GROWTH

International brands find

franchise footing
Economics and dovolopmont trends mako
EMEA markots a primo targot for franciiisors
BY BRUCE SERLEN

CONTRIBUTING EDITOR

he perceived wisdom holds that hotel franchising as practiced

in the U.S. hasn't really caught on in global markets. But the
prevalenceand successof 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
franchisingin the U.K. at leastis in

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"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
franchisingin the
U.K. at leastis in
very robust shape."
Duncan Berry
CEO
Choice Hotels Europe

very robust shape," said Berry, though he

didnote that "franchising has been less
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 changingwith many operators and
owners now reaping the benefits of the
franchise structure," Fitzgibbon said.
Berry cited two reasons for franchising's

12 IHIF Insider February 2014

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 obstacles

Europe 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.

HotelManagementnet

GROWTH

"Historically, the
model has been
restricted by a lack
of understanding
and confidence in
franchising."
Patrick Fitzgibbon
SVP of development
for Europe & Africa of
Hilton 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."

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.

"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.

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.

Many ofthe brand standards, he continued, made it difficult costwise for an owner to embrace franchising for an existing hotel as opposed

Segment matters

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.

Berry, 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."
Choice Clarion St. Albans, U.K.

16 IHIF Insider February 2014

Technology has transformed so many aspects of hotel operations in

Hoie/Managemenf. net

GROWTH

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 trends

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 otherwiseno 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 particulars
Asked to describe the structure of a typical deal. Berry noted that Choice
charges a combinedfianchiseand 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 10year agreements and pay an initial launch fee. "After that, hotels are charged

Areas 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,

"With a hotel's
reputation online
becoming more
and more valuable,
customers no
longer view brands
as a guarantee of
quality."

Robert Hornman
managing director of
Worldhotels
;

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

brandsfor whatever reasonare 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

London stats
Chain 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 RePAR 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.

HotelManagementnet

February 2014 IHIF Insider 17

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