With the jump in the number of hotel conversions during the past two years
(see story), travel buyers have faced unexpected questions about their hotel directories in both their primary and secondary destinations. On the positive side, buyers can rest assured that, in most cases, rates they have negotiated at hotels undergoing a flag change will remain in place for the duration of the contract period.
"Roughly 90 percent of the time rates set by the former flag are honored. Occasionally if a hotel is sold or a major renovation is begun, we're told they can't abide by those rates," said Patricia Flothow-Locke, vice president of sales and supplier relations for Radius.
Buyers can add language in any agreement that will help protect the interests of their program. "We make sure in all of our clients' terms and conditions documents that the rate is protected, regardless of a change in ownership or management contract," said Neysa Silver, hotel program consultant at Carlson Wagonlit Travel. "In fact, when we find out there's been a change we typically go back on behalf of clients and get a statement from the director of sales that this is the case."
While a hotel's new management may not be happy with existing rates, they feel obligated to retain them all the same. "You can be sure the following year they're going to be looking for higher rates. They'll reevaluate the business at the end of the contract period to see if the volume projected when the original contract was negotiated came in as forecast and use that as the basis for an increase," said Alison Guilbeaux, director of hotel consulting business development for WorldTravel BTI.
In a frequent conversion scenario, the hotel moves up a notch to a brand with a higher price point as a result of renovations. Consequently, the new flag almost inevitably will seek higher rates. "In some cases, the buyer will feel the improved service levels and amenities warrant an increase. There always will be instances when the owner allowed the property to get a bit rundown, so the conversion and accompanying renovations are welcome news because travelers will be better taken care of," Flothow-Locke said.
Buyers are free to remove a property from their program, if the new rates are unacceptable. "There are markets where a hotel will be the only game in town, but in most cases there are alternatives," said Keith Boccuzzi, vice president and general manager for the Northeast for TQ3 Travel Solutions. "The change-over also is an opportunity for buyers to ask themselves if they want to go down a notch to a lower price point hotel that might be more within their budget."
The stakes for buyers are raised the highest when the flag change affects a key hotel in their program, a property that buyers need to retain. "Given that a lot of this is about location, if the hotel is across the street from the company's headquarters, the buyer is going to need to keep it in the program," Flothow-Locke said.
Considering the number of room nights the property produces, however, a flag change inadvertently can jeopardize buyers' marketshare commitments. "If you're a loyal customer of brand X and all of a sudden your key hotel aligns with brand Y, you're bound to lose some of your ability to move marketshare to X because you still need the hotel in your program. At the same time, you're going to have little, if any, leverage with brand Y because you're basically a brand X customer," Guilbeaux said.
Similarly, the buyer can switch preferred providers. "If the hotel is a big enough volume producer, the buyer now can become a customer of the new brand and begin to drive marketshare to that supplier, assuming the brand's distribution overall is acceptable," Flothow-Locke said.
The large, multi-brand hotel companies are at an advantage because they're likely to have the most distribution in the market. "Chain A no longer may be managing that property, but manages another property that is relatively convenient to where travelers need to be," Boccuzzi said. "If the ability to deliver on marketshare is important enough to the buyer—not just in that city, but overall—switching hotels may be worth the risk of slightly inconveniencing travelers."
The hotel company losing the flag will recognize the buyer's predicament. "National account managers understand that it can be hard for the buyer to hit compliance thresholds as a result of the conversion," Silver said. "Discuss with them the impact of the reflagging on your program, not just in that city but across your program." The hotel will be sympathetic because in the end they want to maintain the relationship.
According to Guilbeaux, the increase in conversions underscores the importance of buyers maintaining their relationships with sales contacts at the property level. "NAMs certainly play an important role, but, in your key hotels, you want to keep those local relationships firmly in place," she said. "In a flag change, the locally based people are much more likely to stay and join the new management team, while the NAMs move on. It's the local people, after all, who know the nuances of the account, have a history with you and can be helpful when the discussion gets around to rate increases."