Historically, hotel owners have had the choice of partnering with a well-known brand or going it alone. Partnering with a brand gives them access to reservation systems, loyal customers, joint marketing programs, name recognition among consumers, and a sense of stability in the financial and investment community. However, brand partnerships come at a cost. Owners pay various fees for franchise rights, marketing, reservations, and customer loyalty programs, and are required to adhere to facility, service, and operational standards.
Independent operation relieves owners of the burden of franchise-related expenses and allows owners and operators greater flexibility in facilities, services and operations. However, without national or global marketing assistance, independent hotels are left to rely on their individual reputation and appeal to niche travelers.
history
Around 2000, hotel owners were offered a third option – soft brands. Today, the soft brand sector has evolved into the so-called “lifestyle space” that encompasses most STR hotel chains. In the early 1980s and early 1990s, trendy hotels emerged, mostly independent properties located in high-end urban locations or luxury resorts. These hotels belonged to giants such as Ian Schrager’s Morgans Hotel Group and Bill Kimpton’s Kimpton Hotels & Restaurants, the latter of which is now synonymous with the soft brand space and a pioneer of the “branded boutique hotel” mainstay. Soft brand lines such as Joie de Vivre entered the market around the same time. Veteran brand expert Barry Sternlicht then launched the W brand in the late 1990s.
In the early 2000s, large brands such as Marriott, Hilton, Starwood, and IHG began implementing growth plans to expand their product offerings directly in the soft brand space. They aimed to acquire and merge as well as grow brands organically, all in an effort to stimulate system distribution growth while creating a competitive advantage and expanding market share by offering a wider range of brand portfolios to more affluent and loyal customers. In 2004, IHG launched Hotel Indigo, and in 2008, Marriott further accelerated growth by launching the Autograph Collection through a partnership with Kessler Collection Hotels. Other brands soon followed. 1 By the 2010s, most major brands had developed their own soft brands, including Curio Collection (Hilton, 2014), Tribute Portfolio (Starwood, 2015), Tapestry (Hilton, 2017), and Unbound Collection (Hyatt, 2016). Mid-priced hotel companies have also entered the soft brand space, with Choice Hotels International announcing its Ascend Hotel Collection in 2008 and Best Western launching Best Western Premier in 2014.
Soft brands and independent brands
Soft brands are a hybrid between independent brands and core brand hotels. Generally speaking, soft brand hotels enjoy the advantages of the core brand's marketing programs and reservation systems, but have greater flexibility in terms of facilities, services and operating standards. Soft brands are often the choice of hotel owners with a historical reputation and their own characteristics. They are also an option for hotel owners who want to develop “hybrid hotels” or hotel owners with high but not extensive facilities and service levels.
In recent years, as developers have questioned the cost/benefit of affiliating with a core brand, they have had to decide whether to sign up with a soft brand or operate independently. To provide some financial data for this decision-making process, CBRE analyzed the performance of comparable soft brands and independent hotels positioned as upscale hotel chains and operated by third-party management companies through 2023. Comparability was established based on number of rooms, occupancy, average daily rate and total operating revenue. Comparable properties located in urban areas as well as remote areas2 were compared.
Independent hotels have higher gross operating profit (GOP) margins in both urban and rural areas. As expected, the main reason for the higher GOP margins is the lack of franchise-related expenses. Urban soft-brand hotels spend an average of 12.6% of total revenue on their sales and marketing departments, compared to 7.3% for independent hotels. In rural areas, the difference is 11.9% for soft-brand hotels, compared to 6% for independent hotels.
To compensate for the lack of regional, national and global brand sales and marketing programs, independent hotels rely more heavily on their own sales professionals. As a result, urban independent hotels have 18.3% higher sales and marketing department labor costs per available room (PAR) than urban soft brand hotels. In the remote sample, independent hotels have 25.4% higher sales and marketing department labor costs per available room (PAR) than remote soft brand hotels.
While independent hotels have higher GOP margins, soft brand hotels have higher EBITDA3 margins. This may indicate the collective buying power that soft brand owners gain in non-operating ownership costs such as insurance. Insurance cost PAR is 20% to 30% lower for remote and urban soft brand hotels, respectively, in 2023.
Other considerations
To evaluate the operational efficiency of soft-branded hotels versus independent hotels, we intentionally selected hotels with comparable revenues. However, based on our experience in the market, we generally find that soft-branded hotels do achieve higher and more stable occupancy rates because they can use the brand’s reservation system and customer loyalty program. Higher revenue levels can offset the operational inefficiencies noted in our analysis.
Furthermore, our analysis does not include the impact on capital costs. While soft-branded hotels have less restrictive facility and service standards than core-branded hotels, these standards often require greater capital investments than independent hotels.
in conclusion
Soft brands have come a long way since the movement began, and the sector has become an exciting trend for investors and consumers to watch. Independent hotels and soft brands have expanded their offerings, providing more choice for consumers and owners.
