Insurance and Real Estate & Retail

The challenge of change: Switching hotel flags can be hard work, but operators say new brands pay off

April 4, 2005

As general manager of the new Hilton Indianapolis North, Mark Deinhart has a lot on his plate these days. But the hefty portions include more than his duties supervising the hotel's revamped restaurant as part of a $5 million renovation.

The former Omni North Hotel on Shadeland Avenue near Interstate 69 converted to the Hilton brand after Norwalk, Conn.-based HEI Hospitality bought it last August. The flag change came with the renovation on the side, making the switch to a new brand even more cumbersome than usual.

"It involves everything from the face plate on the telephones to the guest directories," Deinhart said. "It's really endless. The magnitude of what you go through is really amazing. If you don't have a strong team, it can be very difficult."

HEI's agreement with Omni expired Dec. 31. Three months later, on April 1, the Hilton flag officially began flying at the site. In the meantime, in addition to the much more visible construction, a lot of behind-the-scenes work went into making the name change happen.

HEI retained the entire hotel staff, which has made the transition easier, Deinhart said. The Hilton will employ 150 people once it's fully operational again. Every one of the 221 rooms in the six-story structure is being renovated. To keep the hotel at least partially operational, floors have closed one at a time to accommodate patrons.

Switching flags has been common in the hospitality industry for years, as hotel owners try to reposition their offerings to capture more of a market segment. Other times, a property might fall below standards set by a chain, prompting a hotel owner to seek a less-expensive brand. But the volatility is becoming part of the industry because of the recessional effect of 9/11, one hotel executive said.

"What we're finding in the hotel industry is that there's been a lot of consolidation of the brands," said Bob Habeeb, president of Des Plaines, Ill.-based First Hospitality Group. "The latest economic cycle really shook things up. Things got very severe after 9/11."

First Hospitality owns 30 hotels in the Midwest, including the Hilton Garden Inn in downtown Indianapolis that opened in December 2003 following its conversion from a Ramada Inn.

All told, at least three hotels in Indianapolis have been re-branded in the past 18 months, and they all include the Hilton name. The former downtown Adam's Mark switched to the Hilton brand and launched a $6.5 million renovation last summer after it came under new ownership. And another Hilton Garden Inn is being built at Interstate 69 and 96th Street, just up the road from the Hilton North.

Such companies as Washington, D.C.-based Marriott International Inc., Beverly Hills, Calif.-based Hilton Hospitality Inc. and Chicago-based Hyatt Corp. franchise their brands to hotel operators who contract with management firms to run dayto-day operations.

Because the chains license so many different hotel names-Marriott, for instance, now has about 10 brands ranging from the tony Ritz Carlton to the ordinary Fairfield Inn-owners can drop more hotels on the landscape without violating competitive agreements.

But the numerous brands have proliferated during the past decade to the point where owners now are having more trouble securing the flag they want, said Mark Eble, a locally based hotel real estate consultant with Philadelphia-based PKF Consulting.

Eble said he's currently working with a developer on a hotel project in Hamilton County that's struggling to find a brand that's available.

"Their second, third and fourth choices have been sucked up," he said. "There's a competition among the vendors of these brands to put their name on a product. One of the dimensions of that is if you rent the Hilton name, you don't want a Hilton right next to you."

The Hilton moniker has become synonymous with hotels, Eble said, which is why more in Indianapolis are beginning to champion the name. The varying levels of price and amenities each Hilton brand offers has contributed to their downtown presence. The lower-level Hilton Garden Inn, for example, won't be competing with the clientele the luxurious Conrad Hilton will attract once it opens next year.

And on the north-east side, Deinhart said he is not worried that the Hilton Garden Inn near his Hilton will vie for the same visitors. But if by chance they do, he would rather lose customers to a competitor waving a similar flag. If one is booked, they may choose the other instead of opting for a competitor.

That's because the hotel industry has taken a page from the airlines and offers programs in which guests, especially business travelers, can earn points for staying at a certain chain.

"They put heads in beds, as they say in this business," Eble said. "So travelers do pay attention to the brand."

At the Hilton North, Merritt Hospitality, a hotel management company and wholly owned subsidiary of HEI Hospitality, operates the property. Deinhart, now an employee of Merritt, arrived at the hotel in 2003, when it was still under the Omni name and owned by a subsidiary of Massachusetts Mutual Life Insurance Co. At the time, he was a hotel manager for Arlington, Va.-based Interstate Hotels & Resorts Inc., which MassMutual brought in to get the property ready for sale.

Since HEI's purchase, Deinhart has been directing the two-phase renovation as well as the flag change, which can consume more time than many might realize.

"You say every day that there's light at the end of the tunnel," Deinhart said, "and there's finally light."

The first phase of the renovation, which includes a revamping of the electrical and mechanical systems, as well as a complete overhaul of the rooms, restaurant and lounge, is set to conclude in mid-April. The second stage, which is set to run from July to September, includes a refurbishing of the meeting space, banquet and catering facilities, restrooms and elevators.

To coincide with the April 1 flag change, a Hilton sign was raised that is visible from I-69. An advertising campaign that includes print advertising and mailers to frequent guests of the hotel chain also is under way.

The costs to acquire a certain flag can be expensive, as they normally account for about 10 percent of annual room revenue, Eble said.

"Someone is making a business decision to say, 'I think it's worth it to buy one brand over another,'" he said. "Somebody has to think very carefully about whether it's worth it."
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