Financial Times

Hotel owners and operators: Parting of ways
As the tourist industry recovers from the ravages of war and gets ready to cater to an increase in arrivals, The Sunday Times FT specialist writer on travel and tourism Pani Seneviratne looks at the relationship between famous hotel chains and local owners.

Famous brand names are important for marketing hotels internationally, as in the case of any other consumer product. Hotels in Sri Lanka, particularly those located in the city of Colombo, had at one time or the other signed management contracts with such international chains as Intercontinental, Oberoi, Meridien, Ramada Renaissance, Holiday Inn, Hilton, Marriot, Hyatt and Taj. Over the last few years, the number of international management chains operating hotels in Colombo has drastically declined. Only three of those names, Holiday Inn, Hilton and Taj, still continue as operators. Contracts with Meridien and Marriot were terminated by Galadari Hotel. Ramada Renaissance (TransAsia), Oberoi (Colombo Plaza) and Intercontinental (Ceylon Continental) have also terminated their obligations to the owners in Colombo.

While some major hotel owners have plans for refurbishing and upgrading hotels, there is less eagerness as in the 1970’s and 1980s to flaunt the names of foreign operators for the refurbished properties.

The tie-ups to those international hotel chains helped local hotels to identify themselves to international visitors by there brand names. By carrying the nametags, they could also claim to offer their customers a product of the quality standard that those names are associated with. Managing companies that are brand owners would ensure that the hotels carrying their international names conformed to the standard of facilities and services associated with the brand names.

A discerning client, say a business traveller, who arrives on an unscheduled visit, would look for a known name of repute in choosing a hotel as would a travel agent making a reservation on behalf of a wealthy individual or corporate client.

Brand names, of course, come at a cost in kind and cash. The owner may be asked to refurbish the hotel or make structural changes or add new services in order to qualify for the use of a brand name. Financial costs of acquiring the name may be embodied in a management contract between the hotel owner and the operator, as the managing company is known. The items of cost may be any one or more - even all - of the following: a percentage of operating profit; a percentage of turnover; a fixed fee per available room. Besides, key posts in the hotels such as General Manager, Food and Beverage Manager and Chef may have to be reserved for nominees from the managing chain.

Malin Hapugoda, President of the Tourist Hotels Association of Sri Lanka, is of the view that the principle reason for the recent phenomenon of hotel owners parting with foreign operators is the price they have to pay for the connection.

At current levels of earnings, in the context of an on-going militancy in the island that was discouraging prospective visitors, the management fees were taking away too large a slice of revenue. New hotels and those previously managed by foreign operators are, however, managing to retain a reasonably high level of skill and competence by wooing Sri Lankan expatriates with overseas experience by offering attractive packages of compensation.

On the question of whether these hotels are missing the marketing advantage offered by the brand names, Hapugoda feels that hotel products that have been promoted in the past with overseas tour operators and at trade fairs are quite well known in overseas travel trade circles.

Chandra Mohotti, Chairman, Hotels Corporation and former General Manager, Galadari Hotel, which employed two operators, Meridien and Marriot, in succession and subsequently operated on its own, believes that the best thing about an international chain is that it brings in good management practices.

Hotels whose foreign operators have pulled out may be missing both the expertise and the support offered by the operator to the specialist staff of the hotel.

A management contract with a chain would invariably include a programme of human resource development. In cases where a chain has pulled out, a rapid downturn that some would anticipate may not occur because of the quality of training imparted to the staff. Being a link in a far-flung chain gives a new orientation to the question of accountability.

The GM of a stand-alone hotel may have to comply, more often than not, with the decisions of the owner even though the two parties may disagree. Within a chain, the GM in Colombo may be reporting to a regional Vice-President in Hong Kong who would apply pressure on the owner to support a project that is considered essential. Making contacts with international corporate clientele and wholesalers from a stand-alone hotel would be extremely difficult if the name is unknown.

Promoting sales on behalf of a chain-hotel, one finds much of the preparatory work done by the operating company's principals Managing companies would always sign contracts that are profitable to them. If an owner finds the management fee too high it may be a sign of the weak bargaining power of the owner, as in the case of a state-owned property.

The prospective operator may, in such a case, push for a high fee. Many Indian hotel owners are tough negotiators, according to Mohotti. They have managed to get international brand names at a relatively low cost.

Nevertheless, a stand-alone hotel has the advantage that marketing in Colombo to high-end clients is relatively easy. Foreign visitors from multi-national companies could be enticed with hotel packages through their corporate branch offices. Personal contacts have often helped to maintain client goodwill. Mohotti believes that personalised promotion can sometimes offset the need for a chain.

Lalin De Mel, Director Marketing, Jetwing Hotels Ltd., virtually echoed the views of the President of the Hotels Association. “For the past 15 years, hotels in Colombo have been paying franchise fees they could not afford at going rates of earnings.”

Describing it as a ‘chicken-and-egg’ situation, where the owner would look for an operator who could improve the earnings while it is the earning capacity of the property that would attract a reputed operator, he said that an operator like Hilton would have developed and managed a resort property if the situation had been different. De Mel says the problem is not merely the shortfall in earnings. Some local owner-developers have no ‘eye for quality’. None of the major Sri Lankan owners has developed a product of an international quality standard to make a name for itself or to establish itself as a brand.

Quality itself has many facets. Having a foreign Chef makes a property more marketable. In Bali, for example, most hotels have foreign Chefs. But in the Sri Lankan context, there is a strong lobby from the Hotel School Alumni for priority for the group.

De Mel thinks that there is good international awareness of the destination, pointing to the entry of the Singapore-based Banyan Tree Group with a "Colours of Angsana" resort in Giritale. But to sustain the demand for a quality product that commands a price of say for example US $ 500 per bed, there is another link in the chain that needs to be integrated. Sixty percent of Sri Lanka's tourists come from Europe.

There are 10 charters that operate to Sri Lanka but the best airlines based in the continent do not fly to Colombo. Visitors who pay US $ 500 per night would be averse to sitting in an aircraft cabin alongside labour traffic to and from the Middle East.

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