Is it a smart way for the hotels to banking on brand conversions while coming out of the crisis?

The biggest hotel companies in the world are gambling on brand conversions to fuel growth from the downturn in travel due to coronavirus. But adjusting a property’s markers isn’t necessarily a magic bullet to boost fresh sales. If major companies or local operators are thinking on this option, there is lots of capital to be earned or left on the table in the sale of a hotel company or through the brand conversion.

In the first quarter, travel demand collapsed as coronavirus spread across the globe. But hotel managers still saw opportunities amidst a tough situation. Over the next few years, the chief executives of global hotel companies like Hyatt, and Marriott all mentioned growth would likely stem from properties under their respective brands converting to a flag. But not everyone is persuaded that conversion talks would be as quick as some of these businesses are planning.

Mostly in smaller markets, it’s sorry to hear, but when a person comes to their front office with a bigger corporation’s business card, independent hotel owners get impacted. Folks keep thinking that some company would come here to rescue them. No. No. If a hotel has a good location, good ethics, and really reaches out to local business drivers, there are chances that they will still do well.

Economic downturns are when large brands and online travel agencies frequently pitch their services to independent hoteliers — global distribution, high-tech booking systems, broad consumer confidence. Wyndham Chief Financial Officer Michele Allen noted last week on the company’s first-quarter earnings call that Wyndham has earmarked $30 million for development opportunities such as converting independent hoteliers into their variety of economies and mid-scale flags.

Here is a discussion from hotel management experts to judge whether it will be a smart move from the independent hotels to bank on brand conversions when coming out of the crisis.

Problems in conversion

Evidence shows brand conversions usually benefit hotel owners — depending on the direction in which the conversion is being scaled. A study conducted by Cornell University in 2015 focused on 260 brand conversions between 1994 and 2012, compared to 2,750 hotels that did not change brands.

According to PKF Hospitality Analysis data included in the report, independent hotels that switched to a brand association saw occupancy rise by an average of approximately 7 per cent. Overall, conversions produced an average occupancy improvement of about 6 per cent.

However, the study states conversions that shift downscale perform best to increase occupancy and income than conversions that seek to make a hotel more upscale. Operators in the Cornell study who carried out conversions aimed at keeping property within the same family of brands or moving upscale, where expenses often are greater, typically did not see any material changes in revenue or profit.

The financial indicators could weigh on operators asking whether the crisis is the right time to pursue a new affiliation with the flag. Although the major brands realize their success by conversion forecasts is the product of the drying up of construction loans for new hotels, brand conversions do need capital to remodel a property to their current brand requirements.

Cash talks and payments walk

Over the next two years, the major chains would already have a compelling case for hotel operators entering a new franchise deal. Big brands are likely to offer, along with their brand awareness, distribution channels, and marketing budget, what initial travellers want during the recovery of coronavirus: increased health and safety standards. For their portfolios, executives with all the global brands including Hyatt, Marriott, and Hilton who listed conversion operation also reported new levels of tidiness.

In the first three years following the financial crash of 2008 Marriott introduced just over 13,000 rooms to his portfolio by brand conversions. But that number is expected to increase, in the recovery of coronavirus as the world’s largest hospitality group is now loaded with several more labels after the Starwood acquisition and has a playing card that will more definitely cater to luxury hoteliers: soft products.

The million-dollar market

When an operator pays to remodel a property to new brand standards, they are also faced with a surge of fees to stay a part of the family. Early franchise fees can run in the tens or even worth hundreds of dollars depending on the property’s luxury scale. Instead come promotion costs, booking rates, and a proportion of overall room sales collected.

The market has totally transformed, and in such a situation, I would expect some hotel owners to be tempted by the large marketing dollars that these brands have available to them. But a process will not be as simple as that. So many factors come into action here.

Brand leaders such as Hyatt suggested earnings call that incentives such as key money, fee waivers, or other forms of financial assistance may need to be able to leverage in the competitor conversion landscape once the industry gushes out of the crisis mode into restoration.

Some major brands like the Magnuson Hotels are also preparing their own protective strategies, including a system of capital costs for hoteliers to renovate properties and receive a cost refund that he says is less than half of what bigger brands charge franchisees.

So accordingly, prediction, It’s likely to be a really difficult fight going on among the brands who go in for the conversions as they come out of the crisis.