Friday, November 13, 2009

It's a PIP! How many new flags will we see at what are now Holiday Inns?

Okay, I'll admit it. I cannot remember the last time I stayed at a Holiday Inn. It isn't because I don't like the flag -- I do -- I think it is just a coincidence. (Full disclosure: I represent clients who have numerous franchise agreements with InterContinental Hotels Group, but I have not spoken to any of them about this post, nor do I know what their plans are respecting their properties.)

In today's Journal there is a story about IHG's plan to force its Holiday properties to upgrade their hotels by February 1 or risk being in default under the franchise agreement, which means the lender also gets a notice of non-compliance. I understand the reasoning behind the PIP program. Right now differentiation is important in the business, and as I noted about my vacation, hotels are doing everything they can to attract customers and preserve RevPAR. They have to, because right now at least there are too many rooms and not enough customers.

The story says the average PIP will cost $150,000 - $250,000 per property. That is a lot of coin when occupancy rates are not where most owners want to see them. I wonder how many of these owners will just look to deflag and move to another brand? This of course has transaction costs associated with deflagging and reflagging to another brand. Some may but many will just have to suck it up and try to keep their position, waiting for a brighter day in the hotel industry. IHG's position? It has lost 125,000 rooms but gained 160,000 more and there are another 120,000 rooms under development. Great, more competition.

Have a great weekend.

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