Through flexibility and innovation, independent hotels can offset the benefits of franchise agreements
When Riley Hotel Group recently took over the management of a 50-room boutique hotel in Key West, FL, the company shared some surprising news with the owner. Instead of doing battle with vacation rental sites like Airbnb and Vrbo, his property could place inventory on those sites and expand its outreach to consumers.
“We’re changing with the times and working with what’s available to us,” said Joe Moffa, president of Medina, OH-based Riley Hotel Group. “Adding Airbnb and Vrbo to independent boutique hotels wasn’t a thing three years ago, but it is now, and it has added an increased level of demand generation for our independent hotels.”
Riley Hotel Group manages a diverse portfolio of 14 independent hotels, 10 franchised, and two soft-branded. In highly competitive markets, especially downtown corporate centers, it may make sense for hoteliers to side with a proven brand, taking advantage of its reservation system, membership clubs, business relationships, and marketing expertise, Moffa said.
In other markets, however, especially tourist destinations, hoteliers often do better by retaining their independence and accenting their individuality, he said. Independent hotels can experiment with their design and layout, add or subtract amenities and services and tailor their menus to local tastes. Through operational agility, independent hoteliers can enhance the guest experience, driving revenue and customer satisfaction simultaneously, Moffa said.
“If you have the right location in the right market, I would choose an independent boutique hotel all day long,” Moffa said. “We could get creative with the design and with the partners that like that type of product instead of a brand. We could get creative with the food-and-beverage concept and the [furniture, fixtures, and equipment]. We could have a rooftop bar. We can do all kinds of things.”
THE NUMBERS GAME
According to CoStar Analytics, about 70% of the roughly 5.6 million hotel rooms in the United States last year were brand-affiliated, continuing a trend of expanded footprints for franchisors. Franchised rooms dominate several market segments, accounting for 71% of midscale rooms, 89% of upper-midscale, 85% of upscale, and 80% of upper-upscale, CoStar reported.
Notably, independents still have the edge in the luxury and economy segments, accounting for 62% and 51% of room inventory, according to CoStar. Luxury hotels, in particular, have opportunities to personalize the guest experience through special services, menu items, gifts, handwritten notes, and other gestures that make guests feel special, Moffa said.
Branded properties, meanwhile, succeed by providing a predictable, uniform experience that’s equally unlikely to disappoint or wow guests. Without brand standards, independent hoteliers have more freedom in sourcing products and services, allowing them to foster relationships with local businesses and elevate their status in the community.
Independent hoteliers can also market their properties as they see fit, targeting niche groups such as environmentally conscious consumers, weekend sports enthusiasts, or foodies – without becoming misaligned with a brand’s broader corporate strategy.
“With an independent hotel, you have the flexibility to do some things for your guests that are outside the box and create memorable experiences you aren’t going to get at the branded property down the street,” Moffa said. “We’re not selling sleep; we’re selling an experience, and I think that’s the biggest difference between independent and branded.”
WEIGHING THE PROS AND CONS
In terms of finances, independent properties offer tradeoffs for hoteliers. There are no franchise fees or royalties, which can total more than $100,000 in upfront costs and around 10% of revenue for the life of the agreement, which can last anywhere from five to 20 years.
Independents also aren’t subject to property improvement plans that require substantial investments from hoteliers every six to 10 years to remain in compliance with brand standards. As hotels struggled through the pandemic, most brands relaxed their PIP requirements, but amid the industry’s strong recovery, franchisors have become less forgiving, Moffa said.
“With an independent hotel, I like that I’m not paying franchise fees or commissions, and I like not being forced to do a seven-year PIP when my product looks brand new,” he said.
On the other hand, it’s easier to get financing for franchised properties, so hoteliers might have to put down a larger down payment to build or purchase an independent property. In March, Reuters reported that a growing number of independent hotels were joining brands, largely due to high interest rates.
Last year, for example, conversions accounted for 40% of organic room signings at Marriott International, up from 20% in 2022. Meantime, half of Accor’s hotel openings last year occurred through conversions, reflecting a larger industry trend, Reuters reported.
Due to inflation, construction costs and borrowing costs have risen in tandem, making it harder for independent hoteliers to access capital. Moffa said difficulty securing financing is “the one drawback” of independent hotel ownership, saying lenders today “want to see that franchise agreement.”
During a conference call with investors this spring, Marriott CEO Anthony Capuano said the company was counting on conversions to fuel its growth while construction of new hotels remains sluggish. About 1,980 new hotels opened in the United States last year, down from 2,730 in 2019, according to Lodging Econometrics.
“In a climate where the debt markets for new construction are somewhat constricted, the importance of conversions is elevated,” Capuano said.
SPEAKING UP FOR BRANDS
Aman Dhillon, a member of AAHOA’s Women Hoteliers Committee, said her Elk Grove, CA-based company, Hotel Management Solutions, owns and operates eight franchised hotels in the select-service segment. She said she prefers the predictable performance that typically comes with branded properties and the ability to learn about hotel operations from brand ambassadors.
Moreover, franchised properties typically benefit from agreements between franchisors and large companies that have employees traveling for business, giving branded properties an advantage, Dhillon said.
“As an independent, you’re on your own, depending only on your reputation in the market,” she said. “With a tried-and-true brand, you’re taking advantage of the brand’s reputation and its connections with different companies.”
Dhillon said hoteliers just getting into the business might view brands’ PIP requirements as onerous and excessive, but after running hotels for a while, they typically understand renovations “breathe new life into the property, improving [average daily rates]and market penetration even for older, established hotels.”
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INTO THE FUTURE
Ravi Patel, past chair of AAHOA’s Independent Hoteliers Committee, said technological advances are adding to the appeal of independent hotel ownership. A second-generation hotelier operating three independent properties, Patel said new technologies are making it easier for independent hoteliers to manage multiple properties while preserving their work/life balance.
Keyless entry systems, remote check-in, facilities management software, security cameras powered by artificial intelligence, and even automated bedbug detection systems are enabling hoteliers to work from home and set their own schedules like never before, Patel said. Sensor-equipped trash cans can alert hoteliers when they’re full, for example, reducing the time spent maintaining a property.
Patel said independent hoteliers can’t afford to invest in every new piece of technology but, unlike franchised hotels, they’re free to implement the solutions that most appeal to them.
“These are the things independent hoteliers can look forward to,” Patel said. “I lived in a motel behind the laundry room, but now you can picture me having all these AI capabilities and being completely offsite. I can check a guest in and open the door for them. If my laundry guy comes to drop off clean sheets and towels, I can open the laundry-room door remotely to let him in. This is where the technology is going.”
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