Hotel Management Agreements (Part-3); Franchise or License Agreements

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This is the third article on “Hotel Management Agreements”, the first article lay the foundations and provide brief information on available options on the market. The second article was on the Hotel Management Agreement and in this article, we will review pros and cons of Franchise or License Agreement.


Up until 20 years ago, probably only luxury hotels and maximum of 30-40% of them were branded and the remaining hotels were independent. The world economy has changed, travelling between the countries becomes easier and cheaper. This allowed more people to travel and explore the world, there are more people travelling the world with leisure purposes than a business now. These changes have created an opportunity for hotel companies to vary their offers in different segments.


The trend towards branding is a phenomenon in the last 10 years. Big hotel companies have realised that the pie is much bigger than what they already covered and therefore, they started to develop sub-brands to provide different options to fulfil all budget segments and customer expectations. It was also obvious that owning, operating and managing hotels require more resources and would not give the profits they expected. Therefore, they decided to strengthen their central functions such as brands identities, strong commercial, marketing and distribution network to sell these services effectively who wish to use their brands.


Above is a quick summary of what has happened our hospitality marketplace. I believe 70-80% of the hotels in Europe and America are branded or brand-affiliated. There is a fine balance here, Hotels need brands, and brands need hotels for their success. Owner’s need recognised hotel brands to gain advantage vs. competition and hotel companies need more and more hotels under their flag to grow their business model. This creates a different hotel management agreement models-which is different than the older models I have mentioned in my previous articles.


In this article, we will review the most preferred and growing model called Franchise or License Agreements.


The branding is often accomplished by a franchise or license agreement from a company owning the brand. Other times it is accomplished by a branded hotel management company entering into a management agreement with the owner of the hotel, providing both the brand and management for the property.


Or in a simple term, franchising;


A business strategy allowing one party (the brand) to use the logo, trademarks and operating systems of another business entity in exchange for a fee.

A network of interdependent business relationships allowing a number of people

  • to share brand identification,

  • to develop a successful method of doing business,

  • to establish a strong marketing and distribution system.

As I mentioned above Franchising is relatively a new business model, different sources mention different starting points but it is commonly agreed that first significant hotel franchising arrangement began in the 1950s with Kemmons Wilson and his Holiday Inn chain. Today hotel owners increasingly affiliate their hotels with other hotels under a common brand name.


Company administering and directing the brand itself is not an owner of hotels, but rather a franchise company. Majority of franchise companies do not actually own the hotels operating under their brand names. Those companies have the right to sell brand name & determine brand standards.


For the owners, franchising helps reduce risk as proven operational methods are used. Franchisees and their financial capital expand the brand faster than franchiser could do solo.


Let’s look at Franchise agreements both brand and owner perspective while explaining the pros and cons accordingly.

Brand


Brand development requires growing the business model with the brand spreading continuously, this helps increasing fee payment to the brand due to preferential status and helping fund and grow fixed overhead of operating that brand. They cannot be seen behind their competitor brands in growth therefore, they are very aggressive to add more hotels in different locations and service levels to increase diversity and recognition of their brand.


The future success of any brand lies in the success of the following areas;

  • Number of hotels currently operating under the brand name

  • Per cent of hotels, on an annual basis, that elected to leave the brand in the past five years

  • Number of new properties currently being built under the brand’s name

  • The number of existing hotels converting to the brand (if conversions are allowed)

  • ADR trend for the last five years in comparison to ADR trend for the industry segment in which the brand competes

  • Occupancy rate trend for the last five years in comparison to the occupancy rate trend for the industry segment in which the brand competes

  • Per cent of total hotel room revenue contributed by the brand’s reservation system and per cent of hotels within the brand that achieves that average rate of contribution

Owners / Developers / Investment Companies