Who The Next Thing is the Old Thing: Investing in People to Build Brands
Alex Mirza, Chairman
When I was head of strategic planning at Starwood Hotels, Barry Sternlicht said “I don’t think we will ever franchise W hotels.” Today, that is entirely conceivable as hotel brands are increasingly adopting franchising business models around the globe. In the process, brands are placing their fate in the hands of 3rd party management companies and owner-operators who now manage over 90% of the over 52,000 properties in the U.S. alone.
Across the industry, operations executives and brand managers revived their rhetoric about the importance of service, spending considerable resources managing their online reputations on meta search, online travel agencies and their own websites.
But when it comes to investing in people, neither the brands or the management companies “walk the talk:” Our review of the franchising agreements and property budgets for over 100 hotel brands found under 2% of the franchise terms and under 5% of brand mandated property budgets focused on recruiting, employee selection, training and customer service related initiatives.
We also performed an informal survey of North American hotel brands and management companies and found that few had dedicated corporate resources or budgets to engage their franchisees or 3rd party management companies in recruiting, employee selection, or customer service initiatives. We were surprised to learn that even large-scale management companies who oversaw as many as 200 hotels had 3 people in corporate HR. Hotel General Managers were bearing the brunt of the pain, spending more than half their time addressing that thing called “human resources.”
Our research suggests this approach to outsourcing employee hiring, training and guest service is not a winning strategy: There was only a 7% correlation between market share leading brands on Smith Travel Research (STR) and their service rankings on TripAdvisor. In other words, even the best hotel brands offered inconsistent customer service. We believe the root cause of these results is declining employee loyalty due to underinvestment in people from selection to training and career development. This is reflected in the 40% annual turnover of almost 5 million employees in the U.S. hotel sector.
Some may argue, who cares? Industry profits are good, labor is local and automation of processes like guest arrival is in the horizon. But the data suggests the service profit chain is fundamentally broken: what may be a value creating strategy for short term shareholders is not working for employees and guests. Real estate, product quality and location can only go so far in the context of massive supply growth and a wave of new brands.Declining employee and customer loyalty are not a recipe to build brand equity or long-term shareholder value. It’s time for the brands and management companies to return to the fundamentals and act like hotel owners and reinvest in people and service.