In 2010, when the Bitcoin (XBT) was worth next to nothing, an early adopter paid 10,000 XBT for two pizzas. Today, that payment is worth over $6 million. A very steep price indeed for a midnight snack.
Of course, the value of that payment could rise or drop dramatically. This time next year, two pizzas for 10,000 XBT might seem like a fantastic deal. That’s the nature of a high risk-high reward investment. Government bonds are a safer bet, but they won’t make you rich overnight.
When hotel owners decide whether to buy into a franchise or build their own brand, they face similar questions of risk and reward. Do they step out on our own and take full responsibility for their own brand, their own identity, their own services and amenities? Or do they relegate a significant amount of control to an established brand in exchange for better security and a safer investment? What are the risks and rewards of each? The answers will differ of course according to whether the hotel is being built or already established however the challenge is still the same – with someone, or by myself?
Franchised hotels involve a licensing fee and contract. The brand recognition is yours, along with its customer loyalty, reservation systems, distribution networks and marketing muscle. In short, you have support—and in the case of large (and especially upscale) chains, that support can be meaningful indeed. Your job as a manager or owner can be easier, less complicated, clearly defined by established procedures and benchmarks.
The promise, essentially, is one of lower risk.
The downside is that your freedom of movement is limited. Corporate offices, often in faraway cities, will make some of your decisions for you. This situation is far from ideal for those who prefer autonomy, who like to innovate, and who want their returns to go as high as their efforts will allow. On the other hand, local franchisees who have tried to go outside franchise guidelines have often found out to their detriment that franchises only work when you follow the system!
Finding the Balance
However big the chain, it’s a mistake to think that franchising will make any hotel in any market more profitable. The risk-reward ratio can change drastically according to where you are, how the market works, and how much value is really added by a particular brand and corporate structure. For example, if the chain gets 10 - 15% of your revenue (including all fees), but gives you robust distribution channels and loyalty programs that increase your bookings by 30 or 40%, the value-add will have been worth it.
But there’s really no telling until you’ve signed the contract and done the makeover.
That’s why the hotel’s location must be carefully considered, along with its design, amenities and existing marketing channels. It’s true that all chains want to make their company as a whole more profitable and sometimes their decisions may not always translate to the most effective action for a specific market, location and neighborhood. In general of course they want their franchisees to be successful but if the market is flooded with their brands or there is no geographic protection then this might not always work.
By contrast, independent hotels can freely target their spending, promotions and efforts toward success and profitability in their own market. Plus, they don’t pay membership fees. The catch? You’re on your own. Those suits in faraway cities have found a winning formula, after all. Independent brands are faced with testing their own formulas in every aspect of the business, from Twitter discounts right down to the fluffiness of towels.
Branded Management: The Middle Ground
Between Bitcoin and government bonds lay a whole host of medium-risk investment options. For hoteliers, this middle-ground is characterised by branded management companies. By supporting independent hotels with (and subjecting them to) strong standards of quality, they cater to the goals of independent owners, offering a range of contracts without assuming ownership. You don’t have to go it alone, nor must you relinquish more control than you wish. But you do have to give them a slice of the pie, and this becomes another factor in the overall risk-reward assessment of paying for support or not. (There are also “white label” companies that will manage the property under a different brand on your behalf, but that is another story.)
No Easy Answer
There’s no easy answer to the question of independent versus franchise hotels (or even versus branded management). That’s why it’s such a hot topic in hospitality conferences, articles and blogs. Owners must drill down as deeply as possible into the numbers and data for their particular market. They must look carefully at the individual hotels and chains in question.
There are cases, in my experience, where the profitability of a hotel isn’t changed much by the flip from independent to franchise, or vice-versa. This is when it becomes a question of lifestyle and personality. These too are valid considerations, but finding out whether one solution or the other will be significantly more profitable is still the most important thing.
To owners in the midst of this decision, I say seek advice and rest easy. Whichever way you go, you’re unlikely to regret your choice as much as the guy who paid $6 million for a couple of pizzas.
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