What Senior Living Operators Can Learn From The Us Hotel Industry

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Labor-intensive operations. A fragmented industry. Properties susceptible to new supply. Multi-brand strategies. That describes senior living – and also the U.S. hotel sector.

This week, I caught an interesting NIC report on the U.S. lodging sector. The report, prepared by Taylor Vance Founder and CEO John Arabia for the senior living industry, details how the hotel sector has grown in recent years, including as it weathered the economic impact of the Covid pandemic.

Hotel owners and operators have adopted “asset-light business models by divesting their real estate holdings and focusing on fee-based management and franchising,” Arabia wrote.

“Once single-branded hotel companies, realizing the opportunity to appeal to a wider array of travelers, developed multi-branded strategies. As a result, the dominant branded managers and franchisors have created global lodging companies that are very successful and difficult to replicate,” he wrote.

Hotel managers and companies with scale, more agreeable risk profiles, good relationships with their customers and financial flexibility have “solid financial track records,” Arabia wrote.

There are clear parallels for the senior living industry from this report. Although senior living and hotels have different customers, companies in both sectors exist in a highly fragmented ownership landscape with many third-party managers. And while senior living operators can’t simply copy the hotel playbook, they can adopt some of the same strategies that hotel companies have used to grow and evolve.

This isn’t the first time I’ve examined the similarities between the strategies of hotel and senior living companies. A few years ago, I wrote about how Lee Equity and Coastwood – after a recap of Discovery Senior Living that brought Integral Senior Living into the umbrella – were following a strategy first laid in 2013, when Lee Equity backed Aimbridge Hospitality and helped transform it into the nation’s largest independent hotel management firm.

In this members-only SHN+ Update, I examine the recent NIC report, my past reporting and other data to offer the following takeaways:

• How hotel managers and senior living operators are similar
• Hotel value-drivers and operational strategies that senior living can learn from
• The crucial areas where senior living differs from hotels

Learning from the hotel industry

Like the U.S. senior living industry, the hotel industry is dominated by separate owners and operators. Like senior living operators, hotel managers typically are responsible for day-to-day operations, including culinary services, sales and marketing, human resources and other similar functions.

Among hotel operators are companies that Arabia refers to as “branded managers” – operators which manage properties for owners under an in-house brand like Marriott or Ritz-Carlton – and “independent managers,” which manage either non-branded properties or ones carrying a brand name like Marriott, Hilton or Hyatt under a franchise agreement with those companies.

Hotel managers charge management fees of between 1% and 4% – typically about 3% – and earn an incentive management fee equaling a percentage of hotel profits – usually between 10% and 20% – above an annual return target.

“Base and incentive management fees represent the income to a hotel manager, from which the manager is responsible for its own non-property-related expenses. Branded managers typically garner higher fees than third-party managers,” Arabia wrote.

Hotels also face similar challenges as senior living operators, albeit with a different target customer. Like senior living operators, hotels must constantly turn over units to make their revenue. Hotels are also capital-intensive and require constant renovation and refurbishment.

Branded managers with the right scale “have proven to be profitable and resilient,” Arabia wrote. These companies share multiple characteristics in general: they achieve unit growth with a high incremental profit margin, they determine and enforce brand standards without funding them, they have connected with their consumers and earned brand loyalty and they have the option to recycle their portfolios with newer properties while offloading older ones.

On the flip side, owners of hotels haven’t done as financially well as managers. Hotels are labor-intensive, meaning they don’t always carry high margins. Owners must keep hotel properties up to brand standards even when they believe they don’t add to a property’s profitability. Hotel owners face challenges from new competition, even at different price points.

“Branded companies (both the managers and franchisors), with their scalable businesses, lower risk profiles, relationships with their customers, and embedded long-term optionality, have proved to be good businesses with solid financial track records. The difficulty in replicating these global businesses makes their competitive moats all that much more valuable,” Arabia concluded. “On the other hand, hotel owners, with their higher earnings volatility, lower earnings predictability, and higher capital requirements have, in aggregate, produced lackluster returns over the past two decades.”

As a result of these advantages, new entrants can struggle to build scale and compete with established players.

“New managers and brands routinely enter the lodging business; however, it is rare for these new entrants to gain the scale necessary to compete on such a large scale or to command the favorable fees or terms of the major companies,” Arabia wrote. “It is common for some of the more successful small brands to be acquired by larger companies.”

Although it’s not a perfect comparison, I think there is much that the senior living industry can learn from hotels. In particular, I think the hotel sector carries lessons regarding multi-brand strategies and winning over customer loyalty.

Senior living companies like Discovery Senior Living have in recent years adopted a similar strategy by operating multiple companies with distinct brands and market price points. While Discovery is today the second-largest senior living operator in the U.S., its communities operate under regionally distinct brands that attract different customers. Under the Discovery model, each operating company has separate financials and leadership, while the larger corporate office provides support.

“The industry is evolving away from purely centralized management toward localized leadership anchored in group accountability across various markets,” Discovery CEO Richard Hutchinson told my colleague Senior Reporter Austin Montgomery last year.

That’s similar to strategies taken by operators like Experience Senior Living, which has multiple brands spanning middle-market and luxury price points.

I also think there are lessons in brand loyalty for senior living operators. Although senior living residents don’t come and go like hotel guests, they do usually favor certain brands in their day-to-day life. Senior living operators have multiple ways to earn more brand loyalty, from building awareness in a market through services or a price point to bringing in outside brands that their customers know, like Solera did years ago with pizza restaurants and ice cream purveyors in certain communities.

Customers rarely are aware of the dynamics underpinning hotels. Arabia wrote that, “at the end of the day, the consumer simply wants the hotel experience … that they expect and purchase at other similarly named locations, irrespective of where it is in the country.”

Senior living operators don’t have the advantage of serving many repeat customers (unless you count baby boomers entering the industry a couple decades after serving as adult children for their parents). But I still think the need to appeal to a kind of standard idea of what senior living is and what it should offer holds true.

This week, I got an email from a baby boomer SHN reader, who told me that they don’t care about country-club marketing tactics, and instead desire good food, competent care and an honest company providing it. Residents can otherwise manage their own lives and fun, they said. I’ve heard operators tell me their newer customers are coming to them with a similar attitude.

This doesn’t mean that senior living operators need to run their communities like hotels. But it does mean that they should think of their customers in a similar way as hotels have thought about theirs.

Crucial differences remain

No doubt, senior living and hotel companies share many similarities. I also think it’s important to talk about how they differ.

In my eyes, the biggest difference between a hotel and a senior living community is a customer’s duration of a stay. A hotel guest might not be as choosy about where they sleep if it’s a handful of nights, but a senior living resident potentially lives with an operator for the rest of their lives. I think that puts even more pressure on senior living operators to get it right with choosy customers.

Indeed, Arabia wrote that hotel customers make far more “purchasing decisions” regarding hotels than they ever would in senior living. Furthermore, a hotel traveler also risks, at worst, a few bad nights, not months or years of potential headaches or discomfort.

“As a result, the specifics of an individual senior housing location (e.g., room specifics, amenities, quality of staff, level of care) are likely of greater importance than simply relying on the reputation of a brand, which is commonplace when making a decision to stay at one hotel versus another versus another,” Arabia wrote.

A cursory glance of senior living reviews will show you the quality of an individual community often matters more than the reputation of its brand name. I think that’s an important distinction for senior living operators to keep in mind as they embark on multi-brand strategies of their own.

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