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Hotels: A Franchising Mainstay For Capital-Rich Investors

Hotels: A Franchising Mainstay For Capital-Rich Investors

While certainly not approachable to every kind of entrepreneur, hotel franchising can be a great way to diversify a property portfolio.

While hotels have been around for centuries, the franchise industry only took hold of this hospitality-driven sector in the last three or so decades. Back in the 1980s, for example, the big hotel names would take on significant debt to purchase or develop their own branded locations.

A look at the industry today, however, reveals that roughly 80 per cent of hotels in the U.S. are franchised operations as opposed to independent entities; with the likes of Hilton, Marriott, and Choice Hotels now opting for more ‘asset lite’ models that see them take on a supportive consultancy role for their franchisees.

But why are hotel franchise networks continuing to expand, even amidst a pandemic that almost seems custom-built to target their revenue streams? And why would independent locations decide to partner with a national or international brand?

“A lot of the hotel franchises have been established for a number of years and not only have a robust network of trained professionals that will help the hotel operator to hire and train the right people, but they also have a lot of resources that an independent property will not have,” says Geraldine Guichardo, global head of research, hotels and hospitality group, at JLL, a provider of numerous real estate services.

“Particularly during COVID-19, having that backing really helps. During the pandemic, a lot of these brands launched sanitation programs where they partnered with major cleaning brands. The combination of those two entities really helped to build consumer confidence in staying in a hotel. An independent property would have to go and do all of that on their own.”

Help needed for hospitality

Before we go any further, it would be remiss to not cover the unavoidable impact that the ongoing pandemic has had on the hospitality and services industry – especially when it comes to hotels.

According to a report by McKinsey & Company, a specialist on travel, logistics, and infrastructure, U.S. hotel revenue per available room will be down by 20 per cent by 2023. This is due to factors such as exceptionally low occupancy rates, and in May 2020, it was recorded that occupancy was less than 15 per cent in luxury U.S. hotels and around 40 per cent for economy locations.

If you take care of your people, train them, and pay them well, that will reflect on the service that they give to the consumer”

Because of the volatile nature of the industry, hotel franchisors are becoming increasingly selective about who they take on as franchisees. The numerous responsibilities associated with running a 24-hour, 365-day operation make hotel franchising much more formidable than opening a new gym or cafe, and as such, only a certain kind of entrepreneur fits the bill.

“Not everyone can say they want to run a hotel and get a franchise from Marriott or Hilton,” explains Guichardo. “They require you to provide a resume with previous hotel experience. That includes experience in running the kind of hotel in the category that you want to develop; for example, if you want to run a JW Marriott, you need to have experience running a luxury product.”

Despite the asset lite developments that many big brands have taken in recent years, this cautious approach by the biggest brands is reflected in their franchising figures. HVS, a consulting firm for the hospitality industry, found that hotel brands are less willing to franchise their luxury properties (at only 8.6 per cent across Accor, Hilton, and Marriott), and instead trust franchisees with midscale (62.6 per cent) and economy (47 per cent) locations.

“To be able to operate something that never shuts down and is consistently adhering to brand standards takes a lot of effort and experience and work,” says Guichardo. “I think it’s quite a bit more difficult to break into the hotel franchise world compared to opening a restaurant or gym, and franchise agreements in this industry can last 10 to 15 years; it’s a long time to live up to expectations and pay fees for anybody unprepared.”

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