CHAINED VERSUS INDEPENDENT HOTELS

Chained versus Independent Hotels

Chained versus Independent Hotels

Abstract

This papers explores the historical performance of chain hotels and separate (non-affiliated) independent hotels. The papers attempts to prove or disprove the speculation that chained hotels are less unstable than separate hotels.

The conclusions of this paper determine that chained or branded hotels have traditionally been less unstable than separate accommodations. The lower instability is basically because of lower instability in room rates. The paper later discusses as which one has the edger over another if it comes to choosing between the two.

Introduction

The concepts of hotel and hotel chain are central to this article and therefore it is important to provide clear definitions. We define “a hotel as a traditional, commercially run form of accommodation in which one, as a tourist (interpreted in the widest sense) can find shelter, even if food and drink are not available on the premises. Hotels are differentiated according to class (from simple to luxury) and to type guest accommodated, the latter being either business people or residents. These service establishments must offer a minimum of comfort, and must be hygienic if they are to be respect the conditions necessary for official recognition” [P. DE GROOTE, 1987, p.327] The World Travel Dictionary [R. ENGLISH, 1999, p. 83] defines “a Hotel as an establishment providing accommodation and meals and would be expected to provide a greater and/or superior range of facilities than establishments such as guest houses”. A Hotel chain is a group of hotels owned by the same person(s) or organisation(s).

It is commonly known among real estate investors and operators that the hotel sector is extremely volatile and cyclical. Not only does the industry share in the long-run volatility common with general economic cycles, but lodging can experience high degrees of seasonal volatility as well. Such seasons can be defined by weather patterns, days of the week and/or local economic factors.

Industry players often use the over-simplified cliché "It's is all about heads in beds". Thus, if such top-line measures influence the psychology in the industry, then the volatility of top line revenues is a major factor for investor sentiment and operator motivations. Such volatility can deter general real estate investors, leaving the asset class to seasoned hotel investors. However, even among seasoned investors the difficulty in timing investment decisions is increased with the frequent and often high levels of volatility. One method to improve top-line performance and control volatility is to affiliate or franchise a property with a national lodging chain. Many operators and financiers commonly believe that chain affiliation helps to limit uncertainty in room revenues.

This paper analyses the historical performance of chain-affiliated hotels and independent (non-affiliated) hotels. National franchise companies have long established reputations based on the claim that they lower the risk and increase the return to investors.

The paper attempts to prove or disprove the hypothesis that chain affiliated hotels are less volatile than independent hotels. While there are many measures of risk and investors are primarily concerned with ...