Hotel Owners, Meet Rosy Scenario

By Jeff Wilder
For H&MM

There are few businesses in the world today that are not both frightened and intrigued by the powerful potential of the Internet to affect the very lifeblood of the enterprise. (Imagine the sweaty palms at both Barnes and Noble and Microsoft as their executives gather to discuss business strategies to counteract Amazon.com and America On Line.) However, the lodging industry has virtually no downside from the Internet and, with almost clear sailing ahead, hotel operators are poised to reap significant e-commerce rewards that are still not fully recognized by industry players.

My belief is that the Internet will assist in reducing risk premiums traditionally attached to hotel assets, with the concomitant benefit of lowering interest rate spreads on hotel debt, required investment returns on equity and, therefore, reduced capitalization rates on overall value. Let me explain. Any of us who have logged onto the Net find that one of the first "go to" choices appearing on our screen is the Travel option. So, it is no wonder that every survey or article we read comes to the same conclusion—demand growth of e-travel business is exponentially expanding. It follows, then, that we in the lodging industry have the wonderful good fortune to be situated directly in the path of a potential e-commerce tidal wave of patronage that is little short of revolutionary. This must result in positive financial implications for our hotel investments that appraisers, lenders, buyers and sellers will clearly come to recognize.

The Internet’s information distribution capability can only benefit hoteliers that use it effectively. I see hotels as empty baskets into which will flow increasing levels of guest reservations made over the web. These reservations will come from a wider distribution of the traveling population, especially the amorphous, and hard to reach, leisure traveler who is currently the web’s main travel client. As hoteliers use the Internet to do ubiquitous marketing of their properties, their reliance on existing room demand-satisfying relationships will be fundamentally altered and the individual property will, therefore, be in a better bargaining position with each of its current business providers. Today, that set of business providers includes franchise companies, local corporate rooms users, global distribution systems, and the like. To this list will now be added web travel sites charging commissions, CVB and Chamber sites, specialized locations such as those for skiers, golfers, and so forth—plus many others. These are all places to which you will be able to list and link your hotel’s own web site, thus garnering more retail business directly from the room user. The natural result is that middle-man fees will be reduced.

So, here’s what happens:

Loan interest rate spreads will lower, and debt capital availability improve, as mortgage bankers see the obvious upside scenario of the Internet for hotel profitability and stability of earnings. There should be more muted swings in an individual property’s profitability during both shifts in national/regional economic conditions and localized supply expansions. Risk of hotel investments (vis a vis today) is diminished.

Appraisers address the fundamentally positive implications of the Internet on the hotel industry and its impact on an indivdual hotel’s capitalization rate. While Bill Gates rightly sees the Internet as a threat to Microsoft (to be co-opted or mitigated), there is simply no threat to the individual hotel from the Internet—only benefits from its aggressive use.

Franchisers will either reduce their fees or increase their benefit packages to franchisees. Those franchisers that don’t pay strict attention to the new rules of the game do so at their own peril. As franchisees dive into the grunt work of listing and linking their own web sites through ISP’s, portals, search engines, e-travel agencies, and the like, the unequal power of the franchiser in its relationship with the franchisee will moderate. E-commerce travel agents with powerful locations (i.e. Preview Travel), and a multitude of other reservation service sites directing traffic to your hotel, will grow in importance, attracting both hotels and guests.

The franchiser must take an ever greater responsibility to (a) negotiate discounted fees
for its members on these new e-commerce sites and (b) provide manpower that broadly markets its members on both general usage and "personalized" web sites beneficial to individual members. This means a significant expansion of the franchiser’s Internet service department with an expanded goal of helping the individual hotel, not just the promotion of the franchiser’s own web site where a    particular hotel may be buried three levels deep.  Qualified management staff will become easier to locate as centralized hotel job opportunity web sites grow in importance. Hoteliers and job seekers will increasingly find "common ground" web sites ever more useful in hooking up in ways that were simply not possible earlier.   All in all, this is a pretty rosy scenario for the hotel owner as he, or she, benefits by the information distribution (and instant booking capabilities) that are central to the Internet’s power. As I said earlier, I believe that this can only serve to reduce the risk premium built into the pricing of hotel assets, thus increasing their values.

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