spread the word in order to drive the revenues at the levels we needed to support the investment; we just weren’t getting there,” he said. “So we decided we would approach the major brands and see if there was some way of creating a unique affiliation. AutoCamp is now a brand within Hilton, but it is not a Hilton brand.”
AutoCamp recently opened its eighth location on Cape Cod and half of its reservations are coming through Hilton.
In terms of cap rates and exit strategies, Mary Beth Cutshall reckoned that independent hotels often achieve better cap rates due to their flexibility and higher ADR and RevPAR. However, branded hotels can offer significant value in portfolio sales, she added, providing a cohesive and recognisable product to potential buyers: “If you are a REIT or a private equity group, [a branded portfolio] can drive a lot of value for cap rates.”
All quotes taken from “The value of the brand – powering performance across segments” panel at IHIF Americas 2024