The market and big companies are ready for partners — do you have the
right stuff?
The devil’s in the details,” is, of course, a proverb implying even the grandest project can be brought down by inattention to its smallest components. A more positive version, however, is “God is in the details,” a saying variously attributed to novelist Gustave Flaubert, architect Ludwig Mies van der Rohe and even Michelangelo. And that’s the interpretation preferred by hotel franchisors.
“I get a bit offended at the insinuation we may be concealing something — though I understand when a prospective franchisee looks at a license agreement it can be intimidating,” says Stuart Laurie, the InterContinental Hotels Group’s Burlington, Ont.-based director of Franchise Sales and Development for Canada.
“The first thing anybody will tell you, whether a consultant or franchisee, is agreements are one-sided. And it’s true. Our license agreements give us broad discretion…to protect our very large system,” Laurie says. However, “If you explain it right, people understand,” he adds. “They want to feel we’re protecting their interests at the same time.”
While franchise agreements themselves have changed little over the years — usually only responding to new legislation around disclosure, insurance or taxation rather than revolutionizing the process — evolving ownership structures have brought new aspects to the business.
“It’s given an opportunity for developers and operators to get the benefits of being associated with a chain, while still having the autonomy of managing the hotel themselves,” says Manlio Marescotti, vice-president, Development, with Mississauga, Ont.-based Marriott Hotels & Resorts of Canada. And from the chain’s perspective, Marescotti says they’ve been able to enter new markets and grow much more rapidly than they could have through managed properties alone.
Of course, rapid expansion can bring other issues to the fore, and while the basic concept of franchising is the same in every industry, licensing a Holiday Inn is a little more complicated than franchising a hot dog wagon. For hotel systems, areas of ongoing concern include construction and renovation, maintaining standards, franchisee know-how, targeting the right markets and, as always, communication.
If you build it
Although newly built hotels are sexier, franchisors agree there will always be a role for rebranded properties, especially when a chain is looking to expand coverage in an underserved market. “We still desire conversions for a variety of reasons,” says Scott Duff, senior director, Development, Canada and Alaska, with Starwood Hotels and Resorts Worldwide. A prime appeal of conversions is realizing an income stream faster, says the Toronto-based Duff. While a renovation may take anywhere from a few months to a year, when building from scratch it can be upwards of two years before the dollars start rolling in. “There are also a lot more opportunities for a new development to trip and fall along the process,” he says, “whereas with the conversion of an operating hotel, the likelihood of an executed deal coming to reality is pretty high.”
Conversion is also the obvious choice when there’s no land available in an attractive market. “When you’ve got a hotel that was built 20 years ago, or was purchased recently for a reasonable dollar, you can get to market as a Brand X perhaps cheaper than having to buy and build at today’s cost,” Duff says.
However, a franchisor still has to make a good case for conversion, especially with the amount of capital available for new builds. So when looking to modernize an older property in secondary and tertiary markets, Marescotti says the limiting factor is standards. The FF&E can be handled fairly quickly, but both room modules and public areas need certain basics. “We have prototypical designs, but we recognize you have to modify for the local market. At the same time, it still has to be consistent with the rest of the brand. So that’s why standards are so important,” he says.
Standard bearers
“Standards are continually increasing, and it’s not coming from us — it’s coming from the customer,” says Laurie, “We have very clearly defined the character and personality of our brands (because) we have a global system of 3,700 hotels to safeguard.”
As you might expect, fellow franchisors strenuously agree. “Two of our brands — Aloft and Element — are exclusively new-build prototypes because they have design and architecture elements that can’t be achieved by conversion,” says Duff. But even for brands where Starwood is open to conversion — such as Sheraton and Four Points Sheraton — the specs are not negotiable. “We want guest rooms, ceiling heights and corridor widths of at least our minimum dimensions, plus (modern) amenities like recreation facilities and meeting space,” he says.
Someone from the public probably doesn’t know if a hotel is franchised or managed, but they go in expecting a level of quality and product that’s the same for every Marriott Courtyard or Residence Inn, says Marescotti. “As we grow the brand, it’s critical that it’s well represented. We have guest satisfaction surveys about product and service levels franchisees must meet,” he says.
Are you experienced?
Rather than “selling franchises,” hotel companies often prefer to think of expansion as developing strategic relationships with long-term partners. So it’s hardly surprising while chains are eager to expand, they’re not about to climb into bed with just anyone.
“We’re always looking for quality individuals with deep owner/operator experience,” says Laurie. That said, he deals with many types of owners — individuals, partnerships, REITs, institutional owners — and has been for a long time. So to ensure the success of franchisees with little or no lodging experience, IHG will often make partnering with a third-party management company a condition of the license.
Starwood’s Duff says understanding the requirements of a complex business is often more important than specific lodging experience. “Someone who has operated a roadside motel or an independent is probably going to have a lot of challenges in an upscale Starwood branded environment.” However an entity like a pension fund can, thanks to the growth of third-party management, operate franchises very successfully. “They may be great developers that can get things built, but [operations] aren’t their skill set and they’re not interested in making it their skill set — they are more passive investors.”
Marescotti says Marriott particularly likes to see franchisees operating multiple properties, but that also has challenges. “We are concerned that they have the (internal) infrastructure in place to support the individual properties. It’s not a question of simply ‘Can they manage a hotel?’ It’s ensuring they have corporate support for their GMs.”
After years — sometime decades — of franchising, execs have gotten pretty good at sniffing out which potential franchisors have the royal jelly and which don’t. However, when a developer has the financial wherewithal, operational experience and personal probity — a fact not to be underestimated — deals can happen surprisingly quickly. In fact, Laurie says when franchisors present a strong application for a market IHG is keen on, the approval process can take as little as 30 days.
To market, to market
“There are a lot of Canadian markets we’re still looking to enter,” says Starwood’s Duff. “A lot of our distribution in Canada is big-box Sheratons and Westins. Those are wonderful to have in the system, because no one is building a lot of new Sheraton Centres these days, but our opportunity is really in the select-service segment,” he says. Specifically, Starwood is looking to grow Four Points, Aloft and Element in proven markets across the country: Calgary, Edmonton, Vancouver, Ottawa and Halifax.
Marriott, on the other hand, sees prospects for growth with limited-service hotels in smaller centres. “In secondary and tertiary markets you can acquire land at a reasonable price, build and quickly become a market leader because other products may be older or not branded. So from an investor’s perspective it becomes very attractive,” Marescotti says. “We’ve gone from seven hotels in 1998, to about 55 now, and we think we can double that by 2010.”
Laurie says most of IHG’s growth over the past few years has also been in mid-scale limited-service, particularly the Holiday Inn Express brand. The company also has a distinct strategy for every Canadian market, involving each of its brands. However, he believes extended-stay — including the upscale Staybridge Suites and the mid-scale Candlewood Suites — is now one of the most promising categories. “I’m trying to get our existing franchise community — as well as prospective franchisees — to understand that given the cost of construction and labour challenges, extended stay is the way to go,” he says.
Ultimately, when it comes to signing on the dotted line, it’s the franchisor’s responsibility to ensure franchises, especially first-timers, understand exactly what they are getting into. “We’re selling wealth,” Laurie says. “We’re making people rich and it’s a very emotional buy (so) relationships matter. We’re selling them on the strength of our brand and our company’s enterprise values, but they should be looking at how a franchisor manages its partners.”
Laurie adds it’s crucial to communicate both macro and local market strategies to franchisees so they understand what the company is doing at all times, and every detail there is to know about becoming part of the system. Surprises, he says, are not good for either party. “If that means interpreting the language and intention of the entire franchise agreement for them, then that’s what needs to happen…so there is no devil in the details.”
