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Definition
A franchised hotel is a “franchisee” or “member” of a larger chain of properties operating under an agreement which provides both restrictions and benefits in the operation of the property under a contractual agreement with the Franchise or Member Organization.
Overview
The traditional franchise arrangement, established in the 1950’s, has become effectively a license or management agreement. This allows property owners to be associated with a particular franchise or “flag” for a period of time under very specific conditions. The fees for the franchise are generated by room revenue levies, franchise applications and mark-up on proprietary supplies. In addition, the property is virtually “locked-in” to a specific brand, and its sometimes costly requirements for periods up to 20 years, often with stipulations dictating fees and improvements regardless of performance.
Some of the benefits to the hotel include national marketing penetration, loyalty programs, and widespread name recognition. Theoretically the greater the name recognition and better the reputation of the franchise brand, the greater the occupancy which will be enjoyed by the member properties. A franchised property may enjoy instant identity and recognition, uniformity of image and increased loyalty among travelers. Access to a centralized reservation and referral systems which can amount to as much as 30% of a property’s occupancy. Chain and corporate sales improve success in reaching corporate and governmental customers. Procedures manuals, staff training and best practices standards to guide franchisees to successful management are another benefit of chain affiliation. Often brands also offer services such as management advice, training, guidance to marketing sources, and group purchasing discounts for products and services.
There are a number of expenses beyond initial application and fees paid on rooms sold through the national franchise system. Often franchisers have preferred providers for everything from furnishings to shampoo, sometimes captive companies which enable the franchise to profit off the requirements it makes on its franchisees. As the market evolves, it is critical for a franchise to remain competitive offering improved services and amenities in its franchised locations. It is also key for member properties that a protected competition area is maintained and the brand is not diluted by allowing reduced standards or non-homogenous properties into the system.
Investment Style
Ultimately the decision of whether or not a franchised hotel property is right for a particular owner comes down to potential for stronger income versus giving up control of many aspects of the property. Franchised hotels generally have higher income and occupancy than their independent local market competition. Chain hotels are generally considered to be less risky investments and tend to be less volatile in terms of revenue per available room. Owners who do well in a franchised system tend to like the option of structured property operations and don’t mind restrictions in management control. These properties are well suited to absentee ownership with professional management companies for more passive income streams.
