In the hotel business, brand names mean a lot less than they used to.
That is the conclusion of a recent study by Brett Hollenbeck, an assistant professor at UCLA Anderson School of Management. By looking at hotel revenue and reviews, he found that while chain hotels still have more sales than independent ones, the margin is narrowing considerably. And the change is largely driven by the growth of online reviews and ratings. Independent hotels got more of a revenue bump than branded hotels from factors such as the number and types of reviews they receive.
Online reviews might be “leveling the playing field between chains and independent businesses,” says Hollenbeck.
New playing field
Before the boom in reviews, travelers had few ways to tell how good a particular hotel was, aside from word-of-mouth and travel books—so the best way for them to pick a reliable hotel was to select a branded one. If travelers booked a room at a Holiday Inn, they knew what they were going to get.
Now that there is more information out there about independent spots, Hollenbeck says, brand recognition doesn’t carry nearly the same weight.
In his research, Hollenbeck looked at hotel revenue over 15 years and analyzed numerous aspects of 1.5 million reviews from multiple platforms.
Branded hotels’ lead in revenue over independents has declined to 19% in 2015 from 32% in 2000, he found. After controlling for a number of other factors that might affect sales, Hollenbeck found that online reviews had a large effect in narrowing that gap.
A boost from reviews
For instance, if an independent hotel gets 10 reviews on average, this translates to about 1.7% higher revenue, while for a chain it increases revenue only by 0.7%, he says. Website reviews had the greatest impact on hotels with a long-term low-quality rating—as measured by AAA’s diamond ratings—and those in small markets.
Those in urban areas saw less of an impact. In small markets, the revenue edge enjoyed by chains fell to 6.9% from 25%. In medium-size towns and suburban markets, the drop was to 13.7% from 33.4%. In denser urban areas, it fell only to 25.9% from 34.5%.
The hotels that lost the most of their revenue edge belong to well-known but modest brands, such as Best Western, La Quinta, LQ, -8.37% Super 8, and Motel 6.
The effect doesn’t seem to hold for higher-end chains, which benefit from loyalty-points programs and luxury amenities that lure in customers, Hollenbeck says.
The paper shows how important it is for hotel managers to keep on top of their online reviews, says David Katz, a managing director who covers hotel stocks at Telsey Advisory Group, a research firm in New York City.
Katz says he expects to see hotel franchisers launching repositioning campaigns for their brands if they fall on the lower end of the quality spectrum. This typically includes requiring franchisees to uphold stricter brand standards, increasing the quality of bedding, signage and lobby décor, with the franchisee and franchiser investing together, he says. Otherwise, they risk hearing from dissatisfied customers online.
“The obligation of the brand promise becomes that you have to deliver a more authentic brand promise, or you will be called out in a public way,” Katz says.
Chana Schoenberger is a writer in New York. Email her at firstname.lastname@example.org.
The story “Online Reviews Help Independent Hotels Steal Business From Chains” first appeared in The Wall Street Journal.