Cost Of Franchising In U.S.
By Stephen Rushmore -- HOTELS Magazine, 11/1/2007
 By Stephen Rushmore, MAI, CHA, CRE, president and founder of HVS International, a global hotel consulting firm with offices in New York, Miami, Denver, San Francisco, Vancouver, Mexico City, London, New Delhi, Singapore, São Paulo and Toronto. Mr. Rushmore can be contacted at 1.516.248.8828 Ext. 204. |
A hotel franchise affiliation represents a significant cost to hotel owners. However, in today's competitive environment, with the benefits of utilizing a brand identification, receiving reservations over a state-of-the-art system and participating in all the other resources offered by most chains, hotel owners usually consider a franchise a good investment.
While evaluating the economic benefits of a franchise is close to impossible, my company, HVS International, has made quantifying the costs very easy. Every few years we collect cost information from most of the hotel franchise companies operating in the United States (these costs may not apply outside of the United States). We then create a financial model of all the costs for three sets of hypothetical hotels-economy, mid-rate and first-class. The output from the model represents the total fees and expenses paid to the franchise company over a 10-year period expressed as a percentage of projected rooms revenue for this period of time.
The fees for typical hotel franchise are structured as an initial fee plus a continuing fee. The initial fee typically takes the form of a minimum dollar amount based on a hotel's room count. This fee covers the franchisor's cost of processing the application, reviewing the site, assessing market potential, evaluating the plans or existing layout, inspecting the property during construction, and providing services during the pre-opening or conversion phases. The continuing fees generally include a royalty fee, an advertising or marketing contribution fee and a reservation fee. In addition, continuing fees may include a frequent traveler program and other miscellaneous fees.
Sometimes franchisors offer additional services. These services generally include consulting, purchasing assistance, computer equipment, equipment rental, on-site pre-opening assistance and marketing campaigns. The fees for these services are not included in our study.
The tables below show the percentage of total rooms revenue (total fees divided by total rooms revenue). To get a guide of all fees listed in the 2007- HVS U.S. Hotel Franchise Fee Analysis Guide go to www.hvs.com and click on the library tab. There you will find initial franchise fees; continuing fees, including royalty fee, reservation fee, marketing fee, frequent travel fee, and miscellaneous fees; the total fees; and fees on a per room basis.
The most expensive franchise affiliation is Westin with a percentage of rooms revenue cost of 13.5%; followed by Wyndham at 12.4%; and Days Inns and Travelodge each at 12.2%. The lowest cost affiliation is Budget Host at 0.8% followed by Best Western at 2.4% and Coast Hotels at 4.8%. What always amazes me from these studies is the total cost of utilizing a franchise affiliation. Hotel owners have a tough decision when it comes to choosing whether or not to use a brand and then what brand to select. HVS has tried for many years to quantify the relative value of each brand but unfortunately sufficient data is not available.
Special thanks goes to Jonathan Sebbane of HVS-New York, who contributed to this article.
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