To franchise or not - four key criteria to examine - Insights

To franchise or not – four key criteria to examine

Insights

franchisingOne of the most challenging aspects of hotel development or major rebranding is deciding whether or not to take on a franchise partner. This decision has extensive ramifications affecting every aspect of the hotel operations as well as investment performance.

Choose poorly and your investment could be lost due to excessive fees with marginal returns. Choose well and your investment can become a true success. As this is such a critical part of any property’s overall strategy, how can a hotel investor properly assess their options and make the optimal decision?

Based on my two decades of experience as a senior executive at Newport Hospitality Group where we are confronted by a question of this gravitas at least once per month, a thorough assessment of the pros and cons is the first priority. For this, I would suggest that an investor needs to examine the tradeoffs and benefits of any particular franchise as it affects four primary aspects of a hotel’s operating universe – guest experience, community advocacy, associate engagement and owner returns.

Guest satisfaction

In terms of guest satisfaction, brands are double-edged swords. They can provide guests with uniform, stress-free experiences in addition to unexpected surprises. As a branded hotel, guests arrive with a predetermined expectation – for better or worse. If you fail to deliver on that expectation, you will do permanent damage to your reputation as well as to the brand’s. On the other hand, if you deliver superior service and delight your guests, you will be rewarded with guest loyalty and praise.

As any hotelier already knows, TripAdvisor has made this reputation management even more critical. Moving in tandem with this heightened transparency, consistent brands nowadays are those that are helpful in managing guest expectations and adding value to a hotel’s operations. Brands that do not mandate and enforce consistency generally detract value from a strong operation.

Community advocacy

Looking beyond the guest experience, brands can help with community advocacy, one of the more critical yet overlooked aspects of a hotel’s success. Often brands are connected with national organizations that support local needs. Rather than recreating the wheel, local hotels can piggyback off of their brand efforts to make a real impact in their respective community. Intercontinental Hotel Group’s support for “Give Kids the World” and Marriott’s partnership with Habitat for Humanity have provided our hotels with numerous opportunities to provide valuable assistance to their local communities. These two examples show that by giving back to their constituencies, hotels will integrate themselves within the market, gaining valuable business opportunities and goodwill.

While hotels can certainly meet community needs on their own, national franchises help ease the process. Franchises can help ease the process of engaging with community services organizations as well as allowing for a more efficient use of your hotel team’s time.

Associate engagement

The third key aspect, associate engagement, can be greatly enhanced through the incorporation of a franchise. By their very nature, brands are large organizations with countless support teams. One of these teams that is generally overlooked pertains to training. Proper associate training can be the difference between mediocrity and excellence.

Franchise training organizations help teach your associate teams to deliver top quality guest experiences. Associates are taught simple techniques to engage and delight guests, resulting in increased quality scores and improved guest loyalty. Another byproduct of this brand-augmented training is increased associate satisfaction and retention. Moreover, employees who are given extra job training and support have higher morale and job tenure. Franchise organizations can provide this level of associate support in order to, ultimately, improve guest experiences.

Owner returns

Finally, how do franchise companies affect owner returns? Clearly, franchises offer many positive benefits to an owner, but at what cost?

The operational benefits of a franchise certainly help to drive operating income by increasing RevPAR and lowering payroll costs, but owners also lose control of part of their hotels. Rather than designing and operating their properties according to their personal tastes, owners must adhere to a set of guiding brand standards.

Furthermore, brands are expensive. A portion of the financial improvement is certainly given back in the form of franchise royalties and program fees, but this must be meticulously weighed against your operating margins, both for good times as well as the worst case scenarios. In this sense, franchise relationships limit choice and cost real dollars, so they must be heavily scrutinized before you proceed.

By tabulating these four critical factors, franchises can indeed provide real value to hotel owners in the form of improved operations, enhanced guest experiences and stronger community relations. The trick is to find a franchise that delivers against these points. Not all do, though.

If an owner cannot secure a franchise that fits all of these characteristics, then the cost-benefit equation begins to waver, and the independent options start to look more attractive. At the end of the day, it’s a matter of numbers – a franchise must deliver greater value to the franchisee than the financial cost and loss of operating freedom.

About the author

Andrew Carey is the Executive Vice President at Newport Hospitality Group, overseeing the management firm’s new growth opportunities through equity ventures and new acquisitions as well as the general operations of the company. Earning his MBA from the Haas School of Business at the University of California, Berkeley, Andrew started his career 20 years ago by structuring and investing limited partnerships in a variety of real estate environments. Shortly thereafter, he joined Paine Webber where he helped to source and invest $200 million in real estate investments across the United States. Andrew now strives to ensure that every property in Newport Hospitality Group’s portfolio receives the best possible hotel management expertise.

 

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