Kinder, Gentler Franchising
Along with the usual priorities, franchisors are announcing the need for better licensee relations. Is it forward thinking, or just another way to close more deals?
By Tony Dela Cruz, Managing Editor -- HOTELS Magazine, 3/1/2001
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Franchising ultimately relies on wealth distribution to succeed. Whether you are selling fast food, tax preparation or hotel room nights, a business model cannot be franchised without prospective owners who can literally buy into an idea. Large pools of potential licensees are needed to give a franchised concept the critical mass that defines a recognizable brand. Brand recognition will spell the difference between a hamburger stand and a McDonald’s.
The importance of branding has turned the fertile economy of the United States into center court for hotel franchising today because it simply has more potential franchisees. They in turn can create the growth brand owners crave. “There is an inherent belief that scale is important to deliver more customers and to amortize costs,” says Mike Leven, chairman of U.S. Franchise Systems (USFS), Atlanta, which recently opened its 500th licensed hotel property. “If you have a franchise company that is not growing, you are not getting new customers and not increasing profits.”
For years, success in hotel franchising has been defined by growth and virtually nothing has changed about that, other than the fact that some franchisors are moderating their stance by denouncing growth for growth’s sake. “It does you no good to put a hotel on every corner,” says Eric Danziger, president and COO, Carlson Hotels Worldwide, Minneapolis. “If your focus is to have distribution, but not the right distribution, you would do disservice to your long-term brand value. The days of having a dot everywhere on the map are gone.”
Mindful Of Quality
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Still, Carlson signed its share of franchise agreements last year, approximately 250, encompassing all of its hotel brands. But Danziger stresses in the past four years the company has terminated 60 Radisson franchises and rejected 100 Radisson franchise applications. “We are very mindful of what comes into each of our brands,” he says.
Of course, high volume growth for most of the past decade has been defined by two pure franchise companies, Cendant Corp. (formerly HFS Inc.), Parsippany, New Jersey, and Choice Hotels International, Silver Spring, Maryland, which now seem headed in different directions.
Following a disastrous merger with CUC International, whose fiscal structure collapsed, Cendant has resumed its mid-1990s form, seeking to consolidate the mid-market hotel brands through acquisition. “CUC was a fraud and now it’s behind us,” says Eric Pfeffer, CEO of Cendant’s hotel division. He says Cendant is returning to the HFS growth strategy which saw a company that owned Days Inn, Ramada and Howard Johnson in 1992 triple that number of hotel brands by 2000, in addition to diversifying into other sectors, including timeshare, real estate and car rental.
The most recent brand acquisition was Amerihost, a limited-service brand which Pfeffer says will allow Cendant to franchise hotels in markets already crowded with Days Inn and Super 8, each of which are approaching a density of 2,000 properties. Still, Pfeffer says the mid-scale without food and beverage segment continues to be high in demand. “Our goal is to take Amerihost national,” he says. “We have already sold 27 franchise agreements in the first quarter of ownership.”
Cendant’s hotel division is also soliciting regional hotel brands for strategic alliances. “We are looking at other hotel companies for ways to fill some space that we are not prevalent in,” Pfeffer says. Cendant has a budget-priced extended-stay brand, Villager, that just announced an agreement to franchise 14 Home & Hearth Inc. extended-stay hotels in Texas, Nevada and Colorado. Although the deal does not constitute a brand acquisition, it will add 2,000 mid-priced rooms that will be flagged Hearthside Extended State Studios by Villager.
Coveting Upscale Segments
“There’s a need for us to be in the mid-priced segment of purpose-built extended-stay,” Pfeffer explains. “And it is no secret we want a brand in the upscale segment.” Either through brand acquisition or through alliances like the one signed with Home & Hearth, Pfeffer says Cendant is determined to break out of the mid-market and franchise a brand with an average daily rate of US$100 or higher.
Choice, on the other hand, is redefining its identity as a franchisor. Once running alongside Cendant in a two horse race for franchising volume, Choice announced a reorganization in December that seems to rearrange the company’s previous priorities. CEO Charles Ledsinger, however, says the changes, which eliminate 140 headquarters jobs, consolidate brand management and close most of Choice’s international franchise sales offices, will yield “a more efficient structure, with emphasis on franchisee services.”
Choice also took an equity loss of US$7 million on its investment in Friendly Hotels plc, a U.K.-based master franchisee, due to Friendly’s reorganization and its asset disposal strategies. Essentially, to aid Friendly’s competitive position in Europe, Choice is forgoing the receipt of certain short-term royalty fees and providing Friendly with a letter of credit up to US$11.5 million. In exchange, Choice will see its ownership in Friendly rise from 44% to 69%. “It is what had to happen,” says Ledsinger.
Going forward, the CEO says Choice will focus on areas where it has critical mass. “We are reining in and re-deploying where we have the opportunity to make money.”
Steve Schultz, Choice’s executive vice president, domestic properties, says the company’s reorganization is focused and streamlined in nature because it is separating the franchise development and service functions for the first time. “Five market areas were consolidated into three, but we did not cut back the number of franchise service directors. We actually have more than before,” he says.
Benefiting From Mass
Still the emphasis going forward would seem to be coming off the international expansion that Choice once said would drive one-third of its future growth. “International is a very important area for our overall company,” Schultz says, “because 25% of our properties are located outside the U.S. We want to grow our brands significantly but we want to do it in areas that we can benefit from mass.” Hence, master franchise agreements remain in place for select markets in Western Europe, Australia and South America, but “it will not be our key strategy to go into tertiary markets and prospect remote properties,” he says.
Nor is Choice in a rush to match Cendant deal for deal in the brand acquisition arena. “I think we are an active acquirer,” Schultz says. “We look at everything active on the street, but it is not our goal to acquire other people’s brands which do not have much mass. We do not need more, smaller brands.”
More attractive to Choice is the prospect of buying brands, or participating in the purchase of real estate, to build one of its own through conversion. “For example, we want MainStay Suites to have more critical mass and we believe in the extended-stay segment,” Schultz says. “So it is not out of the question that we would be an acquirer to build that brand.”
Bass Hotels & Resorts, London, has been successful using precisely that approach, and is probably more flexible in its acquisition strategy because it franchises, manages and owns real estate. In January 2000, Bass purchased Southern Pacific Hotels Co. (SPHC), Australia, adding 59 hotels to the nine it previously had flagged on that continent.
“Our presence was significantly increased to the point where we are a brand leader in Australia,” says John Sweetwood, president of the Americas division, Bass. “We are living the phenomenon of growth via acquisition.”
In other cases, franchising has become a new area of emphasis for companies that have scaled down their previous growth, such as Dallas-based Wyndham International. Back when Wyndham was the operating unit for the Patriot American Hospitality REIT that bought about a dozen hotel companies in the late-1990s, franchising was incidental to the acquisition of real estate. Today, Wyndham wants to add about 12 hotel properties a year, “of which six we would like to be franchised,” says Jim Chu, vice president of franchise operations. The franchising focus will be on the growth-hungry Summerfield Suites extended-stay brand and 200- to 300-room suburban Wyndham hotels.
Clearly, franchisors will explore all possibilities to ensure the growth of its brands, up to and including selling the company, which is what USFS did when it sold its controlling shares last year to interests of the Pritzker family in Chicago. Leven says the new ownership brings a fiscal discipline to USFS that it didn’t have as a public company. “They are enormously skilled in that area, allowing us to do our own thing, but from less of a ‘shoot from the hip’ perspective,” Leven says. “They brought financial stability to the company.”
Typically, however, after franchise sales and overall financial stability, franchisors today are most concerned about maintaining the value of their brands in the face of a constantly shifting market. “From a franchising perspective, 2000 was not as strong a year as 1999,” explains Pfeffer. “The economy was too strong. There was a ‘What do I need you for?’ attitude in the marketplace.” In addition, some new entrants into franchising, such as La Quinta Inns, sliced a shrinking pie into more pieces. But Pfeffer says the 2001 development pipeline is stronger than that of 2000.
Bullish On Growth
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Similarly, fellow franchising giant Marriott International, Washington, is bullish on growth. “We did 38,000 rooms, 200 hotels last year, and will do almost the same this year,” says Steve Joyce, executive vice president, owner and franchise services, Marriott. Although Marriott’s deal count is down a little, the deals themselves are larger, he says, with better locations and higher rates.
One of Marriott’s chief priorities in managing its franchise business is product alignment in the marketplace. The company reacted to renewed interest in the extended-stay segment a few years ago, for instance, by rolling out two sister brands, TownePlace Suites and SpringHill Suites, for the market-leading Residence Inn extended-stay brand. As Joyce explains, distribution is the key to winning the battle for extended-stay guests.
“In an up market, anything works, but in extended-stay stay, you need a lot of hotels,” Joyce says. “The question is when business softens, how will your brands perform?” He says the RevPAR of Marriott brands have shown a history of improving even in down markets. “The brands that are late to the party, with no distribution or customer awareness, will be the first ones to fall out.”
Distribution was also the goal behind the co-branding between Marriott affiliate brand Ramada International and Treff Hotels of Germany and Switzerland. The October 2000 agreement immediately brought 80 hotels into the Ramada International system and lays the development groundwork for 50 more, says Reas Kondraschow, managing director, Ramada International. He says Treff will also provide fresh markets in which Ramada International’s new-build, international-only Encore brand extension can be built.
And what of the well-distributed brands that have only a few franchised properties, such as La Quinta, which began franchising for the first time in September 2000? Allan Tallis, a lodging veteran who returned to the brand as executive vice president/chief development officer, promises that the primary growth vehicle for the flag in the immediate future is going to be its franchise program. The goal is to sell 15 franchises in 2001, 35 in 2002 and between 50 and 60 each year thereafter. Currently, of 301 La Quinta Inns, 300 are company-owned.
It’s not to say La Quinta won’t be developing any more company-owned properties. “We will limit our corporate development to the very high visibility locations that are expensive and have high barriers to entry,” Tallis says. “And if we find a location a licensee wants, it is theirs.”
Tallis believes La Quinta’s calling card will be newness. Thanks to a strict renovation cycle, the oldest La Quinta room in the system is six years old, “and we are starting that cycle again, budgeting an incremental US$20 million to spend on upgrading about 80 properties,” he says.
Mutual Trust
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Potential franchisees will also be looking at a La Quinta brand with a fresh image, bolstered by at least two new prototypes, including an inn and suites design. Tallis describes it as residential in feel, with large work areas, high-speed Internet access and other comforts. Indeed, Tallis’ summary of La Quinta’s franchise pitch indicates how far the notion of franchisee rights has come in recent years. He stresses the existence of “mutual trust” and how the brand will be “developed more smartly than in the past.” He promises a franchise relationship that is “less contentious than some of the other brands.”
Chains large and small are selling brand freshness and brand uniqueness, whether it is the franchise division of Hilton Hotels Corp., Beverly Hills, California, or that of AmericInn LLC, Chanhassen, Minnesota.
Hilton, for instance, already is tweaking some F&B components of its fast-selling Garden Inn brand. About 90 Garden Inns have opened since their introduction in 1997. Much effort is also being placed in differentiating the brands in the Hilton portfolio, which swelled upon the purchase of the Promus hotel brands two years ago. Bill Fortier, senior vice president, franchise development, says “for rooms and new deals, franchising will drive the company for the next few years.”
AmericInn, meanwhile, has much more modest plans. Each year for the past six years the upscale limited-service brand has added 30 properties to the system. “This year, the goal is to get 30 sold franchises,” says Jon Kennedy, senior vice president of franchise development for the brand.
Kennedy says the current ownership of the company took over about seven years ago and most of the growth occurred in the last five years. Emphasis, even at an average rate of US$62, is placed on quality of stay. Rooms are 14-feet wide and quiet due to mandatory concrete block construction. A current chain promotion leverages the wall thickness by sponsoring local and regional chess competitions.
Franchisee Relations
Like most franchisors, AmericInn is placing a premium on franchisee relations, and the brand is still of a size that it can have one dedicated headquarter employee per licensee. And in a sure sign that it is planning ahead, AmericInn, which is open in 17 states, is performing due diligence for international development.
Last year Hilton approved 220 new franchise agreements and is projecting the same for 2001, although with the economy slowing down, 190 to 200 deals would be a realistic projection.
About 40% of Hilton’s franchising will consist of the Hampton brand, followed by Garden Inn and then split evenly between Red Lion, Homewood, Embassy Suites, Doubletree and full-service Hilton hotels.
Significant adjustments in Hilton’s franchising strategy for Homewood (a Residence Inn competitor) include a lower-cost studio room prototype, which is supposed to address building cost concerns, while Hampton Inn and Suites has also received a new prototype. Although rights to franchising the Hilton brand outside of North America belong to Hilton International in London, Hilton Hotels Corp. can franchise the former Promus brands worldwide without restriction. Fortier says he expects five to 10 franchise agreements for Hampton to be executed in South America gateway cities.
He also says Hilton will stay out of the way of other franchisors looking to consolidate or acquire. “It’s not going to affect us at all. We have all the brands that we want right now and every niche that we want to be in,” Fortier says. Hilton will, however, keep an eye on opportunities to re-brand in the wake of acquisitions. “Some of the REITs will be buying up some regional chains,” Fortier says. “There are opportunities to re-brand there.”
Hilton’s franchise division also played a key role in the chain’s recently announced affiliation agreement with Hoteles Camino Real (HOCASA), which will bring 14 Camino Real hotels in Mexico and Texas under the Hilton banner. The affiliation agreement will allow Hilton to impose brand standards on the HOCASA hotels, but in exchange, the Camino Real properties will plug into the Hilton reservations system and benefit from all of the brand’s marketing efforts. Hilton, meanwhile, will be able to lay claim to having the most 4-star and 5-star hotels in Mexico.
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