Why more hotels are owned by franchisees – Hotel-Online
JLL | February 04, 2020
February 04, 2020
The last decade has seen a continuous change in hotel ownership.
In 2010, approximately 70% of branded hotels were franchised establishments. In 2019, that figure rose to around 80%.
The big hotel brands have led the charge. Marriott International, Hilton Worldwide, Wyndham Hotels & Resorts, Choice Hotels International and Intercontinental Hotels Group – the top 5 franchisors by total number of rooms in the United States – collectively represent 82% of total franchise rooms, according to STR and JLL Research.
These companies continue to move away from ownership of the real estate portion of properties and toward a model where they are gaining momentum through franchise agreements. This allows them to enjoy a constant revenue stream while being in expansion mode, explains Geraldine Guichardo, Global Head of Research, Hotels & Hospitality Group, JLL.
â€œThe growth of the franchise model is facilitated by the fact that Wall Street rewards parent hotel companies that have a more lean strategy, because they generally have strong balance sheets because they have less leverage,â€ explains Guichardo. “These companies no longer need to go into debt to buy hotels, which is rewarded with higher stock prices.”
Change of ownership
The high concentration of franchised hotels is a change from the predominant state of the industry in the 1980s, when large hotel companies took on large debts to buy or develop hotels, Guichardo explains. When they subsequently sold these assets, they would come to an agreement with the new owners to allow them to continue to leverage the brand.
However, the economic recession of the 1990s brought about a change. Hotel companies were unable to sell properties in an illiquid market. Companies that have switched to a lighter asset strategy have found themselves in a stronger position.
â€œHaving little or no real estate debt on their books meant that as franchisors, companies like Marriott International could more easily expand into multiple markets, expanding their reach without necessarily making significant capital expenditures,â€ Guichardo explains. â€œThis in turn allowed brands to become more ubiquitous and recognizable. “
It also allowed franchisors to focus on their strengths.
â€œThe growth of their franchise business has allowed large hotel companies to focus on operating hotels, which they are inherently good at and what their business was first created for,â€ Guichardo explains.
Benefits for brands and franchisees
Since hotel development is a capital intensive business, flagship brands are more eager than ever to name an existing property or seek investment from outside companies to develop properties.
In doing so, they receive a percentage of the franchisee’s income and are able to avoid high upfront costs. They are also able to take advantage of their partners’ familiarity with local market dynamics, which is especially important when a brand expands its geographic footprint to new regions, Guichardo explains.
Franchisees also help brands adapt to changing traveler preferences. For example, hotel guests are increasingly looking for unique local experiences. A Hilton Garden Inn in New York City recently introduced a trendy rooftop bar, The Attic, a big plus for a select-service hotel known for its limited food and drink options beyond take-out kiosks.
â€œMost of the selected service hotels have simple amenities,â€ Guichardo explains. â€œBut we’ve started to see the characteristics of a selected service product evolve in markets where it makes sense – Austin, Nashville, New York. These are cities where a franchisee may need to differentiate the product in the face of competition from independent brands that are not affiliated with any major hotel group.
There are also benefits for franchisees, who can own a property with a recognized brand, receive key money, and gain access to global reservation systems and loyalty programs.
â€œFranchisors also offer programs to new owners to learn the business of operating a hotel,â€ explains Guichardo. â€œThere are many great reasons to own a franchise, including the support of a huge parent company, leadership training and technical support. It brings a lot of value to the table.