CapEx and Standards in a Changing Marketplace.
Some of the most difficult situations in a franchisee-franchisor relationship arise over the issue of CapEx, or capital expenditures. Franchise companies that have not required sufficient capital investment for their franchised hotels to offer a competitive product have lost brand value – and their hotels have lost customers and market share. Yet, it can be very difficult for franchisees to justify re-investment in some hotel businesses. None-the-less, the brands that will remain strong are those that require their franchisees to re-invest. However, a franchisor makes money from a hotel even when that hotel loses money. Except for franchisee complaints, nothing restricts a franchisor from requiring the franchisee to invest money in renovations. If the renovation requirements are frivolous, or are designed to upgrade the entire system, the franchisee may not see a return for many years, if ever.
Working Relationships.
Whatever the legal aspects of a franchisee-franchisor relationship, franchising is proliferating. Franchising works in today’s market. It provides a means for an individual to own and operate a business in a complicated world. It makes it possible for lenders to mitigate their risk when they lend to inexperienced operators. It provides national brand marketing for businesses owned by individuals. Franchising is growing because it is a very good idea. Good working relationships between franchisee and franchisor make the best franchise systems effective. Those relationships are based on the concept that an improvement in the franchisee’s business is good for the franchisor, and the matching concept that an improvement in the franchisor’s brand is good for the franchisee. The actual interaction in these relationships takes place in several ways.
Franchise Services
Franchisors have a staff of professionals dedicated to the betterment and operation of the hotels within a brand. Those franchise service professionals:
· Inspect hotels, develop product improvement plans, and generally make sure that the quality of the product in the system is up to standard;
· Provide marketing support through direct corporate and group sales, telemarketing, representation at trade shows, design services, marketing planning, representation to travel consortia, providing listings in directories and networks, developing packages and special promotions, advertising, etc.;
· Operate the reservation systems;
· Advise operators on their marketing and operations;
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· Develop training programs for hotel staff (both in conferences and training materials to be used at hotels);
· Bring additional hotels into the system (identify locations that would be desirable for brand distribution and sell franchises).
Hotel franchisors have shown a real interest in maintaining a positive relationship with their franchise communities. In general, the franchisor staff that deals with franchisees is accommodating and works to provide services to their franchisees.
Franchisee Advisory Boards
Most chains have advisory organizations comprised of franchisees. The structure of the franchisee organizations, and their mandate, is significantly different from one system to another. Choice and Cendant are examples; each system has its own version of an advisory group.
In Choice Hotels, the organization is called the “IOC” and is purely advisory; the Choice Board of Directors has veto power over the IOC. The IOC has regional boards as well as a national committee, which encompasses sub committees for education, technology, awards, audit and other functions. All of Choice’s brands are represented through committees in the IOC. There are corporate (franchisor) representatives on the IOC voting committee.
Cendant has a separate franchisee group for each of its brands. For instance, “Rina” is Ramada’s organization. It includes representatives of the franchisor, and is restricted against actions that would be detrimental to the franchisor (for instance, it cannot reduce franchise fees). However, it is available as a means of communication and discussion between franchisee and franchisor.
For franchisees, active participation in the franchise advisory committee of a chain is an effective way for franchisees to keep up to date with the system. It is also important as a way of protecting franchisee interests within each system.
For franchisors, the advisory committee is a means of communicating with the franchisee community, and a way to gather information about the concerns of their franchisees. Since franchisees tend to be small businesses and vulnerable in comparison to their franchisors, many will not express their concerns or business needs to the franchise company. The advisory committee becomes a conduit for this information. Advisory committees can also provide valuable input for marketing direction and product planning. The franchisor’s corporate staff benefits from feedback about practical ways to implement or modify their strategies.
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