Global Franchise Opportunites, Challenges, Owners POV
by Staff -- Hotels, 10/1/2007
Franchise Focus: Destination Africa
Africa’s hotel franchising story is still about the sub-Saharan region, says Trevor J. Ward, managing director, W Hospitality Group, Lagos. He profiles the market this way:
The players: Southern Sun, which has worked with both IHG and Accor, and Zimsun, which also works with IHG. Southern Sun recently rebranded most of its hotels with home-grown brands (Holiday Inn Garden Court is now simply Garden Court), while Zimsun, through its associates, African Sun, is pressing ahead with IHG. USFS is granting single deal licenses, including a reported franchise for Americas Best Inn in Lagos. Wyndham Hotel Group is also looking at the market—with its Ramada and Days Inn brands. Starwood has franchised to Gold Leaves, based in Dubai. Its top executives worked with Sheraton in Africa.
The playing field: Existing franchises are in or very close to South Africa, where there is a better infrastructure to support the franchisee. IHG has a dedicated office in South Africa to do just that. South Africa is comfortable with the model. It has a wide range of franchised restaurants, both international and domestic, and any of the large retail franchises.
The opportunities: The best opportunities are at the budget and mid-tier levels. Quality control may be much easier, and the products are needed in many markets. Secondary cities (and, in a country such as Nigeria there are many of them), could support only budget or mid-tier properties.
The challenges: Granting a franchise to an individual entrepreneur in Africa brings challenges for both sides. The franchisor has difficult in ensuring quality while the franchisee may get little support due to communications, distances and so forth.
Land title is an issue (it was in Central and Eastern Europe, previously). Records can be scant or non-existent. It is in the chains’ best interest to deal with an existing multi-site land owner.
Many franchised chains see Africa as too difficult. With the huge opportunities in India and China, they are leaving Africa to a later date or not going there at all. This is understandable, but it’s a shame. There are so many opportunities for branded hotel growth on the continent.
Radar On International Franchising
Here is a brief rundown on franchise opportunities in South America, Central America and Asia Pacific:
South America: “The hotel business in South America is growing so much, not only because of corporate travel, but leisure as well. Argentina, Peru, Colombia and Chile are the hot markets. The presence of international brands is not too important, yet, there are a lot of new projects and refurbishments. We will see the international brands taking the opportunity to flag both new and existing hotels.” – Arturo Garcia Rosa, HVS International
Central America: “Franchises will account for about 40% to 50% of our Central and Latin American (CALA) pipeline. (as opposed to 30% to 40% for Marriott’s EMEA pipeline). The biggest hurdle lies in the quality of franchisees and their ability to meet high brand standards. In terms of expectations, the region’s franchisees often have higher expectations for marketing support, much like EMEA. CALA is very competitive marketplace for franchised brands.” – Carlton Ervin, Marriott International’s senior vice president, international development
Asia Pacific: “Asia Pacific is the most saleable international target for hotel franchising.” – Chip Ohlsson, Starwood Hotels & Resorts.
“In Japan, franchise partners understand the benefits of brand affiliation.” – Mark Pearce, Choice Hotels International’s vice president, international
Franchising: What Hurdles Remain
Mark Siebert, CEO, iFranchise, tracks the opportunities and challenges for the franchised business model.
HOTELS: Many chains say 30-40% of their international pipelines will be franchised. What are the obstacles to making that happen?
Siebert: The factors vary on a market by market basis. In some markets, it is a function of the size of investment, construction costs, availability of financing and the perceived need for a U.S. hotel concept at the consumer level. In others, it may be more of a function of the travel environment and the need for more sophisticated reservation systems. Any franchisor attempting to go international will face a number of barriers: language, culture, economic climate, financing, required alterations in the business model and regulation, just to name a few. Hotels, because of the increased investment and their increased sophistication, will trigger more of these concerns. In addition, they bring into plays concerns relative to real estate that other franchisors do not encounter.
HOTELS: How much of a hurdle is the regulatory environment internationally?
Siebert: In most countries, it is not a major factor; most countries’ franchise regulations are less aggressive than those found in the United States. In countries in which regulations do exist, for the most part, they do not pose a barrier to entry to an adequately capitalized franchisor.
HOTELS: How hard will it be for up and comers or repositioned brands to compete?
Siebert: Chains are going to have to create a unique value proposition that will position them clearly in the minds of prospective franchisees and they are going to have to demonstrate strong unit level returns. One of our clients, Value Place, did that by altering several aspects of the basic model. It aggressively redefined the traditional hotel model by squeezing every penny it could out of both investment and operating expenses. Value Place combined a low-cost, extended-stay model with reduced staffing to increase occupancy and simultaneously decrease operating expenses.
Deliver What Owners Want
It may be a seller’s market in the world of franchising, but there is still heated competition for the best franchisees. Dorraine Lallani, senior vice president, Jones Lang LaSalle Hotels, Select Service Division, and Al Calhoun, managing director, Jones Lang LaSalle Hotels Select Service Division, discuss what it will take to protect and grow franchise partners
HOTELS: Is it really a seller’s market?
Calhoun: It has been a seller’s market for many of the best franchisors and will get better as the development pipelines continue grow. I’m doubtful stronger brands have to give up much when negotiating deals with prospective franchisees. Their brands are in such great demand. The lesser quality brands still have a struggle to increase their brand distribution and, therefore, will be more willing to give more concessions.
HOTELS: What brands have an edge?
Calhoun: Brands that are well-established but continue to stay fresh. According to Jones Lang LaSalle Hotels’ recent U.S. Select Service Hotel Investor Study, investors identified Hampton Inn, Courtyard by Marriott, Hilton Garden Inn and Holiday Inn Express as the top brands they target for acquisition or development. These brands are favored because of the strength of their reservation systems, brand recognition and frequent guest programs, as well as a ‘cleaner’ exit strategy, indicative of a larger buy audience, both public and private.
Lallani: Owners recognize the importance guests place on strong frequent stay programs, so they choose brands that have a recognized frequent guest program with a large number of active members. They prefer brand by Hilton, IHG, Marriott and Starwood for just these reasons.
HOTELS: How eager are owners to embrace prototypes and new concepts?
Lallani: Owners will be willing to embrace new brands backed by ‘solid’ parents. I think owners also will be responsive to rejuvenated brands as long as the brand hasn’t been allowed to deteriorate to a level of no return. A rejuvenated brand has the advantage of having a known name and less of a growth curve.
HOTELS: Where do franchisors have room for improvement?
Lallani: Owners still think franchisors have to be more accountable for performance. They also need the ability to get of an agreement when the brand is not working. Good owners who keep up their assets and are current with brand standards also want to hold the brands accountable for dealing with those products that are not keeping up.
HOTELS: What about amenity creep?
Lallani: Owners are saying loud and clear that amenity creep is out of hand. As the costs of owning a hotel go up and up due to expectations in increased employee benefits, higher insurance and on and on, owners are saying, ‘Stop!’ Don’t keep adding to our costs with these amenities.
HOTELS: What are the biggest issues for owners?
Calhoun: Owners want to feel they are getting what they pay for from the brands. They expect a strong reservation system and support for their operating and marketing initiatives. They also feel that the brands are less willing to give them areas of protection. Even if they do, the area is very small and the franchisor may allow other franchisees to put in ‘sister’ brands. Other points of contention are the brands’ right of first refusal and capital reserve mandates.
Trend Report
Industy experts give their point-of-view on the latest trends surrounding hotel franchising:
“With the current economy, decreases in loans and the declining housing market, I think we will eventually see a surplus of upper tier hotels. Salaries have not kept pace with rising inflation and consumers, particularly families and seniors, are not going to pay US$250+ a night on a consistent basis for a hotel room. Leisure travelers aren’t the only ones feeling the pinch. In many instances, employees are required to share a room at an upper mid- to upper tier hotel or stay within the government per diem, which is US$100 per day. So, I am optimistic but cautious about the future growth of the lodging industry.” — Roger Bloss, Vantage Hospitality Group
“Franchisors and franchisees are going to have to be more visionary. I noticed companies and population leaving the Northeastern United States 20 years ago. Both business and the population are moving south—as they have been for some time. I’ve also been adding meeting space to limited-service properties, and did a lot business because of it. You can’t stagnate.”— John Q. Hammons, John Q. Hammons Hotels & Resorts
“As a younger generation travels, they will continue to push the envelope in regard to design and overall guest experience, and they will be willing to pay for it. The traditional hotel/guestroom of the past will need to be updated constantly. If not, it will continue to lose market share.” — Chip Ohlsson, Starwood Hotels & Resorts
“Occupancy will remain relatively flat in the economy lodging segment while rates increase approximately 3.5%.” — Dean Savas, Accor North America
“Supply is still catching up with demand across most market segments.” — Rajiv Trivedi, La Quinta Inns & Suites
“The biggest issue will be whether the upscale select service brands continue to push rates into the full service sector in certain markets.” — Jim Chu, Global Hyatt Corp.
“While there is more conversation across the industry about increasing pipelines, certainly in the full-service segment, supply growth would seem modest. Specifically, our review of our own data and discussions with our general managers give us little reason for concern about supply in urban locations and in the full service segment. For the limited-service segment, we’re less confident about supply. With the exception of a very few suburban locations, bottom line, we have a meaningful impact on our business from U.S. supply growth.” — Marriott International’s U.S. development team
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