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Asset Owner v/s Brand Manager - Indian Owners turn the tables on Brands

Tuesday, April 4, 2017, 13:04 Hrs  [IST]

Those days are over when Indian hotel owners consumed whatever brand owners offered and signed on dotted lines to have brand flags flying on top of their assets. The Indian hotel owners have come a long way in taking informed and sensible decisions as regards management contract making the brands sweat for each contract in the bargain. With a matured eco-system of experienced consultants, legal advisors in tow, Indian owners have been able to turn the tables on the brands. P Krishna Kumar explores how the balance of power is fast shifting in favour of asset owners in the Indian hospitality.

No hotel industry conference of significance across the world concludes without discussing the perennial issue of owner-brand manager relationship. Asset owner- management company relationship have always been a love-hate one with marriages going bumpy and acrimonious quite often leading to divorce mid-way through the contract period. Lot of these grumblings were attributed to lack of proper understanding in deciphering contract provisions by the asset owners in the past. However, there are valid reasons to believe that Indian asset owners have come of age in cracking management contracts to their favour and advantage, in recent years. There have been so many instances in recent past where owners severed partnerships with one management company and went and signed up with another brand at advanced stages of opening, and in certain cases before living together in partnership for a year even. The growing number of brand switch that happened in recent years is also a testimony to this growing clout of owners in the partnership.

Pundits in the industry confides that there has been palpable difference in the way Indian owners understood and executed management contracts five years ago and now. One obvious reason they give is the number of referrals available to owners to help them make informed decisions. Owners talk to each other now and learn from each other’s experiences. There are more referrals in the market than in the early years when management contract was an altogether new concept to them. Another major contributor is sheer choice of companies and brands available to them to choose from. India over the years have matured into a playground of international and home-grown brands.

“I think the biggest change over the past 20 years has been the whole new plethora of brands that have entered the country. Competition is always good for the consumer and in this case the consumer is the hotel owner,” states Manav Thadani, Chairman, HVS-Asia Pacific. Thadani also doesn’t hesitate to take the credit, especially the role HICSA as a platform played in the whole industry evolution and churning. “I do believe events like HICSA have allowed owners to get together and share a lot more information amongst them. We have over the past 14 conferences, held a session on management contract every year and it remains the most popular session amongst owners. My personal wish one day would be to negotiate a contract live on stage till a LOI stage, he said.

The change in equations was not sudden but gradual in the journey of the industry in India. In the course of this journey, both macro and micro environments have changed, says Beni Agrawal, Business Consultant, GK Hospitality Services. “On the macro side - almost every international hotel operator is now present in India giving wider choice to Indian hotel asset owners. On top of that, there has been steady rise in domestic hotel operators offering all kinds of flexibilities and creativities. Today, there is a brand and a hotel operator available for any hotel ranging from 30 to 300 rooms located in tier I to selective tier IV cities. And on the micro side, while repeat-owners have learned from their own past experiences of contracting, the new age owners are better equipped with means to dig the information and create comparatives for better decision making. Technology has also played pivotal role in enhancing the research capabilities of hotel owners resulting in better decision making.”

Over the years, the Indian owners learned lessons the hard way through experiences. “Mainly, this learning has come out of the sharing of the large number of poor experiences that owners have faced in the past. There are now resources available in the form of consultants that are better able to guide this process. Hotel brands and management companies too have realised that they need to make their contracts truly a win-win for owners and themselves,” says Rishad R Minocher, Principal Consultant, Turnstone Hospitality.

Tarini Menezes, Associate Manager, Economic Laws Practice (ELP), a leading law firm in the country, also confirms this gradual evolution. Indian owners have stayed ‘close’ to their hotels and have noticed what works and what is not essential. “They compare notes to learn from experiences and each other. The evolution of hotel owners is largely due to the fact that hotel owners these days are not first time owners, and they have applied their learnings from past projects to the current ones.” The influx of multiple brands, availability of information through various mediums such as reports and publications from hospitality consultants, hospitality focused publications, etc., all contributed to this change, believes Naveen Jain, MD, Nouvelle Knowledge Services. The owners follow the brand identity through social media such as TripAdvisor/OTA platforms etc. to assess the brand’s market positioning and credentials.

Matured Indian owners having multiple hotel properties are going out and engaging multiple brands rather than working with single brand owner for all their assets. Jehangir Aibara, Director, Mahajan & Aibara Business Consultants believes this as a sign of maturity. “Owner’s entering into multiple contracts with different brands enables them to use their past experience understand better the nuances of a management contract.”

Although Indian asset owners who are in the business for a very long time have gained knowledge and expertise through experience, they still cannot match tactfulness and negotiating skills of brand companies, feels Sudip Mullick, Partner, Khaitan & Co. “The brands have decades more experience in management contract negotiation than Indian owners and are experts. They are way ahead of the typical Indian owner and owners who fail to recognise this do so at their peril.”

New Gen Owners
Over the years, a whole new generation of entrepreneurs has emerged from the shadows of the older generation. These new generation entrepreneurs because of their superior educational background and international exposure understand the nitty-gritty of contracts and therefore are better equipped negotiate contracts analysing each provision threadbare, feels industry watchers. The new generation comes equipped with a changed perspective and knowledge of the ground realities that the industry faces in India. Hence, they approach contract negotiations in a manner that protects their interests, while ensuring that their assets are optimally positioned in the market and ‘sweated’, says Minocher.

The intellectual level, research capabilities, and other necessary negotiation skills definitely make the new generation more organised in their approach. And they also do not hesitate to rely on professional help when required, says Beni. However, its perhaps the ‘Team Work’ between ‘Experienced and Calculative Old Generation’ with ‘Qualified and Enthusiastic Young Ones’ that gives the real edge in negotiating contracts, he adds.

Aibara feels otherwise, he doesn’t believe first time new generation hoteliers will be able to make any difference to the character of deals. “In comparison, the first generation players who have been through the process and owing to their experience understand what the more vital/relevant points are and on which to focus the negotiations on,” he observes.

Matured Eco-system
Among other factors, what helped the Indian owners is the emergence of a pool of industry consultants, both international consultancy agencies, as well as independent consultants, who after spending decades in the top management positions in the industry turned into consultants and advisors for the industry. Most of these new breed of consultants having been seen and part of many management negotiations both as a management representative as well as an owner’s henchmen are capable of guiding the owners through tough and marathon negotiations without wilting on key points.

“Owners have begun to rely more on professional firms to negotiate contracts for them, as they know that we can often get them better terms than they would be able to on their own. Additionally, more number of law firms specialising in this industry are available to hotel owners in current times than in the past,” informs Thadani of HVS.

“Several knowledge partners are available today to advise owners/developers and negotiate brand agreements on their behalf. Not only it is limited to brand contracts but what is the right fit for the right location is very critical for the owners to get ROI. Our experience has been on both sides of the table hence we understand the nuisances,” adds Jain of Nouvelle Knowledge Services.

Even legal advisors now have their specialised teams, which was not the case earlier because the Indian hospitality market was not as active and large, says Menezes of ELP. “The specialist support comprises teams that understand the legitimate needs of both, the operator as well as owners. Knowing both sides concerns is what enables ELP to bring just the larger points to the negotiating table. This saves valuable time and expense,” she adds.

Expert law firms also perform an important role in the process. “At Khaitan, we have established a national hospitality team to service domestic and foreign clients with fully integrated real estate, financing, tax, corporate, intellectual property and dispute resolution expertise. The kind of assistance that is available to hoteliers include due diligences for hotel acquisitions and sales, documentation for new construction and development, hotel financing and debt restructuring, transaction structuring and negotiating hotel management contracts and franchises,” says Mullick.

While professional support for management contract has always been available to qwners, the challenge was, not every owner has the paying appetite for the hefty fee charges of international consultants, says Beni of GKHS, especially those building a mid-scale hotel with small room inventory. Hotel owner advisory firms like GKHS have come up primarily to cater to price-sensitive or value-driven mid-scale hotel owners with their specialisation in brand search and contract negotiation, informs Beni. “Using professional help not only reduces the timeframe of the process which is a very critical element for any investor, but also lets the owners settle with the ‘right hotel brand’ on ‘right set of commercial & non-commercial’ terms with a balanced contract,” he observed.

Too Rigid to Highly Flexible
Hotel investments, especially investments in new projects, have literally come to a naught in the last few years. The situation today is too many brands following too few projects giving the project owners whole lot of choices thereby enhancing their bargaining power with brands. According to industry experts, brands have become more flexible now ready to negotiate even those terms and conditions and standards considered non-negotiable few years ago. “Brands are now more flexible when it comes to their brand standards as a lot of the opportunities today are brown field and conversions. We are also seeing varied forms of financial contribution /assistance by the operator’s in order to obtain deals in key locations,” confirms Aibara.

Giving a different perspective to the reason for brands becoming more flexible, Minocher said that there have been “rash of failures in the past” on the part of management companies in delivering results as promised. “Therefore, most hotel management companies are now willing to compromise on many aspects of management agreements.”

Previously brands would retain guest data, and always maintain that guest data as the property of the brand. Even post termination, the owner would not be provided with any access to, or knowledge of guest data. We have observed that operators are now willing to work with owners as regards client data and its preservation, and, in some instances, permit owners to have access to certain details of guest data, Tarini informed. We have also observed that subject to the fulfillment of certain conditions by prospective transferees, exit rights to owners are less rigid now, she added.

Expressing similar views, Jain also said that brands are now ready to work on more friendly terms with owners. “The brands are now offering owner friendly terms such as lower tenure, co-branding, deferment of incentive fee to owner’s EMI payments/liabilities, area of protection, step up GOP linked fees, minimum guarantee on GOPs.”

HVS, one of the internationally renowned hospitality consultants, also shares the same sentiment. “Overall, we find that brands are more comfortable negotiating shorter terms with multiple renewal options on mutual consent than in the past. Previously, contract extension was mostly at the operator’s election or automatic. We also see that brands are willing to offer competitive performance-based incentive fee structure, which could go as low as 0-2% for GOP margins that are below 30% in certain markets that are strong. In addition, operator performance tests are more robust now with higher RevPAR and GOP thresholds than before particularly in strong hotel markets. Further, brands are willing to offer key money for promising projects, although it does continue to be the last line of funding available to the owner,” informs Thadani.

“We are seeing more flexibility from brands in a number of different areas such as the duration of the original term of the contract (shorter terms), the structuring of incentive fees based on the level of profitability and the ability to terminate on payment of compensation,” said Mullick, adding, “The willingness of brands to change management contract terms depends on a number of factors including how desperate the brand is to get a particular hotel in a particular location, how many other hotels the brand has in that market and who is negotiating a contract for the owner.”

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