Branding Challenge
When Irene Irene took majority majority control control of her her family’s family’s hotel hotel Airotel Airotel in 1997, business business was was pretty pretty good goo d –no –nott great great .With .With her backgr background ound in salesw salesw and hospit hospitali ality ty manage management ment , Feller Feller was confid confident ent she could increa increase se revenue revenue occupancy occupancy rates rates , despit despitee the slow slow growth growth of Swiss Swiss economy At this time the majority majority of hotel guest in Switzerland came from the EU and the US , although the number of guest from Asia (China and India) and Russia was growing fast . But then came September 2001. For the entire Zurich tourism market was a good year the first eight month but the terrori terrorist st attack attack on the world world trade trade centre centre in Neyyork Neyyork trigger triggered ed a steep steep decline decline in both business and leisure travel. Perhaps hardest hit was the country renowned airline Swissair, which was grounded on October 2, 2001, and subsequently entered bankruptcy.
Airotel like most hospitality companies had enjoyed a profitable first three quarters of 2001 but the incurred such losses in the fourth quarter that the entire year’s earnings came in at a loss. This situation was not what Fellner had hoped hop ed to achieve with her family’s hotel. By 2002, she determined determined that she needed some outsife outsife help so she called called Thomas a colleague who was entrusted to find out how much are customers are willing to pay for a branded versus a non branded hotel. She hoped Thomas could help her determine whether her best option at this time was to become a franchise of an existing brand ,rather than remaining an independent brand .
Airotel The family hotel offered 50 rooms and a breakfast buffet and a nearby restaurant had a wide ranging menu for lunch and dinner. The windows were sound proofed, but the hotel lacked air conditioning. Located in the small village of Rumlang the hotel was approximately 10 minutes by car from Zurich Airport.It was also around 20 minutes to Zurich city c ity and 10 minutes to Zurich Messe. The average room rate of CHF 140 (appox US$120 or Euro 94)per night including break fast .The long term apartment rented for CHF 1200 per month.
Thomas Undertook a conjoint analysis of potential guest at Airotel. To determine potential consumers’ preference , the study obtained responses from 162 passengers who landed at Zurich Airport. By enforcing age quotas, the final sample contained 41.2% of respondent in the 20- to 35- year agebracket 31% between 35-45 and 27.8% over 50 .The interview included 103 male and 59 female passengers most of whom were from Europe.
The Analysis returned some overall trends from the conjoint analysis . First the respondent clerly preferred city location over fringe and airport
Figure 1: Utility of three location
However , the focus of their conjoint study was brand equity – should Fellner join an existing brand as a franchise or stay independent? Therefore , they compared the perceived utility distribution among brands with the utility function of prices . The means of the calculated brands utilities shown in figure 2. Figure 2 : Utility of three brands
In contrast , according to figure 3, the utility bewtween the prices of CHF 160 and CHF 190, which drops from +0.39 to +0.16 is not significant . A price increase from CHF 190 to CHF 220 however has a significant impact . For this type of hotel room a threshold level appears to exist between CHF 190 and 160 equals a utility loss of 0.94. room . Figure 3: Utilities of the three prices
The Comfort Inn Offer
Choice Hotels representatives performed their own assessments of Airotel Rumlang , including its recent sales and profit and loss statements. They would have seen that the first quarter of 2002 continued the vast losses suffered in the end of 2001. The second quarter looked to be slightly better, but profits would still be negative. The budget for 2002-2003 (refer to exhibit 3) indicated profits of approximately CHF 60,000 (about 5% of revenues), as well as the seasonal pattern of the hotel business. Specifically, it performed best during the week, Monday to Thursday, experienced low bookings for weekends, and little business during the vacation seasons in July- August and Christmas. The Choice Hotels representatives also conducted site visits. After their analysis they offered a contract with the following conditions in March 2003.
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Branding as “Comfort Hotel Zurich Airport”.
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Initial sign up fee of CHF 12,000.
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Payment of 2% hotel revenues as royalties.
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Payment of 1% hotel revenues as marketing fee.
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Payment of 6% of all bookings generated thorugh Choice Hotle reservation system.
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•
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Required investments of CHF 24,000 over the next three years to improve the hotel and reach the Comfort standard ( mainly for signs, new television sets , carpets and improvement to the lounge and reception areas). Adoption of the Choice Hotels quality management book. Fellner’s attendance, at her own expense, at three training days a year ( approximately CHF 3,000 per year) Cancellation of the contract by either party could occur after 5, 10 or 15 years
In contrast, the default franchise contract in the United States demanded and average franchise fee of 10% of net revenues, with a sign-up fee of at least $50,000- approximately twice what hoice was asking from Airotel Rumlang.
Yet Fellner was unsure. A 9% commission for new bookings made through Choice Hotel reservation system (i.e., 6% for the system + 2% as royalty + 1% as marketing fee) was not that much, and the additional bookings would likely be profitable. However paying 3% of all revenues, even those earned from long-standing clients who would not perceive any advantage from the Comfort Inn brand, made her very nervous. Negotiations were underway. Should she proceed? Did she have choice? And once Fellner had convinced herself, could she convince her minority shareholders, her family members, to follow her lead and accept the Comfort Inn franchise offer? Exhibit 1 Break down by region Average utilities per attribute by region
City Fringe Airport sample size
EUROPE AMERICAN ASIAN ARABS 1.72 1.6 0.96 1.42 -0.54 -0.82 -0.41 -0.72 -1.17 -0.77 -0.56 -0.7 115
19
19
9
Average utilities per attribute by region
SFR 160 SFR 190 SFR 220 Sample size
EUROPE AMERICAN ASIAN ARABS 0.34 0.53 0.74 0.42 0.2 0.26 -0.15 -0.04 -0.53 -0.79 -0.59 -0.39 115
19
19
9
Average utilities per attribute by region
Holiday inn Best Western Airotel
EUROPE AMERICAN ASIAN ARABS 0.52 0.60 0.93 1.33 -0.14 -0.19 -0.15 0.09 -0.38 -0.40 -0.78 -1.42
Sample size
115
19
19
9
Exhibit 2 Budget for Airotel 2002-2003 before franchising 2002 ll numbers in SFR revenue Hotel
2002
2002
August
September
44268
67116
99960
July
2002
2002
2002
2003
November
December
January
101388
99960
72828
72828
97104
95676
94248
101388
85680
1032444
October
2003 February
2003 March
2003 April
2003 May
2003
total
June
Revenue partments total revenue
16000
16000
16000
16000
16000
16000
16000
16000
16000
16000
16000
16000
192000
60268
83116
115960
117388
115960
88828
88828
113104
110248
117388
-4427
-6712
-9996
-10139
-9996
-7283
-7283
-9710
-9425
-10139
10168 0 -8568
1224444
Direct cost hotel
11167 6 -9568
Direct cost apartment et contribution
-1333
-1333
-1333
-1333
-1333
-1333
-1333
-1333
-1333
-1333
-1333
-1333
-15996
54508
75071
104631
105916
104631
80212
80212
102061
99490
105916
91779
1105202
Salaries
-35300
-35300
-35300
-35300
-35300
-35300
-35300
-35300
10077 5 -35300
-35300
-35300
-35300
-423600
Other fixed cost
-25000
-25000
-25000
-25000
-25000
-25000
-25000
-25000
-25000
-25000
-25000
-25000
-300000
Mortgage interest Deprication
-16850
-16850
-16850
-16850
-16850
-16850
-16850
-16850
-16850
-16850
-16850
-16850
-202200
-10000
-10000
-10000
-10000
-10000
-10000
-10000
-10000
-10000
-10000
-10000
-10000
-120000
-32642
-12079
17481
18766
17481
-6938
-6938
14911
13625
12340
18766
4629
59402
Profit and loss account
-103246
