Posted in News on 28 Feb 2019

The growth in the number of hotel brands since the 1980s has been remarkable and Marriott International - now the world’s largest hotel chain [1] has 30 distinct brands in its portfolio, all designed to satisfy the different appetites and requirements of its guests. It is not alone in this approach; Accor has 27 brands, [2] Intercontinental Hotels Group has 15 [3] and the other major hotel chains all have a significant amount of brands in their respective portfolios.

This growth in hotel brands can be linked to the growth in demand of travel globally in the same period, and has been facilitated by the major hotel chains’ focus on an ‘asset light’ strategy; enabling them to shift focus from the more traditional model of the construction and ongoing operational management of a global hotel property portfolio (and the debt that arises from it), into the business of pure hotel management and the building of a brand, as opposed to physical assets.

Franchising is central to this asset light strategy and this model has allowed the world’s major hotel chains to expand rapidly and achieve the high growth that supply has demanded. However, there is a learning curve and this model’s success does depend on the maturity of the market. Hotel chains need to be assured that their brand standards are fully implemented before they relinquish control of management to a third party franchisee, which is why hotel franchising is still in its relative infancy in Asia, Middle East and Africa.

Power of the Brand

To the customer, the ownership model of the hotel should be irrelevant and impossible to decipher. The guest sees only the brand name above the door and traditionally this brand name was very important as it promised a certain quality, service and experience for the guest. For a traveller from New York used to staying in a Hilton in the US, they could travel to Europe, stay in a Hilton hotel and instantly have a feeling of familiarity. The booking of the brand ultimately offered customers’ peace of mind.

This demand for consistency meant that hotel chains were trying to give people the same room and same standard and style of service, all over the world. Although brands still offer a level of peace of mind and a certain level of consistency, demand for ‘consistency’ itself has changed with the rise of the sharing economy, a shift in how people book and plan their holidays, and the ongoing growth in demand for a new, often more ‘authentic’ experience.

The sharing economy has been largely driven by Airbnb, which has been ahead of the curve in recognising changing consumer trends - and many of the large hotel chains are now trying to replicate the Airbnb offering of ‘authentic’ travel experience, in an attempt to draw consumers away from the app.

Consumers today are confronted with an overwhelming amount of hotel choices on online travel agency (OTA) sites and will rely almost exclusively on the OTA site filters to narrow down their choice. Due to this fundamental shift in distribution and the sharing economy you could argue the ‘power’ of the brand has diminished and its future somewhat uncertain. However, arguably with so much choice the power of the brand has never been more important; hotels now have to differentiate themselves from the crowd more decisively. There are now different categories of brands. ‘Soft branded’ hotels are designed to be unique in their design and feel, with subtle features of a brand, while the owners still have access to their franchisors’ distribution and reservation systems. ‘Hard branded’ hotels maintain access to the central systems along with using ‘prominent logos, brand colours, or other uniform elements of corporate design, product or service elements [4].’

Whether it is a soft branded MOXY hotel targeting millennials [5], or a hard branded traditional Hilton, what matters is that each is providing a unique experience for the guest, often now with a local flavour. In an age of the customer review, dominated by Trip Advisor [6], the experience of the guest and their subsequent opinions can have a very powerful and very real effect on a hotel performance and a damaging or positive impact on a brand.

Risks to the Brand

As the brand is both the greatest risk to a chain and its greatest asset, it is vital to protect it. In the increasingly litigious global environment in which hotel chains find themselves, this is not a simple process. In order to continue to secure growth, hotel chains are increasingly looking further afield and are actively considering broader investments into territories which previously may have been discounted on account of high levels of risk. For example, a decision to invest in an emerging market can be swayed by a number of factors ranging from the stability of the economic environment, the range of commercial partners, the maturity of the tourism sector, and the availability and quality of supporting infrastructure ranging from telecommunications, to water. Yet utilisation of the franchise model helps influence the decision on whether to invest; if it is the franchisee that is responsible for the success of the investment and the only risk to the chain is the protection of the brand, then the threshold for ‘investment’ is lowered from a risk perspective and the opportunity then becomes commercially viable.

Once the decision has been made to open a new franchise or transition from a managed or owned location to a franchise, then the hotel company has to ensure that the third party owners comply with the requirements as outlined in their franchise agreements. Such an agreement dictates best practice operations, including in respect of risk management.

Forming part of this agreement, specific risk management sections often contain contractually binding insurance requirements which are ultimately designed to protect the hotel chain’s brand and balance sheet in the event of a loss. These will typically include worldwide jurisdiction for claims brought against the insured and having the ‘franchisor’ named as an additional insured on the policy and the inclusion of Terrorism cover. Unfortunately, the franchisee may be unable to fully comply with these requirements, or coverage might be cost prohibitive.

For example, if a guest slipped in a hotel’s lobby and suffered serious injuries, or there was an outbreak of food poisoning and the claims were made against the franchisor (the brand above the door) and they were not named in the insurance policy, the franchisor could be held liable for millions of dollars without having the appropriate insurance in place – which could directly impact their balance sheet.

As well as third party claims, first party property claims can also directly impact the franchisor as well as the franchisee. If there is a serious fire at the hotel it is likely that as well as the physical damage to the property, the hotel will suffer a loss of business income and their subsequent profit. If the franchisor is not named as an additional named insured on the policy and that policy does not have a specific extension for Royalties, then the franchisor will likely not be able to collect its expected return. As such, franchisors must ensure that their franchisees are structuring the right type and breadth of insurance coverage, in order to provide the greatest protection to the hotel chains’ brand.

About Alesco Risk Management Solutions

Alesco Risk Management Solutions, a leading London market insurance broker, has over 20 years’ experience of working with major hotel chains and helping them in providing unique risk management and insurance solutions.

We have worked alongside some of the major hotel chains to design and create insurance products that satisfy the requirements of the franchise agreement, while at the same time being highly competitive on price and accessible via an online platform. Having worked alongside some of the biggest hotel chains through their franchising journey, we are ideally placed to provide innovative, efficient and competitive insurance and risk management solutions for hotel chains and their franchisees.

In 2014 we negotiated a specific insurance facility covering Comprehensive General Liability, which not only meets the franchise agreement requirements, but is also highly competitive on premiums. Not only have we negotiated both coverage and pricing but we have also launched the product on a bespoke online platform. In 2018, we broadened the product options to include a Property Damage and Business Interruption product, which includes Terrorism Coverage. Franchisees will soon be able to access additional coverages such as Reputational Harm, and Cyber. Our team also offers a range of risk management solutions for our clients to support them in managing the workload of tracking franchisee compliance with contractual requirements. For example, our Compliance Tracking platform helps hotel risk management departments in understanding which franchisees are non-compliant and helps reduce the administrative compliance workload.

Ultimately, the knowledge and expertise that Alesco has developed in this space helps franchisor and franchisee alike to protect their brands and their balance sheet.


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