Battle of the Brands Is Pitting Hotel Owners and Chains

Staff Reporter

A raft of brand acquisitions by Hilton Hotels Corp. and other major chains has left many of their existing franchisees feeling crowded by competition from new corporate stablemates operating nearby.

The hotels claim that the addition of new brands to a market won't hurt existing properties, because they're all marketed at different price points. Some owners, however, say that's not true.

"Consumers aren't brand loyal, they're price loyal," said Hitesh Bhakta, chairman of the Asian American Hotel Owners Association. Bhakta owns one of Hilton's Hampton Inn franchises in Los Angeles.

A lawsuit filed in March by L.A.-based hotel owner WH Holdings against Hilton competitor Marriott International spotlights how the chains' expansions have factored into owners' ire on a national scale.

The petition, filed in Orleans County Circuit Court, accuses Marriott of an "unfair and unlawful" effort to take over management of a competing luxury property in the same New Orleans neighborhood as a Ritz-Carlton owned by WH Holdings in March. (Marriott owns the Ritz-Carlton brand.)

The WH Holdings suit the latest in a string of hotel industry squabbles accuses Marriott of using "detailed, specialized knowledge" about its hotel's operations so Marriott could win a management contract with the new owner of the former Le Meridien hotel. The new owner had a previous relationship with Marriott, owning other hotels under its brand.

Despite admitting that the new hotel, which would be operated under the J.W. Marriott name, could "have a material adverse effect" on the nearby Ritz-Carlton, Marriott decided to ink the deal anyway, the suit claims. The company then announced that it would divert overflow from one of its mid-priced hotels to the new building; the Ritz-Carlton had previously been the beneficiary of the overflow.

Last year Beverly Hills-based Hilton settled a similar dispute with Felcor Lodging Trust, a real estate investment trust that owns several L.A. hotels, including the Embassy Suites near LAX.

Accusations of territorial encroachment, also called "impact" or hidden competition are at the center of a raging debate within the hotel industry.

Hilton now manages and franchises seven hotels within five miles of Los Angeles International Airport, including two Embassy Suites and a Doubletree. Another rival, Starwood Hotels & Resorts Worldwide Inc., operates three hotels in the airport area.

Hilton successfully fought off an encroachment claim in September in an arbitration case filed by Houston franchisee H.B. Zachry who accused the chain of violating a non-compete clause when it took over the management of several competing hotels.

Encroachment was also among the accusations made by Strategic Hotel Capital against Marriott in a lawsuit filed in Los Angeles Superior Court last August. Strategic, which owns the Burbank Hilton and Loews Santa Monica Beach Hotel, accused Marriott of using financial data from one of its hotels to win a management contract for a similar luxury project in Laguna Beach.

With declining room rates and weak occupancy levels, hotel owners have a laundry list of complaints with the major chains, including questions about how those firms allocate corporate-level costs to their ledgers. But encroachment has been a major bone of contention.

"Essentially you have developed a market, then the chain comes in and profits off your hard work," Bhakta said.

Not every owner views it that way. "If you manage your relationship with the brands, then you don't have to worry about encroachment," said Greg Casselry, president of Tarsadia Hotels, which owns the Hilton Checkers Hotel in downtown L.A.

Hilton, Marriott and their rivals generate revenue by either charging a franchise fee or by taking a cut of revenues from a hotel it manages on behalf of an owner.

The fees can reach as much as 5 percent of room revenues generated by a franchisee; a management contract is worth at least that much, and includes money generated from room service and catering.

To generate additional revenue growth, the chains have to add new hotels. With little room to add more hotels to their flagship brands, Hilton and others have expanded by either offering new brands at different price points or acquiring existing ones.

Hilton expanded its own collection of chains four years ago when it acquired Promus, which brought it the Embassy Suites and Doubletree brands. Hilton also expanded its own in-house offerings with the formation of Hilton Garden Inns.

Hotel companies claim that this penetration doesn't hurt owners because each chain targets a different price point in the market.

"If a customer calls the Chicago Hilton and doesn't like the room rate, we can put them in a Doubletree for thirty bucks less. So having the penetration and the critical mass has been the benefit for the company and the owners," said Marc Grossman, Hilton's senior vice president.

Bevy of Brands
Hotel chains have made major additions in the past decade.

Marriott International:

Renaissance (1995), TownPlace Suites (1997), SpringHill Suites (1998), Ritz-Carlton (1999)

Hilton Hotels:

Hilton Garden Inn (1997), Homewood Suites (1998), Doubletree (1998), Embassy Suites (1998), Hampton Inn (1998), Hampton Inn & Suites (1998)

Starwood Hotels & Resorts

Westin (1998), Sheraton (1998), Four Points (1998), W (1998), St. Regis (2000)

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