Franchising sees a resurgence in interest

The Homewood New York/Midtown Manhattan Times Square-South is owned by a JV between The Buccini/Pollin Group, Albanese Development Corp. and Rockwood Capital. It’s managed by PM Hospitality Strategies.

The Homewood New York/Midtown Manhattan Times Square-South is owned by a JV between The Buccini/Pollin Group, Albanese Development Corp. and Rockwood Capital. It’s managed by PM Hospitality Strategies.

New York – Hotel companies are viewing franchising very differently these days, as described by Hilton Worldwide’s Bill Fortier, Marriott International’s Noah Silverman and Hersha Hospitality Management’s Naveen Kakarla during the franchise workshop at June’s NYU International Hospitality Industry Investment Conference.

“We’re far more open to franchising than we used to be. We no longer approach the marketing of a hotel as a choice between having to manage versus agreeing to franchise. We’ve become much more agnostic,” said Silverman, Marriott’s CDO for North America, full-service hotels.

“We’ve come to fully embrace the idea that franchisees can operate our hotels effectively. There’s such a wealth of talented owners who are managing hotels as franchisees,” said Fortier, Hilton’s SVP for development in the Americas.

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The change in mindset seemed to dovetail with the move of the traditional franchise brands into urban markets, according to Kakarla, HMM president & CEO. “Once the hotel companies started allowing urban franchising, the door was open to franchising other brands in the portfolio, including the lifestyle brands favored by the up-and-coming Millennial generation,” he said.

“Consequently, there are fewer markets in North America where we’ll only manage, rather than franchise,” Silverman said.

One question the brands have had to grapple with as the concept of urban franchising has taken hold in the major markets has been areas of protection, Kakarla pointed out. “Given how concentrated major downtowns tend to be, the brands have had to be more flexible than they might traditionally have been,” he said.

Franchise contracts

Moderator Joel Eisemann, CDO for IHG, asked panel members if they thought the cost of affiliation as spelled out in the franchise agreement was still a critical issue in choosing a brand today as it might have been previously.

NewcrestImage Chairman & CEO Mehul Patel explained that owners like himself sought a balanced approach. “You want to make sure you have the right brand, that the culture of the brand is a good fit for the market and location. On the other hand, cost is certainly a factor,” he said.

The Hilton Garden Inn Georgetown, in Washington, D.C., is owned by PerStar M Street Partners and managed by O2O.

The Hilton Garden Inn Georgetown, in Washington, D.C., is owned by PerStar M Street Partners and managed by O2O.

Not that many brands may be available in top locations, even with a more relaxed approach to areas of protection, noted Northview Hotel Group partner Matthew Trevenen. “At the end of the day, it’s about choosing a brand that will give you as strong a competitive advantage in the market as possible,” he said.

Surprisingly, through this sea change, not much is new in terms of the actual franchise agreements. “There hasn’t really been any dramatic change, when it comes to the content of the agreements,” Silverman said.

Fortier pointed to changes in language, which has made agreements easier to understand. “There’s less legalese, which is a good thing,” he said.

Not that there aren’t issues brewing beneath the surface. “If anything, we’d like to see more transparency on the part of the brands, which would also be a positive development. There are still difficult issues out there that need addressing,” said Kakarla, citing issues around capital expenditures (CapEx) as an example. “We want to be addressing those substantive questions and not just new items on the breakfast buffet.”

“Now that there’s money available, we have to get the hotels fixed,” said Fortier, acknowledging that the brands took a more flexible position during the recession.

Since those dollars are coming out of the franchisees’ pocket, there’s been a fair amount of pushback. “The issue comes to a head for us when we’re in the process of selling a hotel and the CapEx requirement gets folded into a change of ownership property improvement plan (PIP),” Trevenen said. “Our preference would be to transfer responsibility for the PIP to the new owner.”

“We know there can be differences of opinion about the PIP requirements when a hotel is sold, and we try to avoid any unreasonable demands,” Silverman said.

Given how large some franchise brands have become, the face-to-face contact in itself is important. “The closer you are to your franchisees, the better your relationships and the more successful the brand will be,” Silverman said.

Patel spoke not only as a franchisee owner/operator at NewcrestImage, but as an officer of the Asian American Hotel Owners Association, whose members control a large percentage of the franchise hotel inventory in the U.S.

“At the AAHOA level, we want to bring some fresh and innovative thinking to the table,” Patel said. “Some franchise brands are now close to 60 years old. How can we help the brands remain attractive and compelling to today’s consumers for the benefit of both franchisees and franchisors?”

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