The Needless Distance Between The Restaurant & Hotel Industries - Jan 27, 2025

In the News

• Behind Darden’s Q2 (ending Nov 2024): Quality Over Marketing
  • LongHorn, Darden’s largest brand & ~25% of the company’s revenues, is seeing the impact of strategy shifts that have been years in the making, said CEO Rick Cardenas. The company eliminated price promotions (BOGO’s etc.) and moved that marketing spend into product enhancements, or “put more food on the plate and talk about quality,” as Cardenas put it. What he said next was even more interesting (emphasis mine) “Then, over time, we didn’t have to talk about quality because everybody knew. Over time, we weaned off the communication and put more on the plate per dollar than everybody in the space… we also invested in the team and have record low turnover and a great experience. When consumers find value, it’s not always what you pay, it’s what you get for what you pay, and we think we’ve hit the sweet spot.”
  • Takeaways: I believe this is a theme we will see more and more in the years ahead: the companies with the best products and experiences will win (what a concept), not those with the flashiest marketing. Whereas in prior generations, companies would strive to differentiate their very similar product through catchy jingles and “brand identities,” I believe consumers are tuning out virtually all of it and are now more brand agnostic than ever. Brands that take the time to invest in the infrastructure needed to deliver high quality products and an enhanced customer experience will win a greater share of customers’ wallets. Longhorn is a good example of this in the restaurant industry. This concept could be applied to hotels by making investments into product and experience consistency - 
• Credit Card Debt Increasing Across All Consumers: 
  • Consumers are carrying higher credit card balances vs pre-pandemic and the APR on those balances (an average of ~21%) is well above pre-pandemic. A higher portion of customers are making just the minimum payment and Capital One’s CEO, Richard Fairbank, added an interesting nugget during their most recent earnings call “We’re seeing this minimum-payment effect across this credit spectrum. I’m not making a point here about the low end of the market or even about subprime.” 
  • Takeaways: Fairbank later added that consumers were generally in good shape financially, but this is something to keep an eye on, as its part of a larger series of cost-of-living “straws” (higher housing costs, higher costs of groceries, everything etc.) that could eventually break consumers’ backs. 
• Steak ‘n Shake Using Beef Tallow in Fries
  • Steak ‘n Shake announced that it will switch to using 100% beef tallow to make its french fries going forward. There has been a growing movement away from seed oils, due to perceived health risks, particularly in the Conservative and fitness communities. Steak ‘n Shake notes that they are pursuing this “in order to achieve the highest quality and best taste,” says their chief supply chain officer. It also makes sense from a customer perspective. Many of the same communities that eschew seed oils also gravitate to diets higher in red meat. Steak ‘n Shake, a burger chain, can now market itself as a health food to this community, while still maintaining its status as a special treat to a larger audience.
  • Takeaways: Two things jump out here. 1) It’s important to keep up to date on consumer tastes beyond just “what do they like to eat?” 15 years ago, the idea of marketing potatoes deep fried in animal fat as a healthy alternative would have been insane. 2) This is another smart example of product & customer strategy leading marketing, rather than the other way around. Steak ‘n Shake knows it cannot go toe-to-toe with McDonald’s or Burger King on things like price and distribution, so it needs to carve out areas of the market it can win. In this case, it’s identifying a core customer, then improving the product in ways that directly appeal to them. 
• New Law in Italy Lets Hotel Owners Fight Phony Reviews (Eventually)
  • A few big things jump out about the law: 1) The law also allows Italy’s tourism entities to request the removal of any bad reviews after two years if the offending establishment can show that the challenges have been adequately dealt with. 2) It will shift the responsibility of ensuring all reviews are left by individuals who actually visited the establishment to travel review sites (Tripadvisor, Google etc.). 
  • This sort of a law could become more important in the age of AI, where it is now possible to almost instantly generate hundreds of negative reviews that can put a restaurant out of business. Additionally, I like that this allows establishments to bounce back from a bad experience. Restaurants and hotels should be held accountable for legitimate poor customer experiences, but they should also be given the opportunity to atone for those sins. We’ll see if similar laws catch on elsewhere. 
• Trump Tax Law Implications on Hotels
  • Skift put together a great article on the implications of the tax environment under the second Trump administration. It includes some pretty eye-popping stats, such as Marriott & Hilton claiming benefits of $194M and $610M, respectively, from the Trump Tax Cuts & Jobs Act of 2017. 
  • Takeaways: Skift called out three things to keep an eye on in the coming months. First, the small business deduction: One aspiration is to make permanent a 20% deduction for small businesses on income from ordinary business operations, which would impact ~half of hotels in the US. Second is bonus depreciation: Another goal is to extend the 100% write-off for commercial assets in the year they're acquired. The incentive began phasing out in 2023 and will completely expire by 2027. For hotels, the most salient issue is managing renovation costs. If hotel owners can't write off expansion costs immediately, they may find it more difficult to afford property enhancements. Lastly, the like-kind exchange preservation, which allows owners of real estate to defer capital gains taxes if the proceeds of the sale of a piece of real estate are rolled into the purchase of another. If this provision goes away, real estate owners of all kinds, including hotel owners, could find it harder to sell properties without incurring large tax bills. 

Thought of the Week: Needless Distance Between Hotel & Restaurant Franchising Businesses 

Something that has always interested me is the distance between the hotel and restaurant franchising businesses. Hotels are typically lumped in with the broader travel industry together with airlines and cruise lines. Industry conferences typically speak about trends in these industries, consulting firms orient practice areas around “travel,” and executives frequently move between various travel businesses. The thing is, modern hotel franchising businesses have more in common with another industry: restaurant franchisors. From the way these businesses make money, to the primary stakeholder matrix, hotel and restaurant franchisors are remarkably similar. 

Business Structure

Most franchising businesses are not the businesses the average consumer thinks they are. Most name-brand hotel brands are hyper asset-light businesses that do not own the vast majority (~95+%, depending on the firm) of hotels flying their flag. The ownership and management of these hotels has been transferred to franchisees and management companies, while the branding, marketing and, in some cases, revenue/commercial management is handled by the franchisor. Restaurant franchisors, from casual dining establishments like Dine Brands’ Applebee’s to IBR’s Burger King, typically run a similar model. 

Airlines and cruise lines could not be more different. These are massively capital-intensive businesses that are much more complicated to operate. Airlines own their product, planes, which cost billions of dollars each year to purchase, maintain and operate. Similar economics exist in the cruise industry, with cruise ships averaging $1B+ to build. Fuel costs can swing wildly, such that these firms often employ divisions of the company to 

How these businesses make money

Franchisors of any kind take a cut of the revenue their franchise system (stores, hotels etc.) generate. This leads to a relatively simple formula that franchisors manage their business against:

(Net System Growth) x (Revenue per Unit) + (Ancillary Revenue Streams)

In the world of hotels, this would play out as:

(Net Unit Growth) x (Revenue Per Available Room) + (Ancillary revenue from partnerships, credit cards etc.)

This gives management in hotels 3 main incentives: 

• Grow the number of hotels in the system
• Grow the revenue each of those hotels is producing, such that the franchisor can charge fees on a larger revenue base
• Develop additional sources of revenue, driven by the customer and/or franchisee system

Restaurants and fast food companies have a very similar structure - just swap the word “hotel” for “restaurant” and you’d have a pretty clear understanding of how a restaurant franchisor makes money. There are nuances here, such as the types of fees charged in the restaurant business vs the hotel business (ex: McDonald’s will sometimes own the land that franchisees have their restaurants on, then charge them rent). Hotel companies like Wyndham & Choice, which lean toward the midscale & budget ends of the market have much more in common with a fast food franchise than does a Four Seasons, but the fundamental nature of these businesses are very much aligned. 

Franchisees

Another key similarity between the hotel restaurant franchising industries is the role of the franchisees in these businesses (I am full of hard-hitting, deep insights). For franchisor hotel and restaurant chains, their true customer - the one who pays their bills - is the franchisee, rather than the guest or patron. 

In some cases, these franchisees are small businesses, owning a single or a handful of units. These franchisees often band together in committees or councils to influence the franchisor. In other cases, franchisees can be major companies in their own right. The Flynn Group, for example, operates establishments under a variety of brands, from Applebee’s to Planet Fitness, and $4.6B in revenue. Publicly traded Park Hotels & Resorts, originally spun out of Hilton, has a portfolio of over 23,000 rooms and did ~$2.7B in revenue in 2023. These business can hold major sway over the decisions and strategy of their franchisor partners.

While airlines often have partner airlines that operate under their brand, they have a much less prominent role in the operations of the business. The concept of franchising is non-existent in the cruise industry. There are pros and cons to this approach. Companies can move more quickly when they own and operate all of the units in their system, whereas franchisors have to generate a certain level of buy-in from the franchisee community or they risk losing units from the system. On the other hand, the margins on these pure-franchising businesses are incredible as they don’t need to worry about managing and upkeep billions of dollars in real estate. Franchises are also free to split their real estate investments across a variety of franchisors, reducing their risk and giving them the opportunity to take learnings from one franchisor, and apply it to another. 

What Should Change

There should be more cross-pollination between the restaurant and hotel franchising businesses. Management moving from one industry to the other will be able to be more effective, given their familiarity with key fundamentals of each other's business. More importantly, executives could share more about what each industry does best:

• Hotel executives can share learnings about how to build loyalty programs that drive more intense customer loyalty. While many argue hotel loyalty programs leave something to be desired, they don’t have a real peer in the restaurant industry. Restaurants have the opportunity to make their loyalty programs less transactional, rewarding their best customers with elevated levels of service and access to special perks. 
• Restaurant execs can implement the systems and know-how to drive better consistency in the product. Much of the hotel stock is stale. Restaurant leaders who have developed more experience staying much more in touch with changing customer tastes and preferences would breath fresh life into hotel product development. 

Focus

"The greater the difficulty, the more glory in surmounting it." — Epicurus

Things are ramping up after the Holiday lull. Get after it this week.