To increase or maintain the market value of hotels, and for other business reasons, hotel owners often consider rebranding their properties. While Lodging Hospitality and others have commented on the increasing frequency with which hotel rebranding appears to be happening, until recently there’s been no scientific research investigating the effects of hotel rebranding on financial performance. Bjorn Hanson of New York University and Anna Mattila and Yonghee Kim or Penn State University and I recently set out to determine the effects of all of the recent hotel brand changes. Using Smith Travel Research data going back to 2003, we investigated three types of brand changes:

• Hotels changing from a lower scale to a higher scale (we used the Smith Travel Research scales of Luxury, Upper Upscale, Upscale, Midscale with F&B, Midscale without F&B, and Economy), such as a Howard Johnson (Midscale with F&B) to a Courtyard (Upscale),

• Hotels changing from a higher to a lower scale such as a Hampton Inn (Midscale without F&B) to an Econo Lodge (Economy); and

• Hotels changing their brands without changing their scales, such as Holiday Inn to a Ramada Inn (both Midscale with F&B).

Using the statistical technique of regression analysis, we had some intuitive findings, but we also discovered some counterintuitive ones:

1. After hotels change from a lower to a higher scale, they have significantly higher average daily rates (ADRs), as would be expected. However, with such a rebranding, we found no significant change in occupancy after the brand change.

2. After hotels change from a higher to a lower scale, they have no significant change in occupancy or ADR.

3. After hotels change their brand without changing their scale, they have no significant change in occupancy or ADR.

Our counterintuitive findings that so many hotels having brand changes showed no significant change in occupancy or ADR may be explained by the fact that fundamental aspects of the hotels themselves, such as their locations, did not change. Also, although hoteliers usually understand nuanced differences between brands, average consumers may not.

After we investigated the effects of rebranding on top-line indicators of occupancy and ADR, we looked at the effects of brand changes on the bottom line. Interestingly, we found in the first year after rebranding, the average hotel's net operating income (NOI) declined by 35 percent (during a period of time when the average hotel that didn't rebrand registered NOI increases). We attribute this decrease to atypical new operating expenses, such as employee training and marketing the new brand. In the second year after rebranding, NOI increased an average of 101 percent over the previous year (30 percent higher than two years previous). We conclude that rebranding appears to usually have a positive effect on NOI, but it may take a couple years for the new brand to get traction.

The Penn State Index of U.S. Hotel Values econometric model estimates overall hotel values declined 18.4 percent in 2009, but that these declines will begin to level off in 2010. With an approximate $71,000 per-room decrease in value, luxury hotels had the largest value decreases in 2009. Economy hotels registered the largest percentage decline in value, with about a 30 percent drop last year.

John W. O’Neill, MAI, CHE, Ph.D., is Managing Director of Hospitality Advisory Services, LLC, and Associate Professor in the School of Hospitality Management at The Pennsylvania State University. He can be reached at jwo3@psu.edu or 814-863-8984.