Franchising Focus Narrows
After years of rolling out brands and testing new segments, hotel franchisors seek to grow with what they already have.
By Tony Dela Cruz, Managing Editor -- HOTELS Magazine, 3/1/2000
- Summary table of chain franchise fees, mid-rate hotels
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The new millennium appears to be a time of reflecting and reloading for the hotel franchising business. In North America, from which most of the industry’s franchise activity emanates, hoteliers are cooling down after three years of unprecedented brand growth and corporate mergers brought the total of franchised hotel brands and brand extensions to more than 180. Going forward, experts say hotel franchising will be tempered by more conservative hotel financing; hotel companies themselves will be more occupied with brand strategy than with flag creation and although most franchisors have international targets, most of the activity remains focused on the U.S. domestic market.
With available financing for building or buying real estate considered the lifeblood of the hotel franchising business, most say 2000 will be more difficult to fund expansion than 1999, but not dramatically so. “This year is incrementally more difficult than last year, but not a great diversion from last year,” says Steve Schultz, executive vice president, Choice Hotels International, Silver Spring, Maryland. “Our developers have experienced a tightening in the marketplace in terms of getting financing, but not to the degree it has been in other troughs.”
The good news for both franchisors and franchisees is people continue to travel, consuming whatever gluts in room supply that may have cropped up over the last few years of expansion driven by easily-accessed capital. “Demand has continued to grow and is growing steadily,” says Jim Abrahamson, executive vice president, franchise development, Hilton Hotels Corp., Beverly Hills, California. He explained the industry’s money lenders have become more diligent in limiting the supply of capital made available to eager builders and lenders. “What’s happened here is the capital markets have definitely improved in managing that,” Abrahamson says. “It is keeping the dumb money on the sidelines.”
Money Still Available
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Choice’s Schultz says good franchise deals are as easy to finance as they have been in the past and marginal deals are harder to justify. “This makes it competitive for franchise companies across the board, but the environment is sound because the demand is holding up,” he says. Terry O’Leary, senior vice president of franchising at Prime Hospitality, says Wall Street funding may have diminished, “but there’s still money out there on relationship-type lending basis from local and regional sources.”
The balance of franchised growth between newly built and converted properties may shift for some, according to Steve Joyce, senior vice president, full-service franchising, Marriott International. He says his division will definitely hit its projected growth targets but would not be surprised to see more conversions. “The business will probably tighten a little bit, it may only see a little more growth,” Joyce says. “Our premiums grow when the markets soften; we are probably the last brand to get in trouble.” With Marriott as the first choice for many owners seeking to shift brands, Joyce asserts, conversions become an easy sell in down times.
Outside of the U.S., franchise potential is determined by broad issues such as brand ownership and regional economics. Roger Titley, vice president, development/asset management, Latin America, for Bass Hotels & Resorts, Atlanta, says “capital continues to be expensive and difficult to source for a lot of the franchised product in Latin America.” In addition, there are very few conversion opportunities south of the border for a brand like Bass’ Crowne Plaza because upscale hotels south of the border typically are owned and operated, not franchised.
American franchisors seem just as content to grow through acquisition or master franchise agreements. Choice is doing both, having purchased the Flag franchise in Australia, and is working with a master franchisee out of England to try and penetrate continental Europe. Marriott saw its main U.K. franchisee Whitbread blossom when it bought out a competitor, Swallow. It is a relationship that has allowed Marriott to “double and double again” its exposure in the U.K., Joyce says.
More Mergers Coming
Some feel strongly that brand acquisitions may continue to be the big story in hotels, and consequently, hotel franchising this year. Mike Leven, chairman and chief executive officer of Atlanta-based U.S. Franchise Systems, says public hotel companies, by their nature, must increase their earnings year to year. “There are no mature public hotel companies that can grow their earnings enough off the assets they have,” he says, a thought echoed by Carlson Hospitality Worldwide President Eric Danziger.
“In the next year or two, there will be no more of those 6%, 8% 10% RevPAR growth years, it will be more like 2% or 3%,” he says, and investors accustomed to high growth will want results regardless of the RevPAR plateau. “The public company shareholder is saying, ‘stop all this silly growth and digestion of stuff and run the businesses, find the synergies you said you’d find,’” Danziger says. “I really do think that the market has said we got carried away, this is not a real estate business, this is an operating business.”
Hence, Leven says, the largest global hotel companies who have done the bulk of recent brand consolidation, can be expected to do more acquisitions just to satisfy their shareholders.
“Bass and Accor are two large international players and Marriott, Hilton and Starwood are the other domestic, major players,” he says. “I would say that those five companies are going to get bigger.” A company like White Plains, New York-based Starwood Hotels and Resorts, for which Leven serves as a director, “has nothing in the middle of the market, nothing at the bottom of the market,” and may be seeking to fill in gaps in its brand-price equation.
Accor’s Turn, Again?
Leven says the franchising giants are more likely to acquire based on regional bias, with Bass searching Western Europe and Marriott wanting to “own any market they can own in the U.S. But he says the exception is Accor, which outbid U.S. Franchise Systems in its successful pursuit of Red Roof Inns. “I do not think Accor is through in the United States,” Leven says. “They looked at everything and they could do more.”
Carlson’s Danziger points out all the brand acquiring cannot help but have ramifications in the franchise community. The Hilton-Promus merger, for example, raises questions about the Red Lion brand, first acquired by Doubletree before it merged with Promus, where it languished before being re-launched just weeks prior to the announcement of the Hilton acquisition of Promus. “Red Lion was gone and it came back; I do not see it as a surviving brand,” Danziger says.
Similar doubt can be cast on Doubletree itself, he says, because the most recent merger pushed it into the second tier of all the Hilton brands. Georges Le Mener, president of Accor Economy Lodging, Houston, says brand consolidation in the U.S. is far from being completed and that consolidation of hotel companies will be more important in the U.S. than anywhere else. That is probably due to a process of elimination, he explains. Asia is about 10 years from being ripe for the kind of merger and acquisition activity seen today, while Europe has “not much to buy” because the market is dominated by three large hotel companies. Nor is it likely anyone would launch a brand because North America is too close to the end of its current economic cycle.
What Le Mener will acknowledge is that Accor Economy Lodging’s focus is to be a “major brand company,” and it is employing two paths toward that end: developing its existing brands (Motel 6, Studio 6 and Red Roof Inns) and “maybe making an acquisition.”
Organic Growth
Aside from the major brand acquisition, most franchise companies will be trying to grow their portfolios organically. And for those companies who did manage to launch brands in time to take advantage of the last several years of booming growth, they will be able to reap the benefits of timing the cycle correctly. Marriott International has launched two moderately-price suite products since 1996, TownePlace Suites and SpringHill Suites. Joe Lavin, Marriott’s senior vice president, franchising for select service properties, says TownePlace will be near 100 open units by the end of 2000, with “a large share of the moderate segment extended-stay pipeline. It, coupled with SpringHill, is expected to represent a good portion of Marriott’s limited-service growth.
If Marriott seems to have been skating away from the lower end of the franchised market, it is because the company feels that segment of the market is most vulnerable to outside pressure. “Sometimes Wall Street turns its back, says the barriers to entry are too low,” Lavin says, but “there’s a lot of activity going on in that segment, profit margins are still very high and people are making money with it.”
On the full-service end of the franchise business, Marriott is expecting a strong year, with plans to develop 15 hotels in North America, according to Steve Joyce, senior vice president, franchising, for full-service. Joyce is looking at emerging markets such as Alpharetta, Georgia, and also taking advantage of “opportunities to replace hotels that have been deleted from the system because of age.” Marriott’s other full-service option is its Renaissance brand, the franchising of which is ramping up. Nine Renaissance franchises were executed last year, and Joyce expects between six and 15 this year. Globally, Marriott will franchise close to 30 full-service hotels this year, two-thirds of them new-builds and many in Europe and the Far East.
Big Getting Bigger
Major competitor Bass Hotels & Resorts is projecting similar numbers for its full-service franchised hotels in North America, according to Bob Massey, vice president development/asset management, North America. “Historically we have grown on an annualized basis 12 to 18 hotels a year,” he says. “Last year, we had 28 new additions to the portfolio; we’d like to have comparable growth year over year.” Massey also notes there have been a number of Bass franchisees from North America who have moved into the European markets faster than licensees of competing brands.
Hilton, thanks to the Promus acquisition, is tracking twice as many brands as it is used to this time of year. Hilton’s volume leader is now Hampton Inn, with about 100 projected executed franchise agreements.
The mid-market Hilton Garden Inn and newly-re-launched Homewood Suites by Hilton are going to be pushed along with the Hampton line extension Hampton Inn and Suites. All told, according to Abrahamson, Hilton will try to franchise between 240 and 260 hotels this year, and that includes the licensing of Doubletree and Hampton in Latin America. Prior to the Promus merger, Hilton was bound from franchising outside of North America by its marketing agreement with London-based Hilton Group, which owns the international rights to the Hilton brand.
Carlson, viewed by Leven as a sleeping giant ready for a major move, plans to add 40 Radisson hotels outside of the U.S. this year, “divided as half Europe, the balance in Asia and a little bit in South Africa and South America,” Danziger says. Internationally, Carlson wants to add 25 Country Inn properties, the majority of them in Europe.
Caution Taking Hold
Dallas-based Wyndham International, meanwhile, offers proof that not all full-service franchising is taking place on a large scale. Three years ago, Wyndham was paired with Patriot American Hospitality in a high-flying REIT primed to expand into Western Europe with both franchises and management contracts. Today, the slimmed-down company still owns the brands in purchased during its bull run, notably Malmaison and Grand Bay, but is focusing strictly on the Wyndham brand. “As we look at what we own in our portfolio and maximize what we currently own, I think franchising is a good way to grow the brand,” says Diane Parmalee, Wyndham’s director of franchising. Even then, Parmalee sees franchise growth comprising no more than 20% of the brand’s expansion. “The difference between Wyndham and other franchise companies is we’re trying to build a brand rather than a franchise organization,” she says.
Growth for better reasons other than growth’s sake is a theme heard almost uniformly in today’s cautious environment. If there is a brand shakeout coming, it will be because consumers reject efforts to be sold product they do not need. “We believe that the consumer drives all the business; the consumer will do all the folding in that needs to be done.” says John Sweetwood, president of North American mid-scale brands, Bass Hotels & Resorts.
And some are even more blunt in their assessment of the competitive environment. “You are going to see brands go away,” says Marriott’s Lavin. “If you have a limited-service brand that does not have 100 units in it, nobody knows what it is.”
Franchisees Want More
Despite recent initiatives toward a level playing
field, franchisors are viewed as still having control of franchisees.
For better or for worse, the lodging franchising community will not soon forget an incendiary incident at the recent Asian American Hotel Owners Association (AAHOA) annual conference. Those who attended say a panel discussion featuring executives from four hotel franchising companies turned ugly when panelist and attorney Robert Zarco polarized the affair with inflammatory comments. This prompted one of the other participants, U.S. Franchise Systems Chairman Mike Leven, to walk out on the panel, dismissing it as “amateur hour.” Although Leven later returned to applause, it is ironic he would be targeted for complaints, since he founded AAHOA in the first place.
The incident was referenced at another panel discussion on franchisee relations held weeks later at the UCLA Extension Hotel Investment Conference in Los Angeles. This panel, which included Cendant Hotel Division CEO Eric Pfeffer, Creative Hotel Associates (CHA) Chairman Bob Hazard and Diplomat Hotel Corp. President Mike Patel, was determined to make a more civil showing, but still could not avoid underscoring how hotel companies and their licensees often view the notion of partnership in completely different terms.
Hazard, the former chairman of Choice Hotels International, is now a franchisee himself, and favors abolishing many of the practices he once upheld, such as charging licensees liquidated damages to be let out of an agreement early. He bemoans the fact that Marriott International’s franchise agreement is 66 pages long, full of legalities meant to favor the franchisor. Conversely, he points out how a Hampton Inn franchisee, following Hilton’s acquisition of former Hampton parent Promus Hotel Corp., will pay an additional 1% in royalty fees.
One-Sided Agreements
Pfeffer agrees that franchise agreements are one-sided, but insists they are not all inequitable or unfair. And liquidated damages, he says, are simply part of a system of checks and balances needed to keep franchisees from changing brands at their own whim.
Aside from the David and Goliath contrast between most licensees and franchisors, what divides the two parties most frequently, by consensus, is the issue of impact, or the effect a hotel company has on franchisees when it allows or encourages similarly branded hotels to compete with each other. Impact is a two-sided, subjective issue that has inspired both franchisees and franchisors to categorize what each believes fair treatment is. AAHOA has its Twelve Points of Fair Franchising, while many of the large franchisors have created principles pledging fairness. “We continue to want to avoid litigation as the ultimate measure of disputes,” says Steve Schultz, executive vice president, Choice Hotels International.
Leven says hotel franchising will probably always be Darwinian in nature. “The real rule of thumb is, the stronger you are, the more you tell the franchisee what to do,” he says. Ramesh Surati, the 1999 chairman of AAHOA, says, “I don’t think we have made major progress on impact, liquidated damages or encroachment, but we have made progress because we are having better dialogues with the franchisors.” Marriott executives say impact concerns are normal in their course of business. “Impact is always an issue, and always will be,” says Joe Lavin, senior vice president of franchising, select service brands.
Other Side Of The Fence
Still Hazard, a SpringHill Suites (by Marriott) franchisee himself, says Marriott could benefit from having more franchisee-friendly contracts and agreements. “Marriott says they can replace you tomorrow and that it would cost them nothing to do so,” Hazard says.
Howard Johnson International, Parsippany, New Jersey, just did introduce what it calls a friendlier agreement, one that caps franchise fees based on whether licensees can maintain a high quality rating. It also will allow, under certain conditions, an owner to leave the system without liquidated damages. “This is a way to grow aggressively without sacrificing quality,” says Howard Johnson President Mary Mahoney.
Although he asks why franchisors cannot be nicer to franchisees, Hazard answers his own question when asked if he was as insensitive a franchise executive at Choice: “I do not think I was a bad franchisor,” he says. “I did what was best for Choice, and the best thing for Choice was to have a plantation mentality.”
Peaking Market, Mergers Steer Branding
This year, major hotel companies are expected to enter a stage of conservative assessment of their brand portfolios.
Hotel branding activity has risen and fallen in cycles over the decades, and it would be hard to miss its most recent peak, illustrated by a rush toward extended-stay products. Such brands, many of them franchised, were created, imitated, bought, sold, merged into one another or splintered, actions all indicative of a hot segment reaching its zenith.
The other major trend affecting franchised brands has been corporate mergers and acquisitions. In one example, by purchasing Memphis-based Promus Hotel Corp., Hilton was able to blend its nascent extended-stay brand Hilton Residential Suites into an older, more widely distributed Promus product now known as Homewood Suites By Hilton. The same deal delivered to Hilton its first heavily franchised limited-service product, Hampton Inn. Some companies, like Evry, France-based Accor SA, embodied both trends in 1999, introducing an extended-stay brand, Studio 6, and acquiring a competitor, Red Roof Inns, giving the global hotel operator a unified beachhead in the U.S. now called Accor Economy Lodging.
Moving forward, however, nothing appears to be bubbling below the surface as the next “must-build” lodging product and the hotel mega-merger seems to be receding with the 20th century. But the franchising community is collectively astute, so the major brand companies seems to know what to expect from their competition. For example, Steve Schultz, executive vice president at Choice Hotels International, Silver Spring, Maryland, observes most of the opportunities for new products exist “outside of the power alley that we are in as Choice,” but he also finds the upper limited-service segment intriguing and “over-dominated by Courtyard by Marriott.”
Seeking Higher Ground
As it turns out, Washington-based Marriott International also prefers the higher end of limited-service, having announced a major repositioning of its entry level Fairfield Inn brand, which will now be known as Fairfield Inn & Suites. New construction Fairfields will have an optional two-bedroom suite and will be built with upscale amenities such as 32-inch televisions, audio systems, workspace, a kitchen and what Senior Vice President of Brand Management Craig Lambert describes as a lobby and breakfast room with an airline lounge atmosphere. “This will be very different in this segment of rooms.”
Pricing will also be different, in fact high enough, at an expected US$70 to take Fairfield out of the economy segment and into the lower moderate category. Although Lambert stops short of saying Marriott no longer needs to have a flag in the economy segment, he says Fairfield franchisees say they needed to respond to evolving consumer demand for a more fully featured product. “We believe this is the most successful place for Fairfield to be,” Lambert says.
Beverly Hills, California-based Hilton Hotels, meanwhile, faced a different type of brand adjustment when it acquired Homewood Suites, an extended-stay brand it was previously building against with its new Hilton Residential Suites flag. “Obviously, it did not make sense to have two products competing for the same customer,” says Jim Holthauser, senior vice president, Homewood Suites.
While it would have surprised few for Hilton to fold the mostly developmental Residential Suites flag into the 11-year old Homewood portfolio, Hilton also decided to create a new design for Homewood (its fifth generation) that incorporates much of the newer brand’s features. These include what Hilton Executive Vice President Franchise Development Jim Abrahamson calls a “cost-efficient floor plan” (studios will now be mixed in with traditional one-bedroom suites) to combat what has been generally accepted as a high per-key development cost for Homewood. “We have leveled the playing field,” Holthauser says.
New Year, New Owner
Although Hilton is bent on driving franchise sales for Homewood with such enticements as discounted royalties in the first two years, preferential financing for multi-unit developers and pre-opening marketing support, the primary advantage for the new Homewood mentioned by Holthauser is its new affiliation. “The biggest obstacle has been brand awareness,” because Promus had not been a name recognized by consumers the way Marriott is, appended to the segment-leading Residence Inn name.
Most franchisors find themselves spectators to what little brand strategy has unfolded thus far in 2000. Mike Leven, chairman of Atlanta-based U.S. Franchise Systems, predicts more mergers of smaller franchise companies seeking critical mass in a market where the largest franchisors increase their lead over everyone else. “Looking at the hotel landscape today, frankly, you don’t see very much new going on,” he says. “That is why you’re going to see some merging of companies.” But he added that the days of easy buys, the so-called “low-hanging fruit,” are over.
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