Part One of three – Understanding the business model and its evolution -

In 2009, franchising and branding continue to be integral parts of the hotel and hospitality landscape, with an estimated 28,200 of the 49,500 hotels (roughly 56%) in the US belonging to a branded or franchised organization.

Another calculation projects that an estimated 68%+ of the more than 4,600,000 US hotel  rooms  ( or 3.1 million) are somehow brand affiliated, when management agreements and brand owned and operated hotels are included.

A variation of franchising practices goes back to the Middle Ages, when feudal lords granted rights to hold markets or to operate ferries.  Common law evolved from the practice and in certain western European countries, the notion of buying product from a single source became prevalent if, for example, a tavern owner needed a line of credit or a competitive edge.

In the US, the foundations of modern franchising first began in the 1850s, with Singer Sewing Machines dividing distribution rights and then service responsibilities for their product.  The auto industry followed the business model of sharing distribution costs and profits, with General Motors and Ford among the first to use this concept to get the physical product to their customers.

After World War II, many other industries recognized the potential of this form of business and hotel distribution exploded with franchises and referral organizations. In the 1960s and 1970s, literally dozens of brands were created in the hotel and motel industry  alone.  Government regulations in the 1970s were introduced to address and prevent fraudulent practices.  Specific disclosures of  franchise ownership and registration requirements were adopted. 

In 1979, the Federal Trade Commission was given authority over franchising (Rule 436) due to the interstate commerce nature of the industry.  This act had 20 sections dealing with Franchisor background, business experience, litigation and/or bankruptcy history and the overall obligations of the Franchisor to the Franchisee.

The reasons franchising became a norm are the proven formulas for likely success.  If a franchise has a solid track record in many different locations , chances are stronger that this model can be replicated.   While success is not a guarantee,  the tendency of the traveling public to patronize familiar brands in the 1970s-1990s boosted operator perception of franchising.

Changes in the law and the economy

The economy tends to go in cycles. The 1986 changes made to the tax codes by the US Congress   had a resounding effect on a number of well-known hotel franchise companies.  The tax code changes also affected many banks holding real estate loans that were under-funded from an equity perspective and these banks experienced many defaults.

The Resolution Trust Corporation (RTC) was a temporary federal agency established in 1989 to oversee the disposal of assets from failed savings and loan (S&L) institutions. It was created by Congress in the wake of the 1980s S&L crisis, in which hundreds of depository institutions slipped into insolvency due to unsound banking practices.

By the time the RTC closed in December 1995, it had managed some 747 S&L closures and sell-offs valued at $460 billion in assets and $225 billion in deposit liabilities. The RTC's work affected no less than 25 million U.S. bank accounts, and while it was in operation, it operated the federal government's fourth-largest off-site records system.

Among the assets in the RTC's inventory were office complexes, retail shopping centers, bank branches, mobile home parks, storage facilities/mini-warehouses, industrial park/warehouses, restaurants, parking garages/lots, medical facilities/private hospitals, nursing/retirement homes, hotels/motels, resorts/golf courses, apartments, office condominiums, and mixed-use zoned land.

As hotels were involved, a good number of established franchise companies were acquired by other companies or, in some cases, entered into bankruptcy.  Major names like Howard Johnson, Days Inns, Ramada Inns, Knights Inns, Travelodge, Rodeway Inns, Econo-Lodge, Friendship Inns, Royal Inns and others either changed ownership or disappeared , some more than once in relatively short time periods. 

The challenge was not necessarily with the franchisors' quality, but frequently the domino effect caused by lenders calling loans on undercapitalized properties.  If the property could not meet the call in this period of economic uncertainty, the fees owed to the franchisors could often not be paid either.

The industry experienced challenging years in the 1985-1995 period, but emerged stronger due to more experienced operators with better equity positions.  

Franchising was strengthened and consolidated as illustrated by the following examples in the 1990s and into the first decade of the new century:

• Hilton acquired the Promus Group, which had Hampton Inns, Homewood Suites, Embassy Suites and Doubletree Hotels. The Hilton Garden brand sought to fill a mid-market niche, while the Conrad brand targeted larger international locations. Hilton later was purchased by Blackstone and went from a publicly traded company to a private company, which includes franchising La Quinta. 
• Marriott continued to create its own brands, but selectively acquired Residence Inns, Renaissance and Ritz Carlton. A partnership with boutique hotelier Ian Schrager with the name Edition Hotels is among the newest franchise options.
• Intercontinental became the global name for a rapidly changing Holidays Inns that became Bass and then Six Continents before finalizing IHG. Holiday Express was born successfully among a number of additional Holiday named sub-products.  Acquiring Candlewood Suites and Cambridge Suites as additional brands allowed flexibility in certain markets, and they launched a lifestyle brand, Hotel Indigo.
• ACCOR, well known in Asia and Europe for 4 and 5 star brands, entered the US and Canadian markets with the acquisition of Motel 6 and Red Roof Inns.  Red Roof was sold in 2008.
• Carlson acquired the names of Regent and Park Inns and Plazas, while adding their own Country Suites brand to their initial hotel brand, Radisson. 
• CHOICE  Hotels, the original product segmentation group, added Sleep Inns, Clarion, Econo-Lodge, Rodeway and others by acquisition, as well as launching their new life style hotel Cambria.
• A new entity, Hospitality Franchise Systems acquired over the years the franchising rights to Days Inns, Howard Johnson, Knights Inns, Ramada Inns, Travelodge, Super 8 and Villager, while establishing a new brand of its own, Wingate.  HFS evolved into CENDANT, which moved into time-share giant RCI and other related venues and again changed business model and name when it acquired the name and some real estate of Wyndam Hotels.  Wyndham also acquired Hawthorn Suites and Microtel from Hyatt, as well as Baymont Inns from the Marcus Corporation (which would phase in most of their AmeriHost Inns brand)\
• Another new entity, Starwood, acquired Westin, Sheraton and Four Points and proceeded to solidify them while adding the W brand, the Luxury Collection, the St Regis Collection, time shares and in the past two years Aloft and Element.

Part One of the Getting the Most out of your hotel franchise investment series is meant to offer a high-level overview of the business matters that directly link to the running of a hotel.   Business gets more complicated every year and the evolution of the global marketplace make it even more complex.

As of December 2008:  Total # properties in the US : 49,537 Total # rooms in the US : 4,636,625 ; Total # branded properties in the US : 28,236 Total # branded rooms in the US   3,170,352. Source:   Lindsay Culbreath  Director of Sales  STR www.strglobal.com A new name in global hotel benchmarking

2 For additional insight to the RTC's development, unique structure, personnel practices, and the impact its structure had on its performance, see Mark Cassell's book How Governments Privatize: The Politics of Divestment in the United States and Germany (Georgetown University Press, http://www.press.georgetown.edu/detail.html?id=9781589010086 ).

The next two portions of this series will address some of those marketplace challenges.

• Part Two – Evaluating the franchise business model as a potential franchisee
• Part Three– Working with your franchisor for everyone's success

Feel free to share an idea at johnjhogan@yahoo.com anytime or contact me regarding consulting, customized workshops or speaking engagements

Disclaimer:  the author is not an attorney and is not offering legal advice, but rather is sharing experiences and examples on effectively working within the franchise business model

All rights reserved by John Hogan and this column may be included in an upcoming book on hotel management.   The opinions expressed in this article are those of the author and do not necessarily reflect the views of this publication  

John Hogan, a career hotelier and educator, is a frequent speaker and seminar leader at many hospitality industry events.  He is a successful senior executive with a record of accomplishment leading organizations at multiple levels.  His professional experience includes over 35 years in hotel operations, food & beverage, sales & marketing, training, management development and asset management including service as Senior VP of Operations.

http://www.linkedin.com/in/drjohnhoganchache