Death, Taxes & Hotel Brands

By Matthew Petrie

Benjamin Franklin said that there only two things certain in life: death and taxes. However, for the benefit of those operating in the lodging sector, I will add a third……. investors will seek out the operators, brand and distribution partnerships that they think will deliver the best return as they try to optimise the performance of their hotel assets. Not quite as snappy as Mr Franklin’s words, I admit!

But do investors and their management teams have all the information they need to determine which brands deliver the best return on the cost affiliation? Do brand owners have the best tools to measure the health and positioning of their brand assets?

In virtually any industry, the two main criteria for successful brands are the same. They need to deliver outperformance in terms of market demand (volume), or a superior price point – or ideally both. The received wisdom in the lodging sector is that a good hotel brand ‘puts heads on beds’ through a combination of nationwide distribution, strong consumer awareness and a large and effective frequent guest programme.

But can hotel brands actually command a price premium in a notoriously price sensitive market? If so, which brands perform best?

BDRC’s Brand Margin® methodology uses a wisdom of crowds approach to determine how much more (or less) consumers are willing to pay for a named brand relative to an otherwise identical alternative. The first wave of results for the U.S. lodging industry is now available. (Only available on a subscription basis, so I limit myself here to sharing a few highlights):

Brand Margin Hotels Chart

  • In the Economy tier, brands on average carry a margin of $4 against an unbranded equivalent. Five of the 28 economy tier hotel brands tracked in the U.S. actually carry a negative margin, with ‘the crowd’ implicitly suggesting that these brands carry sufficiently negative connotations that guests require a lower than normal rate to warrant staying there. By contrast, the top performing brands in the tier, Hampton Inn and Ibis Styles, carry a margin of over $13.
  • Reinforcing the view that consumers view hotel brands on a continuum rather than in the discrete tiers used by analysts, the likes of Hampton and Ibis Styles perform significantly better than the weaker brands in the midscale. Nevertheless, the average Brand Margin® for midscale brands rises to $17, with the best-in-class brand, Hyatt Place, securing a margin of $25.
  • In the upper full service tier, the average Brand Margin® doubles relative to the midscale. Here we have identified significant variations by type of location, with consumers appearing to attach greatest importance to brands in resort locations. For example, ‘the crowd’ says that consumers will pay an additional $28 to stay in a Hilton-branded property in a provincial location, but as much as $49 in a resort.
  • Waldorf Astoria narrowly outflanks The Ritz Carlton to attain the highest Brand Margin® of all, comfortably in excess of $100. And remember, this is an additional sum relative to otherwise identical alternatives!

Across all the markets in which this research has been carried out, we have consistently found that millennials are willing to pay more for brands. They may be brand-promiscuous, but all the evidence suggests that they are more emotionally engaged with brands than older age cohorts.  In time we will be able to judge whether this engagement is genuinely age cohort related, or simply a consequence of youth.

Following from the Brand Margin® rankings comes the inevitable question: what enables one brand to command a higher price premium than another? In the economy tier, we have identified a close, though by no means perfect, correlation with guest experience metrics.   The brands recording the strongest Brand Margins® tend also to be those with the highest Net Promoter Scores (NPS).  But as we move up the tiers, we find that other factors become significant – in particular the extent to which brands resonate with their target audiences at an emotional as well as functional level.

Find out more about Brand Margin® and hotel brand performance benchmarking.

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