What Are The Big Brands Doing?
The short answer is: planning for and opening a lot of new properties. According to Lodging Econometrics, Hilton, Marriott and IHG will see their current room inventories grow by 4.8%, 3.9% and 4.5%, respectively, in 2017 with all three majors expected to grow at or above these levels in 2018 and 2019.
As is often the case during these periods of expansions, the majors launch new brands to better compete up and down the Average Daily Rate (ADR) curve, while vying to be the front runner for ever-changing consumer trends.
With the success of Hilton’s Home2 Suites product, IHG and Marriott are increasingly focused on their new brands like Avid for IHG or refreshing existing flags such as Fairfield, TownePlace Suites, Courtyard and Hampton Inn to further penetrate the Upper Midscale market segments.
So, what are some of the top hotel chains doing in 2017?
Hampton by Hilton (including Hampton Inn by Hilton and Hampton Inn & Suites by Hilton) was the number one ranked franchise in 2011, 2012, 2013 and 2015, according to Entrepreneur. The chain of hotels “serves value-conscious and quality-driven travelers” with more than 2,100 properties in 18 countries. Hampton is also planning on opening an additional 38 hotels soon, according to its website. One of the signature amenities is a suite with two bedrooms, a living room and kitchen area. These properties offer complimentary hot breakfast and fresh coffee.
Courtyard by Marriott Hotels is the 8th largest lodging brand in the world. The brand has over 1,100 properties currently in 47 countries, and another 271 to open soon, according to its development website. Courtyard is known to suit the modern business traveler with smartly-designed guest rooms, lobbies and public areas.
Which Markets Are Seeing New Supply?
While new supply trends are increasing in most markets across the U.S., the supply/demand imbalance many were expecting in 2017 has failed to materialize as the pace of underlying economic growth continues to accelerate. According to Lodging Econometrics, the new supply pipeline bottomed out in 2011 and increased at a measured pace through mid-2017 across most of the top 50 markets. However, while the overall pace of projects being delivered is starting to plateau across the U.S. in the aggregate, there are markets such as Nashville, Denver, NYC and Seattle where the pipeline will see significant project deliveries through at least 2020.
In general, new supply is projected to be manageable at or below 2.5% of existing room inventory in regions such as New England, the South Atlantic, Midwest, Mountain and Pacific regions. It’s the East, West and South Central U.S. regions, consisting of the Gulf Coast states outside of Florida and states into the Ohio River Valley, which will see new supply being delivered through 2020 in excess of 3% of existing room inventory. Extra caution should be taken if one is looking to enter one of these markets.
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According to Hotel Management Magazine, select-service hotels account for the bulk of new rooms under construction and this has been a unique aspect of the current inventory expansion within the space when compared to prior cycles. As the cost to build new properties continues to increase, owners are focusing their efforts on projects that can be delivered quickly, stabilize in less than 24 months and generate stable returns with less oversight than what a full service hotel development project would entail.
How to Buy a Hotel Franchise.
Buying into a hotel franchise involves careful evaluation of your capabilities and a sizeable investment. Experience in managing the facility is also important, especially if you don’t plan to hire someone to run the place for you. The buying process starts with reviewing your reasons for buying a hotel franchise and confirming that they match up with your financial and investment capabilities. After you know the answers to these questions, you’re ready to start the hotel franchise buying process.
Secure Financing.
Estimate how much financing you need to buy into a hotel franchise. According to the Entrepreneur website, the Baymont Inn & Suites requires startup costs ranging from $191,000 to $5.84 million, while the high-end Double Tree by Hilton hotel franchise starts at $35.48 million and up. Check with your bank or the Small Business Administration regarding financing. Plan to provide details about your personal financial situation as well as a projected opening-day balance sheet. You also need income, expense and cash flow projections to show how your hotel will become profitable. To find out if a hotel franchise is part of the SBA loan program, visit the Franchise Registry website.
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Start Shopping.
After you decide the type of hotel franchise you want to buy, it’s time to start looking for one in the location you want. You have two choices: build a new hotel or buy and convert an established hotel to meet the franchisor’s requirements. Even if you find a hotel for sale that already carries the branding of the franchise you want, you must sign a new franchise agreement if you want to keep the brand, according to the Global Hospitality Group. Keep in mind that some hotels may require improvements to meet the franchise requirements. These improvements usually require an additional investment on your part – above and beyond the sale price -- so start talking to the franchisor to find out what costs are involved.
Review Information.
Examine the Franchise Disclosure Document to learn about the specific franchise in which you’re considering investing. The document contains operating and training manuals as well as financial statements from the franchise that help you figure out how to run the hotel. The franchisor must provide these documents to you 14 days before you give the company any money or sign a franchise agreement.
Negotiate.
After you find the hotel franchise that best fits your needs, you’re ready to start negotiating. If you buy an established hotel and want to continue running the hotel under the same franchise, you may want to negotiate for a reduction in the improvements the franchisor requires or request a longer period of time to get them done, according to Global Hospitality Group. Other negotiable items include the franchise fee and territorial boundaries.
Differing in Purpose.
This chapter discusses some of the decision points and issues that arise in the relationship between franchisee and franchisor. Franchising is a changing and growing industry and this chapter also looks at the emerging future of hotel franchise relationships. The best-known names in the hotel industry, Holiday Inn, Hampton Inn, Courtyard by Marriott, Sheraton, Ramada, etc., are not directly in the lodging business. They are franchising companies. Names such as JHM Enterprises, White Lodging, Starwood, Sunburst Hospitality and many others that are seldom recognized by hotel guests, are actually hotel companies. This is the nature of franchising, and it creates an opportunistic relationship between hotel companies and their franchisors.
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Franchisee.
Hotel owners are in the business of leasing hotel rooms. For the use of a room, they charge a room rate. Their related businesses may be entertainment, dining or other services offered to guests. In the hotel business, a company’s revenues and profits depend on the frequency with which they rent rooms (occupancy) and the rate at which those rooms are rented (average rate). The hotel company’s most visible assets are the real estate it owns and operates. So, one of its missions is to build real estate value. Travelers (guests) are the customers of hotel owners.
Franchisor.
Hotel franchising companies are in the business of leasing a brand name to operating hotels. For the use of that brand name, they charge a percentage of revenues. Each franchising company also operates related businesses, such as reservation systems and purchasing services, which they provide to their franchisees for a fee. In the franchising business, a company’s revenues and profits depend on distribution, or the number of hotels, which carry its brands. A franchising company’s most visible assets are the brand names it owns. So, one of its missions is to build brand recognition. Hotel owners are the customers of hotel franchisors.
Although they differ in purpose, and often have conflicting goals, hotel franchisees and franchisors have a symbiotic relationship. They need each other to survive. Obviously, a franchisor has no source of revenues without the hotel owners who are its clients. Conversely, a hotel owner has a strong need for the franchisor because we live in an extremely brand-conscious society. A small business like a hotel simply does not have the money to sustain brand awareness on its own. Participation in a franchise provides brand.
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Franchise Desirability.
Franchises differ in many ways. Some franchises offer more services than others. For instance, Holiday Inn has a large skilled and well-equipped support staff for its franchisees to use. In comparison, Red Carpet provides comparatively little in terms of training, staff and technology. Some franchises represent upscale hotels while others represent mid-market or economy product. For instance, Hilton Garden Inn has only high quality new hotels in its system while Ramada represents a wide range of product. Some franchises have a very large brand loyal customer base, generate a large proportion of their franchisees room sales, and their franchisees consistently out-perform the market. Courtyard by Marriott is currently the best example of this. Other brands are recognizable, but have lower market penetration, on average. Howard Johnson is an example of this.
People tend to select a franchise by process of elimination. First they identify the franchises that may be available for a given location, eliminating those brands that are already represented in the neighborhood. Then they narrow the field to those franchises that would consider their project. For instance, Marriott brands, Hilton Garden Inn and Comfort Suite franchises are generally only available for new construction hotels; they are unlikely to accept a conversion from another brand. Days Inn, Clarion and Four Points license new construction hotels, but also accept conversions from other brands. Then, from among the potential brands, the prospective franchisee selects a first choice. Making that selection may be a delightful process, if you have a great site in a market where the best franchisors would like to gain representation. In that situation, you can select among desirable alternatives by comparing productivity of each franchise, and the deal each franchisor will offer. On the other hand, if you are in a location where the most desirable franchises are already represented, or if you have a product that is less than desirable, selecting a franchise may mean choosing between less desirable options. A host of factors contribute to a franchise’s desirability, but the strongest are those listed below.
Distribution.
Brands with a strategically located collection of stores generate more business because they have stronger recognition among potential guests. For instance, Hampton Inns brand strength increased as its distribution became national. However, distribution does not have to be national to be effective. A well-placed regional chain can be very effective. Days Inn was extremely strong on Interstate 95, before it had national distribution, because it was well distributed on that corridor.
Consistent Product.
Brands that have consistent product typically have a higher proportion of loyal customers who travel within that chain. The fundamental reason for selecting a product by brand is the guests’ belief that the brand removes the risk of making a bad selection. A chain of hotels that is very different from one property to the next puts each guest at risk of making a poor choice every time they select that brand. As soon as the guest lands in a poor quality property, or hears about someone staying in an unsatisfactory hotel in the chain, their loyalty is shaken. A consistent chain has more repeat business, which is the least expensive way to attract guests. To attract the same proportion of guests through their chain affiliation, an inconsistent chain would have to spend much more on marketing. As a result, inconsistent chains typically generate less business for their franchisees.
Marketing.
Marketing programs offered by franchisors are paid for by franchisees. They differ in terms of the amount of money directed to marketing, the sophistication of marketing programs, quality of advertising, distribution among various media and market segments, and direct yield to the franchisee. While each brand markets to a wide range of market segments, most focus on market segments appropriate for their hotels. For instance, national convention sales efforts would not be appropriate for Econolodge any more than promotions for truckers would be appropriate for Hyatt. Marriott’s marketing for Courtyards is most targeted within the corporate segment. For full service Marriotts, the company targets groups more directly. Hilton’s marketing is known for its effectiveness with groups and executives. Days Inn was historically strong in the Senior Citizen market, but their success has drawn direct competition for these customers in recent years. The best brand for a location has marketing appropriate for the kinds of customers who will be attracted to that specific hotel. Marketing programs differ in other ways as well. Choice’s marketing has been oriented toward television, and has promoted a multi-brand system over individual brands. Cendant brands, which are also clustered within one company, are promoted individually. They focus on different media, depending on the marketing goals of the particular brand.
Reservation Systems.
Reservation systems are extremely expensive to install and operate. They are also technology-intensive. Chains with senior executives who are comfortable with technology and believe in its application tend to have better systems. Franchisors who are willing to forego short-term profits to invest in the future of their chains tend to have better systems. Holiday Inn has a reservation system called Holidex that has been upgraded and updated as technology changes, and is one of the strongest in the hotel industry. Radisson, which has travel agencies as sister companies, was one of the first to make its reservation system directly accessible to travel agents, a major breakthrough. Radisson was comfortable investing in technology, at least in part, because its executives had seen the impact in their other businesses.
Corporate Culture.
The culture in each franchise company is remarkably different from its competitors. Prospective franchisees evaluate these cultures through visits to the corporate headquarters, interaction with franchise salespeople, discussions with other hotel owners and other means. Attitude becomes oddly important in the selection of a brand. People say that they become Marriott franchisees because of the company’s culture. They feel that Marriott is committed to the success of its franchisees. Yet, the actual terms of a Marriott franchise agreement mean that the culture could be changed at any time. US Franchise Systems markets its intent to treat franchisees fairly, and uses this attitude to offset its relative newness and still small distribution. However, corporate culture is a transient thing. It changes when brands are sold, top executives replaced, private companies are taken public (or vice versa), and when the market changes. Culture in Howard Johnson changed significantly several times as the brand changed owners. Holiday Inn changed when the company moved from Memphis to Atlanta, and so on. The culture of a franchisor is important to its franchisees. It determines how pleasant, or unpleasant, conducting business will be. Starting a franchise relationship in a culture you like is important. However, that culture is highly likely to change before the end of the franchise agreement. Only the actual franchise agreement (contract) commits the franchisor and franchisee to a standard of behavior.
Image.
A franchise that is desirable on one hotel, may not be effective on another. For example, an owner-operator built a small high-quality limited service hotel in north Atlanta. He selected a franchise that had excellent distribution and a well-known brand name. However, the brand was targeted toward economy travelers, and the hotel was designed for mid-market guests. Corporate customers were deterred by the brand while economy travelers were deterred by the room rates at the hotel. Among other decision criteria, it is important to select a brand that attracts the appropriate customers for the specific hotel. Hoteliers will sometimes settle for an inappropriate brand, if better-suited brands are not available. The developer assumes that the desired clientele will use the hotel anyway, following a little extra marketing effort. It rarely works, because this society is very aware of image. Guests do not just select on the basis of product, they select the brand that suits their image. The hotel industry has trained its customers well and it is extremely risky to move into a marketplace with the wrong brand for the hotel and location.
Brands with strong marketing, strong reservation systems, strong image, good distribution and consistent product are the brands that deliver above market performance. They are today’s most desirable brands.
Pricing a Brand
Like any other business relationship, participation with a franchise comes at a price. The price of a franchise is not intended to be “fair” to the franchisee, any more than the profits on a hotel are intended to be “fair” to guests. Franchise price is as high as the franchisor can command, without losing too many franchisees. Similarly, room rates are as high as a hotel owner can command, without losing too many guests. The price of a franchise has a number of components. It isn’t a simple dollar amount, because it is a price paid over a long period of time. In addition, it encompasses a menu of services and benefits.
The basic fees associated with a franchise are:
Royalties. – A royalty is the fee charged for the use of a brand name. In the hotel industry, royalties are typically in the range of 3 to 5 percent of room revenues. They vary depending on the value of the brand and some peculiarities of the market. In general, a strong brand commands a higher royalty and commands that royalty in full over the life of the agreement. A weak brand may have a lower royalty, and may negotiate discounts during some part of the term of the agreement. Pricing of royalties reflects more than the simple desirability of a brand. Franchisors consider the speed at which they wish to sell franchises, the cost of the services they provide, the amount of competition from other franchisors for hotels at their product level, and other factors. Since royalties are calculated as a percentage of room sales, the royalty earned per room rented is much higher on a hotel like a Hyatt, with rates well over $150, than on a hotel like a Red Roof Inn, which may have rates under $50.
Costs of Entry. – Franchisees pay application and initiation fees at the time they join the franchise system. In addition, among other items, costs of entry include:
· signage;
· logo’d items;
· architectural details required by the brand (like Holiday InnExpress’s clock tower);
· brand specific computer systems;
· charges for operating manuals;
· charges for training (both sending management to training and paying for franchisor trainers and openers to come to the hotel).
Reservation System Charges.– Franchisees pay for the operation of the chain reservation system. Typically, the reservation system is charged back to the franchisee community “at cost”, meaning that the franchisor does not book a profit on the system. Reservation system charges generally include a percentage of room sales. There may also be charges per reservation, charges for reservation equipment, and various fees for usage. Travel agent commissions and Global Distribution System charges are also billed through the reservation system. The charges for delivering guests to hotels add up when they include franchise fee (5 percent), reservation and marketing fee (3.5 percent), Global Distribution System charge ($3 to $4 per reservation), travel agent commission (10 percent), etc. For a hotel with a $50 rate, these charges may total over 35 percent of revenue. For a hotel with a $200 average rate they may exceed $40 for a room night. Most hotel reservation systems allocate the costs of the reservation service as a percent of room revenues. This method encourages franchisees to use the reservation system as much as possible because their costs do not increase for heavier usage. The benefit to the franchise company is that the franchise system controls a larger proportion of the total volume of sales at its hotels. Guests also receive the most seamless service because franchisees are likely to make more of their rates and group programs available through the reservation system. The alternative system allocates a larger share of the cost of the reservation system to the hotels that use it most heavily by charging a fee per reservation booked, in addition to a base fee. Under this system, some hotels keep special programs, like group bookings, off the national reservation system and require group guests to book directly with the hotel. In general, taking full advantage of the reservation system is beneficial to hotels.
Marketing Assessments. – Franchisees pay for the national marketing programs of their brand. These programs are officially not-for-profit to the franchisor. There is a suspicion in the franchisee community that franchisors use marketing and reservation system money to offset other costs of company operations. For this reason, many franchise systems have a committee of franchisees with some authority to review the expenditures of the marketing and reservation funds. There is generally a base marketing assessment that is a percentage of sales. In addition, there are charges for:
· special programs;
· listings with some travel consortia;
· rooms rented to guests through select promotions (for instance Holiday Inn hotels pay a fee for each room rented to a Priority Club guest);
· participation in regional marketing programs (marketing collectives of hotels within a chain are now prevalent, for instance, Days Inns in Florida have a franchise-sponsored collective that identifies specific marketing programs and funds those programs in addition to their national franchise marketing assessment).
Various Charges. – Incidental other charges are a common part of the franchise relationship. Some costs associated with a franchise would be incurred by an independent hotel as well, and may be less expensive for a franchisee. Management education is a good example. Without programs provided by a franchisor, it is difficult for a hotel operator to find training programs that are cost effective and specifically designed for a given type of property. Various charges include:
· fees for attending national conventions, regional meetings and required training sessions;
· mandatory fees for franchisee councils;
· computer support arranged through the franchise company for franchise-specific software and hardware;
· miscellaneous fines for non-compliance;
· required upgrades of computer systems and other technology (like adding a satellite dish to communicate with the chain, or purchasing a specific computer for staff training);
· required chain standard items (adding irons and ironing boards to all guest rooms, for instance, or adding continental breakfast to all hotels, or creating “senior citizen” rooms to support a national marketing effort);
· signage changes (Holiday Inn changed its “Great Sign” to its current signage standard some years ago, Best Western, Howard Johnson, Hilton and Choice brands, among others, have also changed their signage);
· complying with changing facilities standards;
· purchasing insurance to protect the franchisor against a possible loss of revenue in case of a problem with the hotel.
Sticking Points.
Most of the time, most franchisees and franchisors get along. Most of the time, both parties make money and both parties are reasonably happy. But, not always. These are the common sticking points.
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