Episode 57 – Reshaping Destinations: The Power of Diffused Hospitality

Reshaping Destinations: The Power of Diffused Hospitality with co-host Ty Maloney and special guest Nelson Marsh

Welcome to “The Redemptification Podcast,” where transformative ideas meet tangible action. In this episode, host John Marsh, alongside co-host Ty Maloney and special guest Nelson Marsh, explore the innovative concept of diffused hospitality and its potential to reshape small-town economies.

Nelson Marsh, an expert in Italian wine, sets the stage by highlighting Italy’s unique landscape challenges for traditional hospitality. He illustrates the evolution of diffused hospitality, citing examples like San Felice, where historic towns have been repurposed to preserve culture and foster authentic experiences.

Ty Maloney adds depth to the discussion, emphasizing the transcendent potential of diffused hospitality for small towns worldwide. He underscores the importance of authenticity and cultural immersion in creating meaningful experiences.

Throughout the episode, John Marsh outlines the economic rationale behind diffused hospitality, drawing parallels between hospitality and real estate. He discusses the long-term value proposition of adaptive reuse and strategic investment in small-town assets.

From the economics of diffused hospitality to its ripple effects on local businesses and community development, “The Redemptification Podcast” offers a thought-provoking exploration of a transformative concept poised to redefine the hospitality industry. Join us on this journey of discovery and redemption, where every town holds the promise of becoming a destination, one unforgettable experience at a time.

Insights & Inspirations

Nelson Marsh (04:00): So this is a big deal in Italy. There’s a couple things that have conspired to make hospitality work different there. First, anyone who knows anything about Italy knows that it is the most mountainous country on earth. And so because of this, they don’t have a lot of flat land, and this has meant that you have these little pockets with incredibly diverse ecology and you grow all these different things. But it’s also meant that building large buildings is very difficult. In Italy, you won’t see a lot of skyscrapers. It’s very seismically active there. And so all of this kind of conspired together to create a situation where the Italian government in the seventies and eighties was really trying to push tourism kind of on the tail of this Dolce Vita and Sophia Loren and that whole thing.
Nelson Marsh (05:22): Well, this worked so well that in the seventies there was a little town in Tuscany called San Felice, and they’re famous for growing this grape there. For those of y’all who don’t know, my expertise is in Italian wine. They have a very rare grape there called Pello that means little fist.
Nelson Marsh (05:55): And there was an English insurance company that actually bought the whole thing as one big asset from ’em. So what they got was a little tiny town in Tuscany with a winery that was producing a whole bunch and with little restaurants and a whole bunch of people living there. Well, as it depopulated, what they started doing was using it for corporate retreats. And then eventually they would stick a room in one building, a room in another building, and eventually the whole town turned over and they kept the winery running and they kept the industry there, but they actually turned this whole town into a diffused little model.
Nelson Marsh (06:49): And what it does is it allows you to preserve the culture and fabric of these areas. The other thing it does is it allows you to really have an incredibly high level of experience with existing structures. These days, it’s really gotten prohibitively expensive to build anything, but especially hospitality has really gone through the roof. And so what a lot of little cities in Italy have done is they’ve been able to build up an inventory of rooms that have a backstop where they can go and rent these things out as apartments. They’re just houses, but they’re able to have this overnight stay component.
John Marsh (07:42): So one thing we realized through this play, we started out realizing through our own experience here in Opelika, that restaurants move people. Food and beverage is powerful. You get someone to go to the worst neighborhood in town for good barbecue, we can move small places in a major way with good food. And as this has evolved, and that was right, and we are still doing that, and I think that’s still like the minimum viable plan for a town is to get one good place to eat. But when you bolt on overnight stay, and when you bolt on celebratory events, the sum of those three parts is greater than I could initially imagine it. It’s not in multiples, it’s exponential.
John Marsh (08:59): If you go downtown and stay in this diffused manner, scattered hotel, horizontal hotel, or as we’re calling it, diffused hotel in existing structures, you actually get to be a temporary citizen instead of just a visitor.
Ty Maloney (09:49): And we know that in the hotel industry, there’s a lot happening right now just overall in the hospitality industry. There’s this real pool for more experiential destination driven hospitality. But in the typical kind of classes of hotels from economy to budget, midscale to upscale, the hotel industry has done a great job of classifying. And if we were going to look on a Co-star (SDR was bought by Co-star) and look at a report and you look at how the industry kind of classifies, I’m not sure our conversation really fits because like Nelson said, the thing that, what’s really attracted to me around this idea is that, and just thinking aspirationally, is that there’s a model here that really could be transcendent for small towns because we could really create this experience, I think, and have these economic viable models that really allow a transient person to come into a place, into an authentic experience and not feel transient.
Nelson Marsh (11:18): in Italy especially, unless you’re in a major city, there are no historic hotels. There are some left and large. I mean, if you’re in Milan, there are some historic hotels. There are no historic hotels in San Felice, or I was recently in Gaana. There’s no historic hotels there. So I want to be careful to not make this sound like this is a replacement for these historic things because authenticity is important.
Nelson Marsh (12:03): This is about first creating a model that doesn’t require that and require new construction. But second, I think we need to address the thing around the hotel business, and this is in all big businesses that do something long enough, it becomes rote. For any of y’all Thomas Koons fans, this is a paradigm. A paradigm is a set of arbitrary tasks that we decide to do, and that becomes a way we do it, and now it’s sacrosanct, and we always have to do it this way just because we’ve been doing it. And then someone comes along and they break the paradigm when they say, well, why do we do that? And could we do it different way?
Ty Maloney (17:29): There’s also a transformation economy, and I think more people are becoming more and more aware of one, their health too, where their food comes from. And I think that’s what now we need to speak to is beyond the diffused hospitality story in Italy. But you can’t go to Italy and not fully appreciate what it took to put something on the plate. And I think that’s the kind of appreciation that we can bring in a small town setting because we can bring authenticity and expression and culture in a way, in a small town in this format.
Nelson Marsh (18:49): The freedom of expression in small towns can often be a greenhouse for creating beautiful things.
Nelson Marsh (19:24): And there are people everywhere wanting to do great things. The problem is we don’t often have a way for them to take that inspiration and that love and put it into action. And in Italy, the difference is they have fought tooth and nail to save and preserve the opportunity for these small experiences and small expressions.
John Marsh (20:07): And one tagline we are kind of working on here is every town is one unforgettable meal and overnight stay from being a destination. Once it happens, everything changes and people begin to go, I had this amazing weekend in this small town and we did this and we did this.
Ty Maloney (21:03): what I intuitively believe that it’s not going to show up necessarily on a market report. So I think when it comes to, if you’re sitting there thinking like, wow, this is an interesting conversation. How does this apply to my town? I believe that a gas tank away market from, if you think about a couple, an average couple, I believe that an average couple would, there’s a good size market that would spend $1,500 to $1,800 for a weekend. And if you can create a very meaningful experience for that amount, and I think there’s interesting about there’s not elasticity in an ADR average daily rate for a property like Blackberry Farms or a property that’s food and beverage driven or wellness driven
Ty Maloney (26:22): So that’s the thing is that we create spaces around moments. You have to be intentional to create moments, and a lot of those moments have to be revealed. That’s the beauty of these small towns is these authentic spaces and places, and there’s character and all the things.
Ty Maloney (27:27): You start looking at it and you say, well, hey, how can you start looking at that square footage and applying a programmatic model to a critical mass of overnight stay, food and beverage, and venue space to really start thinking about a holistic model that could be used for these assets?
Ty Maloney (29:35): So I think one thing that we have to really consider, so many of this at the scale we’re talking about from a hospitality standpoint and what’s typical in a small town from a mom and pop standpoint is that any one of these businesses would have a single operator and have to stand on its own. So for example, the restaurant would have to stand on its own. And I think that is actually one of the weaknesses. I mean, it’s really hard for an operator, even if they’re good in a small market for a restaurant to stand on its own, you have to be really, really good.
Ty Maloney (30:30): And so that’s one example. And then if you think about it, well, there’s a lot of people that do Airbnb overnight in small towns and do a great job at that. And then there’s a lot of venue spaces. But rolling all those together in a single operating format gives you more ability to have an overarching hospitality expression
Ty Maloney (31:15): I know one of the quotes that I hear often in real estate is that really, especially commercial real estate, is that an asset is really nothing more than a collection of leases. And that’s really in the context of a town and a place that we hope aspirationally is more than just a portfolio of leases, really, it’s a portfolio of operators.
Ty Maloney (32:32): Well, so in the accounting from a resort perspective, a lot of your revenue centers are rolled up into one pro forma, if you will, or one income statement. And if we were to do a restaurant here in our town standalone, we could probably expect the profitability of that restaurant to be between eight and 10% on an industry average standpoint. But when you see that in a hotel or a more collected income statement with other revenue cycles, you would see, you start thinking about it differently. It’s really a revenue center that generates gross operating profit that then has a shared GNA or general administrative cost and property operating expenses and marketing, et cetera. So it allows you to leverage that differently or thinking about it differently, and it gives you more support for that food and beverage operation.
John Marsh (34:14): I mean if you look at a side of the road hotel , Holiday Inn Express, if it’s $175,000 a key to build one today, a hundred room hotel is 17.5 million dollars. And we are talking about going into towns where we could build rooms, a restaurant, and event space for less than that. I mean, think about if let’s say your rooms are $295 a night ADR, and it only had 50 rooms, that’s a potential $14,750 if it was fully rented. And if you multiply that times 365, that would give you a potential $5.3 million income. If you do it at a say 60% occupancy, that still puts it down at $3.2 million and 50% of your money went out in expenses. That’s $1,800,000 guys. There’s models where it could be between, for the restaurant food and beverage, the 50 room hotel and the events, it could do $2.5, $3 million in profit a year.
Nelson Marsh (36:04): Another thing that’s worth thinking about, and I’ve learned this from the wine industry, this five seven year investment nonsense is not a horizon that makes sense for the longevity and flourishing of our cities. It’s just, it’s shortsighted and it’s foolish and it’s often predatory if you look out over a long-term.
Nelson Marsh (36:48): Well, if I take and do this model and let’s say I put 40 million in a downtown or 10 million in a downtown, those buildings are going to be worth more. They’re more special, they’re more unique every single year. And then because they were adaptive reuse to get there, they can be adaptive reuse again.
Ty Maloney (41:41): All of a sudden, when you start to identify with somebody who’s doing hospitality with excellence, and you see that, that’s why I believe it’s almost like it could be a catalyst just like our smoke stacks.
John Marsh (41:55): Right? Well, it certainly can because if you’re successful running something like this, if you think shops, retail, yoga studio, everything’s not going to pop up around it. You’re crazy. I mean, of course it will.