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Moving from independent hotel management to becoming part of a franchise involves a significant change in operations, branding, and business strategy. Hotel franchising, which earlier began in the U.S in 1950s, have recorded significant milestones since being introduced. This hotel management system has more market opportunities than independently managed hotels. The question regarding franchising as against independent operation has been subject to debate among experts and industry players for a long time. The topic has continued to generate to generate further interest as investors seek to weigh their options.
This post explores key considerations hotel owners should evaluate before transitioning from independent ownership to a branded franchise affiliation. Before taking your hotel business to the next level, you will need to consider the following. Franchise hotels offer some benefits over independently managed hotels. However, this is not in all aspects of the hospitality business.
Benefits of Operating Under Hotel Franchise Compared to Independent HotelsStudy by John W.O’Neil and Mats Carlback concluded that hotels operating under brand affiliations operated with significantly higher occupancy rates than independent hotels. Meanwhile, independent brands operated with significantly higher average daily rate (ADR) and room revenues per available room (RevPAR) than branded hotels.
Over the years, hotel franchise has been on the increase. According to post by Brand Finance, the popularity of franchising in the hotel industry has seen a significant rise in recent years. The proportion of franchised hotels increased from 66% in 2012 to 72% in 2023 according to McKinsey. Franchising in the hospitality industry allows for increased and consistent revenue streams. Franchising offers the benefits of getting support on how to handle dip in sales, and how to improve revenue.
Franchise Hotels offer great visibility over independently owned brands. Becoming part of an established brand enhances your hotel’s credibility and visibility within the industry. Read this post on “Why franchise a hotel: 5 best hotel franchises”. Franchising provide biggest advantage of gaining access to a company that have an established brand recognition and reputation within the industry. Independent brand requires building a brand from the scratch, which can take time and significant marketing investment.
Franchise hotels is best suited for hotels targeting mainstream or business travelers familiar with and loyal to global brands. It also offer more advantages in highly competitive or international markets where brand power influences booking decisions.
With hotel franchise, you will receive on-going support for your business. This is important especially if you are starting the business newly and you do not have management experience at your disposal. With franchising, you won’t be left stranded on management know-how and how to handle customer’s enquiries and complaints. Franchising also provides comprehensive information and keeps you informed about market conditions and industry developments. Franchise companies have staff and training programs in place to provide support to franchisee businesses. It provides international marketing support and innovative strategies for effectively managing the hotel business.
Check out this article on “The most profitable hotel franchises of 2024”.
Process of Hotel Franchising
The process of going franchise in the hotel industry involves several structured steps. This ranges from evaluating your property to signing the agreement and launching under a franchised brand. The following are few of the steps to follow:
1. Carry Out Feasibility and Strategic Evaluation. This include evaluation of location, market demand, competition, and revenue projections to determine whether a franchise aligns with your business goals, market positioning, and expected level of control.
2. Research and Select a Franchise Brand. Review the various hotel brands based on their reputation, target market, fees, etc. to determine which brand to operate with their trade mark.
3. Application and Proposal Submission. Submit your hotel’s business proposal, property details, and financials to the franchise brands for approval and consideration.
4. Review Terms and Conditions. This includes review of franchise duration, initial fees, royalty and marketing costs, brand compliance, termination clauses, and support services. Engage the services of solicitors or legal counsels to review the Hotel Franchise Agreement before contract execution.
5. Initial Opening. Temporary opening to test systems and service standards, and then carry out brand-wide marketing and loyalty programs. Ensure compliance with the franchisor service standards.
Fees Considerations for Operating Under Hotel Franchise
The average fees for operating under a hotel franchise varies widely depending on the brand, location, hotel size, and market segment. Below is the estimated breakdown of franchise fees.
Initial Franchise Fee
One-time fee ranging from $30,000 – $75,000. This covers the right to use trademark, onboarding and training.
Royalty Fee
Royalty fee is between 4%-6% of gross room revenue which can be monthly or quarterly. This covers ongoing brand support, access to company systems and oversights.
Marketing/Advertising Contribution
This ranges from 2% – 4% of gross room revenue. This covers participation advertising, brand campaigns, and loyalty programs.
Reservation/Distribution Fee
Reservation or distribution fee ranges from $2 – $5 per reservation or 1% – 2% of gross room revenue. This covers the use of the brand’s Central Reservation System (CRS), Global Distribution System (GDS), and booking platforms.
Hotel franchising, despite its numerous benefits, has several notable setbacks and challenges. Hotel franchise involves huge capital outlay. Franchise Fees such as Royalties, marketing contributions, reservation fees, and technology charges can significantly reduce net profit. The franchisor also enforces strict compliance with their brand standards which include uniform design, service protocols, and operational procedures, etc. This sometimes lead to loss of operational flexibilities and incurring of penalties for breaches. Franchise businesses can lead to reputational loss. A single hotel operating under the same brand with poor ratings or substandard service can negatively impact the reputation and performance of all other hotels within the franchise network.
Operating hotel under a franchise model requires thorough evaluation of both the financial commitments and the strategic advantages the franchise offers. This also include assessing how well the franchise fits into your hotel’s long-term business goals, and desired level of control.
