Product Improvement Plans (PIPs)
When you consider a hotel acquisition, you evaluate retaining the hotel’s existing brand and may consider alternative brands. Whether you are the new owner seeking to keep the hotel affiliated with its current brand (a “change of ownership” process) or are applying for affiliation with a different brand, the hotel will be evaluated by the brand for compliance with brand standards. A PIP is a document prepared by a franchise or brand that details the upgrades and replacements required for a hotel to be accepted as, or continue as, an affiliate.
The PIP is a list of every little thing that must be upgraded, updated, renovated or replaced for the hotel to remain in the brand system. Minor or major renovations are common in PIPs depending on the brand and the current condition of the hotel. Changing brand also includes adopting new brand identifiers.
As owner, you typically will engage contractors to implement the plan.
Completing the PIP typically brings the hotel into compliance with brand standards.
According to HVS, an effective PIP should help owners gain market share, increase guest satisfaction, drive revenue performance, and enhance profitability.
Executing a PIP is as simple or complex as the individual PIP for your hotel. Once you have settled on the scope of work with brand, take the time to plan implementation. PIPs take budgeting, contracting, the team of experts and contractors. Timing matters – you will implement the PIP during the off-season, if practical.
The final stage of working through a PIP is re-launching the hotel. To get the most value from your work, plan the relaunch in detail with your marketing team and the brand so the market recognizes and values your investment.
The “why” of PIPs
PIPs (property improvement plans) exist to ensure all franchisees are brand compliant because brands find that this drives customer satisfaction.
Before there were PIPs, brands found that some hotels in their systems were allowed to deteriorate and the brands had no way to enforce product improvements. In addition, each owner made wildly different choices about design, quality and aesthetics when hotels were maintained or renovated. Since customers did not know what to expect, loyalty suffered which impacted revenues. In response, hotel companies developed brand standards and implemented the PIP system to tie branded hotels to those standards.
When there is a change in ownership or franchise renewal (to enable the hotel to continue operating within the system), your brand will take the opportunity to have you upgrade the hotel to current brand standards according to a PIP. PIPs are also implemented for hotels that are changing brand to join a different system. In addition, brand refreshes, which are initiatives that periodically upgrade brand standards, sometimes require PIP elements to be implemented throughout the system over the course of a few years.
Not all PIPs are practical; sometimes the cost to implement is more than the value of the hotel. This happens with very outdated hotels and it also happens when the brand wants to replace an older hotel with a larger, better located or new construction property.
Understand the brand’s intentions when you consider a PIP. The brand may or may not think it is desirable to have your hotel in their system. Sometimes the PIP is a way of communicating that the brand is only willing to work with the hotel if dramatic changes are made.
Predictably, a minimal PIP that involves little more than changing signs is unlikely to significantly boost revenue. Assuming the purpose of your PIP is to trigger a material upside in revenue, the scope and expense will be affected by several variables:
- Building age: Older buildings that have not been gutted and renovated within the past ten years or so incur more expensive PIPs that may involve infrastructure like roofs, elevators, flooring, wiring and other major elements.
- Dated design: Freshness is critical to market acceptance of a hotel so the PIP for a property that appears dated or is intended to change market position is likely to include significant expense in areas like building exterior skin and roofline, architectural elements outside the building, redesign of public areas, and characteristic interior features like doorways as well as interior design elements and furniture, fixtures and equipment (FF&E).
- Market: Highly competitive markets and high-profile locations where the brand’s image is on display, like major resorts or locations near the brand headquarters, are likely to incur more intense PIPs (conversely, a hotel in a highly sought high barrier to entry location may negotiate a smaller PIP if the brand is intent on bringing the hotel into their system and the property would be representative of the brand’s image).
- Brand refresh: Brands themselves get dated and go through periodic refreshes during which standards, designs and services are overhauled; PIPs after a brand overhaul are likely to be comprehensive and therefore more expensive.
- Brand standards: Some brands have much more rigorous standards than others; logically a PIP for a high dollar brand should cost more than a PIP for an economy brand.
Brand standards and PIPs
Each hotel brand has detailed standards that are regularly updated and cover every aspect of the hotel from the physical plant to exterior appearance, landscaping, furnishings, amenities, services, technology, procedures (from check in to cleaning), paperwork (from employment records to brand compliance), and more.
Since brand standards are adjusted often to meet current conditions, hotels tend to drift out of compliance. The brands conduct inspections that push the properties into operational and maintenance compliance.
Furnishings and integral features of the property wear over time and eventually are too dated or worn to be compliant. Recognizing this, hotel brands prepare PIPs as part of each change in ownership and franchise renewal. PIPs are also prepared for hotels when they apply to join a new brand.
PIPs are usually implemented and completed at the hotel shortly after preparation, but occasionally they may be done in stages. In either case, the hotel must comply with the PIP in order to open in the brand system or stay within the brand system.
Hotels in a franchise are required to stay up to date with brand standards. Failing to stay in compliance can result in penalties and fines, or in extreme cases, expulsion from the brand. Planning a hotel investment includes anticipating the costs of periodic PIPs and constantly evolving brand standards. Occasional disruption of business and the resultant loss of revenue is part of the cost of staying current with brand standards and is also part of the budgeting process. As an owner, you will manage the financial burdens of implementing PIPs and brand standards as part of the cost of doing business.
A specialist from the brand will prepare the PIP based on an in-person assessment of the hotel and brand standards. There is commonly a charge of several thousand dollars from the brand to prepare the PIP.
Some owners have a PIP prepared to decide about selling the hotel, set pricing, or facilitate marketing the asset. In this case, the PIP may be available to you from the current owner. In other situations, particularly if you are considering a change in brand, you may commission the PIP yourself with the potential new brand.
The PIP covers what needs to be done, but not the cost. Local conditions and the resources of individual licensees affect costs, so these are calculated by the licensee. Variables include region, choice of materials, cost of labor and supplies and more. Elements of the PIP include:
- Plumbing and electrical systems
- Mechanical systems
- Guest rooms and corridors
- Elevators and stairways
- Meeting rooms
- Fitness centers/swimming pools/recreational facilities
- Security, safety and communications systems
- Food and drink facilities
- Parking areas
- Interior and exterior lighting
- Front desk and back-of-house functional areas
Elements like signage, lighting, furnishing and fixtures are foundational. Elements like energy-efficient equipment upgrades are now entering the equation as well.
Most hotel chains minimize negotiations on the PIP because their goal is to maintain brand standards. However, assuming the brand is willing to have your hotel in their system, there may be a little negotiating room.
- Sometimes the PIP contains an item that violates local building codes or is physically impossible and the brand may negotiate alternative solutions.
- A professional review may uncover opportunities for value engineering from the exact requirement of the PIP and the brand may be open to recommended alternatives.
- PIPs include subjective items and substitution may be considered, if the item is not a brand identifier.
- There may be a requirement in the PIP that hasn’t been fully tested by the brand or is not readily available to install and the brand may consider alternatives of equal quality.
- While it is cost effective to do many aspects of a PIP at once, some elements may not need to be implemented immediately; the brand may negotiate a grace period that lets you spread the costs over a few years, especially when you are bringing a new hotel under the brand flag.
- Recognize that partial or delayed implementation of a PIP may not be in your best interest because the market will not necessarily accept a hotel under a new flag unless it meets or exceeds expectations.
- Sometimes an influential experienced management company partner or investor is better positioned to negotiate than a new one-hotel licensee.
- Branding comes with time boundaries. Once you contract with the brand to implement a PIP, it must be completed within the contracted time frame.