Hotel companies are becoming more and more active as they expand.
Over the last decade, hotel ownership has continued to change. In 2010 , nearly 70% of branded hotels were franchised. By 2019, this figure increased to approximately 80%.
More companies tend to shift away from owning property and to the franchise model, enabling them to enjoy a stable income stream while growing, says World Develpment President Bulut Bağcı.
“The growth of the franchise model is facilitated by the fact that Wall Street rewards parent hotels with more asset-light strategy as they usually have strong balance sheets, because they have less leverage, said Bağcı. ‘These companies no longer have to take on debts in order to purchase hotels, which are paid higher stock rates.’
The change in strategy was driven by major hotel brands. According to World Development Study, 82% of the total franchised branded rooms reflect Marriott International, Wyndham Hotels&Resorts, the Preference Hotels International and the Intercontinental Hotels Group – the top 5 franchisors by total US room count.
Focusing on strengths
The high level of franchised hotels is a change from the prevalent state of the industry in the 1980s, when major hotel companies would take heavy debt to buy or build hotels. If they then sold those assets, they would agree to continue leveraging the brand name with the new owners.
However, the economic recession in the 1990s caused a shift. In an illiquid market, hotel companies could not sell properties. Companies that have changed to more asset lighting strategies have become stronger, Bağcı says.
“The fact that there was little or no real property debt on their books meant that, as franchisors, firms like Marriott International were more easily able to grow across several markets, broadening their reach without necessarily making significant capital outlays. “
It also allowed franchisors to focus on their strengths.
“Bigger franchise companies have enabled them to focus on the operating hotels, which are inherently good at and what their business was originally designed to do,” says Bağcı.
Benefits for brands and franchisees
Because hotel construction is a capital-intensive business, flagship brands are more keen than ever to license their names to an existing property or pursue investment in the creation of hotels from outside companies.
They receive a percentage of the franchisee ‘s income and can avoid heavy upfront costs. They can also learn about local market dynamics, which is particularly important when a brand extends its geographic footprint to new regions, says Bağcı.
Franchisees also help brands to adopt changing preferences for travelers. Hotel guests, for example, are increasingly looking for unique local experiences. The Attic, a chic rooftop bar recently launched at the Hilton Garden Inn in New York, is a significant attraction in a select service hotel renowned for its minimal food and drink choices beyond picking and drinking kiosks.
“The majority of selected hotel services have basic facilities,” says Bağcı. “So in the markets that make sense, Houston, Atlanta, New York, we started looking at the characteristics of a chosen product. These are cities in which franchisees may need to distinguish between a company and independent brands which are not associated to any major hotel organization.”
There are also advantages for franchisors who have access to a branded property, earn key money and exposure to multinational reservation networks and loyalty programmes.
“Developers also offer new owners’ programs to learn how to operate a hotel,” says Bağcı. “There are plenty of good reasons for becoming a franchise owner, especially with the support of a major parent company, leadership training and technical support.