Any hotel chain knows of the existence of the chain scale, a ranking system based on hotels’ average daily rate and the number and quality of amenities and services they offer.
The chain scale offers six classes—luxury, upper upscale, upscale, upper midscale, midscale and economy— and chains can move from one to another as they make changes to hotels, such as adding (or subtracting) an amenity or altering their room rates.
Are there any advantages to moving up or down on the chain scales? Absolutely, say industry experts.
First, let’s look at why the chain scale is important.
The chain scale is “a critical benchmarking tool,” said Bryan Younge, managing partner, Horwath HTL, a hospitality consulting and strategic advisory firm in New York City. It “influences not only guest expectations but also investor underwriting, brand requirements and operational strategy. Hotels often adjust amenities, service levels or even design to align with a desired chain scale.”
Where a hotel is on the chain scale makes a big difference. “Higher chain scale positions typically offer stronger brand equity, greater pricing power and institutional appeal—but they also come with high capital intensity and sensitivity to demand fluctuations,” he said.
And, higher classes such as luxury and upper upscale often have a lower internal rate of return (IRR), he said. For example, in a mature market like San Francisco, the IRR might just 8.65 percent (luxury) and 9.30 percent (upper upscale), while lower chain scale hotels like midscale and economy offer higher IRRs (above 11.5 percent) but also carry higher risk, “often tied to operational volatility or location-specifics,” said Younge.
The chain scale, he explained, “provides a vital framework for aligning development cost, brand standards and revenue potential. Developers lean heavily on chain scale to calibrate these trade-offs.”
The chain scale is also encouraging growth and movement within the industry, said Will Loughran, COO of Concord Hospitality, Raleigh, N.C. And much of this has happened in the past 10 or 15 years, he explained, with the creation of soft brands like Marriott’s Autograph Collection, which have “created tremendous growth vehicles and customer acquisition across all travel.” The chain scale, he added, has “created so much significant opportunity and niche performance and it’s really enabling the entire industry’s growth.”
Concord itself has expanded considerably over the last five years into broader full-service lifestyle and even some luxury business, while continuing to expand in the economy extended stay arena.
Benefits of the Chain Scale
Since consumers—the people spending money at hotels—aren’t aware, for the most part, of the existence of the chain scale, what’s their benefit?
For a hotel chain, Loughran said, it allows a company to see where there’s demand in the market, so helps guide what type of hotel to open.
It also helps a hotel hire well, which in turns leads to it adding resources in areas such as culinary and driving creativity within them. “When you have people in so many different disciplines (culinary, graphic artists, etc.) you cast a much broader net across the local market,” he said.
The chain scale also helps drive reputation and is “very influential” in how a hotel performs from a digital marketing standpoint, he said. “Not only are we trying to market a hotel room but we’re trying to create a halo effect around the property.”
The chain scales have become important as more hotels have become franchised and thus need investors. Investors, said Younge, “started pulling together massive funds for hotels. But they needed clear definitions of what they were getting into.”
If you’re renovating a hotel, the chain scale can also help you understand how much you can command for your ADR (average daily rate). There’s no point spending enormous amounts on making a hotel look great, said Suraj Bhakta, CEO of NewGen Advisory, a hospitality brokerage and advisory firm in Phoenix, Ariz., if you can’t recoup it because of how much you can ask for your room rate based on where you are in the chain scale.
Keeping Up With the Joneses
Hotel chains keep abreast of where they are on the chain scale so knowing what their competitors are doing is vital. “We look at who’s moving quickly or who’s moving into a segment,” said Loughran. It also helps Concord make decisions about new products and amenities it might launch at certain brands, such as a breakfast reinvention it’s working on now.
Loughran has recently been working with one of his hotel owners looking to move his property from the upper upscale to the luxury segment. “The question is are we able to drive the revenue expectation by adding certain amenities that would appeal to a new customer and attract more of the luxury owners?” he said.
Concord executives have to ask questions about how large are guestrooms and whether the public areas feel like the luxury category. They also look at whether a hotel has corresponding amenities such as a pool experience, an outsized health club, a spa.
The chain scale is “very important because it gives a good overview of how the industry’s performing,” said Jan Freitag, national director, hospitality analytics, CoStar Group (which acquired STR, which determines the chain scale). “It’s helpful to have a benchmark by price point. The hotel industry uses it for comparability purposes—are we competing well with other brands?”
And for newly created brands, he said, the parent companies—the brand creators and revenue managers— want to know what class it is in. First the hotel chain creates the brand and the price point and then STR slots it into a class.
Hotels continually monitor where they are in the chain scale against their competitors, said Younge, and this is central to both revenue management and strategic planning.
“Hotels use real-time benchmarking tools, brand-level analytics and third-party intelligence to track rate changes, amenity offerings, loyalty strategies and supply additions,” said Younge. There is certainly a ‘keeping-up’ dynamic, especially in higher chain scales where differentiation is more fragile and rate compression from peers can be costly if not addressed proactively.”
Moving in the Chain Scale
Hotels do move between chain scales, said Younge. It’s not a frequent occurrence, he added, but “strategic repositioning within or across adjacent classes does occur, particularly during brand conversions, renovations or asset repositioning events.”
Sometimes hotels owners might want to move out of the class they’re in. So an owner of a Courtyard by Marriott might want to downscale it into a Fairfield Inn and move into a different class. “The higher they go, the more the expectation is to put money into the property,” said Freitag.
And things are changing, said Bhakta. Both Hilton and Marriott, for example, he pointed out, have introduced new brands—respectively Spark and City Express—that have put them into a new class: midscale.
“That’s a unique proposition,” Bhakta said. While the lower chain scale brands have always tried to move up, previously, if a hotel chain was in a higher class it would stay there “but now they’ve reached down. The brands want to make sure they have more properties in their portfolio.” This is primarily a numbers game, he explained. “The more classes you are in, the larger your consumer base is and the more options you have for your loyal consumers.”
Previously a chain might have phased out a hotel that wasn’t performing as the chain wanted it to, whereas now, it might drop that hotel in the chain scale instead, said Bhakta. And since construction costs are so high, by dropping down in the chain scale, a hotel company can hold onto the asset and broaden its loyalty program by appealing to more consumers. “It’s a killing of two birds with one stone,” he said.
And that loyalty program, he explained, “is of paramount importance—it’s the most important thing they have.” Hotel chains’ mindset is that if people believe in them, they stay with them, he said.
Brands move up in the chain scale, too, he said, pointing to the example of Best Western, which introduced Best Western Plus and Best Western Premium in 2002. “If you’re a one trick pony you don’t have as many opportunities,” said Bhakta.
Walking the Talk
In July, Bradford Allen, a national full-service real estate firm in Chicago, opened the Hyatt Centric Chicago O’Hare, a lifestyle boutique hotel, taking Hyatt into a new category, from upscale to upper upscale.
Hyatt Centric is an emerging full-service lifestyle hotel concept that combines the service and design of smaller boutique hotels with the conveniences of large chains, along with immersive local experiences. Hyatt Hotels is eliminating all of its non-sub-brand hotels to become a little more upscale.
“Our hotel, when it was just a Hyatt, was a cookie-cutter corporate hotel, very neutral, inoffensive and not very memorable,” said Aghfar Arun, executive director of hospitality at Bradford Allen. “Ours is a heavily design-inspired concept, with high-end amenities and immersive, and that’s let us drive up the chain scale.” The daily rate at the hotel has increased by $75 to $100 since the renovation “so we’re already seeing the proof of concept,” he said.
As Bradford Allen develops its hotel portfolio, which it launched in 2022, the chain scale is important, said Arun. “We consider the chain scale in potential new acquisitions and how they might complement our existing portfolio and operationally it’s a very different burden going from one chain scale to another. The Hyatt Centric is not truly upscale, but in the upper upscale the operations are much more complex but you’re dealing with a very different demographic and a different demand base.”
And it’s easier operationally on Bradford Allen, he said, if all of its properties are in a similar place in the chain scale. “At the forethought of my mind is always ‘what are my guests expecting.’ If we operated across all of the chain scale, that internal question becomes much harder to answer. We’re not oblivious to the fact that being a jack of all trades means you’re not a master of none.”
This article was originally published in the September edition of Hotel Management magazine. Subscribe here.