While signs continue to point to better days in the hospitality industry, the franchising industry seems to be slowing to take a look at itself.
When the chief executive officer of Bedrock Partners, a Dallas-based hotel investment acquisition group, recently sought to interview a trio of hotel franchisors for a new Boston property, he received a surprise.
"Typically, we try to look at three different franchises before selecting the brand, one of which is Courtyard by Marriott," says CEO Paul Novak. "But we discovered that Courtyard was restricted in the Boston area. We couldn't even consider them. We might not have even chosen Courtyard, but we at least wanted to talk with them."
Novak says he was caught off-guard, but adds that such problems probably will become more common in the years ahead. "As our company grows, we are discovering we are entering mature metropolitan areas that already have major brands, so we're finding some franchises are restricted from talking with us," he continues.
A franchise such as Courtyard saying "no" to a new property? Welcome to the evolving world of hotel branding. After years of continued growth, the industry is confronted by a number of new issues, not the least of which is how many brands from a single franchise company can be approved in a particular area. While contemplating that potentially explosive issue, the industry is also faced with problems ranging from a drop in brand conversions, the dilemma of what to do with hotels that are not adhering to the franchisor's standards, and increasing confusion among consumers over which hotels are operated by what companies.
"It's becoming interesting," says Judy Sarch of Coopers & Lybrand in New York. "The industry is certainly changing. We expect to see some more transformation in the years ahead."
The good news is that the hospitality industry, which was in the doldrums only four years ago, is eagerly anticipating better days ahead. Analysts note that in 1994, some 42,000 hotel rooms were built nationally (not counting Las Vegas) compared to 23,000 the previous year. An estimated 50,000 rooms are expected to be completed this year with some 60,000 forecast for 1996. While the statistics are definitely an improvement, they pale in comparison to the 120,000 rooms finished in 1988 -- a record. At the same time, hotel occupancy is up. In 1994 if was 65.2%, the highest in 14 years. That is in stark contrast to the wake-up call hoteliers received in 1991 when, thanks to the Gulf War and industry overbuilding, a mere 60.9% of the nation's hotel rooms had guests. 1991 was, in fact, the lowest occupancy ever, analysts point out. The industry is now roaring back. Occupancy is expected to be 67% this year and will grow by another two percentage points in 1996.
On the other hand, "The rate of conversions from independent to brand is slowing," explains Bjorn Hanson, managing director of PaineWebber's lodging division in New York. "Yet roughly 80% of the new hotels are going for the brand, probably because it helps with financing."
Don Wise, first vice president of Lodging and Hospitality Services for CB Commercial Real Estate Group in Anaheim, Calif., says he expects 1995 will see less franchising than in 1994 or 1993 for a variety of reasons. "You've got a lot of properties that have made it through the recession," he continues. "Occupancy is now up, and 1996 looks like a boom year. So some owners are thinking, `why would I give a company x% of my revenues? I'll just stick it out.' Is there continued growth for franchise companies? I'd have to say it's a qualified maybe."
Already, a more managed franchise growth pattern, at a less hectic pace, is emerging at some companies. Brian Murcott, vice president, membership development and quality assurance for Best Western International, notes that Best Western's growth purposely slowed last year when it accepted 117 new applications in North America for membership in 1994, including 20 conversions from other brands, 57 new construction projects and 49 first time affiliations of independent brands. Best Western deliberately slowed its pace with members while it developed a new impact study policy early this year. "We were accessing our plans," he explains.
Companies show aggressive philosophies
At the same time, a number of other franchisors are plunging ahead aggressively. During 1994, Choice Hotels -- one of the world's largest international franchisors with Comfort Inns and Suites, Sleep Inns, Quality Inns, Hotels and Suites, Clarion Hotels, Suites, Resorts and Carriage House Inns, Rodeway Inns, Econo Lodge and Friendship Inns -- opened 345 new properties with 30,521 rooms, equating to one new hotel every 25 hours, the fastest growth rate of any hotel chain in the world.
Wyndham Hotels and Resorts continues its remarkable growth in all product categories, adding Wyndham Luxury Hotels, Wyndham Garden Hotels and Wyndham Resorts in key markets." 1994 was the best year ever," reports James D. Carreker, president and CEO of the Dallas-based chain. "Across the board we added 19 properties in 1994. Wyndham now has more than 60 upscale hotels and resorts in the United States, Bermuda and the Caribbean."
Ramada Franchise Systems Inc., a division of Parsippany, N.J.-based Hospitality Franchise Systems Inc., recently announced plans for restructuring. It will convert 150 of its properties into Ramada Plaza Hotels for the corporate traveler, upgrade its quality assurance requirements and simplify its tier structure to three distinct products.
With the expansion of the Plaza Hotel tier, the chain's Hotel and Inn tier designations will be merged. By the end of 1995, all Ramada hotels will fall into one of three categories: Ramada Limiteds, Ramada Inns or Ramada Plaza Hotels. More than 80 Ramada Hotels and Inns are expected to upgrade to Ramada Plaza Hotels by the end of the year; already more than 50 potential Ramada Plaza Hotels have committed to the early upgrade option. Those Ramada properties with lower quality assurance scores will be asked to upgrade or leave the system when Ramada raises its quality assurance standards on Jan. 1, 1996.
"Ramada is now in the vanguard of the sweeping improvements in our industry," says Ramada Franchise Systems president and COO Steven J. Belmonte. "Many things are possible now that the industry slump is over and money has been freed up for renovations. It's time for every chain to do what we're doing."
Reportedly the world's single largest hotel brand, Holiday Inn Worldwide, owned by Bass PLC, also is carrying out a new branding strategy in the worldwide market. Holiday Inn currently operates or franchises more than 1,900 hotels and 360,000 guest rooms in more than 60 countries and territories, and plans to reach its goal of 3,000 hotels worldwide by 1998.
In America, Holiday Inn is launching a quality and customer service program for modernization and greater consistency in Holiday Inn Hotels; establishing the up-market Crowne Plaza as a separate brand; introducing two new Holiday Inn brands: Holiday Inn Select hotels, which is geared toward business travelers, and Holiday Inn Hotel & Suites; and modifying food and beverage programs for convenience--and profitability.
Holiday Inn brands in the Americas now include: Holiday Inn hotels, Holiday Inn Select, Holiday Inn Hotel & Suites, Holiday Inn Express and Holiday Inn SunSpree Resorts.
Marriott International's lodging group expects 1995 to be a banner year for franchise growth within its Courtyard, Fairfield Inn and Residence Inn hotel systems, and feels that franchisees have greatly accelerated the growth of Marriott hotels in the economy, moderate and extended-stay segments of the industry in the past four years.
"We feel very fortunate to have attracted franchisees who share our passion for quality and customer service and have an appetite for multi-unit development," says Todd Clist, executive vice president of Marriott Lodging.
More than 80% of the Courtyard, Fairfield Inn and Residence Inn hotels under development by franchisees are new prototype designs that were developed with input from Marriott's franchise partners. "Input from our franchisees has resulted in prototypes which have favorable development and operating economics as well as design flexibility for meeting local market demand and location requirements," states Daryl Nickel, senior vice president of Marriott Lodging Development.
"Right now, there is a huge amount of turmoil in the industry," says Best Western's Murcott. "Because of that, we think there are franchising opportunities. We expect to do a considerable amount of conversions in the year ahead, and don't see it slowing down. As of now, we have 2,020 Best Westerns in North America and 1,400 outside North America."
"We have over 100 Doubletree hotels now, says Gus Boss, senior vice president of franchising for Doubletree Hotels Corp., Phoenix, which merged last year with Guest Quarters. "We ended last year with occupancy over 71% at $83 per night."
Currently, Doubletree has three brands: Doubletree Guest Suites, which are converted Guest Quarters Suites; Doubletree Hotels, which are Doubletree's four-star properties; and Club Hotels by Doubletree, formerly Compri Hotels, which are the company's three-star entry.
In the past Doubletree has primarily been a management company, Boss says. "Currently we're 22% to 23% franchised, but we plan to grow to about one-third franchised," he adds. "Within five years we expect to grow to 300 hotels.
"We've got the former Weston at LAX, the Vista in Pittsburgh and the Embassy Suites in Manhattan," Boss says. "Signature properties like these will help drive the whole system."
Promus Hotels plans to continue its aggressive franchising efforts during the coming year for its three hotel brands, Hampton Inn, which includes Hampton Inn & Suites, Embassy Suites and Homewood Suites. Industry giant Hospitality Franchise Systems, up-and-coming Microtel Franchise and Development Corp., Holiday Inn Worldwide, Doubletree Hotels and others also report significant growth in the past year.
"Franchising is the best way for an individual hotel to dramatically increase business," notes Choice Hotels president Donald J. Landry. "It is a tough world out there and hotel owners are learning how important it is to have a partner."
"I think many are finding it is difficult to compete without a franchise of some sort," says Michael Conway, vice president of marketing for Winegardner & Hammons Inc., a Cincinnati-based hotel management firm.
Ray Schultz, president and CEO of Promus Hotels, adds that the number of limited-service hotels will continue to increase in the future because of the profit potential for this hotel segment. "Limited-service hotels cost less to build than full-service hotels and incur fewer add-on expenses, such as food and beverage facilities and service," he says. "These attributes, coupled with the hotels' popularity with business and leisure travelers, make them an attractive development prospect."
The benefits of franchising are obvious: a franchised hotel typically receives instant identity, recognition and image; franchises provide an immediate reservation or referral system and perform chainwide advertising and sales. In addition, it is often easier to secure mortgage financing on a nationally franchised property than on an independent property.
But there are drawbacks, say those in the industry. Franchisees must adhere to certain construction, design, operation and maintenance standards that require additional funding. There is a higher break-even level of sales. Because most franchise fees are based on gross rooms revenues, franchises have an incentive to require physical changes that result in higher average rates.
More importantly, hotel franchisees sometimes lose business in cases of "guilt by association." Since travelers have a tendency to judge an entire chain based on their experience at one brand, some sister properties could be adversely affected when standards at several brands in a chain's portfolio deteriorate.
Some issues prove explosive
Probably the most explosive issue today in the franchising world is encroachment, oftentimes referred to as "hidden competition." Because most franchisors are loathe to grant exclusive territories, a company may franchise a competing brand property in the same area. For example, Choice theoretically could put a Comfort Inn next to a Clarion Hotel down the street from an Econo Lodge. By doing this, some affected franchisees say, they reduce the value of the franchise to the original franchisee, without any commensurate reduction in fees. Franchise companies with multiple brands say such expansion is necessary, particularly in today's highly competitive hospitality environment. Unless they continue to grow, they won't achieve the success they would like.
"Both sides have very good points," explains Randy Smith of Gallatin, Tenn.-based Smith Travel Research. "The man with the property says he has a contract and expects some consideration. At the same time, franchisors say that a new hotel is going to be built, and it might as well be franchised by them. There is also the argument that if the franchisor doesn't put its name on new hotels, it will have nothing but older properties paying franchise fees." The issue is expected to be hotly debated in the months ahead.
Also facing the industry is a tight financing market -- and some companies are reacting aggressively. There is now a move by some franchisors to help find financing for some properties. Microtel Franchise and Development Corp. of Rochester, N.Y., throws its weight behind developers, loan applications in hopes of doubling its size, matching up a local bank with its newest franchisees. Microtel has lined up financing from local lenders for about half of its motels built during the last nine years or currently under construction. Microtel officials point out that they are one of the few franchisors who are actually building, and would like to have 500 hotels in the next five years. "But virtually all the banks you've heard of just are not lending, so we have gone to more community-oriented banks that may be smaller in scope and we have found those bankers to be receptive to doing our projects," says president George R. Justus.
Other companies are not standing still and are pursuing different ways of growing. The global strategy of Choice is different from other lodging companies, says chairman Robert C. Hazard Jr. "When Marriott decides to go abroad they'll put one hotel in London, one in Paris and another major city, then another, and so forth. Choice uses the hub and spoke system, establishing properties in major cities and then growing out to surrounding markets from there. Companies like Marriott use the Neiman Marcus approach. We use the Wal-Mart approach."
A new market opens up
One event to watch is the opening up of the franchising field. Over the past several years, the franchising of midpriced hotels has done extremely well and Hilton, Omni, Sheraton and Radisson have historically offered franchise agreements. Yet many luxury U.S. hotel chains have been reluctant to offer franchises. That is about to change. Westin recently started an affiliation program and Hyatt is signing up franchisees. "They are proceeding cautiously, because it could be a rough road ahead for luxury hotel franchising," says CB Commercial's Wise. "The mid-priced properties have simple operations, sort of a like a fast food outlet, with limited service. But making a high-end hotel a franchise can be tricky. Marriott succeeded for a number of years because it joined with a good operator, Interstate Hotels, that has done a very good, consistent job." He also thinks part of the reason Marriott recently announced plans to merge with the luxurious Ritz Carlton brand was to provide Marriott with an opportunity to expand that brand on the international level.
"Everyone would like to go international, but there are problems. Just look at what happened with the peso recently. There are also questions about a different country's ability to do things differently as well as different customs," says Wise.
Also facing the industry in the years ahead is the question of what to do with properties that don't -- or won't -- conform to standards. Chains can sometimes be reluctant to ax a property that is not living up to its standards any more. "In short, they are saying we don't want that $50,000 or so in franchise fees any more, and that takes some doing," adds Wise.
Mindful of that fact, companies such as Choice are taking action. "During 1994, 197 hotels were terminated for failure to meet quality, service or system standards. We believe this is the toughest termination record in the hotel industry and a testament to our commitment to quality and service improvement," says chairman Gerald W. Petitt.
One of the biggest problems in the franchise business," states Conway of Winegardner & Hammons, "is when a franchise is inconsistent, causing consumer confusion. In recommending the best franchise for a particular company, we applaud a franchise for strengthening its standards and maintaining a consistent brand identity to which the consumer can relate.
"In the future," he continues, "I see franchisors becoming more selective."
"We also have a concern about quality in the industry and it being maintained throughout a particular brand," Best Western's Murcott says. "Not maintaining a quality level throughout the entire brand could cause some problems down the line. If you stay at Brand V and it's not good, and you stay at Brand X and it's not good, you might conclude that the chains are not keeping up their standards. It will have a negative effect. I think this lack of enforcement is going to be a big question later on.
At the same time, for a hotel to convert from a chain affiliation to an independent is not easy even if the decision is made by the owners. "In the minds of the traveling public, going from a chain to an independent could be detrimental," points out Smith of Smith Travel Research. "It's sometimes perceived by the public as detrimental, and hotels on average lose 10% to 15% in occupancy and $10 to $5 in room rates."
All this action could have some affects in the future. In the years ahead, some analysts say, multibrand franchisors will have to confront the jumble that could result from their expansions. Patrick Quek, president and CEO of PKF Consulting, notes there is currently confusion about franchising in the public mind, adding that, unlike earlier years, consumers, investors and even interested industry parties find it difficult to define what a specific company stands for. "Just calling a property a Sheraton, Hilton or Marriott doesn't instantly tell you who owns or operates the hotel," he says. "By managing multiple brands, what should I expect when I stay at a hotel managed by Richfield or Interstate. What we don't see anymore is the pride in brand once exhibited by the major hotel companies."
While the franchising industry is taking a hard look at itself, most companies say they can deal with any problems in the future because they are taking a long hard look at the situation. And, with the addition of new rooms in the years ahead, many expect that while franchising may slow down compared to the past several years, the future remains bright for the industry.
With expectations of earnings recently buoyed by the improved performance of hotels and the record low amount of new construction in that sector, investors have returned to the hospitality market in force.
Last year was the first time in five years that the increase in the national average daily room rate outpaced inflation, according to the most recent market survey by Coopers & Lybrand. At the same time, the average annual occupancy reached 65.2%, its highest level since 1984.
"A record number of buyers have entered the hotel market -- more than I've seen in 18 years," says Patrick Ford, president of Portsmouth, N.H.-based New England Hotel Realty, and editor of Transactions, a hotel real estate reference book published by The Hotel Motel Brokers of America (HMBA). In 1994, the approximately 150-member HMBA organization sold 270 hotels, up from 228 the year before.
"Mostly, we see equity cash funds coming together to purchase hotel properties -- either from Wall Street or private groups," says Ford. "The REITs were very active through the summer of '94 until interest rates began to climb and then they stalled."
Increased demand for product has boosted hotel prices about 10% to 15% over the past two years, says Ford.
New players include tax-exempt entities, and conservative investors from Southeast Asia and Western Europe, says Thomas Arasi, executive vice president/finance and development for the Manhattan-based Tishman Hotel Corp., a major management, ownership and investment firm. Last year, Tishman raised $308 million in investment capital, $130 million of which was for third-party investors.
Helping to feed the frenzy is the return of some traditional tenders to the fray, though the terms remain conservative. It's the mid-market lenders -- credit companies and mortgage-backed securities -- that are most active, says Ford. Typically, they are lending up to $10 million on name-brand economy and limited-service hotels, while loans under $4 million are being financed by local community banks. Anything above $10 million is being funded by Wall Street.
In a reversal of the bottom-fishing days of the early 1990s, well-positioned, well-performing hotels are in the highest demand from investors today. Within this category, there are more investors chasing hotel deals than there are good properties available for purchase, observes Edward R. Lewis, president and owner of the Manhattan-based Brener & Lewis brokerage firm.
Though hotel prices have improved, appraised values are still well below their peak performance years, says Arasi. One compensation is that while two years ago buyers were only willing to pay for historic cash flow, today they're paying a little for future performance, he says.
Despite general improvements in the industry, "An equity problem still exists," says Arasi. Hotel performance has not rebounded enough and traditional lenders' terms are still too restrictive. "Typically, they only want to lend on a great hotel priced at 50% of its original cost, and then they only want to lend on 50% of that," he concludes.
"The faucet for lending on hotels has been turned on, but it's a mere drip," agrees Lawrence J. Vogler, a Chicago-based managing director for Kennedy-Wilson International, a publicly owned international real estate brokerage firm.
Some industry observers caution that the recent gain in health may be short-lived as interest rates continue to rise. That is because most of the recent boost to the industry has been achieved through lower adjustable interest rates during restructurings performed over the past three years, says John P. Rijos, president and CEO of Northbrook, Ill.-based Lane Hospitality Inc., a hotel ownership and management firm with $212 million in annual revenues.
As the debt burden on hotels deepens once again, a second wave of bank foreclosures and subsequent workouts is possible, says Len Wolman, president of the Waterford Hotel Group Inc., a privately owned hotel management firm based in Waterford, Conn.
For this reason, Rijos concludes, "We're still a long way from a full recovery in the hotel industry."
Looking to franchise? Those interested in doing so should consider a number of points, say franchisors, franchisees and hospitality analysts.
"The decision to franchise or change the current franchise affiliation is a decision that may affect a hotel's ability to compete in the local market, generate profits, achieve a certain image or market orientation and benefit from referral business," notes Dana Michael Ciraldo, executive vice president with Mineola, N.Y.-based Hospitality Valuation Services, a national hotel real estate organization. "Since the success of a hotel is based predominantly on the cash flow it generates, owners and lenders must quantitatively measure the benefits and services of a national affiliation against the total cost of such a commitment."
Hotel franchise fees typically range anywhere from 1.5% to 9.6% of room revenues, with a median fee of 7.2%, according to a Hospitality Valuation Services survey. (Analysts say chains such as Best Western and Preferred Hotels are technically not franchises but association or referral organizations; their fee schedule, structured for the benefit of their member hotels, is oriented more toward covering operating costs than producing large profits.) The decision whether or not to franchise must be made knowing that it is a serious long-term relationship, a "marriage" not easily broken by either party.
"A company must do its homework," says Brian Murcott, vice president, membership development and quality assurance for Best Western International. "They should call the franchisees and perform reference checks. They should ask the hard questions. What are the pros and cons of going with a particular franchise? Does the cost analysis make sense? They need to put the pencil to the paper and determine exactly what it will cost to become a franchisee and what wilt it receive in return."
Such caution is understandable because the choice of a franchise plays an important role in determining a hotel's competitive market position, pricing and appeal to consumers.
"Selecting a management company that has the owner's interest in mind and the sound fiscal strategies to make a hotel profitable can be the difference between owning a performing asset or a financial disaster," emphasizes Paul J. Sistare, president and CEO of Richfield Hospitality Services Inc.
Thus companies also should examine a franchise group's market niche, their services and amenities, the cost to build the units and especially the franchise fee schedule. At the same time, looking into the franchisor's quality assurance program is advisable is is requesting documentation of this. In addition:
* Visit other hotels within the franchise, discuss concerns with the general manager and others.
* Understand completely the royalty fee structure of the franchisor and what support can be expected. For example, will it cover costs for advertising and marketing?
* Make sure the franchisor's philosophy is consistent with the franchisee.
With expectations of earnings recently buoyed by the improved performance of hotels and the record low amount of new construction in that sector, investors have returned to the hospitality market in force.
Last year was the first time in five years that the increase in the national average daily room rate outpaced inflation, according to the most recent market survey by Coopers & Lybrand. At the same time, the average manual occupancy reached 65.2% its highest level since 1984.
"A record number of buyers have entered the hotel market -- more than I've seen in 18 years," says Patrick Ford, president of Portsmouth, N.H.-based New England Hotel Realty, and editor of TransActions, a hotel real estate reference book published by The Hotel Motel Brokers of America (HMBA). In 1994, the approximately 150-member HMBA organization sold 270 hotels, up from 228 the year before.
"Mostly, we see equity cash funds coming together to purchase hotel properties -- either from Wall Street or private groups," says Ford. "The REITs were very active through the summer of '94 until interest rates began to climb and then they stalled."
Increased demand for product has boosted hotel prices about 10% to 15% over the past two years, says Ford.
New players include tax-exempt entities, and conservative investors from Southeast Asia and Western Europe, says Thomas Arasi, executive vice president/finance and development for thee Manhattan-based Tishman Hotel Corp., a major management, ownership and investment firm. Last year, Tishman raised $308 million in investment capital, $130 million of which was for third-party investors.
Helping to feed the frenzy is the return of some traditional lenders to the fray, though the terms remain conservative. It's the mid-market lenders -- credit companies and mortgage-backed securities -- that are most active, says Ford. Typically, they are lending up to $10 million on name-brand economy and limited-service hotels, while loans under $4 million are being financed by local community banks. Anything above $10 million is being funded by Wall Street.
In a reversal of the bottom-fishing days of the early 1990s, well-positioned, well-performing hotels are in the highest demand from investors today. Within this category, there are more investors chasing hotel deals than there are good properties available for purchase, observes Edward R. Lewis, president and owner of the Manhattan-based Brener & Lewis brokerage firm.
Though hotel prices have improved, appraised values are still well below their peak performance years, says Arasi. One compensation is that while two years ago buyers were only willing to pay for historic cash flow, today they're paying a little for future performance, he says.
Despite general improvements in the industry, "An equity problem still exists," says Arasi. Hotel performance has not rebounded enough and traditional lenders' terms are still too restrictive. "Typically, they only want to lend on a great hotel priced at 50% of its original cost, and then they only want to lend on 50% of that," he concludes.
"The faucet for lending on hotels has been turned on, but it's a mere drip," agrees Lawrence J. Vogler, a Chicago-based managing director for Kennedy-Wilson International, a publicly owned international real estate brokerage firm.
Some industry observers caution that the recent gain in health may be short-lived as interest rates continue to rise. That is because most of the recent boost to the industry has been achieved through lower adjustable interest rates during restructurings performed over the past three years, says John P. Rijos, president and CEO of Northbrook, Ill.-based Lane Hospitality Inc., a hotel ownership and management firm with $212 million in annual revenues.
As the debt burden on hotels deepens once again, a second wave of bank foreclosures and subsequent workouts is possible, says Len Wolman, president of the Waterford Hotel Group Inc., a privately owned hotel management firm based in Waterford, Conn.
For this reason, Rijos concludes, "We're still a long way from a full recovery in the hotel industry."
Mike Sheridan is a Houston-based freelance writer who contributes regularly to a number of national magazines.