Three unstoppable processes have influenced the hotel industry in recent decades: globalization, digitalization, and innovation. The combination of these three factors has prompted the appearance of new forms of affiliation between market actors seeking to adapt to the demands and preferences of customers, to optimize their resources and to take advantage of opportunities for international development and expansion. Added to this, the hospitality industry has for years played a leading role in intense growth and is driving new affiliation mechanisms among its various actors, soft branding being one of them.
Soft branding is an agreement (or set of agreements) under which a hotel chain, usually a reputable business with a strong brand identity, offers an independent hotel (or one belonging to a smaller chain) the chance to become affiliated with its network, while retaining its own personality and independence, but benefiting from certain services and advantages provided by the channel and focused mainly on increasing their revenue.
This recent mechanism is a contractual arrangement not defined in Spanish law, which contains clauses on a range of legal transactions, such as trademark licensing and use, distribution of sales of overnight stays on electronic media, software licensing, know-how licensing, technology and marketing advisory services, and in some cases training in specific areas. These clauses imply a number of obligations and considerations for both parties, which must be defined with clarity and balance, taking each party’s interests and risks into account.
Despite a certain amount of initial confusion, soft branding is not identical to hotel franchising, because it does not involve the typical uniformity of the affiliated establishment with the chain. The affiliated hotel retains its name, its design, its management and its customers, although it comes under the chain’s banner, collection or sub-brand. This brings it certain technical assistance relating to sales and marketing and above all greater visibility, reputation and access to exclusive distribution channels and loyalty programs that will boost the number of potential customers or give it the chance to raise the average price of overnight stays, and, in a few cases, of bar and restaurant or other add-on services. In exchange, the affiliated hotel retains its own unique character and its way of operating it, although it must meet minimum quality and service standards, respect the chain’s image and values, and pay a set of rates, fees or royalties for use of the trademark and for other services received.
By comparison with a hotel management agreement, soft branding does not involve a transfer of management or the taking over of operations of the establishment affiliated to the chain. The company operating the affiliated hotel (whether its owner, lessee or manager) continues to be responsible for commanding and handling the business. Therefore, it retains management of its human resources, customers, suppliers, accounting, administrative, tax and other matters. It also continues to be directly responsible for its profitability, and investment planning. The chain offering soft branding simply provides the affiliated hotel with support and advisory services, without acquiring any risk or share of the hotel’s gains or losses, except for a greater or lesser return by reference to certain income targets for the affiliate hotel where this is agreed by the parties.
Soft branding comes from Anglo-Saxon market, where it has been used for decades both as an alternative and to supplement franchising and hotel management, especially in the luxury and boutique hotel segments. Due to its recent appearance in Spain, there is no case law on this subject as yet. This means special attention is needed in negotiating and drafting the related contracts, and in defining, specifying and outlining the services to be provided. Also, it is highly recommendable to agree on and properly define a balanced and practical procedure for dispute resolution between the parties.
This is, without a doubt, a very useful business model for the development of large hotel chains, because, with a very small initial outlay, they can step up or roll out their presence in certain cities and tourist destinations, by taking advantage of the potential and the unique character of affiliate hotels. Furthermore, this model can complement or coexist with a hotel lease or management arrangement, depending on the characteristics and needs in each case.
Soft branding also poses a number of tax issues for the parties to take into account, especially where a cross-border legal and economic relationship arises, involving two or more jurisdictions. Special attention is also needed from both a legal and tax standpoint, where on the hotel chain’s side two or more entities take part, each providing one of the range of services in the package making up this contractual arrangement.
All in all, soft branding is a complex and innovative contractual arrangement that presents advantages and challenges for both the hotel chains and the independent hotels or smaller chains, which need to carry out an in-depth analysis of its tax and legal implications.
Head of Garrigues Tourism and Hotels industry
