Branding Challenge

When Irene took majority control of her family’s hotel Airotel in 1997, business was pretty
good –not great .With her background in salesw and hospitality management , Feller was
confident she could increase revenue occupancy rates , despite the slow growth of Swiss
economy

At this time the 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 terrorist attack on the world trade centre in Neyyork triggered a steep 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 to achieve with her family’s hotel.

By 2002, she determined that she needed some outsife help so she 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 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.

• Branding as “Comfort Hotel Zurich Airport”.

• Initial sign up fee of CHF 12,000.

• Payment of 2% hotel revenues as royalties.

• Payment of 1% hotel revenues as marketing fee.

• Payment of 6% of all bookings generated thorugh Choice Hotle reservation system.

• 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

EUROPE AMERICAN ASIAN ARABS

City 1.72 1.6 0.96 1.42
Fringe -0.54 -0.82 -0.41 -0.72
Airport -1.17 -0.77 -0.56 -0.7

sample size 115 19 19 9

Average utilities per attribute by region

EUROPE AMERICAN ASIAN ARABS

SFR 160 0.34 0.53 0.74 0.42
SFR 190 0.2 0.26 -0.15 -0.04
SFR 220 -0.53 -0.79 -0.59 -0.39

Sample size 115 19 19 9

Average utilities per attribute by region

EUROPE AMERICAN ASIAN ARABS

Holiday inn 0.52 0.60 0.93 1.33
Best Western -0.14 -0.19 -0.15 0.09
Airotel -0.38 -0.40 -0.78 -1.42
 Sample size 115 19 19 9

Exhibit 2

Budget for Airotel 2002-2003 before franchising

2002 2002 2002 2002 2002 2002 2003 2003 2003 2003 2003 2003 total
All numbers in July August September October November December January February March April May June
SFR
revenue Hotel 44268 67116 99960 101388 99960 72828 72828 97104 95676 94248 101388 85680 1032444
Revenue 16000 16000 16000 16000 16000 16000 16000 16000 16000 16000 16000 16000 192000
Apartments
total revenue 60268 83116 115960 117388 115960 88828 88828 113104 11167 110248 117388 10168 1224444
6 0
Direct cost hotel -4427 -6712 -9996 -10139 -9996 -7283 -7283 -9710 -9568 -9425 -10139 -8568 -103246
Direct cost -1333 -1333 -1333 -1333 -1333 -1333 -1333 -1333 -1333 -1333 -1333 -1333 -15996
apartment
Net contribution 54508 75071 104631 105916 104631 80212 80212 102061 10077 99490 105916 91779 1105202
5
Salaries -35300 -35300 -35300 -35300 -35300 -35300 -35300 -35300 -35300 -35300 -35300 -35300 -423600
Other fixed cost -25000 -25000 -25000 -25000 -25000 -25000 -25000 -25000 -25000 -25000 -25000 -25000 -300000
Mortgage -16850 -16850 -16850 -16850 -16850 -16850 -16850 -16850 -16850 -16850 -16850 -16850 -202200
interest
Deprication -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -120000
Profit and loss -32642 -12079 17481 18766 17481 -6938 -6938 14911 13625 12340 18766 4629 59402
account