Coronavirus Upheaval Prompts Independent Hotels to Look at Management Company Startups

Many owners of smaller, independent hotels may have less capacity to handle the coronavirus pandemic than owners of larger properties affiliated with major chains. The U.S. has about 22,000 independently owned and operated hotels, according to STR. But not all of them will survive months of low occupancy along with higher costs for new pandemic-related procedures for cleanliness and safety.

The crisis may present next-generation property management startups like Life House, Sonder, and Cosi a chance to compete with chains. The recession may be a proving ground for automation and centralization of financial reporting, pricing systems, and digital marketing, which are tasks that had been low on the priority lists of independent hotel operators before.

Exhibit A: Life House, a startup that began by running hotels under its own brand, said Monday it had launched a white-label management company. Called Life Hospitality, it provides owners with full management over their staff. It also offers a full set of operational software without the need for a property to change its brand or furnishings.

“The booming demand before the crisis masked operational challenges that are now more clear for a lot of independent hotel operators,” said founder and CEO Rami Zeidan. “They’ve already sunk their blood, sweat, and tears into their properties, but they don’t have the operational wherewithal to invest in what’s necessary to cope with this new crisis.”

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The New York-based hotel management and software provider, which closed a $30 million Series B investment round in January, said it has taken over seven hotels already, separate from the five it runs under its own brand.

Nex-Gen Wave

Life House isn’t alone among companies that centralize financial accounting and reporting while automating the setting of room rates and the marketing of rooms online. But most of the venture-backed management companies in the market typically require properties to adopt their brand name and furnishings.

In the U.S., Sonder has been opening licensed hotels in entire buildings and has been reported to be closing a new funding round of about $150 million.

In Germany, Cosi has launched five locations in recent months. Other full stack hospitality operators in the U.S. and Europe include Oyo, which has had to lay off a third of its U.S. staff due to the crisis and has faced teething issues in entering the market from its home in India.

Yet some hotel owners may have some skepticism about new management companies.

“New players are often just bringing sand to the beach,” said Janak Patel, a Texas-based investor who has invested in and managed branded and independent hotels. “Existing management companies have gotten pretty sophisticated with their tech stacks and proprietary customer service models.”

Another issue: Venture-equity backed management companies may struggle to win owners because banks are often more likely to give low-interest loans to an owner franchising under a global brand, experts said.

Reborn Identity

If you own a hotel but you’re under water financially, costs will be a top worry.

Some independents may seek safety in franchising. Earlier this month, Wyndham said it expected thousands of independent hotel operators to rush to franchises to take advantage of their reservation systems, loyalty programs, and marketing budgets.

Yet other owners may balk at the loss of control. Franchising can create friction between owners and hotel companies.

Independents may seek an alternative in brand networks . Many independent hotels have signed up for the reservation, marketing, or loyalty networks of brands like Small Luxury Hotels, Preferred Hotels, WorldHotels, and Stash Rewards.

Or owners might opt for a management company with a track record, like Distinctive Hospitality Group or Tristar.

Life Hospitality hopes to win some owners to its own model.

“We’re like a Squarespace for hotels and can step in within about two weeks without transition costs for the hotelier,” Zeidan said. “As for the ongoing management fee, we’re probably the lowest cost management company on the market. We’re also waiving those management fees until next year. Our tech can help independent hoteliers generate profitability at much lower revenue levels.”

Piggybacking on Google’s Growing Influence

Big brands like InterContinental and Marriott have a big perk for franchisees in that they use their bargaining power to negotiate lower commissions from online travel agencies. That savings on commissions can make up for the franchise fees. Owners sometimes give their property to a big brand to manage. Other times they manage it on their own while paying a royalty fee of, say, 5 percent of top-line revenue to the brand.

Life House aims to reduce the need for online travel agency bookings. It seeks most of its bookings via lower-cost price-comparison search channels, such as Google’s metasearch ads.

Hotel owners also seek reliable sources of direct bookings. Big brands have established customer databases that they can tap to drive direct bookings with the help of loyalty programs.

“If Airbnb went into offering a management service along with its brand, that would be more interesting for independent hoteliers because it has a powerful brand there that could drive direct bookings,” said Patel.

On their own, independent hotels face long-term gaps in their operational efficiency.

“If there is one thing for certain, it’s that the hotel owners and operators who do make it through COVID-19 will all be thinking about how to digitize their customer experience and property management and transform their organizations,” said Adam Schuit, a London-based investor at A/O PropTech. Schuit liked how Life House automates and synchs financial accounting and reporting systems, hands tablet and mobile apps to staff and guests, and makes data available to owners in ways that help them better manage their property portfolios.

Decisions may come down to price, others said.

“Independent hoteliers need to be thinking about costs most of all this year, whichever path they take,” said Nicolás Guerrero Gómez-Vuistaz, a hospitality entrepreneur based in Mexico City. “Costs will be a sure thing, while the level of rebound in revenue and profit will be uncertain.”

Whether hoteliers opt to franchise, try a next-gen company, or go it alone, their decisions may be life-and-death in some cases. About 2 percent of the world’s hotels will close for good due to the pandemic according to research and brokerage firm Bernstein as Skift has reported.

The new entrants will compete against big brands, who have been handed a hefty marketing advantage thanks to the pandemic.

“Many consumers will trust that brands will have standards particularly around cleanliness and hygiene and the big brands will be heavily marketing that message, too,” said Asim Ibrahim, CEO of the consultancy Lakeshore Hospitality Group. “Independents may struggle more than usual.”