Pillow Fight
Customers want a better night's sleep. Franchisees want more profit. Franchisors are battling to find cost-effective ways to keep both camps happy and loyal.
By Mary Scoviak, Features Editor -- HOTELS Magazine, 6/1/2005
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Go to any franchise conference and the conversation inevitably turns to beds. Brands that do not have a signature “sleep experience” soon will. They also will have new prototypes, new breakfast programs, new developers’ incentive packages, new standards enforcement programs and new marketing initiatives. Sensing the upturn in the cycle, every brand is looking for an edge with customers and owners. “Just think what the Heavenly Bed® did to get Westin ahead of the pack,” says Thomas J. Corcoran, CEO, FelCor Lodging Trust, Dallas.
Growth opportunities are here, now, for the brands that can make themselves heard. In 2005 and 2006, it could be boom times for franchisors as capital continues to seek higher returns in a rebounding industry. Newcomers joining the fray alongside major institutional players and opportunity funds will drive U.S. room starts to nearly 240,000 by the end of next year, forecasts PricewaterhouseCoopers (PwC). Even allowing for managed hotels and independents, “that will mean a lot of franchise opportunities,” says Bjorn Hanson, PwC’s New York City-based global industry leader, hospitality and leisure.
The Sales Pitch
Hanson estimates that existing franchisees will account
for roughly two-thirds of the project pipelines for
franchisors in the United States over the next two
years—a
figure most chains confirm. In Europe, where franchising
has less penetration, the percentages of existing versus
new franchise development is closer to 50-50 for established chains
such as InterContinental Hotels Group (IHG). Asia is largely virgin
territory, with a handful of notable exceptions.
Chains will be fighting hard with promises of higher yielding CRS returns and a menu of cost-cutting developers’ tools to keep franchisees loyal. Why preach to the choir? “Prior to 2000, most of our franchisees were new to the system,” says Bill Fortier, senior vice president, franchise development, Hilton Hotels Corp., Beverly Hills, California. “It took more resources to sell the brands, build the hotels and monitor their performance. Because most of our owners know us as well as we know them, things are much more efficient. Our development pace is better than it has ever been. If we had to work primarily with new owners, the process would take longer.”
Watch for more stringent brand standards enforcement to protect the franchise network. Owners sense a growing gap between the “have” and “have not” brands, and it is not one they are willing to cross. “You have to look at brand standardization when choosing a franchise,” says Peter Brock, principal with both New Rochelle Hotel Associates and Brock Development, West Palm Beach, Florida. “You want to know that your property will not be pulling up the brand nor will it be dragging it down.”
Expect more prototypes, especially suites products that score high marks with consumers. They will tempt existing franchisees to move up or out with sister brands or move into new locations that will benefit distribution. There are concepts for every price point: revamped guestroom designs for core Marriott hotels and its sister Renaissance brand; more cost-efficient mid-tier Holiday Inns; niche plays such as Choice Hotels International’s “lower-upscale, select-service” all-suite Cambria Suites; and boutique-inspired offerings such as IHG’s new mid-tier Indigo brand. The list can only get longer. Starwood has hinted at two brand launches, one W-inspired mid-tier and one extended-stay by the end of the year. Carlson Hotels Worldwide is looking at a revamp to appeal to the Gen-X customer of the future.
Innovation has its rewards. Franchisors are building in the kinds of brand-boosting extras that customers will pay for, while trimming unnecessary development costs that range from curved walls to gimmicky technology and irrelevant design details. David Pepper, Choice Hotels International’s senior vice president, franchise sales, says new concepts focus on what guests want most: bigger rooms or suites, a better breakfast, upgraded shower heads and a better bed. “You have to ask whether the change is going to drive higher rate, higher RevPAR and higher profits,” says Pepper. “Prototypes should enable the brand to value engineer its product to put in the things customers want and take out the things they do not.”
Do most new prototypes help with costs? “Absolutely. Capitalization will be lower,” Brock says. “The developer will get more value for money because of all of the items that are standardized. There is a savings in construction costs as well as furniture, fixtures and equipment.”
The payback looks just as good to a giant such as Dallas-based FelCor Lodging Trust. “What is happening is that prototypes are trying to make operations more cost efficient. They are cutting space that does not make money. From that point of view, yes, these prototypes make sense,” Corcoran says.
Holiday Inn’s Mark Snyder, senior vice president, the Americas, predicts these move-up/move-out owners will become the “New Lords of Lodging.” He profiles them as young, ethnically diverse hoteliers who entered the industry via limited service and now want full-service hotels. They are comfortable with hotels that include food and beverage operations and, in many cases, comfortable with new concepts.
Increased sophistication on the part of owners could signal new directions for franchising growth. “Previously, mid-tier franchisees in the limited-service and mid-scale segments confined their development almost exclusively to suburban locations along highways,” says Alan L. Tallis, executive vice president, chief development officer and president of franchising, LaQuinta Corp., Dallas. “They were building 80-room hotels. As the industry matures, we will see more mixed developments. We will also see more condominium developers involving hotel components in projects that combine hotel and residential.”
New Blood
Still, 30% of franchisors’ growth will come from buyers new
to their brands. In the United States, major targets
include increasingly entrepreneurial ethnic minorities; developers new to the
hotel industry (but not new to commercial development); move-up players who
had inexpensive fast-food or automotive franchises and now can afford
a hotel franchise; and real estate companies looking
for higher returns.
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Each brand has its own pool of potential buyers. “For extended-stay, we are seeing conversion of franchisees who previously may have focused on transient hotels, multi-family projects and light commercial, such as storage facilities,” says Kirk Kinsell, IHG’s senior vice president, chief development officer, the Americas. “For the mid-tier or limited service, there is a lot of interest from the Taiwanese and Indian-American communities. We are seeing more Hispanics and African Americans becoming involved in hotel franchising.” Regional crossover should bring in more new money, he says, as Canadian developers move into Mexico and U.S. developers look toward Canada for opportunities. Pepper adds women to the list of targeted, new franchisees.
Nicholas Bonrepos, Wyndham International’s senior vice president, business development and owner relations, adds third-party management companies to that list, along with institutional investors strengthening their real estate portfolios in a recovering hotel sector, as well as owner/operators “looking to enhance the sophistication of their brand portfolio.” He foresees renewed interest in the upscale segment “as franchisees aim to capture the benefits of the economic upswing to position their existing assets or acquire assets that can be repositioned.”
New buyers are leaning toward simpler concepts with less exposure. “Investors and developers coming into the hotel sector for the first time frequently look at limited service,” Hanson says. “Project costs are lower, and operations are simpler. They do not have to worry about the complexities of food and beverage.” Faster ramp-up could make limited-service even more appealing at this point in the cycle.
That is pressuring brands to roll out more turn-key solutions, both on the development and support sides. “The new pool of franchisees will include individuals who have never been in the hotel business,” says Michael Leven, CEO and president, U.S. Franchise Systems. “They are looking for big returns on equity, and clean, new brands that are easy to build and operate. We need to work harder with this new generation of franchisees to get their hotels off the ground and operating.” Brands such as Cendant Hotel Group are unveiling “revenue blitz” initiatives to help their franchisees improve profitability. These programs are about hands-on, on-site support for rate and investment management, systems maintenance and local sales. “The biggest change franchisees will see in franchise services is in the area of enhanced field support,” says Robert Bilotti, Cendant Hotel Group’s senior vice president, franchise sales and development.
Worldwide Potential
Much of franchising’s future will be written outside of the
United States. The UK and France remain the most
fertile ground for franchisors. However, “we are seeing interest
in Scandinavia. There is increasing demand in Germany, Benelux,
Austria and even from Switzerland, Italy and Spain—countries
that have been quite closed to franchising in the past,” says
Hans-Peter Kolditz,
general manager, Accor Hotels, Europe/Middle East/Africa.
Expect demand to increase in Central and Eastern
Europe in the mid-term. Brands such as Accor want
a strong network of
managed hotels in a country before launching franchise
initiatives. Through its master franchise agreement
with Carlson Hotels Worldwide, Rezidor SAS Hospitality
also plans a major growth push in Europe, aiming
for 150 mid-market Park Inns to be open or under
development by 2007.
Robin Wicks, IHG’s senior vice president, franchising, Europe/Middle East/Africa, says that while the UK is the main target, reports of franchisors uphill battle on the continent are overblown. “Franchising is not a hard sell in Europe if you build depth. Spain is the only market where it still is difficult,” Wicks says. He says both bankers and franchise buyers around the EU have become receptive to franchising, which is creating a strong investment market for established brands.
Competition should be heating up. Simon Allison, director of the newly founded Hotel Owners’ and Franchisees’ Transatlantic and European League (HOFTEL), predicts franchising’s growth will accelerate for four main reasons:
- A wave of private equity capital looking to buy hotel assets rather than manage them, combined with a wave of operators looking to unload real estate
- More focus from U.S. brands (seeing an overheated domestic situation?) looking to market their skills to new professional owning companies.
- As more flags go up, more owners will see the benefit and more will be interested in franchising. The entry of established brands such as Hilton can only increase the take-up.
- Terms should improve as owners flex their muscles with brands (and via groups such as HOFTEL). Franchise contracts would become more attractive as a result.
The effects are being felt already, Allison contends. He cites the growth of locally based franchisee groups such as Firoka, London Plaza Hotels and BDL Hotels in the UK; PREM Group in Ireland; and Deutsche Interhotel and Ahlbeck & Zehden in Germany. He points out, however, that many leading European-based franchisees are still U.S.-based: Harrell Hospitality for Marriott and Westmont Hospitality for Holiday Inn.
Big brands will have the advantage. “The only real pan-European brands in the mid-scale are Accor, IHG and NH Hotels,” says Allison. “For other brands, which may have only a handful of flags in smaller, domestic markets, the effort to prove that the fees generate a satisfactory return is something of an uphill battle. With limited brand recognition, the prospect is a hard sell.” Key cities should be the targets. Flags mean less in the continent’s less-traveled regional markets. “France, the UK and Scandinavia will be the most receptive markets. By contrast, franchising growth in Southern Europe (with most citing Portugal as an exception) will be painfully slow,” he adds.
Beyond Europe, all eyes are on China first, then India. Patience will be a virtue. “You could have 45 hotels with 35 different owners in China. There is a lot of demand,” says Patrick Imbardelli, IHG’s senior vice president, Asia Pacific.
Regional companies will be taking a close look IndiOne, a limited-service sister brand to Taj Hotels and Resorts, which is not ruling out the possibility of franchising. With one hotel open and another 10 in the pipeline, the brand is just building its foundation. “We will look at franchising once the brand is established—which is a few years away. With the kind of change happening in this field, it is too early to say,” says Partha Chatterjee, general manager, sales and marketing.
Amenity Creep: Brands Viewpoint
Amenity creep hasn’t been an issue since the early 1990s. “Now, people are starting to talk about it again,” says Choice International’s Senior Vice President of Franchise Sales David Pepper. This time, the discussion is different. Owners, like guests, are willing to pay more to get more. But the proof has to be on the bottom line. What do franchisors say?
“The first question should be: Will guests find value in this new product/service, and will they pay for it? Added upgrades and amenities have to make sense from the owners’ perspective.” — Nicholas Bonrepos, Wyndham International
“There is no place for imposing amenity creep on franchisees. Every (unnecessary) expense impacts the economic situation of our partners and that, in turn, impacts our results” — Hans-Peter Kolditz, Accor
“You cannot add product for product’s sake. It has to be about results. Since the Express Start Breakfast was rolled out to more than 1,200 hotels, we saw RevPAR totaling more than US$20 million in incremental revenue on a US$3.1 million investment.” — Kirk Kinsell, InterContinental Hotels Group
“While it is true that new amenities are implemented at the suggestion of franchisors, brands have to be mindful of the bottom-line impact. But, no one can turn a blind eye to what guests want, and what they need to remain competitive. Any new added costs must be weighed against staying competitive and driving franchisee occupancy.” —John Valletta, Super 8
“Owners should be concerned with amenity creep. We are entering an era where each of the major brands is seeking to build a better mattress and have the fluffiest pillows. Changes to brand standards should be reviewed on an ROI basis.” —Alan Tallis, La Quinta
Amenity Creep: Franchisees’ Viewpoint
Amenities are wonderful to the degree they differentiate a brand and drive share and rate. What do franchisees say?
“The problem is, if they are popular, they become a tier standard. Are people really going to make more trips just to get a room with an electric bed, or is the owner getting saddled with a cost he or she was not saddled with before?” — Peter Brock, New Rochelle Hotel Associates/Brock Development
“If people were willing to sleep on cots that would be great. But I do not think they are. For the time being, anything that delivers a better night’s sleep or speaks to concerns about sanitation—like washable duvets—will deliver a price advantage.” — Thomas Corcoran, FelCor
“Innovation is good. But, without a market for that innovation, it is difficult to get a hotel to operate properly. Successful operators know it is necessary to add new services, amenities and soft goods and to make changes to address market preferences. However, in the past couple of years, some brands are looking at amenity upgrades as their marketing program instead of for the true value it brings to the guest experience.” — Dave Durbin, Crestline Hotels & Resorts
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