At first glance, franchising might not seem like a traditional product to shop for. And while it’s not exactly a physical product one can see, touch or sit on, owners and developers must do their due diligence in evaluating franchisors to make sure they’re choosing the right one for the right project in the right location.
And while many owners and developers are familiar with franchising, having been in the game a long time, Gerry Chase, president and COO of New Castle Hotels & Resorts, noted that there are also a lot of new players interested in franchising, compared to the past. “Franchising has evolved to include a broader group of developers,” he said. “In the mid 1980s, [New Castle] was one of a very few companies approved to franchise and operate major brands. Now, anyone who can pull together the capital can launch a career as a hotel developer. The brands are much more inclusive now, and more effective at training and helping new developers who are interested in the hotel sector.”
So what should hoteliers think about when selecting a franchise for a particular project? When evaluating franchisors, Naveen P. Kakarla, president and CEO at HHM, noted that he looks at “premium contribution from their direct booking channels, availability of a specific brand relative to others in the same submarket, franchise and related fees, concessions around food and beverage, and ramp up in the early years of a new project.”
For his part, Joe Reardon, SVP of business development and marketing at Hotel Equities, said that examining relationships is absolutely paramount when aligning with a franchisor. “It’s important to view the relationship as a true partnership and to be intentional in our evaluation and selection,” he said.
Specific things for hoteliers to consider: projected valuation, available shelf space, and how they drive reservations, said Chase.
Reardon had this advice for owners and developers investigating franchisor possibilities: “Align yourself with a reputable brand for the right market and demographics,” he said. Then, hotel companies should “embrace and overutilize the tools and processes the franchise has established for success,” he said. “To provide a more seamless experience for our owners, we also use our proprietary systems to ensure that we are maximizing both top line revenues and profitability. Key differences are support levels, contributions, FF&E replacement cost structures, labor models to pull through the guest experiences and brand expectations.”
All agreed that there are certain pain points for franchisees, which give weight to how hoteliers operate. For his part, Chase pointed to “frequently changing standards, capital costs and oversupply in some markets.”
Other pain points to consider are related to following established rules and guidelines across markets, initial costs and brand generation changes.
For Kakarla, challenges include renovation costs, increasing operating costs due to brand standards, and proliferation of too many brands in some markets within the same brand family. “It is more important than ever for a brand to prove its value relative to an independent execution,” he said.
The industry is at an interesting point, where hospitality is seeing a greater consolidation of brands with major mergers and acquisitions, but the choices available to franchisees are increasing as more franchisors are debuting new brands. Notably, franchisors are strategizing to increase their value through direct-booking campaigns and other moves meant to curb the power of intermediaries and broaden the appeal of the brand’s reservation tools. So how does this affect franchisees and the industry as a whole?
“Soft brands have taken hold and are, in many cases, outpacing core brands,” said Kakarla. “Further, brands are working more diligently to curb the negative trend of intermediaries—including OTAs and many other types of indirect booking channels—that arguably diminish the value of a brand’s direct booking engines. Owners continue to worry about supply, proliferation of new brands within the same system, and more frequent renovations or use of brand standards that are driving up CapEx in many markets that may not have supporting revenue growth. All that said, brands continue to be strong partners to their owners and are working to overcome these obstacles.”
Kakarla added that soft brands offer unique benefits for hoteliers. “Soft brands allow much more flexibility around design standards and related positioning than their core brethren,” he said. “Further, some of the newly emerging brands offer competitive ramps or termination rights to owners who want proof of concept around resulting contribution and premium business that would come from signing a long term franchise agreement.”
Chase noted that one thing a franchisor can do to make itself a better partner is communicate. “They can be more proactive in their communication and make more effective use of communication technology,” he said. “I’m much more likely to receive, read and respond to a text or email than I am to seek out information on the website and drill through three layers to find something.”
Reardon stressed the importance of technology, specifically how franchisors can provide real-time results, which gives hoteliers “more power with the ability to make informed decisions based on the facts and do so faster than ever before,” he said. “Technology has yielded enhanced communication tools, allowing franchisors and franchisees to be better connected and remain nimble despite distances.”
Chase agreed. “For owners, the brand’s communication with us has become quicker and simpler, and the availability of data enables us to do a better job of underwriting a deal,” he said. “Operationally, real-time communication of standards and policies means that they are more quickly adopted everywhere, which ultimately translates into a better guest experience.”
Regardless of which franchisor an owner or developer partners with, Reardon noted, “Modern franchising is built around the concept of making good ideas great. Its structure encourages a healthy, consistent self-evaluation into concepts and processes in a desire to build upon them, stay current and stay relevant. You must be prepared for the fast pace and exciting changes happening rapidly in the world of franchising.”