New year, new opportunities: Why the hotel industry needs to shake up the owner-operator relationship

Robert Swade, managing director of Maze Hospitality, outlines the reasons why the owner-operator relationship needs to be improved, with some suggestions as to how.

As we find ourselves in the midst of a third lockdown in the UK, hotels and the wider hospitality industry are once again facing closure and disruption. All over the world, the industry is grappling with a difficult start to a new year, with strict restrictions still in place as we await the widespread distribution of the vaccine. However, despite these significant challenges, the start of a new year still presents an opportunity for new, and improved, approaches.

Until now, much of the focus on the impact of Covid-19 on hospitality has been on the challenges from an operational perspective. But what about the core relationship behind the operations? What do these challenges mean for hotel owners and their long-term engagement with operators?

For many years, owners have felt that operating brands have lacked flexibility, presenting prospective owners with an opportunity that they can either take or leave. Even though the negotiation of hotel management agreements is now a lengthy process, we continue to see management contracts which include a significant term of engagement, limited termination rights for a hotel owner and performance tests which are structured in such a way that the operator may be unlikely to fail.

The prevailing model arguably remains weighted significantly in favour of the operator, and despite limited or no capital investment in most hotel developments, we continue to witness many management companies seeking to exercise what can perhaps best be described as a quasi-ownership role.

Now more than ever, we must reassess this model and strive to improve the owner-operator relationship in the long-term.

Ultimately, there are more operators now than there are opportunities. Operators should think carefully about what they are offering which makes them desirable. The negotiations should reflect the commercial reality of current market conditions and allow more weight to shift towards owners to allow for better, collaborative partnerships between the two parties.

This starts with addressing management agreements. In the first instance, it is recommended that both parties seek expert advice at the beginning of the negotiation process and throughout the duration of the term – the agreement is what sits at the heart of the owner-operator relationship and it is imperative to have expert counsel to guide these discussions.

For hotel owners, they would be best advised to set out clearly and concisely their expectations of the hotel operator, ensuring that operators perform both to the letter and the spirit of a management contract. Arguably, this applies to owners with existing arrangements in place as well as to those considering the appointment of a management company.

In light of the current climate, they should also demand a greater degree of flexibility and, as well as expecting the operator to achieve at least fair market share, should also scrutinise a management company’s offering in relation to matters such as brand recognition in multiple markets, commercial capability, service excellence and the delivery of superior results in existing managed hotels. Further to this, they should look at company culture (including stated aims in relation to community initiatives, climate change and environmental issues) and the approach of the brand to unique differentiation.

For hotel operators, this will understandably be a challenge at this time. However, brands which are prepared to offer a flexible and adaptable approach, both in respect of their contractual arrangements, fee structure, operating model and design guidelines are those which are likely to have a competitive advantage.

Brands need to show how they are adapting to increase their top-line revenue. Businesses cannot expect owners to invest if their plan is simply to wait until things go back to normal. Operators should proactively showcase their strategy, which should be tailored to their business but could involve anything from repurposing accommodation or working across different industries and changing their customer base.

In order to come out of this crisis and thrive in the long-term, operators also need to present their approach to long-term issues. Committing to more sustainable, people-centred operations, and actively demonstrating how you will achieve this, will be more attractive for any investor looking to move with the times and future proof their investment.

Particularly if you are an established brand, Covid-19 has presented an opportunity for new hospitality businesses to refocus on purpose-driven models and it is with these brands that you will be competing. Those who articulate their mission will stand above those without.

This will involve fresh ideas and creative thinking which means operators must also think very carefully about their teams. Understandably, the pandemic has had a huge effect on people’s livelihoods and made it difficult to retain staff. But your colleagues are your greatest asset – ensure you have the right people around you and the right advisers to map out your mission to best present it to the world.

As we go forward this year, we can feel positive that there is hope on the horizon. We do now have a Covid vaccine and there are increasingly innovations being developed to help industries recover. This presents a space for positive change and reinvention of the tired models we had before – that have been brought into even sharper focus because of the pandemic.

The days of outdated models for owners and operators, which only allow for a one-size-fits-all approach, are gone. It is time for unique, considered agreements, which reflect the market reality and enable positive collaboration between owners and operators. It is time to embrace a new age for the hotel industry.

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