MAR 331 Suburban Hotel Development - Choosing a Franchise Brand

Suburban Hotel Development

Choosing a Franchise Brand

Problem: Gulph Creek Hotels found a great opportunity to start working on a new project after the downturn caused by September 11. The company is now analyzing the possibility of opening up a new hotel in the remote area in Pennsylvania. We have already found suitable land (6.22 acres) and discussed initial costs for building the facility with the construction management company. It was estimated the new hotel would have 130 rooms and construction cost of $84,000 per each room. In order to receive financing from the commercial banks, Gulph Creek Hotels needs to select a franchise with a reputable name because it will ease the pathway to receiving financing. There are many potential candidates among hotel brand names, but I have carefully chosen Hampton Inn, Courtyard by Marriott, and Best Western brands to compare, which will help us make a final decision.

Background: Before selecting the three best candidates for our new hotel, I have spent much time on addressing key factors to make sure the project was worth pursuing. Certain analysis was done in the demographics area, identifying potential consumers and their characteristics such as population, age (35-36 years old) and household income (mid to upper-scale). In addition, competition analysis was conducted. The existing and potential competitors pose some risk to opening a new hotel, but the potential of generating revenues is much higher. One thing our company also had to consider was that opening a new hotel could pose a possible risk in decrease of the RevPar percentage in the area. However, the research showed that that the new hotel would be slowly getting absorbed in the market due to the existing demand in the area because of large corporations, which are located in the area. It would be a similar situation like with Homewood Suites, which just opened in Valley Forge. After all the above factors were considered, I have singled out three best candidates to choose from when opening a franchise: Hampton Inn, Courtyard by Marriott, and Best Western. These brands all have advantages and disadvantages. In order to select the best fit for the new site, certain analysis was done comparing various benefits and drawbacks through financial information, satisfaction surveys, loyalty programs, hotel prices to consumers, and other relevant analysis. 

Comparison of ADR and Occupancy for 2004

According to the table below Courtyard by Marriott seems to be the best fit according to all of the collected data. It has highest occupancy rate, which is very important because we need to make sure the hotel is utilizing all of the 130 rooms as much as possible. In addition, the RevPar is also the highest among the three. This data needs to be compared in terms of revenue as well. We need to calculate the daily room revenue for each of the hotel brand names. We need to apply this formula:  Daily Room Revenue = ADR x Occupancy Rate x Number of rooms available. The number of rooms in the proposed hotel is 130. The annual room revenue = Daily Room Revenue x 365 (days). Therefore, according to the table below the most profitable candidate to consider for a franchise name is Courtyard by Marriott. However, the numbers below are calculated according to the estimation that all 130 rooms will be occupied during all of the 365 days. In real life this may not be the case and other factors have to be considered before drawing a final conclusion.

Brand/Property	ADR	Occupancy	RevPar	Daily Room Revenue	Annual Room Revenue (365 Days)
Proposed Hotel (subject)		130 rooms
Hampton Inn	$81.64	68.3%	$55.73	$7,248.82	$2,645,819.30
Courtyard by Marriott	$97.18	71.4%	$69.35	$9,020.25	$3,292,391.25
Best Western	$75.21	60.9%	$45.78	$5,954.38	$2,173,348.70

Breakeven Occupancy Rate Analysis

	Hampton	Courtyard by Marriott	Best Western
Variable cost per occupied room per day	$21	$21	$21
Total Fixed Costs (excluding franchise costs)	$10,920,000 (total construction 130 rooms) $ 2,000,000 (land) $12,920,000	$12,920,000	$12,920,000
Total Fixed costs per day (excluding franchise costs)	$35,397.26	$35,397.26	$35,397.26
Total Franchise Costs	$238,123.74	$296,315.21	$65,200.46
Total Franchise Cost per day	$652.39	$811.82	$178.63
Total Fixed Costs (including Franchise costs)	13,158,123.74	13,216,315.21	12,985,200.46
Total Fixed Costs Per Day	36,049.65	36,209.08	35,575.89
Daily Breakeven Revenue	$7,248.82	$9,020.25	$5,954.38
Daily Variable Costs	$1864.59	$1949.22	$1662.57

We also need to take into consideration the breakeven occupancy rate, which will supply us with the information needed to make a final decision. The formulas for calculating breakeven occupancy rate are:

Daily breakeven revenue = Daily fixed costs + Daily variable costs, where

Daily breakeven revenue = (projected ADR) x 130 (rooms) x Occupancy percentage. Daily fixed costs = Total Fixed Costs / 365 days.

Daily variable costs = $21 (variable cost per occupied room) x 130 (rooms) x Occupancy percentage. The table shows the calculations.  For example, for Hampton Inn $7248.32 does not equal the total fixed and variable costs per day. The costs are much higher. The conclusion that we can draw is that at the stage of opening a new hotel, none of the hotels seem to bring any profit or breakeven the first year. We know, however, that the turn around time for big projects like this might be more than a year before we make any profit.

Analysis of the Revenue and Franchise Cost:

            The table below shows the associated franchise costs for each of the selected brands. According to the chart below it could be clearly seen that Best Western brand name (membership association) will consume less than 3% of the total annual room revenue. The percentage seems very reasonable and, therefore, most beneficial at first sight. However, it is difficult to determine without the estimated annual room revenue if that would be the best-case scenario.

Comparison of Annual Franchise Cost

Brand	Royalty Fee	Marketing Fee	Reservation Fee	Total Annual Franchise Cost
Hampton Inn	5%	4%	None	9% of total room revenue
Courtyard by Marriott	5.5%	2%	1%	8-9%
Best Western	$3,761 for 100 rooms	$28,653 for 100 rooms	$14,600 for 100 rooms	Approximately less than 3%

Therefore, after calculating the final franchise costs the Best Western total costs are the lowest compared to the other brands. We can also check if Best Western would be the best fit by figuring out how franchise costs would affect the revenue and how much profit would be left.

Brand	Annual Room Revenue (365 Days)	Total Annual Franchise Costs	Total Annual Variable Costs	Annual Profit less Franchise Costs
Hampton Inn	$2,645,819.30	$238,123.74	$680,575.35	$1,727,120.21
Courtyard by Marriott	$3,292,391.25	$296,315.21	$711,465.30	$2,284,610.74
Best Western	$2,173,348.70	$65,200.46	$606,838.05	$1,501,310.19

Best Western Total Annual Franchise Cost = $2,173,348.70 x 0.03 = $65,200.46 (Profit $1,501,310.19)

Hampton Inn Total Annual Franchise Cost = $2,645,819.30 x 0.09 = $238,123.74 (Profit $1,727,120.21)

Courtyard by Marriott Total Annual Franchise Cost = $3,292,391.25 x 0.09 = $296,315.21 (Profit $2,284,610.74)

           

Even though the Best Western franchise costs are the lowest, Courtyard by Marriott still has more profit left at year-end despite the high franchise costs (which were taken as 9% of total annual room revenue). Opening up the latter franchise makes it more advantageous for Gulph Creek Hotels because it brings more profit at year-end.

Analysis of MMHI Satisfaction survey

            While all the financial analysis and occupancy rates point out that Courtyard Marriott might be our best choice, we need to consider our potential customers and their perception of those three brands. Our company Gulph Creek Hotels’ main concentration at all of the locations has been on customer satisfaction. According to the data below, Hampton Inn seems to be a winner especially in the customer satisfaction category. However, our strongest competitor in the area is the already operating Hampton Inn & Suites  - Oaks. In addition, my main concern is that the brand name may not be available for us for this particular site because we already have four franchises like this in Philadelphia. Now if we compare the class of the hotels, Courtyard by Marriott is considered as an upscale hotel according to the MMHI Survey. Since the demographics show that most of the household income is medium to upper level in the area in addition to all financial advantages already discussed above, it could be our best choice. We could simply work towards the more upscale target market by still offering a compatible price that could attract others as well. The reason for this is because this franchise can compete both with full-service and limited-service hotels because of the affordability of the price and all the extra amenities that a lot of the customers are looking for.

Brand/Property	Class	Customer Satisfaction	Emotions	Very Likely to Return	Loyalty Program Strength	Reported Price
Hampton Inn	Midscale w/o F&B	84.1	77	73%	12%	$81
Courtyard by Marriott	Upscale	82.5	77	63%	10%	$95
Best Western	Midscale w/o F&B	79.7	74	51%	3%	$76

Analysis of the Loyalty programs

Now let’s take a look at the loyalty programs. The score indicates its relative success compared to other programs. This measure combines the percentage of guests who are members of a brand’s loyalty program and the importance of the brand for the guest, when selecting a hotel. According to this definition Hampton Inn has the highest rating. The loyalty programs are all a matter of preference to the customer. For example, Marriott Rewards or Hilton HHonors are somewhat similar in a way that they provide various benefits in different areas. While Best Western Gold Crown Club is a little bit different. There are less partners it is associated with and also provides less points for each dollar spent. If we were to choose just by considering the advantages and responsiveness of the customers to the loyalty programs, then Hampton Inn would be a bit better than Marriott. A loyalty program that works to serve the customer can guarantee the retention of guest’s commitment to the brand.

Brand/Property	Loyalty Program Strength
Hampton Inn	12%
Courtyard by Marriott	10%
Best Western	3%

Hotel prices to consumers and other analysis

            The average reported price according to one of the surveys is listed below in the table. Since we have a lot of competition in the area, and we do not really have the best location, Best Western provides the lowest price and therefore may guarantee the occupancy. However, low prices do not necessarily mean customers will prefer the brand over the other. The already discussed factors play a cumulative role in the consumer decision-making process.

Brand/Property	Reported Price	ADR
Hampton Inn	$81	$81.64
Courtyard by Marriott	$95	$97.18
Best Western	$76	$75.21

Proposed solution

            All things considered, I believe that opening a franchise under Courtyard by Marriott brand name would be the best fit for the new site because of the financial benefits such as the projected annual profits. These profits are higher compared to the other proposed franchises given the fact all other factors will work seamlessly together to bring in customer traffic. The high occupancy rate of 71.4% in addition to the 63% that the customers will likely return ensure daily customer traffic and, therefore, back up the idea of the potential profits. Despite the highest costs on franchise, the brand name boasts high customer satisfaction and well-formed loyalty program that works for customer’s benefit. The upscale class of the hotel may set it apart from its competitors in the area by offering extra amenities and convenience. In addition, we can offer a compatible price for the daily rate that would be attractive for the potential customers in combination with other obvious benefits discussed above. Of course there is always a risk but the analysis was carefully conducted and therefore we hope that the new site, Courtyard by Marriott would be the best fit for our company. It is also a reputable brand name, which will favorably influence the decision making in financing with commercial banks.

Please Note! All of the work posted in my blog is my personal insight into problem solving and answering questions. It is subjective opinions based on scholarly readings. The information may have some errors. I am not a professor.

If you see something you would like to contribute to or correct, you are more than welcome to comment below. I would appreciate it!