When it comes to choosing a hotel brand to franchise, there’s more choice than ever. But with that choice, comes a host of tough questions that need to be addressed and, ultimately, it’s the answers to those questions that will determine which flag to fly.
“The state of hotel franchising is good right now,” enthuses Gus Stamoutsos, EVP of Franchise Development at the Wyndham Hotel Group. “There’s a lot of cash on the sidelines, and people are looking at the best way to use that cash in the hotel business.”
But prospective hoteliers considering a new flag need to sift through a long list of brand providers, new niches and service offerings. They must also decide whether to build from the ground up or convert an existing property. And, to make it more interesting, technology has made the value-proposition franchisors tender to franchisees even more layered with an evolving catalogue of incentives. Whether you’re looking to break into the big leagues or just upping your participation in the hotel game, deciding which flag to fly can be a challenging proposition, and not always an easy decision.
MAKING THE DECISION “I would argue the decision is more challenging now from an owner or developer’s perspective, because they have more choice,” says Scott T. Duff, senior director of Development, Canada and Alaska, Starwood Hotels and Resorts. “There are large brand providers that have multiple brands beneath them, all serving different segments of the marketplace.”
When choosing a flag affiliation, first consider the market the property in question serves. For example, is the geographic area you’re investigating already served by the type of hotel you wish to operate? Is your particular niche already crowded? Additionally, the breakdown between full- and limited-service properties in the area needs to be determined. Is there an extended-stay property in the mix? Should there be one?
The choice of a new-build, versus an asset conversion, is another consideration. On one hand, many new-builds have hit the market with branding already in place. But, whether a property is independently run or coming to the end of a contract and primed to be reinvented, conversion opportunities are also on the upswing. From a financing standpoint, lenders are certainly more partial to branded properties, particularly those with a global presence and support mechanisms such as training, operations support, marketing and bundled national sales.
A few years back when Vinnie Patel and Deepak Ruparell went shopping for a new hotel to build, they settled on Starwood’s Aloft brand, a newcomer to the Canadian hotel scene. Patel, president of the Mississauga, Ont.-based Northampton Group, was familiar with Starwood and its efforts to “combat the commoditization of hotels” by introducing a lifestyle brand. The partners liked the design of the company’s two newer brands — Aloft and Element. They were also intrigued by Starwood’s foray into the select-service space, and the company’s renowned loyalty program. Ruparell, president of Mississauga, Ont.-based Silver Hotel Group, and Patel’s partner in the venture, also welcomed the opportunity to participate in design and construction discussions with regard to the Aloft brand, which they saw as “developer-friendly.”
The duo wanted something different, and they felt they were getting that since the brand is designed to maximize space and cater to the tastes of generation X and Y. The result is hip, young designs customers love.
“The Aloft brand is a key part of our expansion strategy in Canada,” says Duff. “When it premiered, it made a bold statement by providing a true alternative to the existing select-service products in the marketplace,” he explains. “We’ve seen strong guest and developer demand for this brand, and its momentum clearly demonstrates Canada is ready for the next-generation Aloft hotel experience.”
What makes the brand unique, says Duff, is its “cool initiatives in music, design and technology,” making it “a must-have brand for the next-generation traveller.” Guests can mingle with friends at Aloft’s hip Wxyz Bar or Re:mix Lounge. Select properties also have a rooftop “backyard” for social gatherings. And, from a developer’s point of view, the price point makes sense for development. “We saw an opportunity to develop these for the Montreal and Vaughan, Ont., markets — we felt such concepts would work,” says Patel. “We knew the power of Starwood support, and were assured of their commitment to these brands and their ability to deliver.”
“Those were pretty heady times,” says Duff, looking back on the launch of the Aloft brand in 2006. “We had a significant amount of interest around that brand; we signed a lot of deals, got a lot of projects in the ground and built in a very short period of time.” The brand went international quicker than most — a testament, Duff says, to sheer differentiation. “Every Aloft guestroom features soaring nine-foot ceilings, bold industrial touches, ultra-comfortable signature platform beds and plug-and-play docking stations, which link tablets, laptops or music devices to the room’s 42″ LCD TV.” Critical, too, was Starwood’s support. “You had a global hotel company with significant innovation and one of the most acclaimed loyalty programs in the world — and it worked,” says Duff.
FRANCHISOR PERKS When searching for the right franchise, you need to consider the plethora of essentials featured on any brand’s basic perk sheet, which includes everything from Wi-Fi to a comprehensive reservation system and the indisputable strength of a brand’s loyalty program. Beyond that, a number of other considerations also exist, including flat-screen TVs, leveraged buying programs for goods such as mattresses and training that relieves newbies from having to reinvent the wheel; smaller, regional-type franchises can’t likely provide those benefits.
Irwin Prince, president, COO, of Realstar Hospitality in Toronto, urges franchisees to ask themselves: “How active is the franchisor going to be in helping me generate sales, and what’s the franchisor doing to build awareness in the customer’s mind?”
According to Wyndham’s Stamoutsos, one of the biggest mistakes new players make is opting for short-minded decisions in lieu of longer-range ones. “They look at the fee structure versus the value proposition,” he laments. “They’re willing to save $10,000 on something that won’t serve them well in the long term.” In other words, they’re putting considerations such as royalties, marketing and reservation fees ahead of efforts aimed at improving the overall customer experience. Stamoutsos explains: “If a guest goes into a property where wireless Internet isn’t a brand standard, he’ll probably not come back if he can go down the street to get Wi-Fi … along with loyalty points and breakfast.”
FRANCHISEE’S COSTS Regardless of brand, the fees franchisees pay hotel companies are fairly standard. Typically, they include a five-per-cent franchise fee for most brands; a marketing fee that hovers around 1.5 per cent or 1.8 per cent of a property’s gross revenues, and a 1.5-per-cent fee for accessing a brand’s reservation systems. Additionally, there may be individual charges associated with every reservation the parent company sends along — usually around $2.50 per reservation. Taken together, franchise fees tend to represent approximately 10 per cent of a franchisee’s gross sales. Add to that the investments franchisees make to build and develop the system (according to brand-standard manuals and parent-company guidance) and you have the full scope of a franchisee’s financial commitment.
In return for that fiscal outlay, the franchisor is obliged to meet certain expectations that should deliver the best return to its franchisees. It means maximizing the consumers the franchisor can drive through its different business channels, loyalty programs, marketing initiatives, websites and relationships with online travel agents and affiliated global sales.
More specifically, Brian Leon, managing director, Franchise Growth and Administration, Choice Hotels Canada Inc., believes the franchisor should provide a mighty reservations-delivery system. “Technology has made the concept of booking hotel rooms more transparent and complex,” says Leon, who oversees 300 Canadian properties with a company that’s close to 100-per-cent franchised. A strong property-management system is another non-negotiable. Choice’s proprietary Internet-based Advantage system allows GMs to change rates from their couches and is purported to be the most prevalent online property-management system in the world.
“Brands are big machines,” says Steve Gupta, president, CEO of Easton’s Group of Hotels, whose 15 Ontario and Quebec brands include Marriott, Hilton and Holiday Inn. “Sometimes the squeaky wheel gets the grease,” he says. Would-be franchisees shouldn’t shy away from making requests perceived to be outside a standard arrangement. Gupta encourages franchisees to ask what services are available in every domain, from marketing to administration. Brand specialists in each hotel operation should offer help and guidance.
Ultimately, says Realstar’s Prince, franchisees are looking for a colleague they can communicate with, one who is open to taking suggestions and someone with a transparent operating style that’s aligned with them in building a business. “Providing accessibility helps cultivate relationships. And it’s critically important to us that our owners know we’re committed to helping them become stronger operators on the revenue side, but also on the operational and on expense sides, too.”
To Prince, a great franchisor understands follow-through. “The pitch is not all too different, but it’s the execution that separates,” he says.
WHAT FRANCHISORS EXPECT For their part, franchisors have a fairly standard set of franchisees expectations. They want their brand standards to be met and for guests to be satisfied with each property’s levels of cleanliness, housekeeping, hospitality and maintenance. If wireless Internet is part of a hotel’s brand standard, franchisees must provide it. If there’s a certain breakfast expectation, franchisees need to honour that, too. If the brand is part of a loyalty program, franchisees are mandated to grow the platform with as many new acquisitions as possible.
“Generally speaking, we’re looking for full buy-in and compliance with brand standards, programs and initiatives,” says Prince. And a long-term commitment is expected. Starwood’s Duff points out that franchise agreements are generally 20 years long, and that managed hotel agreements can extend for as long as two parties agree. “Fifty, even 75 years is not unheard of in this game,” says Duff.
Either way, investing in a franchise is about a partnership. “Both parties have a vested interest in making the relationship work,” says Gupta. It behoves the developer to establish what kind of facility will work, and it’s incumbent on the franchisee to read agreements carefully, understand the competitive arena, establish pockets of exclusivity and be satisfied with the amenities his franchisor offers. If he’s skeptical about a potential bias, he needs to retain the services of a consultant for the goods. “The franchisor will always give you the best advice,” says Gupta. “It’s their business, after all, and they can’t have an unhappy franchisee. Nobody wants to close a hotel and take the flag out. That never looks good.”
photo courtesy of Margaret Mulligan