What’s In It For Me
According to FRANdata, as of 2018 there were 32,818 hotels in the US in 2018, of which 30,650 or 93 percent were franchised. This because, for most hoteliers, a franchise has significant benefits.
Howard Johnson and Holiday Inn were the first franchised hotels, starting in 1954. They offered standardized hotel rooms with reliable systems for things like cleanliness – which was a big change from the mom and pop motels available then. They also created marketing programs and reservations systems which simplified finding and booking hotels for guests. Franchises offer more now and are more complex to meet current market demands, but the basic concepts of reliable product and combined forces for marketing are still at the core of hotel franchising.
Brand is one of the most consequential decisions a hotel owner makes. To be successful, your hotel needs the right brand for its market and that brand must be available to you. When those criteria are satisfied, other considerations come into play. Your quest for a brand for your hotel will start with research so you understand your market and the brands that you believe will be most valuable. You will talk to brand representatives, hoteliers or consultants, and you will study information about possible brands in the process. You will also present yourself as a qualified prospective franchisee to have access to the brand you prefer.
Recognition is the fundamental value offered by a brand. In a franchise relationship, you are paying royalties for the right to use that brand and its trademarks. You benefit from a brand that has strong recognition in the markets you are targeting.
In addition, when you join a franchise, you are buying into a tested business model. This reduces the learning curve for new owners, which shortens the time to market and should reduce overall costs. Although you don’t need to “reinvent the wheel”, as a franchisee, you can have a franchised hotel and still bring your own touches to your hotel and business operation.
Hotel franchise business models – and their financial results – differ from one brand to another. It is up to you study the brands to determine which has the most upside for your market and situation. Overall, however, brands are expected to reduce the risk of business failure. For this reason, lenders are generally more interested in financing franchised hotels.
Choosing a brand: Availability
As an owner and a franchisee, you will want to receive the reservations for your brand that come into your market. Since this is true of virtually all owners, franchise companies are reasonably careful not to license more than one hotel in the same immediate market area. This is negotiated in the franchise agreement. For a brand to be available, there may be limited market overlap between your hotel and the nearest property with the same brand, but it should not be egregious. So, the first test is availability. If you are buying a hotel and want to keep the brand, your due diligence will include making sure that the brand company is willing to keep their brand on the hotel under your ownership and for what period of time. If you are looking for a new brand, your due diligence will include making sure that the brand you want has not already been reserved for another hotel. It is worth asking because sometimes brands that seem to be unavailable may be scheduled to be available when another hotel leaves the system.
Brands are particular about the owners they accept into their systems. Their requirements may include experience operating hotels, including hotels of that brand or caliber, a certain level of wealth, business experience, and other attributes. Although brands are interested in selling, you and your team will have to pass muster to join the brand.
Brands often have a plan in place for each market. They may have decided the Interstate exit or sector of town where they want a hotel. There may be a minimum size hotel they will accept for a market; in a large convention market, for instance, they may only accept applications for large hotels. They may only accept new construction in some markets while they may be willing to accept a conversion in other locations. Part of your role as an owner and prospective franchisee is to understand what your preferred brand wants, and to present your project as a strong candidate.
If your goal is to own a particular brand, then an early step on your path to ownership may be identifying the markets where your preferred brand wants to add a hotel. Additionally, meeting and becoming acquainted with the brand representatives of your preferred brand may help you focus your efforts on these targeted markets and the brands the franchisor wishes to expand. You will also get a head start on their review of you as a prospective owner.
Choosing a brand: Hotel product fit for the market
Knowing that the franchise you are getting into has market opportunity should be your first target. As a hotel owner you research the market before you research franchises to ensure that the market has an available brand that will work. If the market data do not support your first brand preference you can consider other markets or other brands. Once you identify the market with the greatest opportunity for you, then you can nail down your brand.
Sometimes, people fall in love with a brand, convince themselves that there is a market to support their love interest and make a bad business decision. You should love your hotel, but in a pragmatic way. Do your research, put together your plan, then find the franchise system or brand that helps you achieve that plan.
Both financing companies and brands will be interested in an independent study of your proposed project and a positive study will lend credibility to your applications. Once you complete your own market assessment, you can engage an independent consultant to analyze the market for you. Companies like HVS, CBRE, Cushman as well as smaller firms and independent consultants do market or feasibility studies to assess the viability of your proposed project. These studies consider the existing inventory of rooms, age of the assets, possible new projects in the area, market drivers, etc. and provide projections of REVPAR, average daily rate, occupancy levels etc. Consulting companies consider brand and make recommendations based on the brands available and your market. The International Society of Hospitality Consultants, www.ISHC.com is a great resource to find qualified hotel consultants.
Generally, franchisers require that you have a certain amount of fixed capital to start your business. If you can’t deliver the hotel financially, there isn’t much benefit for them to work with you. They want to know that you will have funding for acquisition, equipment, construction, inventory, supplies and other items needed to open the doors and start the franchised business model. These tangibles are itemized in the franchise disclosure document (FDD) in the Item 7 disclosure and help you understand how much money will be needed to open the franchised business.
Hotel brands provide services that drive occupancy which may include reservation systems, loyalty programs as well as brand marketing. However, these services have costs attached to them.
Your due diligence is about identifying these numbers so you don’t have the heartache of falling in love with a franchise product you can’t afford to deliver or that has a cost structure that is unlikely to be profitable in your market.
Hotel brands offer packages of services to hotel owners. These are described below and include:
- Brand recognition
- Marketing programs and reservation services
- Loyalty programs
- Brand standards
- Quality control and training
- Product design
- Financing credibility
What the brand offers, what the brand family (collection of brands under one umbrella) offers in addition, how the company deals with franchisees (company culture), how the brand charges, and how the brand is promoted to prospective owners varies widely. While you may not end up affiliating with a brand, most hotel owners do. Exploring the brands is carried out on the Internet, by walking hotels, talking to other owners, and meeting with franchise representatives. Take good notes as you research the best match for your hotel venture.
At its core, a franchise is about using a well-known trademark of the franchised business. If popular in the market, the brand or brand family will attract consumers even before your own marketing efforts take effect. Brand recognition is supported by advertising, marketing initiatives, loyalty programs, representation on the OTAs and other distribution channels and the other elements of brand marketing.
Brands are designed to have wide market appeal, but each brand is particularly appealing to, and recognized by, some segments of the market. For instance, some are well recognized by experience-seeking millennials, some by truckers, others by construction workers. Some are keyed to expense account business travelers. At the high end of the spectrum are brands recognized by luxury corporate groups, or conventions or spa-aficionados. The brand you select should have strong recognition with the kind of customers your hotel is targeting. As part of your research and brand selection, you can assess the markets the brand is targeting by reading about its prototypical products and its advertising.
When you join a brand and agree to use its trademarks, you are also agreeing to comply with the brand’s standards for use of their trademarks and image. For the brand, it is crucial that all the properties in the system use the marks in the same way. While it is not always convenient for an individual hotel, this approach is beneficial overall; and you can expect the brand to be a stickler for compliance.
- Brand image: is strongest and builds when it is consistent and travelers can recognize branded marketing immediately. Brands defend their rights to their trademarks because these are a significant part of their value.
- Brand trust: controls the conversation around the brand and its values. This makes it critical that the hotels in the system comply and deliver consistently in areas like customer service, employee diversity policies, cleanliness and safety.
- Quick and clear presentation: consistent brands are easier for customers to book and generate less uncertainty; consistent brand image makes the booking experience faster and easier, closing more sales.
- Higher revenue: direct bookings through brand.com are less expensive than bookings through other channels so brand consistency that draws customers to brand.com keeps revenues with the hotels.
- Lower costs: multiple hotels working together consistently through compliant brand marketing reduces competition between hotels within the brand and protects against legal issues such as copyright infringement.
For these reasons, brands typically make brand compliance a part of their training and inspection programs. They extend their standards on brand use beyond brand controlled sites to every aspect of operations including what employees can post online.
Each hotel has its own local marketing budget to enhance marketing through the brand. To comply, these budgets must be spent in accordance with brand standards. This extends to social media, which must be used in compliance with brand standards. It also extends to the images associated with the brand and its identity. Brands are specific about what images can be used, how they should be used, and details like color.
Marketing, Reservations and Loyalty Programs
Hotels draw guests who live across the country and the world. To reach individual customers in a vast market is difficult for a relatively small business in a single location. Hotel brands and brand families are built to solve this challenge. Brand families like Hilton, Wyndham, IHG, Marriott or Choice are large, widely distributed nationally and internationally, and promote access to reliable predictable lodging. Individual brands within the families, like Homewood Suites by Hilton or Cambria by Choice, are recognized by consumers for purpose of trip (family vacation versus convention), price point (luxury within that family to economy within that family), product (all-suite versus standard guest room or select-service versus lively bars and entertainment), etc. As a franchisee, you use a well-known franchise trademark for both the brand family and your hotel’s brand, which simplifies your marketing message.
The brands run large scale marketing programs which extend your marketing reach. This simplifies your marketing initiatives and reduces your other marketing expenses. In a sense, all the marketing and market visibility of every hotel in the brand contributes to your recognition by potential guests. (This is also why you should look at other hotels in the system as part of evaluating franchises. Their quality will reflect on your operation.) Instead of generating all the marketing for your hotel, you are responsible for the layer of marketing that is largely delivered in your immediate market.
Franchise companies produce a substantial portion of the reservations for their hotels. This also means that the franchise company runs the 800# and staffs the reservation lines, builds and runs the web delivery systems for on-line reservations, and negotiates with OTA channels like Expedia on behalf of franchisees.
OTA and other channels are big, each individual hotel is small, and the cost of doing business can be more than the value of the booking if not negotiated knowledgeably. The cost of maintaining relationships with multiple channels is also high and is taken on, for the most part, by the brand. Franchise affiliation should reduce your cost of OTAs. Reservation delivery, including sources like brand.com versus OTAs, and reservation cost are statistics you can use to compare potential franchises for your hotel.
Loyalty programs run by the brands and brand families are a powerful part of their marketing for their franchisees. You probably belong to loyalty programs like Hilton Honors or Marriott’s Bonvoy. HNN reported more than 375 million loyalty program members among five brand families in 2018, and that number was growing rapidly. https://www.hotelnewsnow.com/Articles/287325/A-look-at-five-public-hotel-companies-loyalty-programs Loyalty programs encourage travelers to look at branded hotels when they are booking travel. They tie everyday travel to aspirational vacation trips and have proven to be powerful. You can evaluate loyalty programs as part of your evaluation of different brands for your hotel. https://travel.usnews.com/rankings/travel-rewards/hotel-rewards/
Owners partner with world renowned brands to connect with guests, access technology and streamline operations. Each brand brings its expertise, market and customer research, insights from committees of hotel owners, marketing concept, purchasing and operations experience, and value engineering together to define the brand concept, style, standards and services. Those standards include everything from building appearance to signage, furnishings, amenities, cleaning products and service standards. The collection is called brand standards. Generally, there are brand standards that guide operations and brand standards that guide construction and development of the physical hotel.
Brand standards are regularly updated. As an owner, you are responsible for meeting current operating standards. You must update to current design and construction standards at every franchise renewal. You will also update to comply with some changes in standards during the term of your franchise. For instance, an upgraded fitness center may become a brand identifier and all the hotels in the brand will install that fitness center within a short period of time. Brand standards may change from the time you signed a franchise agreement to the time you start construction. Your brand design and construction project manager will be able to provide the updates to you on a timely basis. In general, there are brand updates one to three times per year. Some are minor changes and others carry significant costs to the hotel.
A brand inspector signs off that the property has met all the brand standards before it can open under the brand identifiers and turn on the brand reservation system. Brands inspect each hotel one to four times a year to make sure that management is running the operation in compliance with their standards.
Virtually all owners find some standards that are problematic for their project. It may be a physical constraint of your existing building. It may be a cost that you do not want to incur. It may be a matter of taste – an item you do not like. Brand standards may be at odds with something in the local building code. Some standards restrict you from offering higher quality than the brand norm.
There are specified procedures to request an exception to brand standards and appeal procedures if necessary. It is important to follow the procedure so your hotel passes brand inspections as a waiver to a standard is documented and on file for future inspections. Sometimes exceptions are granted and sometimes they are not – but the process enables you to understand why the brand made its ruling about your requested exception.
Standards simplify the design and implementation of a hotel project. They vastly reduce the decisions you make and the work required from your designers and architects. The expertise built into the standards is one of the values you get as part of your brand.
Compliance, Quality Control & Training
When hotel franchising started in the 1950s, cleanliness, safety and service were real risks for travelers. In response, franchise companies quickly took on a quality control role. They set standards, inspected hotels regularly, and cut hotels from their reservation systems when quality did not meet standards. Brands continue to evolve and standards are sophisticated, detailed and regularly updated to meet current expectations and trends. In addition to inspections, brands track customer feedback. When evaluating potential hotel acquisitions, you review inspection reports and the hotel’s rankings and reviews from customers.
As an owner, when you evaluate a hotel manager or management company, their experience with a particular brand can be important. They will have a history of performance compared to brand standards and their skill in meeting the standards of your brand can improve your odds of high ratings with the brand. Their knowledge of brand systems and programs also improves your odds of getting the most from brand marketing initiatives.
The brands recognize that there is learning curve for the hotel business and each brand. Among their services and requirements are likely to be special training for owners as well as training for general managers, sales directors and other key employees. The training is both interesting and useful.
Franchisors use various other measures to support franchisees, including direct assistance during opening of a franchisee’s hotel, advice on business related issues, training and access to comprehensive operations manuals, which give exhaustive instructions on organization and management of the hotel.
As a franchisee, you benefit from your brand’s expertise and mass purchasing power. For some products, the brand opens the door to special discounts and deals. Brands support their design requirements and standards with research and development into products and services. In most cases, franchisees have a choice about buying through the franchise company or through other purchasing agents and vendors. However, working with a vendor that commits to delivering to the brand standards saves you time and money. It saves time because the franchisor is doing the research into products that are durable and appropriate for heavy duty use in a hotel. It saves you money because, if you buy products that meet standards, you don’t have to replace them when they fail inspection. And sometimes you can share the price advantage of mass purchasing power.
Most brands work with prototypical product designs which have been engineered in response to consumer research and feedback from both guests and franchisees, as well as the brand’s goals and strategies. These designs are incorporated into the building exterior, guest room layout, corridors, food and beverage outlets, public spaces as well as FF&E (furniture, fixtures, equipment). As an owner, you use prototypes in several ways.
- Exterior design prototypes show a concept for the exterior of the building which is used to discuss the brand with franchisees. There is usually flexibility in the exterior design because buildings, site requirements, and local conditions – like weather – differ for each hotel. However, there are exterior elements that are required for all hotels in the system so guests recognize the brand. These might include things like signs on the building, pole signs, entryway features, distinctive architectural touches, lighting, colors, etc.
- Architectural prototypes are plans for typical buildings within the more standardized brands. These plans are drawn for several different room counts and building layouts (T-shape, straight line, L-shape, etc.) Your architect will adapt the prototype so it fits your site, room count and market. To your benefit, prototype designs make it simpler for the architect to deliver plans that meet your needs and brand standards. They save you money.
- Design requirements specify interior elements of your hotel. Virtually all brands have requirements about interior signage so guests recognize the brand. Some brands specify virtually everything in the hotel from furniture to linens to front desk millwork. These brands are selling simplicity to owners and consistency to guests. Other brands have specifications, such as the thread count for linen or fire-retardant capabilities of carpet but allow much more latitude. These brands are selling flexibility to owners and a particular quality standard to guests. Hotels where everything is standardized are easier to deliver because fewer decisions and less specialized knowledge are required. Brands that offer more latitude can be unique and reflect more of your personality and your market. As a prospective franchisee, you should evaluate other hotels in the brand because your hotel will be judged by other hotels in the system, as well as its own quality. You should also evaluate guest response through reviews and ratings so you deliver a hotel that will be highly desirable for its market.
- Price/value relationships match the market. Your brand should support a room rate that generates a profit, given the cost to deliver the product. Some brands are more expensive to deliver and to operate than others. Fees to associate with some brands are higher than others. Some brands deliver higher room rates than others. Some brands deliver more guests than others. Basically, expensive brand requirements should result in high room rates while inexpensive standards can be profitable at comparatively low room rates. As an owner, it is your role to analyze these features of potential brands so you select the best value for your investment in your location.
Franchised hotels are known quantities, which can be a benefit when you set out to attract financing. Actual financial averages from the franchise system, the franchisor’s background and reputation, and the lender’s history with the franchise tend to support interest in financing franchised hotels. Lenders with hotel expertise should be familiar with the different brands. They are likely to have experience with the brand’s ability to bring hotels online successfully, while helping the franchisee to avoid mistakes. This enhances trust in the franchisee and business for both the lender and the underwriter. Creditors are in business because they effectively mitigate risk. Although not universally true, in general, lenders perceive franchises to reduce risk, which in turn, reduces obstacles to financing the hotel.