Some Franchisor Policies Can Bring Financial Hardships

Some Franchisor Policies Can Bring Financial Hardships

Reprinted from Advanstar
Hotel & Motel Management Magazine
July 31, 1989
By Jeff Wilder
Wilder Group, L.L.C.

Lately, I've been wrestling with concerns about the unintended consequences of some franchising and product-development policies produced by well-meaning franchisors that may need more discussion and introspection. After all, a relatively few people are setting franchise-development policy and creating clone products that spawn billions of dollars of capital investment. They're certainly not infallible thinkers who can guarantee the success of every venture.

I believe that the major chains make a good effort to ethically balance their growth goals with the economic success of individual property owners. But once in awhile, a franchisor policy develops potential flaws that may cause unhappiness and financial hardship. Generally, however, you can avoid difficulty if your eyes are open.

Some of my observations may not be totally valid, or may be partially inaccurate in some markets. I hope this column spurs open-minded and conservative appraisal of individual project risk and the potentially serious economic consequences certain franchise policies may have for franchisee.

Here are some issues that have a deep effect on earnings potential - I'm sure you'll think of others:

Who's listed in the franchise directory

Some chains have elected to segregate their niche products into different directories; others have opted to incorporate all brands into one universal directory.

Each approach has its pros and cons. Excluding new hotel lines from a universal directory helps keep the core brand from being hurt. Brand loyalists may recognize the fresh product to be newer and cheaper to stay at than "old reliable" - thereby cannibalizing reservation traffic that normally would stay at the core brand. Conversely, inclusion of all hotel lines in a universal directory certainly has an impact on core brand reservation traffic and will divert occupancy if the niche product is perceived as giving greater value.

The franchisor needs to balance the financial health of its core brands with the unstoppable niche-growth of fresh franchised product, including its own. Someone loses - make sure it's not you.

Building smaller rooms

We now have the newly coined "hard budget" franchise market. Naturally, new-product development at low enough prices to compete in the $20-to-$40 range requires a lot of developmental ingenuity. However, it basically involves building undersized rooms, with no public space, to be operated by mom and pop owners in order to be truly profitable.

While the product is new it'll attract new business, at least for awhile. Just remember that once it's built, you can't stretch the walls - it's an undersized room. When a business downturn hits the area, it would seem that a small room might attract less occupancy than a larger room for the same money. When competition heats up and both occupancy and rate are affected, make sure your product is perceived as a good value by the market you're targeting. I'm most concerned about the potential of early functional obsolescence of undersized rooms.

Full-service core brands

In general, franchisors have required their full-service, midpriced core-brand hotels to continue offering a full range of services. This, in the expectation that the guest demands such amenities as three meals a day - with a full complement of employees to go with it. The thinking is that if you don't offer such services, you undermine your customer base, disappoint their expectations, and lose the character of what differentiates you from other niche brands.

From budgets to all-suites, everyone in the industry is developing product that escalates the hotel's profit percentages by cutting food service to a minimum. This significantly increases cash flow.

The franchisor must understand that its need to differentiate segmented product lines has to stop at the water's edge of causing financial hardship to the midpriced, full-service product.

Franchisor requirements of the full-service hotel's franchisee should be re-examined in an effort to creatively assist in driving profitability up by establishing "modified full-service" concepts.

Examples would be buffet breakfast and lunches that don't require waitresses, eliminating lunch, reducing foodservice hours and so forth.

Retrofitting and repositioning

Chains should more seriously consider retrofitting well-located existing product in order to take advantage of many of the wonderfully fresh concepts that have been accented in the last few years.

Incorporate the club concept into the standard hotel; take three regular rooms and create two suites; develop exterior facades that create a profitable budget inn, with good room sizes, from existing tired motels. The creative use of more modest capital levels really should be explored. While it's not as sexy as new development, it could prove most economic. Success will only come if the lodging industry can convince the lending community that this is a viable approach.