BALTIMORE—When you consider that more than 60 percent of the hotels in the U.S. are owned by members of AAHOA, a trade association that counts some 20,000 as members, you realize, then, how important the association is to the hotel brands, which succeed on their ability to convince potential owners to fly one of their flags.
It's a formula that has worked for years. Pure franchisors, the likes of Wyndham, Choice Hotels, Red Roof, Motel 6 and others, who mainly play in the limited-service space, depend on it. And it's why the trade show floor at the 2022 AAHOA Convention at the Baltimore Convention Center was stacked prominently with those companies' booths, accompanied by a crew of franchise development personnel soliciting business.
But it's not all kumbaya. There is friction and defiance that defines the relationship, with a typical franchisee riffing one way or another about how the brands are too greedy, too domineering. Yet, franchisees remain faithful to the brand industrial complex.
Is the franchisee/franchisor a dysfunctional marriage that just works? Likely, because it doesn't seem to be changing all that much. But like any relationship, when times are good, the bellyaching is minimal; when leaner times sweep in, the natives get restless.
No time in the history of hostelry have times been tougher. The pandemic wiped away revenue, dried up profit and impacted personal wealth derived from operating real estate. Hotel ownership might sound like a seductive business, but for many, it's drudgery—long hours and shrinking profit margins.
One delegate at AAHOACON put it this way to me: "It seems apparent that the compounded stresses of the last 20 years (9/11, the GFC, COVID-19) have taken their toll on owners. With RevPAR slowed down by the pandemic and now inflation and a labor shortage, it’s harder for owners to make profit.
One of the ways, AAHOA says, is through the "12 points of fair franchising," first established in 1998 and continuously updated "to reflect business changes and the long-term, mutually beneficial relationship between industry franchisors and franchisees." The list includes early termination rights, brand performance hurdles, fee transparency and vendor exclusivity, among more.
Still, there remains a divide. Hotel owners are like an island that constantly takes on an inflow of water that when it recedes takes a little bit of the island with it. This inundation is in the form of the various fees that a hotel owner has to deal with, from the franchise fees that eat away at gross rooms revenue (on average, initial fee and continuous franchise costs total nearly 10.8 percent of rooms revenue, according to the 2020 edition of the HVS U.S. Hotel Franchise Fee Guide) to the pesky commissions paid out to OTAs on the sale of each room, which can amount to as much as 20 percent.
On top of the fees are the brand-necessitated property improvement plans (PIPs) and other costly brand standards to keep on top of.
Yet They Stay
And, still, the vast majority of hotels within the U.S. are the branded type. A 2019 New York Times piece, citing STR, wrote that: "Thirty years ago, about two-thirds of all hotels were independent. Today, less than 40 percent are independently owned and run." Three years later, this percentage has surely dwindled. Why?
Branded hotels are like a baked-in insurance policy for owners. A financial crutch to lean on. The vast majority of hotels are bought with or built with a blend of equity and debt and banks are typically more leery to extend financing to hotels that will not carry a brand with it. This is why it is so difficult to get a pure independent hotel built today; if they are done, they are likely affiliated under one of the soft brands (properties that are ostensibly independent, but part of a brand platform). In sum, hotels with brands get done.
Later on, at exit, hotels with a brand typically sell at a premium to those without. In between, hotels within a brand family reap the benefits of a global reservations system and loyalty program that, although a cost, is a large facilitator of hotel bookings.
Perhaps no clip portrays the relationship between brands and owners better than this one from "Seinfeld." Kramer gets it.
Franchisors and franchisees have a symbiotic relationship that will not cease. But which one favors more from it is something that will debated for the next 30 years and beyond.