Top Hotel Franchising Issues and Post COVID-19 Reality

Hotel ownership is a rewarding but often challenging road. Recent trends and cost structures deemed by overarching brands have made operations expensive and left franchisees vulnerable.

These hotel franchising issues are particularly present during times of crisis like current COVID-19 events.

“Many people don’t know this, but most hotels are independently owned and operated. We’re just small business owners, just franchisees, of these big multibillion-dollar hotel corporations,” said Sawan Patel in a post on LinkedIn where he called on hotel brands to provide immediate financial relief to franchisees.

With occupancy rates dropping and cancelations increasing, there is little to no revenue coming in for these small business owners. Operating expenses, franchise royalties, mortgages, payroll, and other costs continue to accumulate.

So, we ask, what are the major hotel franchising issues and cost vulnerabilities, and how should brands step in to help amidst the new COVID-19 reality?

Burdens from Hotel Property Improvement Plans

Property improvement plans (PIP) are a required element of branded hotel ownership. When corporations undergo ‘brand refreshes,’ the responsibility falls on franchisees to bring their properties in compliance with new standards.

These updates can entail extensive and expensive renovations. Owners must handle everything from revamped marketing materials, websites, and signage to new room fixtures, structural alterations, and buildouts.

A growing number of hotel owners feel that PIPs are firmly in the interests of the chains and not their franchisees. Owners have unprecedented capital expenditures for brand upgrades that often feel nominal or unnecessary.

Franchisees are often left weak due to the increased cost of operations. Thomas Magnuson, Co-founder & CEO of Magnuson Hotels, states that big brands such as Choice, Holiday Inn, Wyndham, and Best Western, often use PIPs to push hoteliers out of a market to benefit corporate expansion strategies.

Regardless of opinions, franchisees have no choice. Failing to stay up-to-date with even the smallest aspect of a PIP can result in hefty fines, or extreme cases, termination as a franchisee altogether.

Owners require a long-term solution that offers affordable access to the tools necessary to maintain and promote the larger hotel brand.

Brand Response to COVID-19 Hotel Franchisees Issues

Some brands have rolled out relief initiatives for franchisees, helping to shoulder the burden during current economic conditions caused by COVID-19 disruptions. But the majority of hotel owners think the steps taken aren’t adequate.

Fair Franchising Initiative (FFI) surveyed hotel owners, and an overwhelming number of franchisees give shallow marks to the relief efforts from their brand partners, expect for Best Western owners.

Survey participant and hotelier Sagar Shah shared, “We are grateful to our brand partners at Best Western for demonstrating exemplary leadership with the utmost compassion towards their membership during this crisis. While most franchisors were waiting for their peers to take action, CEO David Kong and the executive leadership team took unprecedented steps including reducing most member fees by half, taking a 50% compensation cut, and pledging their corporate sponsored 401K plans to the company as it also navigates through uncharted territory.”

Shah continues, “While we face dark times ahead as an industry, Best Western has differentiated itself as a class-act, torchbearer organization whose interests are clearly aligned with those of their hotel owners. Their decisive crisis management steps and consideration for the welfare of small business owners will not be forgotten when we expand our portfolio in the years to come.”

Lodging Magazine reports that other hotel brands have responded to the COVID-19 pandemic in various ways—from temporarily suspending brand standards to cutting franchise fees.

While these steps temporarily lessen hotel franchising issues, the brands that go above and beyond to help their owners during these difficult times will see long-term benefits and success.

Oversaturation of Hotel Brands

Overbuilding and the explosion of new hotel brands have made the industry more vulnerable. Companies are going after every segment, launching multiple chains for luxury, boutique, select service, and budget/economy. Portfolios often include various brands in the same category, with little to no differentiation.

  • Marriot has 32 brands
  • Hilton has 18 brands
  • IHG has 12 brands
  • Choice Hotels has 13 brands
  • Hyatt has 20 brands

Angela Roper’s 2017 book, “Vertical Disintegration in the Corporate Hotel Industry: The End of Business as Usual,” goes in-depth on the issue. And the New York Times recently reported on the “bewildering array of choices” of hotel options now available.

Most of the brands are linked together by a reward club or loyalty program that tries to lock in travelers to one portfolio. But the benefits and perks aren’t enough to compete with the price war caused by hotel brand proliferation.

Online booking has created a race for low price options, and consumers often don’t care where they stay, as long as the chain fits their needs.

Intense competition is now affecting the industry, commoditizing hotels. Efforts are needed to create a more sustainable model for hoteliers.

Anil Patel, hotelier in New Jersey and FFI Chairman, states that “More brands mean less cashflow for hoteliers to spend on core guest needs and upgrades and subsequently reduced quality of standards for the hotel guests.”

Consolidating the number of brands would be beneficial to franchisees who are paying for brand recognition. With no limit to the number of hotel brand variations, the existing franchise business becomes diluted.

Lower the Cost of Hotel Booking

To effectively promote hotel room availability and expand reach, owners must connect to a multitude of online systems. Each of which takes a percentage or charge a fee for bookings.

GDS and OTA fees are the most prolific. They include hefty setup fees and investments in technology systems, monthly connection fees, pass-through charges, and reservation commissions.

That’s on top of the fees paid to the hotel brand itself. Franchisees pay upwards of 11 percent of their rooms’ revenue through royalty fees, sales fees, marketing fees, loyalty fees, miscellaneous fees, and initial startup fees.

A Global Distribution System (GDS) is a worldwide computer network that passes inventory and rates for hotels, flights, and car rentals to travel agents and travel sites, allowing for automated transactions and reservations. Franchisees pay both monthly connection and contract fees and either flat or percentage-based fees for each booking. Not to mention, commission to travel agents.

Online travel agencies (OTAs) like Booking.com and Expedia charge commissions. The OTAs receive income (generally between 10 percent and 30 percent) on bookings made via their sites. On top of the OTA commission charges, hotel brands charge hotel connection fees since they control the channel.

While these systems are valuable channels for sales, the current cost structures are not sustainable for the hotel industry. Owners will suffer in the future unless the fee model changes. A solution is necessary to lessen hotel franchising issues.

Self-Commission Fees from Hotel Brands Continue to Climb

An alarming trend lies in the commission fees charged by brands on franchise owners for business generated on a brand’s website.

Recently, Hotels brands have introduced new commissions that are charged on the bookings generated via their own channels. These commissions are on top of the marketing fees charged by the brands on regular franchise invoices.

These new costs have burdened hoteliers tremendously by increasing expenditures without meaningful increase, or sometimes no increase, in revenue.

“One of the key reasons we want to have franchise branded hotel is so that we don’t have to pay OTA commissions,” explains Rajesh Patel hotel owner and FFI member. “If brands act like OTA they are conveying that the model is not working.”

Brands are trending towards acting like travel agents, and the model is becoming too expensive for hotel franchisees to maintain.

Lessening Hotel Franchising Issues During Times of Peril

While franchisees can expect some aid from the CARE Act and Economic Stabilization emergency loans, hotel franchising issues are still dire.

Brands must rethink their business models to help owners remain sustainable during and after these trying times.

The burden of delivery cannot remain on hotel franchisees alone. As many independent franchise hotel owners struggle, brands will need to step in and offer new forms of aid.

David Eisen of Hotel Management says it well, “…a more equitable relationship can and should be reached that benefits both sides because one thing is clear: Brands don’t get built without developers and developers can’t build more hotels without brands.”

The government has stepped up to help small businesses, and hotel brands need to rise to the challenge of helping the owners who have built their brands.

The post-COVID-19 world for the hospitality industry will look much different than before. The franchising model will have to change to adapt to a new reality.

Fair Franchising Initiative (FFI) is an independent, advocacy group of franchised hotel owners, highlighting the most crucial issues of our time – sustainable hotel franchising, profitability growth, and well-being of hospitality ecosystem.

See our membership benefits and levels here.