What Do Hotel Franchises Actually Cost?
By Stephen Rushmore, President and Founder of HVS International -- Hotels, 5/31/2001 11:00:00 PM
Most hotel lenders today require some type of chain affiliation before they will consider lending on a hotel project. They believe the benefits of having an established brand image, a central reservation system, coordinated marketing and a frequent traveler program is worth the cost of associating with a hotel chain. Hotel companies with an established brand give independent lodging owners the right to utilize their service marks, reservation systems and other programs by either granting a franchise or actually taking over the property’s management through a management contract. Globally, the franchise has become the most popular method of obtaining brand identity because the hotel owner does not have to relinquish operational control.
While the total benefits of chain affiliation are difficult to quantify, the actual costs of a hotel franchise are set forth in a disclosure document called a uniform franchise offering circular (UFOC). Every two years, HVS International collects these UFOC’s from all the hotel franchisors and builds a model to calculate the total cost of obtaining and maintaining a hotel franchise over a 10-year timeframe. It then expresses the total franchise cost as a percentage of rooms revenue. The tables seen here show the results of our most recent survey.
The total cost of a hotel affiliation ranges from 2.1% of rooms revenue for Best Western (which is technically not a franchise) to 11.3% for a Marriott hotel. Most hotel brands cost between 8% to 10% of rooms revenue with the median at 8.3%. Other organizations achieving low percentages included Master Host Inns at 4.4%, Guesthouse Inns at 5.3% and Key West Inns at 5.4%. The study showed that the total franchise cost expressed as a percentage of rooms revenue ranged from 5.3% to 10.4% in the economy category, 2.1% to 10.5% in the mid-rate category and 6.8% to 11.3% in the first-class category. Guesthouse Inns, Best Western and Omni were the respective category leaders in the low percentage at 5.3%, 2.1% and 6.8% respectively.
Hotel franchise affiliations usually contain several types of fees. They start with an initial fee typically based on a dollar amount per room. Continuing fees usually include a royalty fee for the use of the trade name and service marks, an advertising or marketing contribution fee, reservation expenses and frequent traveler costs. Other fees often include computer software, training programs, global distribution systems and equipment rentals. The total of all these fees and expenses were used in calculating the percentage of rooms revenue.
As this survey indicates, the cost of utilizing a hotel chain affiliation can be significant. Owners should carefully evaluate the price/value relationship of all the potential hotel brands before signing a long-term franchise agreement.
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