The New Era of Owner-Operator Cooperation, with Sean O’Neill

Episode Transcript

Sean: If you turn on the TV lately, you listen to a lot of podcasts. Everything is doom, doom. Things are really bad. It’s a recession. At the time that we’re recording this, lots of central banks are raising their interest rates and they’re trying to tame inflation, and that’s going to hurt economies and stuff. And so usually hotels are in this cycle. They sort of rise when things are boom time and fall. But I do think it’s right to be cautiously optimistic because hoteliers for 2023 that it can still be a pretty good year in most markets. The hotel industry really suffered much more in 2020 than all the other industries. So they still have so much more to come back even if there is recessionary pressures.

Robin: Welcome to the Innovative Hotelier podcast by Hotels magazine with weekly thought provoking discussions with the world’s leading hotel and hospitality innovators.

Robin: Welcome to the Innovative Hotel, your podcast brought to you by Hotels magazine. I’m your host, Robin Trimingham, and my guest today is Sean O’Neill, senior hospitality editor for Skift. Today, we’re discussing the new era of owner-operator relationships.

Robin: For the last 15 years, GroupeGM has been a leader in the luxury cosmetic amenities industry. The group proposes a 360 solution from manufacturing to distribution. With over 40 international brands in its worldwide distribution network, GroupeGM offers different shapes and sizes of eco friendly products in hotels all over the world. Discover more on www.groupegm.com.

Robin: Welcome, Sean.

Sean: Welcome, Robin. I’d much rather be in Bermuda where you are today, but thank you very much for having me on the show.

Robin: Well, it’s kind of windy and rainy here today, but we do have a pretty good life here on the Rock. I think this is going to be a fascinating conversation. And I think you’re the perfect guy to have it with because you talk to everybody. So without sharing any real secrets, I’m hoping that you’re going to share some insights and observations about what’s been going on, because let’s face it, there’s been momentous change occurring in the relationship between owners and operators really over the last three years. So a lot of people know this. But just to set the stage, if you will, can you paint us a little bit of a picture of what the typical owner-operator relationship was like a few years ago?

Sean: Finger pointing. There’s a lot of finger-pointing, a lot of tension. Some back story from that. You have two types of owners broadly. You have your families and limited partnership kind of owners, and then you have the REITs, the real estate investment trusts. So they’re going to have a different tenor for both of it, whether if you’re an operator dealing with either one. But in either case, I think owners have sort of been singing from a different hymn book than what operators have been seeing and singing from for quite some time. And partly because they’re tracking different things, the owner is looking at their spreadsheets and their goals. The asset is one part of a broader portfolio. Usually in they’re expecting a certain kind of return and a certain kind of cadence, so they don’t like surprises. And some of those surprises may be involving capital expenditures or investments, whereas the operators are keeping their eye on supply and demand and also changes in customer behavior, looking at things through the lens of the customer and needing to make sure that they stay one step ahead, that’s at least an ideal operator. So a lot of times you’ll have this sort of conflict. I think the one example before the pandemic that came to mind is there was kind of amenity creep in some of the lower segments of hotels. So if you were at maybe in the budget or select service sector operators would start wanting to add in is already the continental breakfast and you get the add the coffee makers and then you need to have the special devices for your phones because that’s where guests want to have. And then fitness centers, there’s a new fitness trends. Let’s get the new machine and let’s change. The food needs are changing. So let’s have a gluten option from the perspective of an operator there. Staying on top of the trends. From the perspective of the owner, this is sort of like this costs and coal is becoming. So there’s a lot of finger-pointing and tension is how I would sum it up.

Robin: Robin Yeah, I’d have to agree with you the bit that I observed personally, there’s a real distinction between a family-owned owner, and one that is I’m just going to call it a professional entity because the family-owned one can even be quite emotional because they feel a personal stake or personal involvement or personal investment. And conversely, I don’t know what you found, but I found that some of the professional entities, you know, they roll out the forensic accountants and they’re grilling people who would have her background in hotels, but maybe not on the forensic accounting level.

Sean: I think that’s a really sharp observation. And also for some owners, it’s their contribution to the community. If you have, it is a significant town but not a major city. Your hotel might be the place where business happens. It’s where people come together. It’s where, you know, the people who have had their weddings there, you’re hands-on. And so I think the owner-operation relationship is different in that kind of situation, like you say.

Robin: Yeah. So it kind of goes without saying that the arrival of the pandemic took everybody by surprise. I mean, it was completely unprecedented, as we all know, and some owners and some operators embraced this notion that things were changing permanently more quickly than others. What sort of experiences were you hearing about?

Sean: I asked the CEO of Standard International, Amber Ascher, about this in a recent interview. And one thing that she said was that she was hearing in the market generally was that owners and operators in the pandemic had to work much more collaboratively during the pandemic than they did in other here’s a once in a century situation. And she says whether it was employee matters or reopenings or renovations or marketing strategies or working capital needs, what rates to set, all of these things, very emotional, as well as some employees, were dealing with social stresses in their own life. And then how do you come up to that? And so you’d have, I think, owners coming around to try to participate. There was a lot more hands on. I think what happened was you got a sense of both sides pulling together in a way that perhaps they hadn’t done to a certain level of intensity through that was forged bonds of trust. You saw people actually, you were talking to them sometimes, you know, the owner, if you might be talking to them remotely, you’re getting the see inside their house and see their families in a way that was personal. So I think people all the tough decisions they had to go through, I think there’s been sort of more collaboration with something that sort of came out of it.

Robin: Yeah, I think that’s an excellent insight. I’m also aware that there were situations where maybe the owners and operators were aligned in their thinking and their handling of all of this, but sometimes there would be like a third-party contractor that wasn’t really getting it and still trying to say, Well, no, there’s a quarterly installment that’s due. I saw that coming up. In situations like when you’re dealing with a city or you’re dealing with a tourism authority and they’re used to getting some kind of levy or fee or whatever, and everybody else is going wake up guys.

Sean: That’s an excellent point. Robin Yeah, for sure. I think there was a lot of having to learn on the fly. There was this sudden interest in keyless contactless check-in, and this wasn’t a new idea for the hotel industry. I mean, a decade ago NCR had 10,000 dollar kiosks that were contactless, but guests weren’t using them when they installed them. But suddenly the pandemic made a lot of just tossed a lot of assumptions up in the air. And there was sort of this willingness to sort of experiment. So it was sort of like, let’s try and re-change the relationship with some of the third parties. I think.

Robin: I think some of that reluctance might have to do with what we’ve all experienced in the major airports where you’re dragging your bags and there’s a really long line and you try to scan your passport five times. And it’s just not happening or you get all of your passport done and then it won’t print your boarding pass or whatever the case may be. So I can understand where there’s huge reluctance to put in a kiosk or, heaven forbid, get a guest to actually use It comes from because you want this to be a welcoming kind of experience.

Sean: For sure.

Robin: Do you think that by and large owners currently have a realistic view of what they can expect from hotel operations? Because let’s face it, before the pandemic, everybody was doing their pricing models using a product like Ideas or one of the other major competitors. And for a big stretch of time, that just really wasn’t going to work because it wasn’t going to be giving you accurate data.

Sean: Yeah, whether you were using Ideas or Duetto or any of the other products that were out there, a lot of them were based on historical data and norms. And here you were in this once-in-a-century situation. So it’s a fascinating question. Robin. I guess I would take it as a multi-part answer. So it depends on what kind of hotel we’re talking about for a full-service hotel. Operators in cities right now are not being realistic, maybe in their 2023 budget planning about whether they’re going to be able to get back to 2019 levels of staffing. And I spoke recently with Andrea Grigg, who leads the global management practice at JLL, which manages about 90 hotels. And what she’s been hearing in the industry I’ve echoed with this point. For me, that was sort of more instinctive. She actually had actual data, which is that a lot of there’s this natural inclination as a manager, any kind of manager always wants to get back to the staffing that they had before. The managers love seeing all of their bodies, but unfortunately, the reality is the cost of labor has just increased a lot and cost of other inputs in our inflationary environment increased. The owners are going to say you need to have a certain level of margin coming out of this, especially property upkeep balances have kind of declined. The furniture, the FF&E has sort of been strained. You need to have to do that renovation coming down the line. You have to set a certain amount of money aside. And so there’s been great collaboration. We were just talking very positively about things, but I think owners are going to hold the line a little bit on operators not being as realistic about what they’re staffing goals can be at sort of full-service hotels in the budget end of the scale, whether it’s in North America or in Western Europe.

Sean: I think both owners and operators are a bit in denial about how much pressure independent hotels are going to have. You may see something like 10,000 independent hotels exit the system within the next decade in Europe is sort of the opposite of America. And America you have is two-thirds branded, roughly speaking, one-third independent roughly. In Europe, it’s sort of the opposite. Most are independent and just a tremendous pressures that independent hotel operators are going to experience over the next few years. Things that caused a lot of hotels in the US to become branded that trend. All those factors and trends are coming to Europe, but I think some operators and owners are, because of the great post-pandemic surge and average daily rates are really great right now and everyone’s been so caught up in the crisis and the recovery of the past few years. I think the long term there is a lot of headwinds. So I think branding with the global brands is something that’s going to become more common. And one of the reasons is if you’re an independent hotelier, it is hard to get financing. It will get harder over time. I was talking with Andrew Benioff, who’s the founder of the Independent Lodging Congress. He runs these festivals and he talks to lots of independent hoteliers. And it is harder if you’re looking for a regional bank to support you right now. It’s not the quality of the independent hotel is bad or that the cash flow is bad or that the model is bad.

Sean: It’s that the banks are having this really weird moment right now and how they’re figuring out their money. And so it is harder to get those deals across the line. So that’s a very long-winded answer, but I think it really depends on the segment and the market. But I think some owners and I think it’s right to be cautiously optimistic. I think there is a disconnect. The last thing I’d say, Robin, is I think if you turn on the TV lately, you listen to a lot of podcasts, everything is doom. Doom, things are really bad. And it’s recessions. At the time that we’re recording this, lots of central banks are raising their interest rates and they’re trying to tame inflation, and that’s going to hurt economies and stuff. And so usually hotels are in this cycle. They sort of rise when things are boom time and fall. But I do think it’s right to be cautiously optimistic because hoteliers for 2023 that it can still be a pretty good year in most markets, maybe not in the UK, maybe not in some cities like Minneapolis that have been struggling. But overall, I think you have the hotel industry really suffered much more in 2020 than all the other industries. So they still have so much more to come back even if there is recessionary pressures. So I think owners and operators are in line on some things. I think they do have a realistic view on some things, but then on other things they may maybe in some denial.

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Robin: You know, I think you make an interesting point when you talk about what’s going on in the markets. I know historically when you think about hospitality and tourism in the stock market, they tend to say it follows the opposite end of the cycle so that they are kind of the last thing to fall off the cliff when the economy is tanking and sometimes quite the last thing to recover when the economy is recovering. If I ask you to look in the crystal ball, what do you think it’s going to look like in 2023?

Sean: So that is a question for people who are much smarter than me. But when I interview, I try to interview and talk to them and listening in to the earnings calls in the fall of 2022 to all of the major hotel groups, I mean, they’re all very optimistic. They’re very optimistic about 2023. So I think you have to assume that they know what they’re doing. They have the analysts, they know the history and they’re looking at things. I think some properties that are in the upper end of the market may see some compression faster than they expect in 2023. Maybe the second half of 2023 is going to be a little harder than they expect. It’s going to be hard to bring inflation down. It has been stubborn so far. And so my economics professor in college was like inflation is really bad and it’s a very hard thing to tame. And so I am worried about it. But the experts who are at the major hotel groups are very optimistic. But exactly what you said about the historical pattern, Robin, it may be the last to fall off and may not fall off as much as people expect.

Robin: I think that it’s going to be interesting to see exactly what does happen. You’ve talked about the alignment between the owners and the operators as they have tried to find their way through all of the things that have been going on. What do you suspect is going to happen going forward or are we going to see them go back to a more what I’m going to call a traditional working relationship? Or do you think this new approach is working for them and it’s likely to persist?

Sean: Very interesting question. I hope for you that there will be continued cooperation. I think both sides have more to gain if they keep the collaboration going than going back to the traditional working relationship, as you say. So I guess the one spin I would put on it would be I’d sort of say the question kind of assumes that the way things are right now is the way things will sort of stay, that the way the owners and operators will continue to have these positions. And I guess one out-of-the-box kind of question I’d have is does it have to so much be this way? And one thing that’s really surprised me in sort of covering the hotel sector is just how much of a religion asset-light is this idea that the owners and the operators should be separate from each other? I was recently talking to a very smart woman who, she’s the dean and managing director of EHL, which is one of Europe’s biggest hospitality schools in this. Inès Blal. She’s studied this for her doctoral dissertation was on this issue, and she was sort of like the pendulum has swung just so far towards asset-light, towards this idea that owners and operators should be sort of on the opposite side of each other and not sort of working really all is part of the same organization, that there’s an opportunity for hotel companies that come up that sort of where everyone actually is part of the same organization becomes a model that will sprout out more. So I kind of suspect that that might happen. You know, there’s the CitizenM’s of the world, there’s the standards. There’s an example of a Chicago based company called First Hospitality. And so it is both a third-party operator, but it also has ownership interests.

Sean: And in the past year, the Georgetown Company, a major real estate investors essentially giving them 1B dollard with to manage a bunch of hotels for them. But by playing, as in both the owner and the operator rule, it’s sort of the best of both worlds in some ways because you learn operators going back to the point that you and I were talking about before, Robin, they’re in the mix. They’re seeing how consumer behavior is changing. They’re seeing what experiential needs are more important. Suddenly pickleball, everyone’s doing pickleball. We need to have a pickleball event activation or something, whereas the owners are very much more in the long term looking at the numbers kind of thing, I think there’s something to be said for either a hybrid model like First Hospitality I think may get some advantage in the next few years because the industry has sort of shifted so much towards owners versus operators that the ones that are pulling together will have an advantage. I’m blabbing a little bit a lot, but I guess my last point on this is that technology. Technology is so important, but if you’re constantly pointing fingers at each other as the owners supposed to spend the money on it or the operators are supposed to figure out how to handle the cost of it and you’re not aligned on that. You’re going to be slow compared to some other company where the owners and operators are all on the same page. They’re all figuring out what the technology game should be and they’re moving more quickly. They’ll be able to adapt faster. And so I feel like there are certain trends in the market that may be the owner versus operator model is going to have some friction on, I suppose.

Robin: I think your last point there is excellent because everybody that I talk to the conversation ultimately becomes one where we’re talking about the implementation of AI and just how fast things are changing and what it’s going to look like in three years, let alone five years. I think we’re looking at new ways of working, new ways of collaborating, new ways of taking care of guests, of attracting and keeping them. And I really do think it’s going to require some I’m going to call it version of teamwork in order to keep on top of all of this will be really interesting to see what happens because it’s very unfamiliar territory for some of the really big brands where you have the brand being the consistent thing across all of the hotel properties, but you could have multiple owners underneath all of that. So if you were giving advice to, I’m just going to say an owner or alternatively an operator about what they’re working agreement should look like going forward. Would your advice be the same for both of them or would it be different in some way?

Sean: I think many of your other guests would probably look at this question and answer it from a different perspective than I am. I’m going to do my best on this. I think there are other models are starting to percolate up out there that I think are going to inspire changes to contract negotiations for both the owners and the operators. And I think I’ll just use one example. This past October, my husband and I, we visited Rome, Italy. We didn’t stay in a standard hotel while we were there. I love hotels, but in this particular case we wanted to be in the neighborhood and we stayed in what was a professionally run, branded short-term rental. And it was a half dozen units in an apartment building was right near the Jewish ghetto, but it was professionally run. So you had you could schedule at 9:00 in the morning. Someone’s going to come to the door and bring the breakfast with the coffee is going to be hot. There was going to be daily housekeeping. You knew the locks were going to be good on the doors. So it wasn’t like the free for all that we think of as a typical Airbnb.

Sean: So what does that have to do with owner-operator contracts? Well, I think the relationship that you’re having here between the owner of that building and the operator who’s providing the professional service, they’ve taken some different approaches. They’ve come up with different ways of structuring what the liability is and what the risks are. And how are you going to handle the online travel distribution and how are you going to handle the contracts with the housekeepers and how are you going to make sure there’s accountability and what systems do you use? And I think some of that’s going to be inspiring. It’s like a fresh look, like someone took a look at the whole business model and said, What if we just started from scratch? Let’s do it all differently. And I think some of those clauses, terms, procedures, it’s it’s not a dramatic change, but I think it’s an emphasis here in nuance. They are going to inform how the operator contracts and owner contracts are going to go be going.

Robin: I agree with you. And it’s a very interesting time because what we seem to be looking at and what I think you were just describing is a situation in which we’re thinking about the guest. We’re not thinking about running the hotel. We’re not thinking about our asset portfolio, about how do we make this a fantastic travel experience for, “oh yeah, the customer!”

Sean: It is. When you use that as the lens at which you’re looking things, it’s sort of like just putting on a different like you’re switching from regular glasses to progressives when your eyes get to a certain age. I realize some listeners are like, well, what’s really changing me? I always cared about the guests, but I think it is it’s a different emphasis. You said it better than what I can sum it up as right there, yeah.

Robin: Yeah, well, I think we live in very interesting times and I think it’s going to be very interesting. Oh, there’s that word again to see what happens as we go forward. Sean, I want to thank you so much for taking time for what I know is your very busy schedule to chat with me today.

Robin: You’ve been listening to the Innovative Hotelier podcast brought to you by Hotels magazine. Join us again soon for more up-to-the-minute insights and information specifically for the hotel and hospitality industry. You’ve been listening to the Innovative Hotelier podcast by Hotels Magazine. Join us again soon for more conversations with hospitality industry thought leaders.