Why Is It Becoming More Expensive To Run Boutique Hotels?

By Korosh Farazad - Founder & Chairman of Farazad Group of Companies and Member of Board for Trinity Hospitality Group

24 January 2020
  • Why Is It Becoming More Expensive To Run Boutique Hotels?

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Boutique hotels have started facing increasing difficulties to operate. Hospitality giants such as Marriot International, Accor, and IHG are following an expansionary strategy by acquiring collections of boutique hotels. The goal is to expand their offerings to the clients and at the same time benefit from a larger market share, economies of scale and even internal capital markets up to an extent. On the other hand, boutique hotels and independent resorts are willing to join large hospitality chains in order to benefit not only from bigger and potentially more efficient marketing but also from boosted operational margins.

Operating as an independent boutique hotel means that there is low or no existing brand recognition when compared to that of the large chains. Therefore, the main target would be to define the boutique hotel or resort as a brand and communicate its standards in the same way that larger resorts do. In that way, the customers will gain a similar level of comfort and familiarity. Alternatively, boutique hotels could portray a unique story behind their location or history and significantly increase their occupancy and profit margins. However, there are significant costs (especially marketing and human capital investment) associated with the aforementioned approach, which hospitality giants can overcome as their brand name speaks for itself.

In recent years, it is getting increasingly challenging to operate as an independent boutique hotel. As with any other industry, the major hospitality brands can approach corporate clients with a large portfolio of offerings and a range of prices. On top of the stiff competition, it is also appropriate to consider the growing number of Airbnb offerings and other short-term rentals.

Furthermore, boutique hotels can face higher costs when working with online travel agencies such as Expedia or Booking. As a rule of thumb, hotels face a 15% to 30% commission when costumers use online booking agencies to reserve a room. However, industry giants could utilize their market power to negotiate lower booking fees, which leads to improved margins, lower costs and price advantage over the independent boutique hotels. It is also worth - mentioning that boutique hotels, which cannot afford to be advertised as much or do not have as powerful booking platforms, rely more on online travel agents to book their hotel guests. As a result, their costs are largely inflated by booking commissions leading either to deteriorated margins or to increased average daily rates, which drives the occupancy rates further down.

Boutique hotels also face competition from online booking agencies' websites. It is common practise that the agencies will buy keywords, including the hotel name, to advertise on Google and steer travelers to their sites. This practice can translate to reservations that are less lucrative for independent boutique hotels.

Additionally, extreme weather conditions have been significantly hard on boutique hotels as they don't have adequate financial resources that major hotel players have in place in order to rebuild or repair potential damage. According to the research company STR, 1,000 independently owned and operated hotels closed in areas along the Gulf of Mexico and the Atlantic from 2003 to 2007. Those were the years that nearly 40 hurricanes, including Katrina, came through the areas.

Finally, the ability of the industry giants in building new hotels at a faster clip cannot be neglected. According to Mr. Phonsanam, one of the reasons that industry giants benefit from this advantage is that lenders prefer hotel projects that are affiliated with a large hotel chain because they see it as a less risky investment. To sum up, it is increasingly challenging to run a successful boutique hotel nowadays. Although the latter can use their unique location or high - end decoration in order to increase their occupancy and average daily rates, their costs are usually very high leading to small profit margins. On the other hand, one could argue that boutique hotels tend to adapt to the style of the city they are based on and provide their guests with a more welcoming environment and creating a destination.

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Farazad Group Ltd.

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Korosh Farazad

As the acting CEO of Farazad Investments (FI), Mr. Farazad, asserts market integrity and an unconventional approach to Structured Financing. He was awarded by the IAIR Awards as the ‘CEO of the Year for Structured Finance Europe Middle East & Africa (EMEA)’ 2015, and awarded with the ‘Best Structured Finance Company 2015’, by the European CEO. FI is headquartered in the United Kingdom and proud member of British Private Equity & Venture Capital Association (BVCA). FI currently operates across five continents, with a presence in the United Kingdom, Europe, Middle East, Asia Pacific, Australia and United States, with an ever expanding portfolio and new innovative funding ventures worldwide. Mr. Farazad’s unique approach has been at the forefront to the firm’s success and paved the way for international recognition from regulatory bodies, who actively seek out his expertise. It is this transparent approach to financing and creative thinking, which introduced an award winning in- house financing formula, which has been praised by international Institutions aspiring to adopt the formula and enhance traditional funding methodology.

Korosh Farazad

Founder and Chairman of Farazad Group of Companies
korosh@farazadinvest.com