CHALLENGES AND OPPORTUNITIES FACING BRAND MANAGEMENT IN THE LODGING INDUSTRY
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Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009
Series V: Economic Sciences
CHALLENGES AND OPPORTUNITIES
FACING BRAND MANAGEMENT
IN THE LODGING INDUSTRY
CodruŃa Adina BĂLTESCU 1
Abstract: Brands are at the heart of marketing and business strategy. If a
company’s offer is perceived to be the same as those of the competitors, then
consumers will be indifferent and will choose the cheapest or most
accessible. The purpose of marketing is to create a preference for the
company’s brand. If customers perceive one brand as superior, they will
prefer it and pay more for it. Successful brands create wealth by attracting
and retaining customers. When a company creates this type of customer
preference and loyalty, it can build a strong market share, maintain good
price levels and generate strong cash flows. The notion that a hotel’s brand
contributes significantly to the property’s market value is supported by an
analysis of nearly eleven hundred hotel transactions over the past fifteen
years.
Key words: brand, guest satisfaction, hotel valuation, brand management,
strategy.
1. Introduction brand managers use satisfaction as a
Today’s lodging guests are seeking measure of operational success of their
consistency and quality at the right price. overall branding strategies.
Consequently, lodging operators have
turned their attention to guest satisfaction 2. Brands’ Added Values
and branding because brand name operates Added values – the subjective beliefs of
as a “shorthand” for quality by giving the customers - are at the heart of building
guest important information about the successful brands. That such beliefs exist
product/service sight unseen. Accordingly, has been demonstrated on countless
hotel executives recognize brand quality as occasions. In test where customers are
an important company asset and as a presented with competitive products in an
potential source of strategic advantage. unbranded form, there is often no clear
The value of a brand is based on the preference. But if a top brand name such as
awareness of the brand, its quality Coca-Cola is attached, a dramatic switch in
perception, and overall customer preferences invariably occurs. Not only
satisfaction. Satisfied customers tend to will people prefer the strong brand name,
buy more, be less price conscious, and to but they will actually be willing to pay a
generate positive word-of-mouth, thus higher price for it [2].
contributing to bottom-line profit [1]. Due Nor the emotional impact of the brand
to increased attention to a customer focus, limited to consumer goods. A classic study
1
Dept. of Marketing, Turism, Services and International Transactions, Transilvania University of Braşov.68 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V by Proffesor T. Levitt at the Harvard risk associated with introduction of new Business School clearly demonstrated that products, and retention of guests. There are the brand image has a significant effect on disadvantages in using brand extensions as industrial buying decisions. He found that well, however, including managerial the more powerful the brand name, the complexities (e.g., establishing corporate greater the chance of the industrial buyer structure to support multiple brands and giving the company a hearing for a new determining the criteria for monitoring the product, and the greater the likelihood of performance of multiple operational units), its early adoption. marketing issues (e.g., positioning the brand Consumers often base their hotel-stay and achieving clarity in the associated decisions on their perception of a specific marketing message and avoiding hotel’s brand name. The United States now cannibalization of one brand by another), and has over 200 hotel brands competing for challenges in customer-relationship business, more than in any other product management (e.g., establishing and category. Many of these brands are maintaining brand-specific customer-service extensions of existing brand names. quality standards) [4]. Brand extension is the practice of introducing a new brand (differentiated by 3. The Role of Brand Affiliation in Hotel market segment) using a well-established Market Value brand name as leverage. One of the earliest A hotel property’s brand identification is examples of brand extension in the clearly a large factor in its market value, hospitality industry occurred in 1981, but measuring the brand’s contribution to a when Quality Hotels (now Choice Hotels) property’s market value has so far been as diversified its line into product tiers, much “art” as “science.” A number of including Comfort Inns and Quality financial indicators are used to determine a Royale (now Clarion) [3]. The subsequent property’s value. Net operating income burst of brand extensions included Holiday (NOI), average daily rate (ADR), Inn’s introduction of Holiday Inn Express occupancy rate, and even number of rooms and Holiday Inn SunSpree Resorts in 1991, have proven to be significant predictors of the upscale Holiday Inn Crowne Plaza in a hotel’s market value [5]. 1983, followed by Holiday Inn Select in Not only is it generally recognized that 1994, and Staybridge Suites by Holiday brands create value for both consumers and Inn in 1998. The above examples are just companies, but consumers use brands as some of the many hotel companies that cues to infer certain product attributes, have tried to capitalize on their brands’ such as quality. Because loyal customers goodwill through brand extension. Most are generally less price-sensitive, more major hotel companies have at least one willing to purchase more, and generate brand extension, implying that hotel chains positive word of mouth, corporate consider the strategy to be successful. management has realized that brand names A brand-extension strategy allows firms to are among the most important assets of a penetrate a variety of market segments with company [6]. A study conducted by differentiated products that carry a single, O’Neill, J, W., and Xiao, Q., examined the well-established brand name. Hotel firms see brand effect on hotel market value from an several advantages to brand extensions, investor-owner perspective. The including quicker acceptance of new fundamental question was: What is the role products by consumers, economies of scale of brands in determining hotels’ market in marketing support expenditures, lower values? In particular, are there value
Băltescu, C. A.: Challenges and Opportunities Facing Brand Management … 69 premiums for hotel properties affiliated brands affect market values of four hotel with certain brands over those affiliated types, namely, midscale without F&B, with other brands? Based on a data set midscale with F&B, upscale, and upper consisting of more than one thousand upscale. At the same time, individual actual hotel-sale transactions, the study brands had greater or lesser effects on explored whether a particular hotel brand hotel valuations. contributes more or less to the value of For hotel owners, whose goal is to hotels flying that flag, while controlling for maximize the market value of their asset, the most recognized value predictors, recognizing the role of brand name in hotel namely, NOI, ADR, occupancy rate, and market value is beneficial for positioning number of guest rooms. By revealing and flagging decisions. Specifically, brands’ effects on hotel values, the authors owners of midscale and upscale hotels expected to assist current and potential should be cognizant of the value their hotel owners, investors, lenders, and other chosen hotel brands bring to their analysts, as well as corporate brand properties. For hotel companies’ brand- management, with their assessment of the management teams, effectively assessing power of brands in terms of hotel market brands’ effects on hotel market values can values. strengthen the overall value of the brands The value of a brand chiefly resides in and possibly improve the brands’ franchise the minds of customers and is based sales. Such rational analysis can signal primarily on customers’ brand awareness, weaknesses and assist with the their perceptions of its quality, and their development of reimaging, retrenchment, brand loyalty. After customers become or remedial brand strategies, when loyal to a brand, the brand owner can necessary [8]. capitalize on the brand’s value through price premiums, decreased price elasticity, 4. The Relationship between Guest increased market share, and more rapid Satisfaction, Room Revenue and brand expansion. Finally, companies with Hotel Branding Strategy successful brands benefit in the financial From a corporate strategy viewpoint, marketplace by improving shareholders’ well-managed brands tend to gain value. increasing market share. Yet, previous The recognized goal of hotel branding is research linking service quality with to provide added value to both guests and market share in the hospitality industry hotel companies by building brand loyalty. shows mixed results. There are two It was reported that 85 percent of business divergent views on the effect of brand travelers and 76 percent of leisure travelers growth on customers’ quality perceptions. preferred branded hotels over independent First, the market signaling theory suggests properties. One reason for this finding is that consumers interpret a high market that hotel guests rely on brand names to share as a signal of high quality, thus reduce the risks associated with staying at resulting in increased future demand. an otherwise unknown property [7]. In that Consequently, it is not surprising that regard, strong brands enable hotel chains market share leaders, including those in the to be part of and to differentiate lodging industry, tend to use their share as themselves in the mind-set of customers. a focal point in their advertising messages Thestudy stated the fact that brands (e.g., Best Western’s advertising campaign collectively have a significant effect on touting that they are the largest hotel chain hotel values. More specifically, hotel in the world).
70 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V The second stream of thought on brand brand executives continue to focus their management proposes that there is a growth strategies to a greater extent on negative relationship between market share franchising and brand management rather and perceived quality. Some large-scale than actual property management, the issue satisfaction studies show that satisfaction of guest satisfaction could become an decreases with an increase in market share. increasingly important factor in As a hospitality industry example, determining the ultimate revenue success McDonald’s executives have of hotel brands. One of the reasons that acknowledged that the company’s growth brands with a greater percentage of has come at a high cost in terms of franchised properties might be achieving quality[9]. lower levels of guest satisfaction, and In this study, guest satisfaction had a ultimately lower occupancy levels, is that positive influence on both occupancy rate as hotels age, they tend to suffer from and ADR (average daily rate). The results functional obsolescence as their designs further indicated that brands with higher experience a decrease in utility over time. guest satisfaction levels seem to achieve When an older hotel suffers from not only greater revenues per guest room functional obsolescence, capital but also achieve higher growth rates in investments will no longer result in an room revenues than brands with lower acceptable return to the owner. Hotel satisfaction. This finding was consistent owners in such a position are financially with branding literature, which suggests demotivated from employing capital to that customers are willing to pay a improve the physical plant, regardless of premium price for their preferred brand. brand standards. Franchisors must make Protecting reputation for satisfaction at a strategic decisions regarding addressing brand level has become a key issue both in the balancing of the guest need for service terms of customer perceptions and versus the brand need for franchise fee franchisee willingness to sign and/or stay revenues. with a particular hotel brand. Because As this study indicates, this balancing act today’s hotel franchisees are as quick to is a crucial one for hotel franchisors. change their brand loyalty, it may be more Although the generation of franchise fees important than ever for hotel brand is a vital short-term goal for any executives to maintain consistent brand franchisor, guest service has a long-term quality (i.e., guest satisfaction).Brand effect on the overall health of hotel brands, sizewas positively linked to occupancy at least in terms of future brand-occupancy percentage, thus suggesting that lodging levels. Consequently, the aggressiveness customers might use brand size as a quality with which brand management disciplines cue. Thus, brands with many hotels and/or and/or eliminates franchisees who are large hotels were considered as relatively providing relatively poor guest service larger brands. Regardless of the merits of may have serious implications regarding the signaling theory, hotel company not only the future reputation, but also the executives need to be prudent when actual future performance of the entire choosing their growth strategies. brand. Growth via franchising might have an Furthermore, the research found that adverse effect on quality. In the study, the brands with higher levels of guest percentage of franchised units within the satisfaction achieve not only higher brand was negatively correlated with both average daily rates, but that these brands guest satisfaction and occupancy. As hotel achieve significantly greater percentage
Băltescu, C. A.: Challenges and Opportunities Facing Brand Management … 71
increases in their average daily rates over extended stay), or the particular user
time, as well. Although hotel guest category (e.g., pleasure vs. business
satisfaction certainly comes with economic travelers), a hotel’s market position is
costs to operators, the important message based on customer perceptions.
to hotel brand managers is that there exists Competitive market efficiency refers to
empirical evidence that guest satisfaction how well a firm (a hotel, in our case),
offers clear economic rewards, as well[10]. relative to its competitors, uses its
available resources to produce outcomes
5. The Hotel’s Market Positioning and desired by its customers. Firms that are
Competitive Market Efficiency able to generate greater customer outcomes
A hotel’s business strategy can take two with fewer resources than their competitors
basic forms - a market emphasis or a cost are more likely to dominate their markets.
emphasis. Of course, hotels can pursue a This is what is meant by competitive
hybrid strategy that blends the strengths of market efficiency.
both a market emphasis and a cost Clearly, competitive market efficiency is
emphasis. A critical issue facing hotels one way in which firms can position
following a market emphasis is to themselves in their customers’ minds.
differentiate themselves from their Firms can attempt to provide more
competitors. Thus, finding a unique outcomes to their customers using fewer
competitive position for the hotel is a key resources.
pursuit of market-focused hotels. A critical Two key customer outcomes,
issue facing hotels that emphasize costs is inextricably linked to each other, are
to find ways to improve their productivity. customer value and customer satisfaction.
In other words, these hotels attempt to Customer Value. Value to the consumer
increase their economic efficiency by is the benefit perceived by the consumer.
lowering their costs while maintaining or Customer Satisfaction. Another outcome
increasing their sales revenues. that a hotel firm can generate is customer
Economic-efficiency research emphasizes satisfaction and consists of the general
improving the ratio of outputs to inputs, feelings that a consumer has developed
whereas market positioning research about a product or service after its
focuses on customer perceptions of the purchase. Consumers are more likely to
hotel’s market offering relative to the use attributes in making postpurchase
competition. A fruitful direction for hotel evaluations than they are in making overall
research is to integrate positioning with product evaluations. Thus, an attribute-
efficiency. It is interesting to study the level analysis is more diagnostic in
efficiency with which different hotel determining the antecedents of consumer
brands are able to generate customer satisfaction and/or dissatisfaction.
satisfaction and perceptions of value. Competitive Market Efficiency. The
Market positioning refers to the location competitive market efficiency can be
of a brand relative to its competitors in the defined as efficient if it provides the
customer’s mind. A hotel’s positioning, for highest value per dollar spent for that set of
example, can be based on specific features characteristics, or, equivalently, if it is the
or attributes (e.g., full food and beverage cheapest brand that can be produced and
service vs. complementary continental sold for that set of characteristics. Any
breakfast only), particular benefits (e.g., brand that fails to satisfy this criterion may
quiet comfort vs. airport convenience), the be regarded as inefficient.
specific usage category (e.g., overnight vs.72 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V
Inefficient brands can exist for several and training better quality front desk staffs,
reasons. One key reason is a lack of placing a greater emphasis on general
information - a lack of information about maintenance and cleanliness, and
what brands are available and what the eliminating problems before they become
relevant attributes are. Another key reason complaints. It also means lowering prices
for inefficient brands is that efficient to more competitive levels. These are
brands may not exist. This occurs where short-term adjustments that a hotel brand
consumers cannot purchase mixtures of can make to become more DEA market
brands but rather must buy discrete brands efficient.
that are near to, but not at, the consumers’ Longer term improvements involve
optimal choice. adjusting the numbers of hotels and sizes
Studies in this field did show how DEA of the hotels in the chain. Some firms are
(Data Envelopment Analysis) could be advised to expand the number of properties
used to assess a hotel brand’s competitive in the chain, whereas others are advised to
market efficiency [11]. A hotel brand’s shrink the size of the chain. Some hotel
market efficiency as the brand’s level of brands can become DEA market efficient
outputs (measured in terms of customer by operating bigger hotels (i.e., more
satisfaction and customer value) relative to rooms per hotel), whereas others are
its inputs (i.e., the hotel’s attributes
advised to limit their hotels’ scale. Unless
including price). The hotel brand’s
these relatively high-priced and market
competitive market efficiency benchmarks
inefficient brands improve their
its market efficiency against those of its
competitors. The results of these studies competitive positioning, they are likely to
show that both of the luxury hotels, experience declining sales growth and
upscale hotel brands, intermediate hotels, reduced shares of the market. Thus, it is
and parsimonious hotels are DEA market important for hotel managers to track their
efficient. In other words, no other hotels competitive market efficiency to ensure
generate greater outputs for the inputs used that they are offering the requisite services
by those DEA market-efficient hotels. The and amenities at the appropriate price so as
dual solution to the primal DEA to generate competitive levels of customer
formulation provided insights as to how satisfaction and perceptions of value.
less efficient hotels can improve their
competitive positions in terms of customer 6. Brands and Romanian Hotels
satisfaction and value. Hotel firms can In 2007 the total amount of Romanian
improve their competitive market hotels gathered 1075 units, out of which 10
positioning by offering their guests more units (0,9%) hotels of 5 stars, 8,2% hotels
and charging them less. classified at 4 stars, 31,6% units of 3 stars,
The DEA findings show that, compared 41,5% of 2 stars, 16% hotels classified at 1
with their competitors, some firms use star, and the rest of 1,8% units are not
their hotel attributes more efficiently to classified [12]. One of the ways to improve
generate customer satisfaction and hotel’s standards, and therefore, to attract
perceptions of value. These are the
more foreign tourists, is the affiliation to
DEA-efficient hotels. Managers of hotel
the international hotel chains, which,
brands that are less efficient can improve
among other very important assets,
their competitive market efficiency by
mimicking their more efficient promote notorious brands. Some of the
competitors. Generally, this means hiring Romanian hotel managers have such aBăltescu, C. A.: Challenges and Opportunities Facing Brand Management … 73
vision. But the percentage of the Romanian 5. Livingston, J. S.: A Burst of Tiers: The
hotels members of hotel chains is rather Scorecard, Cornell Hotel and
critical. These days, only 1% of the Restaurant Administration Quarterly,
Romanian hotels are members of such Vol. 26, No. 3, 1985, pp. 36-38
important hospitality organizations, while 6. O’Neill, J. W., Matilla, A. S.:“Hotel
the European average is 25%, and in the branding Strategy: Its Relationship to
USA, the percentage of membership grows Guest Satisfaction and Room
to 75% [13]. Of course, we can appreciate Revenue”, Journal of Hospitality &
that Romania isn’t a target market for these Tourism Research, 2004; 58,
international hotel chains, but, as far as we pp. 156-165.
consider, the biggest problem is that the 7. O’Neill, J. W., Xiao, Q. :The Role of
Romanian managers are not interested in Brand Affiliation in Hotel Market
affiliation. Did they know something about Value, Cornell Hotel and Restaurant
big hotel brands and the positive results Administration Quarterly 2006; 47;
related to them? Are they willing to offer pp. 210-221.
hospitality services at comparable 8. Weizhong, J., Chekitan, D., Vithala, R.
standards with the hotels which promote R.: Brand Etension and Customer
notorious brands? Well, some of them Loyalty: Evidence from the Lodging
value their independence more than Industry, Cornell Hotel and Restaurant
anything else. But, in these critical Administration Quarterly, Vol. 43;
moments, especially for hotels’ activities, No. 5, 2002, pp. 5-16.
would it be enough? 9. http://insse.ro Accessed: 01-04-2009
10. ***Revista Capital, 26.03.2009, p. 18.
References
Notes
1. Anderson, E., Mittal, V.:
Strengthening the satisfaction-profit 1. Doyle, P., Stern, P.: Marketing
chain, Journal of Service Research, 3, Management and Strategy, fourth ed.,
2000, pp. 107-120. Pearson Education Limited, Harlow
2. Bharadwaj, S. G., Varadarajan, R. P., Essex, 2006, pp. 166-167.
Fahy, J.: “Sustainable Competitive 2. Livingston, J. S.: A Burst of Tiers: The
Advantage in Service Industries: A Scorecard, Cornell Hotel and
Conceptual Model and Research Restaurant Administration Quarterly,
Propositions,” Journal of Marketing Vol. 26, No. 3, 1985, pp.36-38
57 (October 1993), pp. 83-99. 3. Weizhong, J., Chekitan S. D., Vithala,
3. Brown, J. R., Ragsdale, C. T.: The R. R.: Brand Extension and Customer
Competitive Market Efficiency of Hotel Loyalty: Evidence from the Lodging
Brands: An Application of Data Industry, Cornell Hotel and Restaurant
Envelopment Analysis, Journal of Administration Quarterly, Vol. 43;
Hospitality & Tourism Research, No. 5, 2002, pp. 5-16
2002, 26, pp. 332-360. 4. O’Neill, J. W., Xiao, Q.: The Role of
4. Doyle, P., Stern, P.: Marketing Brand Affiliation in Hotel Market
Management and Strategy, fourth ed., Value, Cornell Hotel and Restaurant
Pearson Education Limited, Harlow Administration Quarterly 2006; 47,
Essex, 2006, pp. 166-167. p. 210.74 Bulletin of the Transilvania University of Braşov • Vol. 2 (51) - 2009 • Series V 5. Anderson, E., Mittal, V.: cited work, Tourism Research, 2004;58, pp. 107-120 pp. 156-165 6. Bharadwaj, S. G., Varadarajan, R. P., 9. ibidem Fahy, J.: “Sustainable Competitive 10. Brown, J. R., Ragsdale, C. T.: The Advantage in Service Industries: A Competitive Market Efficiency of Hotel Conceptual Model and Research Brands: An Application of Data Propositions,” Journal of Marketing 57 Envelopment Analysis, Journal of (October 1993), pp. 83-99. Hospitality & Tourism Research, 7. O’Neill, J. W., Xiao, Q.: cited work, 2002, 26, pp. 332-360 pp. 210-221 11. http://insse.ro 8. O’Neill, J. W., Matilla, A. S.: “Hotel 12. Revista Capital, 26.03.2009, p.18 branding Strategy: Its Relationship to Guest Satisfaction and Room Revenue”, Journal of Hospitality &
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