I have written in previous editions of Ai Tourism Investor about the inroads that the regional and international chains are making into Africa – companies such as Protea from South Africa, France’s Accor, the Brussels-based Rezidor with their Radisson and Park Inn brands, and Starwood’s Sheraton and Four Points brands. A recent survey undertaken by us shows that the new-project pipelines of these and other chains in Africa have never been bigger – Africa is firmly on their agenda!
And happily, many investors in the hotel industry are also keen to secure the services of these chains, so there are deals to be done. But there seems to be some confusion regarding the business models that these groups adopt when entering African hotel markets – how often have you seen headlines stating that “ABC international hotel chain is building a new hotel in ZYZ city”? A headline which is almost always inaccurate! By and large, the hotel chains do NOT invest in nor build hotels. Of course, there are exceptions to this rule – Southern Sun own hotels in Dar es Salaam and elsewhere, and Rezidor have invested in Bamako and other locations.
Typically, however, the likes of Hilton, Sheraton et al are providers only of management and marketing services. Only? Well, of course, these services are key to any hotel’s success, particularly in Africa’s increasingly competitive markets, as more and more hotels open.
Operation and branding by a hotel management company has a positive impact in a number of areas, including:
- access to established and well documented policies and procedures;
- access to established training and development programmes;
- head office and regional support in specialist departments such as marketing, financial control and human resources;
- the advantage of being part of an organisation with an established sales network. This enables a hotel to capture individual travellers by virtue of the brand name and through their loyalty card schemes;
- the wide distribution of sales and marketing literature through this network;
- the benefit of referral business.
These benefits should bring greater sales and profitability, and therefore enhanced asset value.
The cost? In financial terms, the chains are charging fees in the order of 3 to 5 per cent of sales, and 8 to 12 per cent of profit, plus a charge for marketing, and other expenses incurred on behalf of the owner of a hotel. Very often there are also upfront fees for technical design services, and the owner will also be required to provide funds for pre-opening and working capital.
Some owners believe that the financial costs are higher than the benefits received from the management company’s services, but in my experience that is due to one or a combination of other factors, rather than to the actual fees paid e.g. the management company does not properly communicate with the owner, or the owner is not ready to accept the loss of day-to-day control that is a condition of the management agreement.
For an owner wishing to retain control of his asset, and to reduce fees paid to a third party, the options are threefold: manage the hotel himself as an independent unit; obtain a franchise with an international chain; or join a marketing consortium.
Independent, unbranded operation can work well, particularly in a sellers’ market. But in the face of competition from professionally managed and branded hotels, the independent hotel invariably performs less well.
Under a franchise agreement, the international chain provides brand standards and marketing support, whilst the owner undertakes the management himself. The customer will not be aware of the difference between, say, a Holiday Inn managed by the owner of the hotel, or one managed by Holiday Inn themselves. This business model is very common in the USA, but far less so in Africa, mainly due to the lack of management expertise that dogs the industry. To the best of my knowledge, most franchised hotels in sub-Saharan are managed not by individual owners but by the major, experienced players – African Sun manage Holiday Inn hotels in Zimbabwe and Accra, Southern Sun manage InterContinental- and Accor-branded hotels in South Africa, and so on.
Fees for franchise agreements are typically expressed as a percentage (5 to 8 per cent) of rooms revenues only. Lower cost than a management contract, but the owner still needs to provide management to the hotel.
Another model entirely is the marketing consortium (so called because they are a collection of independent hotels, and the organisation is run by its members), typified by such global players as Best Western and Leading Hotels of the World (LHW). These organisations provide marketing services to independent hotels, charging a membership fee, which is typically based on the size of the hotel. Whilst certain quality standards and parameters are imposed by the organisation, the owner is able to operate the hotel independently. Best Western imposes a higher branding requirement than LHW – the “hard” versus the “soft” approach. For boutique hotels, there’s the UK-based Small Luxury Hotels of the World, and for those properties where design is “it”, there’s Design Hotels.
How does an owner decide which business model to adopt? For most hotel owners in Africa, the franchise model is not an option – as noted above, global chains such as Hilton and Sheraton will not franchise to independent hotel owners, particularly those without management experience.
So the question is “to manage or not to manage”? And that choice is very often taken not by the owner, but by the debt and equity providers – a lender wants to know who is going to be there generating the cash flow to repay the debt, and may well make the engagement of a professional, branded management company a condition of that loan. Hotel management is not easy, they are complicated businesses, and having a professional in place, with an established marketing network, is a distinct advantage in competitive markets, and in times of a downturn. For many owners, the cost of engaging an operator is fully justified by the financial and other benefits which accrue.
But the international management companies a re not always the answer, and hotel owners with experience of management can consider the option of a marketing consortium like Best Western, who are, like the international operators, increasingly turning their attention to Africa. We are currently working with Best Western to source independent hotel owners with the right quality of product, and the right mindset, to join the consortium. Best Western and others like them provide marketing services only, with the objective of providing brand recognition to the hotel, and driving business to their members through sales and marketing activities. That leaves the independent hotelier free to manage, in the knowledge that they are “not alone”. In addition to the marketing and other business benefits that the marketing consortia provide, the hotel owner gains from the opportunity to network with like-minded hoteliers – a valuable support network.
W Hospitality Group, Lagos