Choosing a franchise is one of the most long term and important decisions that a hotelier has to make. The decision will impact the success or failure of the property for the next ten to twenty years. So, how should a hotel owner choose a brand?
Choosing a franchise is one of the most long term and important decisions that a hotelier has to make. The decision will impact the success or failure of the property for the next ten to twenty years. Mistakes are expensive both in terms of lost revenue as well as out of pocket expenses to change a poor decision. An owner can of course always decide to run the property as an independent. HVS Hotel Management has been successful in operating properties as independents, but this is a separate decision that will not be dealt with in this article. So, how should a hotel owner choose a brand?
There are many factors to consider when choosing a franchise. But make no mistake; the most important factor is revenue. How will the prospective franchise impact the future revenue stream of the hotel? We all know that we are operating highly leveraged properties, both from an operational standpoint as well as from a capital standpoint. Once we reach breakeven levels of revenue, cash flows readily to the bottom line. Conversely as revenues decline below breakeven points the situation deteriorates rapidly. While strong management is the most important factor in the success of a lodging facility, the brand under which a property operates is probably the second most important factor.
At a recent conference I attended, a well-known lodging expert said that there were 187 hotel brands, and only about seven of them knew what they were doing. Although I would differ on the actual number, and can’t vouch for the 187 number (having never taken the time to count them) I think his point was on target. There are a handful of truly strong brands. The strong brands have a good property mix, consistent standards, successful loyalty programs, superior marketing and well established reservation systems. These brands recognize the importance of the changing nature of lodging reservations through the internet and have well developed strategies and systems. They play the internet game to win
How will you know the great brands? First they have a well-defined market segment and have properties that are designed specifically to meet their guests’ needs. They are fanatical and rigid about brand standards and the quality and condition of their properties. They understand that the success of their brand depends on being able to offer their guest a similar experience at all of their hotels no matter where they are located. The best brands have also developed a strong following through loyalty programs. While these programs can appear to be expensive to the operator, they are in reality a cost effective way to keep a customer base. It is always cheaper to keep your current customers than find new ones. While most brands stumbled during the first few years of the new internet booking models, the best brands have recognized that they must make efforts to have these demand sources work for them, rather than having the brand work for the internet booking engine. This is the new reality in the lodging industry and it will only continue to grow in importance.
It is not my intention to name names in this article. It is relatively easy to identify the best brands, the catch is: are they available to your property? In many instances the answer will be no. The best brands will often already have a property in the market. They will also frequently only consider new construction except in unusual situations. These brands constantly upgrade their standards and want their new properties to have all of the bells and whistles. If you can get one of these brands - grab it. If you are fortunate to have one of these brands, you hold on to it as long as you can. A word of caution for those hotel owners who are sitting pretty with a strong brand, but are in the last five years of the franchise agreement: five years will be over before you know it and there is a high likelihood that the brand will not renew the franchise. The best brands will be able to find a developer who will build them a new hotel, with all of the new upgrades, once the brand becomes available to the market. Your twenty-year-old property will not meet all of the new criteria, no matter how well you have maintained it. Start planning your exit strategy now.
For most of us, the best brands will not be available. We will be choosing from the other 180. Where do we start? First, don’t lose focus. This is still about revenues first, expenses later. If revenues are a toss-up, only then will the decision hinge on expenses and terms. How do you go about analyzing revenue potential? Brands throw out all sorts of statistics about reservation contribution to their hotels. As Benjamin Disraeli said: “There are three kinds of lies: lies, damn lies and statistics.” General numbers and overall contribution percentages are meaningless. You need to obtain detailed breakouts of contribution numbers. Where are they really coming from? What are the individual sources? How do these compare to the other brands that are available? Insist that your brand representative gives you detailed figures to look at. If they don’t, disregard whatever they tell you.
Of the available brands for your property, what is the best fit for this hotel? How do the available brands compare to the competitive properties? Which brand is most consistent with the product offering and the price point of the facility? If your hotel will compete on the basis of price, then pick a brand that communicates this to the market. If your hotel will compete on the basis of product offerings, then pick a brand that communicates these offerings whether they are commercial oriented, extended-stay, or leisure driven. Does this brand have a good market presence in your region or specific market segment? There are many regional brands. I would never want to be the one opening up a new region for the brand unless the brand is willing to subsidize me for these efforts. Call other owners in nearby cities that operate hotels under the brand. What is their experience? Never commit to one of these brands early. Competition will help you when you get to the point of negotiating terms. While getting the best terms can save you money, don’t forget that if there is a clear winner on the revenue side: that is your brand.
Many times there will be no clear winner in terms of revenue, and the decision will come down to terms and upfront capital costs. Some things are negotiable, and some things aren’t. At the end of the day, fee structures are regulated by the brand’s UFOC. However many of them will negotiate lower fee structures during the first two to three years. Most of these brands will have a “best deal” that they will offer to a desirable franchisee. Find out what it is and get to it. Most brands will also offer reduced termination fees. A very few will offer performance based exits, or windows at which the brand can be terminated for little or no cost. These are valuable to have if you need to make a change later, but remember that these will only be of value if you find out that you have made the wrong brand choice. By then the lost revenues and opportunity costs will exceed what you will save on liquidated damages. So if there is a winner on the revenue side, do not let the termination fees be a determining factor.
The upfront capital costs that the brand will require are always an important factor. Make sure that you understand all of the costs that will be required, including property management systems and training expenses. Capital costs are also a two-edged sword. If the brand is so willing to limit the amount of capital costs that will be necessary for your project, remember that this means they are also willing to do it for almost everybody else. What should this tell you about the value of the brand and their commitment to long-term revenues and the success of the brand as opposed to their need for short-term fees? Reasonable brands can be reasonably accommodating and can work with you on an acceptable time frame for capital project completion. If on the other hand they are willing to let you get away with items that you know should be done, then you should question if this is really the brand you want to do business with for the next twenty years.
Take your time picking a brand. It is a decision that you will live with for a long time to come. Focus on who is really the best brand available, not just the cheapest. Increased revenues can quickly make up for incremental expenses. Your negotiating position will always be best if you convince the brand that this is a great property for them and that you are a great owner/operator they really want to do business with. So don’t hesitate to have a little selling effort be part of your strategy. One final tip: many brands have quarterly quotas and goals. Your negotiating position is often best near the end of a quarter when they are trying to reach a sales goal.
About the author
Dan King brings 20 years of experience in hospitality management, financing and consulting. He has a keen understanding of the current industry down cycle, having spent the early 90's as a lender (HSBC), successfully taking back non-performing assets, managing and ultimately selling the portfolio at a value increase of nearly 40%.
Logos, product and company names mentioned are the property of their respective owners.
