What does Fair Franchising look like in 2023?
Last April, I met with several second-generation Asian American hotel owners in Baltimore. This generation is becoming the voice that represents ownership of 60% of USA hotels, employs 4.2 million US workers, and is responsible for 1.7% of the USA GDP.
A resounding theme in our conversation was that today’s generation of hotel owners cannot be profitable under the current US hotel franchise structure of the largest corporations. Hotels operating today cannot survive the business model of top corporate hotel franchise companies that set US hotel franchise pricing, requirements, long term agreements, and mandatory purchasing programs in the 1990s.
The current economic conditions do not refer exclusively to the present post-Covid era, but to 20+ years of economic battering starting with 9/11, 2008, and 2020. Other crucial factors at play today also include rising costs in energy, property insurance, labour, and the shortage of willing workers.
So, what choice do hotel owners have that can safeguard their business in the long term?
A couple of decades ago, the choices were limited. Either franchise and rename their hotel with a publicly traded brand or go at it alone as an independent. The former entails a long-term corporate contract with high fees of up to 15-20% of total rooms revenues and standardization requirements which can cost up to $20,000 per room and include a complete personality change. The second option would have meant that in addition to the hundreds of operational decisions required everyday, the owner would have to independently manage and market the hotel, via traditional platforms such as billboards, print advertising and directly manage multiple online booking channels.
But today there is a third option, that allows the owner to successfully compete without strong corporate forces taking advantage and exerting control. There is a choice for hotel owners to succeed with the right partner who will work with them to navigate storms and find opportunities to grow through them.
The right partner, or a franchise operator in this case, is someone who can think like an owner, act like a consultant, and offer all the benefits of a large franchise. If you are an individual hotel owner in 2023, you want to work with a partner who is experienced in managing operations through black swan events, can build resilience into the business and be ‘human’ through it all. Most of all you want to be acutely aware of the benefits of this partnership and not rely on the ‘perceived value’ of a big brand.
Post pandemic, global business travel has been reset to a new form of business travel called ‘essential business travel.’ It represents sectors of professionals who are always required to travel, such as nurses, truckers, construction and energy workers, educators, and others. Hotel owners need help accessing and contracting these segments, which are more sustainable and lower cost than OTAs such as Expedia, booking.com, etc.
Hotel owners across the country are now rising to these needs, and against some of the big brand franchises, that do not meet the evolving needs of the industry. This movement is a plea not for help or handouts, but to be treated fairly and with respect. It has come to be known as the movement for ‘Fair Franchising’ and has been decades in the making.
Here are some of the key features for the big switch towards Fair Franchising:
- No PIPs (property improvement programs): No boxed standardizations: Hotel owners are demanding flexibility to hold off capex given the current inflation and focus on doing more with less. Big franchisors almost always have mandatory PIPs or renovations that do not accommodate this factor, and steep penalty fees for not meeting their timelines. Franchise owners should be able to trust the hotel owners to know what is right for the property and guest profile they cater to.
- No long-term contracting: Owners today want to move away from rigid 10–20-year contracts that leave them with little room to pivot or innovate at the pace at which guest needs are evolving. Longer fee lock-in contracts do not allow for repositioning the hotel that might be needed to attract more local, non-leisure guest profile to build a 52-week occupancy pipeline.
- No procurement mandates: Owners need to move away from franchise contracts with mandatory procurement networks for hotel furnishings, suppliers and vendors that usually charge substantially more than the market price in the name of ‘standardization.’ An example would be a hotel owner in Texas being forced to buy specific TV sets from a mandatory franchise supplier at close to double the cost of purchasing the same model from a local store. The Texan hotel owner would risk default on a multiple year franchise agreement along with crippling liquidated damage fees if he purchased the same TVs locally at nearly 50% savings.
- Fair fee structure: Asian American Hotel Owners, say that paying a big brand franchise of up to 20% of the room sales just isn’t sustainable in today’s economy. They are seeking a franchise option with all the benefits of a corporate but with a more affordable, fairer, and transparent fee structure.
This big switch to a fairer industry has been well underway for some time now, but 2020-23 accelerated the execution, with multiple class action lawsuits filed against franchisors by hotel owners, and the introduction of franchise reform legislation filed in New Jersey.
But it won’t be easy and without a fight. Industry leaders Marriott and Choice Hotels have both dropped membership and support of the Asian American Hotel Owners Association, who own more than 60% of total inventory in the country.
This year onwards, fair franchising isn’t a different approach towards franchising, it’s the only way to franchise.
Hotel owners understand that shared success is the only way to engineer not just survival but also profitability through turbulent times. Having a partner that is experienced, flexible and most importantly fair, can be the competitive edge that one hotel has over another.
"Fairness" has been used as a placeholder in investor relations presentations or keynote speeches at industry events by corporate franchise brands. 2023 demands that fairness becomes a way of doing business.
So, the question that we should be asking is, why not fair franchising? Why don’t large corporate hotel chains champion the cause of hotel owners to succeed in local markets with fair franchising?
Chief Executive Officer
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