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International brands findfranchise footing

Economics and dovolopmont trends makoEMEA markots a primo targot for franciiisors

BY BRUCE SERLEN CONTRIBUTING EDITOR

The perceived wisdom holds that hotel franchising as practiced

in the U.S. hasn't really caught on in global markets. But the

prevalence—and success—of international franchising has

shown a marked increase in the past few years as major hotel

companies have continued their push into these locations, lead

by progress in Europe, the Middle East and Africa.

And as these companies' franchise brands have established a sizable

foothold in these markets, owners' and developers' resistance has started

to fade. They've become more receptive to the economics and rewards of

the franchise model, leading to still more franchising of new-construction

hotels and conversions.

As CEO of Ghoice Hotels Europe, a subsidiary of major U.S. franchisor

Ghoice Hotels International, Duncan Berry has had an up-close and

personal view of how the business model

works. He used the U.K. as an example.

"With some 930 franchised brands

available in the U.K., generating an

Industry turnover of 13.7 billion pounds

annually, I think this proves that

franchising—in the U.K. at least—is in

á"fc^ ^ ^ ^ ^ H very robust shape," said Berry, though he

3 ^^^^^^Ê didnote that "franchising has been less

f-, ̂ ^ H m prevalent in the hotel sector until tecently."

At Hilton Worldwide, more than

25 percent of the company's portfolio in

Europe by room number is now franchised,

according to Patrick Fitzgibbon, SVP

of development for Europe & Africa.

"Historically, the model has been restricted

by a lack of understanding and confidence

in franchising. But the inaccurate

perception that franchise agreements are

restrictive and not mutually profitable

is changing—with many operators and

owners now reaping the benefits of the

franchise structure," Fitzgibbon said.

Berry cited two reasons for franchising's

"With some 930

franchised brands

available in the

U.K., generating an

industry turnover of

13.7 billion pounds

annually, I think

this proves that

franchising—in the

U.K. at least—is in

very robust shape."

Duncan BerryCEO

Choice Hotels Europe

Clarion Hotel Carrickfergus outside Belfast, Northern Ireland

current spike in popularity. First has been the appeal of a brand affiliation.

"Both in the U.K. and Europe, we've witnessed growth in the number of

itidependent hotel operators who want to operate under a brand," he said.

Second is the current lending environment. "All the major banks are

supportive of the franchise model and actively promote themselves to

support lending within the lodging sector," he said.

Brand affiliation is important, and the more international, the better,

Fitzgibbon noted. "As global travel has become more accessible, European

owners and operators have learned that international brands offer a wide,

loyal customer base and can help a hotel gain recognition in a competitive

market," he said.

European opportunities and obstaclesEurope is ripe for further strides, according to Berry. "We view Europe as

probably our single biggest opportunity outside the U.S., considering the

tegion's older hotel stock and the breadth of those independent owners

looking for branded opporttmides," he said.

Robert Hornman, managing director of Worldhotels, offered a

contrasdng view of why the growth of franchising in Europe has lagged

behind the U.S. While Worldhotels, a group of roughly 500 independent

upscale hotels, isn't a traditional franchisor, its hotels operate under a

licensing agreement.

12 IHIF Insider February 2014 HotelManagementnet

GROWTH

"Historically, the

model has been

restricted by a lack

of understanding

and confidence in

franchising."

Patrick FitzgibbonSVP of development

for Europe & Africa ofHilton Worldwide

Hilton Garden Inn Rzeszow, Poland

"For one, the European market has been much more fragmented than

the U.S., with regulations that govern franchising differing from country

to country," Hornman said. "In addition, there's a longstanding tradition

of hotels being family-owned and operated in Europe, which has made

these owners/operators less dependent on the services of third-parties like a

franchisor."

Invariably, cost factors have come into play, considering that many

hotel owners/operators don't consider services included in the franchise

agreement (and for which they pick up the tab) to be necessary.

"Traditional long-term franchise agreements come with brand

standards that often require a significant investment on the owner's part

that hasn't necessarily contributed to the ROI," Hornman said.

Many ofthe brand standards, he continued, made it difficult cost-

wise for an owner to embrace franchising for an existing hotel as opposed

Choice Clarion St. Albans, U.K.

to a new-build. The upshot of these various reservations: "Franchisors

have become more flexible in their requirements, especially in the upscale

industry segment," he said.

Berry, Fitzgibbon and Hornman are all scheduled to appear on

the "Franchise Solutions for Growth" panel at the International Hotel

Investment Fortim in Berlin.

Berry estimated that approximately 80 percent of Choice's European

franchisees are single-unit owners. However, the percentage of multi-unit

owners is growing, a reflection ofthe success these owners are having, as

well as the sense, going into 2014, that the current rebound still has legs.

"Multiunit owners also tend to assemble portfolios made up of multiple

brands," he said.

Segment mattersBerry, Fitzgibbon and Hornman agreed that the most likely candidates for

franchising have been in the economy and select-service indtistry tiers.

"Eocused-service hotels tend to be smaller properties that typically

require a smaller initial investment. Financing is also easier to access

generally, which appeals to many franchisees. Then too, operationally these

brands are simpler to manage, which suits many owners," Fitzgibbon said.

Also, select-service independent operators may lack experience running

a hotel, lack the necessary operating skills or may simply want access to the

brand's distribtition channels. Berry added. That's where the power ofthe

franchised brand can come in. "They recognize the value of being able to

partner with a brand that will provide different kinds of support," he said.

When it comes to full-service Hilton properties operating under

franchise agreements, Fitzgibbon said these deals were typically reserved

for franchisees that are "very experienced at operating complex, large-scale

hotels."

Technology has transformed so many aspects of hotel operations in

16 IHIF Insider February 2014 Hoie/Managemenf. net

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Hilton Garden Inn Krasnodar, Russia

recent years that independent operators can feel overwhelmed in trying

to duplicate that functionality on their own. The large franchisors, on

the other hand, have made these investments. Berry described them as

"immense and probably beyond the capability of many independent

operators." "It's our way of ensuring that our brands get to be seen and

heard," he said.

Hornman argued that, when it comes to upscale hotels, brands—

whether franchise or otherwise—no longer carry the inherent advantage

they once did. "In the upscale segment, customers are increasingly looking

for unique experiences. With a hotel's reputation online becoming more

and more valuable, customers no longer view brands as a guarantee of

quality," Hornman said.

Deal particularsAsked to describe the structure of a typical deal. Berry noted that Choice

charges a combined fianchise and marketing fee that ramps up during

the first couple of years of the agreement, with the ceiling generally

being reached in the third year. Agreements tend to be for 20 years.

"We only apply the fee to the hotel's rooms revenue. In addition, there are

reservation costs that are determined by the channel used, although bookings

made via Choice's branded websites don't incur a fee," he said.

By contrast, the owners of hotels in the Worldhotels network sign 10-

year agreements and pay an initial launch fee. "After that, hotels are charged

London statsChain hotels have been performing well in Europe, if London

is any example. According to the Hot Stats U.K. Chain Hotels

Market Review, chain hotels in London last October

enjoyed Re«PAR growth of 6 pereent over the same

period a year earlier. The profit picture was even better

with chaih hotel profits for the monfh up 8.5 percent,

compared to October 2012. Occupancy for the month

was a healthy 87.2 percent.

a license fee consisting of a percentage of

total net room revenue, along with a flat

per transaction fee for bookings delivered

through the Worldhotels system," Hornman

said. There are no royalty charges or fixed

annual fees.

Master franchising trendsAreas ot excltisivity, long an issue in U.S.

franchising, is less of an issue in Europe

today. "Few new franchise agreements

incorporate a large sphere of exclusivity.

There are more and more circumstances

where different Hilton brands can co-exist in

a single town or city," Fitzgibbon said.

Berry's optimism about the future

of franchising in EMEA extends to the

awarding of master franchise agreements.

Under such agreements, the franchisor

grants the master franchisee the right to

build and operate a number of its branded ;

hotels within a defined territory. Typically,

they're awarded in developing markets or markets where the franchisor's

brands—for whatever reason—are underrepresented. "Our focus is

currently on expanding in the UK, France and Germany through direct

franchising, but we also have master franchise agreements in place in

markets such as Ireland and Scandinavia. It's a market-by-market decision,"

Berry said.

For its part, Hilton Worldwide doesn't enter into master franchise

arrangements. "This allows us to be nimble enough to respond to growth

opportunities and introduce new hotels that best suit the local and regional

market," Fitzgibbon said.

The master agreement question is less relevant to Hornman, given

Worldhotels' upscale positioning. He cited one market, however, where

such a "partnership" might work. But it's far from EMEA. It's an

underserved market where all sorts of hotel development is taking place and

at a torrid pace: China.

hm@questex.com

"With a hotel's

reputation online

becoming more

and more valuable,

customers no

longer view brands

as a guarantee of

quality."

Robert Hornmanmanaging director of

Worldhotels

HotelManagementnet February 2014 IHIF Insider 17

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