Rethinking “Brands” Hotel brands are proliferating at an astounding pace. But there’s a method to the seeming madness. Hotel companies increasingly market their brands to guests as portfolios rather than as standalone chains. In that world it is the brand family and its , not the individual brands, that matter. Hotel franchising (and branded management) is no longer about the brand name; it is now about affiliation with the parent hotel company and the loyalty, marketing, distribution, IT, and other systems that it provides. This has important consequences for hotel franchise, management, and other industry agreements. by John Dent

December 2019

1300 I Street NW ● Suite 400E ● Washington DC 20005 ● (202) 749-8338 ● [email protected] “A brand is a promise.” consumer tastes, and industry consolidation – - Marketing adage have been changing those dynamics. Increasingly, the ability of a brand to attract “When we think about the 30, there is one guests and deliver them to a hotel owner umbrella brand, which is our loyalty program, doesn’t depend on the brand name and Marriott Bonvoy.” promise; it depends on the strength of the - Arne Sorenson, family to which the brand belongs. A quarter- President and CEO, century ago, a “Marriott customer” was someone who stayed at full-service Marriotts;

today, it is someone who concentrates their It’s no secret that hotel brands are proliferating stays within the 30 brands under the Bonvoy like crazy. The barrage of new brand loyalty program. announcements has been bewildering – so Hotel franchise, management, and other much so that it’s doubtful whether guests (or agreements are still stuck in the old world. They even industry participants) can keep them all were written decades ago, based on an straight. Conventional wisdom would say that increasingly anachronistic framework that this explosion of brands is overkill. assumes brands work independently. For the And yet the dizzying array of new brands isn’t a most part, they don’t address, or even mistake. The role of hotel brands has been contemplate, the role and significance of parent undergoing a fundamental transition, decades companies and the support systems they in the making, for both guests and hotel provide. In a world where the primary value of a owners. For guests, the success of a hotel brand hotel brand affiliation has moved away from the once depended on name recognition and ability brand itself to the systems and attributes of the to deliver on a “brand promise” – the quality broader brand family, franchisors, managers, and consistency that consumers could expect owners, and other industry participants need to from that brand. And for owners, the value of a rethink their approaches. brand affiliation came from the brand’s ability The hotel brand landscape to deliver legions of brand-loyal guests to a hotel’s front door. Let’s begin with a look at the current brand lineups of the major US-based hotel companies: Over time, though, tectonic market forces – including the rise of the internet, shifting

© 2019 Dent Legal Strategy LLC 1 All rights reserved. Hotel Brand Families Luxury Full Service Limited Service Extended Stay Economy Autograph Delta AC Design Aloft EDITION Gaylord Courtyard JW Marriott element Le Meridien Fairfield Marriott Luxury Collection Residence Inn Marriott Four Points Ritz-Carlton TownePlace Suites Renaissance Moxy St. Regis Sheraton Protea W Tribute Spring Hill Westin Destination Grand Alila Hyatt Andaz Hyatt Centric Hyatt Miraval Hyatt Regency Hyatt Place Hyatt House Park Hyatt Hyatt Zilara Thompson Hyatt Ziva joie de vivre Unbound Collection Canopy Hampton Conrad DoubleTree Homewood Suites Hilton LXR Embassy Suites Motto Home2 Waldorf Astoria Hilton Tru Signia Hilton Tapestry EVEN avid InterContinental HUALUXE IHG Regent Kimpton Indigo Ascend Quality Inn MainStay Suites Cambria EconoLodge Choice Clarion Suburban Comfort Clarion Pointe Woodspring Suites Sleep Inn Dolce Baymont Dazzler AmericInn Esplendor La Quinta Wyndham Microtel Howard Johnson Trademark Collection TRYP Wyndham Wingate Wyndham Grand Wyndham Garden

Source: Company websites (and MAR 2019 Form 10-K as to Bulgari). Excludes , home rental, and spa brands. “Soft” brands italicized.

© 2019 Dent Legal Strategy LLC 2 All rights reserved. (Note that the above categorizations are mine; Hampton Inn 6.00% some of these brands span categories or defy Homewood Suites 5.50% simple categorization.) Hilton Garden Inn 5.50% As you can see, each of these brand portfolios Embassy Suites 5.50% includes a variety of different brands and Tapestry 5.00% product types: classic strong brands and lesser- LXR 5.00% known new ones, “boutique” and “lifestyle” Curio* 5.00% brands mixed with traditional standardized Signia** 5.00% products, multiple brands across multiple Hilton Waldorf Astoria** 5.00% segments, and catch-all “soft” brands Tru 5.00% (discussed further below). Unless you are a true Motto 5.00% industry insider, you probably don’t recognize Home2 5.00% all these brands; even hotel professionals have Hilton** 5.00% trouble describing the market positioning of DoubleTree 5.00% some of them (or identifying the brand family to Conrad** 5.00% which they belong) without some help. Canopy 5.00% * plus 3% spa revenue In traditional terms, you could put these brands ** plus 3% F&B revenue on a spectrum, with “strong” brands (those with joie de vivre* 7.00% wide name recognition and association with Destination* 7.00% specific product or other attributes) on one end Unbound Collection* 7.00% and “weak” ones (those with neither) on the Hyatt Regency** 6.00% other. You might further expect that franchisees Hyatt Caption 5.00% Hyatt would pay more (in the form of higher royalty Hyatt Centric 5.00% rates) for “stronger” brands than for “weaker” Hyatt House 5.00% ones. Hyatt Place 5.00% *on revenue generated And yet when you look at the royalties that through Hyatt channels each of these brands is currently charging to its ** plus 3% F&B revenue US franchisees, some surprises appear: Kimpton* 6.00% Holiday Inn Express 6.00% 2019 Franchise Royalty Rates Atwell Suites 5.00% Family Brand Royalty EVEN 5.00% Woodspring 6.00% avid 5.00% Suburban 6.00% Intercontinental 5.00% MainStay 6.00% IHG Indigo 5.00% Comfort 6.00% Holiday Inn 5.00% Cambria 6.00% Staybridge Suites 5.00% Sleep 5.50% Choice Crowne Plaza 5.00% Clarion Pointe 5.50% Candlewood 5.00% Quality 5.25% * plus 2% F&B revenue Ascend Collection 5.00% Westin* 7.00% Rodeway 5.00% Marriott Marriott* 6.00% EconoLodge 5.00% JW Marriott* 6.00% Clarion 5.00%

© 2019 Dent Legal Strategy LLC 3 All rights reserved. Sheraton** 6.00% all. The implication is that while some of these Courtyard 6.00% brands can add value, it’s not much. With only a Residence Inn 6.00% few exceptions, there is at most a 100-basis AC 5.50% point spread between each family’s strongest Fairfield 5.50% and weakest brands, including soft brands. For Moxy 5.50% example: SpringHill 5.50% • Choice charges as much for its soft TownePlace 5.50% brand, the Ascend Collection, as it does Aloft 5.50% for Rodeway, EconoLodge, and Clarion. Element 5.50% • Hilton charges as much for Tapestry, Four Points 5.50% LXR, and Curio as it does for Autograph 5.00% DoubleTree. (If a Curio hotel has a spa, Luxury Collection* 5.00% it pays more.) Tribute Portfolio 5.00% • At first glance, Hyatt seems to charge a Delta 5.00% premium for its soft brands – 7%. Hyatt Renaissance*** 5.00% only charges that royalty, though, on Le Meridien** 5.00% reservations made through its * plus 3% F&B revenue proprietary booking channels, the same ** plus 2% F&B revenue *** plus 3% ClubSport revenue way that third party OTA’s (like Expedia Microtel 6.00% and Booking.com) only charge for reservations made through their Hawthorn 5.50% platforms. Hyatt thus positions its Days Inn 5.50% collection brands as, essentially, an Super 8 5.50% alternative distribution system for Wyndham 5.00% independent hotels. Wyndham Grand 5.00% • Marriott charges as much for Wyndham Garden 5.00% Autograph, Luxury Collection, and TRYP 5.00% Wyndham Tribute Portfolio as it does for Delta, La Quinta 5.00% Renaissance, and Le Meridien (in each AmericInn 5.00% case with brand-specific additional Baymont 5.00% royalties for non-rooms revenue). Wingate 4.50% • Marriott and Wyndham have the Ramada 4.50% highest spreads between their most Howard Johnson 4.50% and least expensive brands, although in Travelodge 4.50% Marriott’s case it’s solely due to Westin, Trademark 4.00% likely a carry-over from ’s Source: 2019 US domestic Franchise Disclosure Documents. Percentage is of rooms revenue. Soft more aggressive royalty pricing. brands italicized. Excludes royalty discounts during • Alone among these families, Wyndham ramp-up period and brands not franchised in the charges less for its soft brand, US. Trademark, than it does for its other Startlingly, in many cases an established brand brands – although only 50 basis points is seemingly no more valuable than a lesser- below four of its established brands. known new brand – or even a “soft brand,” What is going on? often the functional equivalent of no brand at

© 2019 Dent Legal Strategy LLC 4 All rights reserved. To answer that question we need to look at two levels within many brands. Every time a hotel broader contexts: the historical development of fell short of guest expectations, that brand hotel brands, and some branding corollaries failed its promise. For decades, hotel brands from other industries. that delivered uniformity and consistency thrived, while others struggled. Hotel branding: a history In recent years, two developments have Branding is everywhere. Something once upended that landscape. The first was the rise reserved for products and services is now used of social media and review sites. With the help to describe companies, people, causes, and of tools like TripAdvisor, Yelp, and Google, places. Everyone and everything, it seems, has a guests no longer need to rely solely on brand brand. promises; they can get reviews and actual In the goods and services world, brands help pictures about specific individual properties, all consumers make purchase decisions. A brand provided by unbiased travelers rather than tells a consumer how a product or service brand marketers. stacks up to the competition: how it does The other development was a shift in consumer everything that its competitors do, and how it preferences away from standardized, cookie- does things its competitors don’t. Those cutter products to local and bespoke “things” can be tangible or intangible, rational experiences. To some extent this development or emotional, real or perceived, but for a brand was generational, reflecting shifting millennial to work they must be relevant to the tastes. But it was also a function of the first consumer’s buying decision. By helping development; in the days before internet travel consumers choose between competing options, sites, it was riskier for a would-be traveler to brands reduce risk and save time. Hence the take a chance on the unknown. Detailed online adage: a brand represents a promise of what a ratings and reviews made vetting and choosing consumer will get if he or she purchases the unique experiences easier and safer. (Airbnb, good or service offered. for one, owes its existence to these capabilities Brands have been important to the hotel and the experiential branding it built around industry since at least the 1960’s, when them.) Kemmons Wilson launched Holiday Inn. Travel The result of these two developments has been decisions are riskier than buying ordinary goods dramatic. Many hotel guests no longer see and services. You can’t try out a hotel before novelty and variety as a risk; they see it as a staying there. The cost of a room night can be benefit. Hotel companies have found significant. And guessing wrong means sleeping themselves needing to build brand promises in a room or building you might find unsafe, around something more than just unclean, unwelcoming or otherwise unpleasant. standardization. Traditionally, hotel brands reduced this risk by promising uniformity, consistency, and Those two developments – online travel sites dependability. When you checked into a and shifting consumer tastes – affected the role branded hotel at 1:00am, you knew exactly of brands. Two other trends dramatically what to expect. increased their number. The first was one that I wrote about in a recent article: the power of Or that was the theory. In practice, hotel guests multi-branding around a loyalty program. often experienced wide variations in design, Pioneered by Marriott and followed by Hilton amenities, quality, cleanliness, and service

© 2019 Dent Legal Strategy LLC 5 All rights reserved. and others, this strategy recognizes that the avoiding the expense of adhering to stricter same guest has different needs on different brand identity and other standards. Soft brands types of trips and that a loyalty program gives a thereby brought an entirely new class of consumer a strong incentive to stay within a independent hotels into hotel company brand family on all of those “stay occasions.” offerings. Over the past two decades, hotel companies The combination of hotel companies wanting to have tried to assemble brand portfolios that provide the right product for every guest need cover every stay occasion that their customers and the right “brand” for every hotel owner may face. greatly expanded the number of hotel brands. The other trend was in response to a different And, as previously discussed, the role of those kind of customer need. Like all franchisors, brands themselves was changing. To help hotel companies have two customers: understand how the combination of those consumers and franchisees. The purpose in life trends is playing out, it’s helpful to look at some of a hotel company is obviously is to sell hotel analogous branding approaches in other rooms to guests. But hotel companies also sell industries. franchise and management agreements to hotel owners; indeed, the primary source of revenue Brand architecture in other industries for hotel companies is the franchise and Multi-branding is not unique to the hotel management fees that they collect from hotel business. Other industries adopted it long ago. owners, not the room rates that hotels collect Those companies use the concept of “brand from guests. Growing those fees depends on architecture” to determine how a brand name continually selling additional management and should be used across different products, both franchise agreements to more and more hotel in breadth (how many different product types) owners, and one way to do so is to increase the and depth (how many varieties of a given size of the owner pool. product). Hotel companies did so by targeting Consider one of the world’s classic branding independent hotels. The owners of those hotels companies, Proctor & Gamble. Its remarkable might like the loyalty, marketing, distribution, brand lineup includes many American IT, and other systems that hotel companies household staples: provide, but might not want a brand. The reasons can vary: the investment in complying Procter & Gamble with brand standards may not produce an Product Brands acceptable return, or a hotel may have unique Baby Care Luvs, Pampers features that are not easily adaptable to brand Fabric Care Tide, Ariel, Bounce, Cheer, standards (or that would be lost in doing so), or Downy, Dreft, ERA, Gain, Ace, a hotel may have a recognized name of its own Rindex that would be diluted by associating with a Family Care Bounty, Charmin, Puffs famous brand. Feminine Care Always, Always Discreet, Tampax For those owners, hotel companies developed Hair Care Head & Shoulders, Aussie, the “soft” or “collection” brand. These “brands” Herbal Essences, Old Spice, provide the same access to a hotel company’s Pantene commercial engines as traditional brands do, but allow a hotel to keep its existing name while

© 2019 Dent Legal Strategy LLC 6 All rights reserved. Home Care Cascade, Dawn, Febreze, Gain, 2 Series Coupe (230i Coupe, Joy, Mr. Clean, Swiffer, Salvo, 230i xDrive Coupe, M240i Ambi Pur, Comet Coupe, M240i xDrive Coupe), 4 Grooming Braun, Gillette, Venus, The Art Series Coupe (440i xDrive of Shaving Coupe, 440i Coupe, 430i XDrive Coupe, 430i Coupe), 4 Series Personal Align, Clearblue, Metamucil, Coupes Gran Coupe, 8 Series Coupe Health Care Pepto-Bismol, Prilosec, Vicks, (840i XDrive Coupe, 840i ZzzQuil Coupe, M850i xDrive Coupe), 8 Oral Care Crest, Fixodent, Oral-B, Scope Series Gran Coupe, M2 Skin and Gillette, Ivory, Olay, Old Spice, Competition Coupe, M4 Coupe, Personal Care Safeguard, Secret, Native, M8 Coupe, BMW i8 Snowberry, SK-II 2 Series Convertible (230i Source: https://us.pg.com/brands xDrive Convertible, 230i Convertible, M240i xDrive Think about how consumers consider the P&G Convertible, M240i name when they buy one of these branded Convertible), 4 Series products. In general, they don’t. Consumers Convertible (440i xDrive Coupe, don’t buy Tide laundry detergent because it’s a Convertible 440i Coupe, 430i xDrive Coupe, P&G brand; most consumers don’t know or 430i Coupe), 8 Series Convertible (840i xDrive Coupe, care. They don’t buy Gillette razors because 840i Coupe, M850i xDrive they use Bounty paper towels, either. Each Coupe), M4 Convertible, M8 brand is marketed and sold independently of Convertible, BMW i8 Roadster, the others. Z4 Roadster Source: www.bmwusa.com In contrast, take a look at BMW: BMW’s model names aren’t really “brands”; the BMW brand is BMW. BMW doesn’t expect its average Product Models customer to know what a “440i xDrive Coupe” BMW X1, X2 Sports Activity is, but when that customer goes to a BMW Coupe, X3, X3 M Sports Activity dealer asking for a “two-door, hard-top Vehicle, BMW X4, X4 M Sports SAVs Activity Coupe, The BMW X5, convertible with four-wheel drive and a little The BMW X6, X6 M Sports extra juice,” the 440i xDrive is what they drive Activity Coupe, X7 Sports off in. Activity Vehicle P&G and BMW represent the extreme examples 3 Series Sedan (330i xDrive Sedan, 330i Sedan, M340i on a spectrum, and there are countless xDrive Sedan, M340i Sedan), 5 examples in between. Consider another car Series Sedan (540i xDrive manufacturer, Ford: Sedan, 540i Sedan, 530i xDrive Sedan, 530i Sedan, M550i Ford Sedans xDrive Sedan, 530e xDrive, Product Vehicles 530e), 7 Series Sedan (740i SUVs & Ecosport, Escape, Edge, Flex, xDrive Sedan, 750i xDrive Crossovers Explorer, Expedition Sedan, 740i Sedan, M760i xDrive Sedan, 745e xDrive, Cars Fiesta, Fusion, Mustang ALPINA B7 xDrive), M5 Sedan, Ranger, Transit Connect, F- BMW i3 Trucks & Vans 150, Super Duty, Transit Connect

© 2019 Dent Legal Strategy LLC 7 All rights reserved. Fusion Hybrid, Fusion Plug-in though, these companies have been migrating Electrics Hybrid, Explorer Limited down the spectrum towards Ford and BMW. Fiesta ST, Edge ST, F-150 Like Ford, their portfolios include numerous Performance Raptor, GT, GT MK II, Mustang strong brand names; indeed, some of them are Vehicles Shelby GT350, Mustang among the world’s most famous marks. But also Shelby GT500 like Ford (and to some extent even BMW), and Source: www.ford.com unlike P&G, hotel companies increasingly The difference between Ford’s branding market their brands as product options within a approach and BMW’s is immediately apparent. branded family rather than standalone brands. Ford uses the strength of both its own brand For some, like Marriott, this is nothing new; for name and those of its vehicles. Ford is one of decades, Marriott has used its parent branding the world’s most famous brands, with as an identifier for brands like Residence Inn, generations of loyal customers that return to , and others. In contrast, buy its cars over and over again. But Ford’s for many years companies like Hilton resisted vehicles also include strong brands, both classic attaching its name to brands like Hampton Inn (Mustang), newer (Fusion), and in between and DoubleTree, wary of adversely tainting the (Explorer). Hilton brand itself. (Marriott historically behaved the same way, in reverse, with respect The differences between the brand architecture to Ritz-Carlton.) Even today, some companies of P&G, BMW and Ford may have something to like IHG do not explicitly incorporate the parent do with how their products are distributed. P&G name into individual brand names at all. products are sold through retailers who sell (lots of) other products. Its challenge is to get What they all do, though, is increasingly funnel consumers to choose its brands over the many their customers through single, portfolio-wide others presented when a consumer arrives at reservation platforms: corporate “brand.com” the store or logs on to Amazon. Cars, on the websites and apps. These distribution sites are other hand, are sold by dedicated dealerships; a the electronic equivalents of the car industry’s manufacturer’s challenge is to convince dealerships; just as Ford uses its brand strength customers to visit one of its showrooms over to drive customers to their bricks-and-mortar one of its competitors’. Customers might do so locations, hotel companies use the advantages because they are attracted to the parent brand of their loyalty programs – primarily customer (like BMW), the product brand (like Mustang), recognition, favorable pricing, and convenience or a combination of the two, but the result is tools like app-based check-in and room the same: they end up at the manufacturer’s selection – to drive guests to their virtual website and/or dealership. Once there, the showrooms, where they are exposed to the manufacturer then presents its array of various product offerings within that family of products to the customer, who can then choose brands. which one most closely matches his or her You can see the trend toward that approach in needs. comparing the older technology of websites to Corollaries in the hotel industry the newer technology of phone and tablet apps. In the desktop browser world, hotel companies With that context, look again at the hotel brand maintain both separate brand-specific websites portfolios back on page 2. Not long ago, those and a parent site for all brands. All these sites lineups would have resembled P&G’s, with each are built on the same underlying IT architecture, brand marketed individually. Increasingly,

© 2019 Dent Legal Strategy LLC 8 All rights reserved. and once a customer searches for hotel minimum expectation of cleanliness, quality availability, the only difference between the and comfort. various sites is the content and order of the Nowhere is this more obvious than with the soft search results (brand-specific sites generating brands. By any traditional measure these can results that either prioritize the chosen brand or hardly be called “brands” at all, given that in list it exclusively.) In all instances, the customer most cases their distinguishing feature is that has the option to display all results within the every hotel within the “brand” is different. brand family. Some of them are notable brands in their own None of these companies, though, maintain right, such as the Mayflower Hotel in brand-specific apps. Searching for a specific Washington DC (now part of the Autograph brand in the App Store, for example, will return Collection). At the extremes, it can even lead to the universal app of the parent company. For naming like the upcoming “ Las the most part, these apps will not even give Vegas, part of the Curio Collection by Hilton” – a consumers the option of a brand-specific search soft brand (Curio) combined with a branded (although they will allow customers to filter chain (Virgin) whose other hotels are not part of search results to include or exclude specific the soft brand. brands). And yet it works. The primary reason So think back to the questions posed at the franchisees affiliate with a soft brand is not the beginning of this article. Are there too many brand name but the features and amenities hotel brands? Does it matter if no one provided by the parent company to all brands in recognizes them or knows that they stand for? the portfolio: an assurance of a baseline quality and cleanliness level, loyalty points, IT features Maybe not. Just as a BMW customer doesn’t such as automated check-in and room selection, need to know what a “428i” is – BMW just and the like – all supplemented by the needs to get the customer in the showroom additional assurance provided by third-party door – a hotel customer doesn’t necessarily customer review sites. The soft “brand” name is need to recognize individual brand names to virtually irrelevant, by design. And yet those navigate the search results on a hotel company franchisees pay the same, or nearly the same, website or app. Most customers will make their royalties as franchisees of the other brands. decision based on the same primary criteria hotel guests have always used: location and Thus the reality for all these brands, soft and value. (The loyalty program is also a factor, but otherwise: the most valuable component of a it would have already been considered in hotel franchise or management agreement is no getting to the site or app in the first place.) longer the license to the brand name. It is now Individual brands still have a role to play; they access to the brand family’s commercial help indicate where a property falls within a systems: loyalty program, distribution systems, brand family hierarchy, and to the extent that a front- and back-office and other technology guest associates a specific brand with a systems, brand support, and other systems and particular promise, they serve the same time- programs available to every hotel in the family saving roles brands always have. But the lack of regardless of individual brand. More than an association – or of name recognition at all – anything, the primary value is being included in is hardly fatal; the guest will rely on the hotel’s the search results on a hotel company’s web association with the parent company for a site or app, particularly as those companies focus their efforts on directing customers to

© 2019 Dent Legal Strategy LLC 9 All rights reserved. shop there rather than at OTA’s or other example, had an area restriction with a 40-mile distribution outlets. radius; it was to be The New York Hilton. The approach was reflected in Hilton’s advertising Implications for franchise and management slogan of the time, “Take Me to the Hilton,” contracts with the implication that only one existed in any Hotel franchise and branded management given market. agreement forms were drafted decades ago to With the rise of multi-brand companies, area describe a P&G world. They commit owners to restrictions evolved to be brand-specific. While brand-specific standards, and generally promise a franchisor or branded operator would non-discriminatory treatment and consistent typically be prohibited from opening another charging within a brand. With very limited property under the same brand within the exceptions, they are silent as to the critical role defined area, that prohibition did not extend to that the hotel company, its loyalty program and other brands. Restrictions also generally its support systems now play. contained carve-outs for properties acquired in In many instances, that approach still makes M&A transactions beyond a de minimis size. sense; there are rational reasons to treat These restrictions made sense so long as different brands within a brand family individual brands were targeted at distinct differently. There are at least two areas, market segments; the designation of a brand in though, where the old world of hotel branding an area restriction became a shorthand for no longer works: area restrictions and change- directly competing products. Both parties could in-control provisions. safely assume that new supply under a different brand would be targeted at a different market 1. Area restrictions. segment and would therefore not directly Area restrictions – provisions that prevent a compete with the existing hotel. franchisor or branded operator from opening In the current market, though, it’s not unusual competing properties within a defined for individual brands within a brand family to geography or market – are badly broken. It’s overlap – or even directly compete in the same not clear that there’s a fix, but they can at least segments. A brand-specific Ritz-Carlton area be refined. restriction is considerably less valuable if 1 60 years ago, in the early days of branded hotel Marriott can open a St. Regis next door. If that management, area restrictions could be very trend was a crack in the area restriction broad, whether in territorial reach, duration, or framework, the rise of soft brands has blown it across brands. Even the most ambitious hotel wide open. The proliferation of soft brands chains typically contemplated a single, flagship across multiple price points, and the ease with property in a given market. The original which hotel companies can introduce new ones, management agreement for what is today has made it vastly easier for directly competing called the New York Hilton Midtown, for hotels to operate within each other’s restricted

1 There are the occasional outliers. In 2008, a separated from the rest of the Marriott brand Maryland jury found that an area restriction family; it is not mentioned on Marriott’s website, the prohibiting another hotel from using the Ritz-Carlton Marriott affiliation is not mentioned on Bulgari’s “marks” applied to a Bulgari hotel whose guest room website, and Bulgari does not participate in Bonvoy. marketing collateral mentioned Ritz-Carlton. It may (Marriott’s SEC filings reflect its ongoing ownership be for that reason that Bulgari is effectively now of the brand.)

© 2019 Dent Legal Strategy LLC 10 All rights reserved. areas, rendering many of those restrictions doing. They can respond jointly to RFP’s, toothless. protect against one undercutting the other, and target their respective products to different The demise of brand-based area restrictions is customers and market segments.2 Far from not a complete disaster. The primary concern being a detriment, sharing that information behind traditional management agreement could be a significant competitive advantage. area restrictions was that new competing intrabrand supply would require a brand to All that said, direct new competition is a spread its customers across a broader base of problem for any hotel. To the extent that area rooms, and would force a manager to divide its restrictions can specifically define prohibited loyalties among multiple masters. With the competition (by product type, facilities, experience of the last two decades there’s targeted market segments, etc.), they would be reason to believe those fears might have been vastly superior to simply using brand name as a overstated. proxy. The reality, though, is that except for high-profile projects on which there is First, hotel companies have been able to grow significant brand competition, owners may lack their customer base even faster than their the negotiating leverage to obtain meaningful supply of hotels. In 2000, Hilton had 11 million protections (particularly in franchise members in Honors; it is now approaching 100 agreements) and may instead need to rely on million. Choice Privileges has 43 million. Bonvoy other mechanisms such as performance tests. has 137 million. The more hotels these systems add to their portfolios, the more options their 2. Change in control. members have to choose from, the easier it is Change-in-control provisions vary widely across for them to earn and burn points, and the more different brands, management versus franchise attractive the programs themselves become – agreements, and even from agreement to leading to a virtuous cycle of attracting still agreement. Whatever their form, they address more members. That dynamic goes a long way the risk that a brand could be acquired by in explaining how these systems have been able someone that lacks the resources or expertise to maintain or grow market share premiums to perform its contractual obligations. Once despite constant and significant supply growth upon a time, such a provision might have given within their own brands. That original 40-mile an owner a consent right over the transaction. radius of the New York Hilton now encompasses Given the strategic importance that M&A has over 135 Hilton-affiliated properties. taken on in the hotel business over the last two Second, competing properties that share the decades, though, change in control provisions same manager have a significant advantage: that could allow and owner to prevent or they can share and coordinate pricing impede a significant transaction have virtually information in ways that the antitrust laws disappeared. Today, a typical hotel franchise would prohibit independent managers from agreement allows a brand to be sold to any

2 There are limits, of course – particularly if together attorney general contended that two Sheraton and the competing hotels control enough supply in a Westin hotels in downtown so dominated market to dictate overall pricing (in antitrust terms, the local convention market that Starwood had if they have “market power.”) I’m aware of only one market power. The case settled with Starwood instance where this happened in the hotel industry, agreeing not to share information between the two almost 20 years ago after Starwood acquired hotels. Sheraton and Westin. The Washington State

© 2019 Dent Legal Strategy LLC 11 All rights reserved. person or entity that can perform the look more like BMW or any other brand franchisor’s contractual obligations; some do architecture, remains to be seen. Different not have even that qualification and allow the companies may take different approaches. As brand (and its agreements) to be sold, period. some approaches succeed and others fail, losers Even in that scenario, though, a transferred may reverse course. brand would stay intact and the transferee In the meantime, area restrictions and change would have to perform its obligations under the in control provisions are two typical hotel transferred agreements. agreement features that have been rendered There’s a major problem with that approach: it obsolete. There may be others. Management does not address the consequences of the companies, franchisors, owners, and other brand being separated from its parent family. industry participants need to look at their The 440i is a nice car, but it wouldn’t sell nearly agreements through the lens of today’s as well if it wasn’t a BMW. The fact that the changed landscape to make that determination. new owner of a brand is competent would be Just as importantly, they need to keep doing so small consolation for losing access to systems as the landscape continues to evolve. and engines that were the primary value in a John Dent is the Principal of Dent Legal Strategy franchise or management agreement in the first LLC, located in Washington DC. He provides place. legal and strategic advice to private equity Brand families almost never intend to shrink, firms, their portfolio companies, and corporate and it happens rarely. But it does happen. legal departments, with an emphasis on the Hilton sold Red Lion in 2001. Wyndham sold lodging industry. John offers project-based, flat- last year. Marriott’s acquisition of fee services that straddle the line between legal Starwood triggered widespread discussion of advice and business strategy, that don’t whether Marriott would spin off any of the generally fit the law firm model, and that in- acquired brands. From time to time over the house legal departments may lack the years, other rumors have circulated about bandwidth or expertise to do themselves. brands such as Sheraton and Doubletree. If the M&A trend continues, it’s conceivable that a merged company could be large enough to pose antitrust concerns and could be required to spin off brands. Twenty (or more) years – the typical initial term of a franchise or branded management agreement – is a long time.

Conclusion The hotel industry has undergone a quiet revolution. Not long ago, it lived in a P&G world of standalone brands and standardized products. Franchise and management agreements were written to implement that world, and they served it well for many years.

That world is gone. Whether the Ford model is here to stay, or whether it evolves further to

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