Cofounder and CEO Ken Cruse zeroes in on what it takes for small hotel groups to outcompete the hotel industry’s corporate giants and why it may be worth joining forces.
Innovation and under-the-radar development approaches put Soul Community Planet (SCP) and other small unique hospitality platforms on the travel map. Having survived Covid, SCP’s nine-hotel-and-growing portfolio continues to make headlines with fresh thinking such as Fair Trade Pricing that lets guests decide how much they’ll pay for a room, its foray outside of the U.S. and a healthy bottom line built on leveraging the financial upside of a focus on personal well-being and regenerative travel. But, with the current costs of customer acquisition for any but the largest hotel companies, a renewed enthusiasm for loyalty programs and inflationary pressures to maximize efficiencies of scale, how long can these Davids hold out against the corporate Goliaths? And, should they?
Ken Cruse, SCP’s CEO and cofounder (along with this wife, Pamela Cruse, who serves as SCP’s chief marketing officer, Ryan McCarthy, head of acquisitions, and Gus Krimm, general manager) shares insights on the challenges, opportunities and future forecast for young, ambitious hospitality companies.
Hotel Investment Today (HIT): How does a small group like SCP compete for deals in this economic climate?
Ken Cruse (KC): Probably the biggest frustration that we have as an organization is that we just haven’t been able to find a lot of deals that penciled out based on our real estate discipline in order to grow our portfolio. That could shift now with the cost of capital increasing, the risk that this temporary recession will take hold and banks being a little more active with loans that have been in forbearance for a long time. These factors are going to conspire to provide deals that will be attractive within our investment requirements.
We have another hotel under contract up in Mendocino, California which is representative of the deals we try to do--which is find the high-hanging fruit that’s off the radar screen of the institutional buyers and major capital players. They’re not going to compete with us for a 22-room hotel on 10 acres overlooking the ocean because the return on resources just isn’t there.
This kind of deal works for SCP not only because it’s a beautiful property, but because we already have a hotel in Mendocino. We can complex these hotels within our system to generate significant operational efficiencies and increase our market presence--much like we did with Salishan Lodge [Gleneden Beach, Oregon] and the creation of clustered feeder market in Portland [Oregon]. As a result, I think we're going end up with a really great deal that’s not being contested because it just doesn’t fit within the the mandate of most investors chasing after us.
HIT: As a smaller company, how do you get the rates and terms that are going to make these deals work for you and who's going to say yes to this size loan?
KC: Often, it’s tenacity and perseverance. We just to have to stick with the deals and be patient, which we can do because there isn’t a feeding frenzy for the properties we want. We waited seven or eight months to close the deal on the property in Costa Rica (the 189-acre Casa Corcovado Jungle Lodge on Costa Rica’s Osa Peninsula purchased December 14, 2022, in partnership with Hovde Properties, marking SCP’s first international expansion). The price for what we’re branding as the SCP Corcovado Wilderness Lodging went down several times to 30% below where we started and we got owner financing. Last year, we closed one deal that was all cash and the next with owner financing at a very low 0% interest rate. So that was a very good rate. We got it for only 50% of the purchase price, so that made “good” really good. We’re in the same situation with a very low interest rate and owner financing for the property under contract now.
Smaller deal size can be a big advantage. Getting a minimum financing element that’s below market is a wonderful way to achieve a sale outcome for the seller but also create a very efficient cost of capital for us as the buyer.
For us, the merger/partnership/strategic partnership angle is absolutely worth considering.
Ken Cruse
HIT: What are the major roadblocks facing smaller groups?
KC: As a small brand, we face challenges on multiple levels. Customer acquisition is something we wrestle with. We have to be focused on the real estate, the management and the brand because we have to have a culture cascade that starts at the top and flows through every aspect of our organization. Growth through franchising or any means that would dilute that culture would create a difficult situation for a young company to grow. Without that culture, the authenticity of what we're offering and the consistency of what we’re doing is at risk.
We have to balance that with the fact that we don’t have a global network and it's very difficult to acquire hotels to tack onto our portfolio. So far, we’re up to nine hotels and chipping away at getting up to 28 near term and then, 50.
HIT: Would you be open to a merger or partnership to give you economies of scale?
KC: There is a fork in the road where you consider partnering up with one of the bigger players that has a good alignment with what you’re doing. You can add strength to the message and loyal customers that are already part of their system. That said, it has to be done in a very careful way. Others are doing it with varying degrees of success. For us, the merger/partnership/strategic partnership angle is absolutely worth considering and something that we do think about and talk about--especially at a time when some brands are giving small groups a great deal of independence rather than forcing them into the corporate structure. Hyatt and Accor are two examples that have done that well.
The big brand families need the authenticity of flags like ours as much as we need their scale, so I think there is an alignment there. I think both sides should be thinking along the same lines.
HIT: Will startup ideas such as Fair Trade Pricing work on the balance sheet as you scale?
KC: Yes. Fair Trade Pricing shows how a company can make the world a better place by being successful. We’re a conscious capitalistic company, not a registered charity. The more profits we generate, the more we can put back into the system to enhance our guests’ personal wellbeing, do social good and proactively improve the environment.
The upside starts on the top line. Across the board, travelers have shown they’re willing to pay more for premium experiences. My wife Pam and I were at dinner the other night. There was a wedge salad on the menu—literally just a slice of iceberg lettuce. It was $24. Everybody knows this is a $3 salad, but they’re willing to pay a high price for the experience at that particular restaurant. In my view, price pushing like this is unfortunate, but it does illustrate the point that smart, top-line consumers will pay more for experiences they value.
Fair Trade Pricing is basically a revenue management approach that fits our core values and our business model. The way it works, we suggest a fair price commensurate with expenses and market forces. When we’re providing a quality experience and people are conditioned to pay our prices, we would be foolish to say, “You can stay here for 20% less than what you thought it was worth.” But we aren’t going to just keep raising prices until we push rates beyond the prices our market will pay. We let the customer determine what they’ll pay.
This policy has been a great success in
our opinion because first, it empowers our guests to pay the price they feel is
appropriate based on the quality of their experiences at our hotels, and second, the program helps us to identify and rectify issues while the guest is still on
property. The vast majority of our guests are happy to pay the suggested
(market) price. To be clear, if a guest ever asked us to increase their rate, no matter how happy they were with their SCP experience, we would not agree do
to this. We’d simply ask the guest to kindly tell a few friends about their
wonderful SCP experience! We’re actually seeing about 0.5% of total revenues are subjected to some level of Fair Trade Pricing adjustment. So that tells us right there that people are excited about the experience and are happy to pay the premium price and that, in turn, translates into pretty good ROI.
HIT: How do you find the win-win initiatives and projects that support both SCP’s mission and its profit goals?
KC: I’ll start with an example. When Pam and I first went to the property that became the SCP Corcovado Wilderness Lodge in Costa Rica, we saw a beautiful place on the edge of a national park –- and one that sat on a beach littered with plastic waste from commercial fishing. A lot of guests going to the hotel would have likely not come back due to the littered beach. The Osa Peninsula where the hotel is located is a beautiful natural environment and the people who live there are very proud of that. Unfortunately, it’s also an economically challenged area and they’re not in a financial position to just spend a day volunteering to clean up the beaches. Our Pristine Playa initiative turns cleaning the beach into an income stream for local families. We’re not under any illusions that we’re saving the oceans by getting the litter off this beach, but we are creating a virtuous cycle. Guests are going to be much better advocates for this type of program because they can see the effects. They are more likely to come back and recommend the property and we’re empowering the community to have an ownership stake in the project.