Hilton, Accor, Marriott, IHG and the other big hotel brands are some of the few western companies that haven’t completely turned their back on Russia.
While they have stopped development and in a number of cases closed their corporate offices, the hotels with their names on are staying open. For the most part that is down to the nature of the modern hotel business, which has seen the big brands move to a franchise model where they generate a lot of their revenues simply from fees.
A hotel now consists of multiple layers including owners, asset managers, operators and brands. This has left these well-known names curiously exposed to geopolitical changes.
Marriott, for example, insisted that: “Our hotels in Russia are owned by third parties and we continue to evaluate the ability for these hotels to remain open.” While IHG said: “We have long-term management or franchise agreements with independent third-party companies that own the hotels in Russia.”
What power do the hotel companies have in this situation?. Of course they could, if they wanted, make a public show of cancelling the franchise or management agreements with their owners but these hotels could in theory ignore the termination and stay open.
As Bernstein senior analyst Richard Clarke pointed out, the Sheraton Damascus and Intercontinental Kabul both kept their names even after both Marriott and IHG pulled out of those markets.
“Practically exiting the long-term franchise and management contracts may be difficult. Even if they technically ‘left’ the market, by closing down any operations and removing any employees, the hotels may still be able to carry the brand name, but with the company having no control over the hotel operations,” Clarke said.
While it might not make sense from an economic point of view, there is undoubtedly a moral issue at stake. This is particularly relevant in the era of social media where online campaigns can quickly build and destroy a brand’s reputation, forcing it, belatedly, to act.
“There is tremendous risk of reputational damage for international hotel brands that continue to operate in Russia. Hotel brands need to carefully evaluate their options,” Chekitan Dev, the Singapore Tourism Distinguished Professor at Cornell University’s Nolan School of Hotel Administration and author of Hospitality Branding, told Hospitality Insights.
Even though a hotel can ignore the hotel brand company’s decision, it still matters that businesses choose to make a stand.
Legal Perspective
From a legal perspective there are a few avenues open to hotel companies if they want to terminate or suspend a franchise agreement.
Firstly, if the owner has been placed on the sanctions list and secondly if the hotel cannot pay whatever it owes – something that is more relevant now given Russia’s partial ban from the SWIFT financial telecommunication system.
“Those will be the two main things that protect them if they wanted to exit out of contracts,” Thomas Page, global head of hotel and leisure group at law firm CMS, said.
Starbucks’ decision to “pause store operations” offers an interesting point of comparison. Like a lot of the hotel brands the stores are run on a franchise basis, meaning that they have a similar arm’s length relationship with the operations. The difference with F&B brands, however is the integrated supply chain. Those Russian stores would need Starbucks cups and coffee to keep operating. The same isn’t as true for the hotels.