Yatra Capital

The sad reality of the hotel franchising model

Sagar V. Shah, Managing Principal, Yatra Capital Group, is part of the Inner Circle, a group of industry leaders and innovators we have brought together to help us contribute to debate in the sector.
 

One would be hard pressed to miss the ubiquitous boxes flanking most American highway exits and suburban towns nationwide. Holiday Inn Express by IHG. Comfort Inn by Choice Hotels. Hampton by Hilton. Fairfield by Marriott. Best Western Plus. Chances are that you have probably stayed at one of our hotels whether you were taking your children to a traveling sports tournament or resting your head after a long business day. With sites in even the most rural locales of our country, weary travellers can find a safe haven for an evening or two and an abundance of complimentary amenities.

The parent companies of these brands, the franchisors, are multi-national conglomerates with billions of dollars on their balance sheets. What most do not realise is that over 90% of the hotels in the United States are franchised operations. These omnipresent properties, often multiple clustered within a square mile, are owned and operated by local hoteliers and families.

The franchising model has served as a catalyst to achieving the American Dream. Our stories, while unique, bear similar hallmarks. First-generation immigrant parents and in some cases grandparents, and various other family members, through blood and sweat equity, saved up just enough seed capital to put a down payment on a small hospitality property. Then, the small family, graduated to owning globally recognised, franchised products which served well to support the family and its future needs for some time until now. Regrettably, this operating model has become increasingly untenable.

Franchisee profit margins continue to erode with onerous brand mandates. While it is the franchisee owner that invests millions into local communities by acquiring or building these hotels, the risk and reward premium is completely in favour of the franchisor. Hotel owners assume all legal and financial liability, comply with an ever-increasing and complex regulatory environment, contribute hundreds of thousands in state and local taxes, employ the local population, operate their businesses 24/7/365, and assume complete responsibility in ensuring their guest’s satisfaction.

We sign long-term licence agreements to operate these brands, in hopes that the brand partnership results in prosperity. Regrettably, franchisors have become progressively brazen to satisfy their shareholders, even after taking 15 to 20% of our gross revenues back to their coffers. What major brands have failed to comprehend is that without happy franchisees, their business model is at risk of imploding.

Turning a blind eye on free market economics, brands not only put financial strain on the hotelier’s bottom line, but force them to use their preferred vendors on everything from credit card processing to furniture purchases to breakfast suppliers.

These preferred vendors then provide rebates, politically correct verbiage for kickbacks, back to the franchisors at the small business owner’s expense. How vendors are selected for these major contracts is an opaque process at best, but in reality, is a self-fulfilling prophesy of increasing their bottom lines at the expense of the franchisee. The obscure method of vendor selection screams corruption.

Franchisors claim that their negotiating strength is stronger when representing all their owners – it begs the question, why are we then paying above market rates for products and services? Forced mandates that shackle the ingenuity of America’s small business owners is nothing short of modern day indentured servitude. To maintain relevance, brands further require hoteliers to reinvest hundreds of thousands to millions of dollars into renovations after a five to seven year operating cycle, irrespective of whether a hotel is well-kept and maintained properly. These expectations have only become worse, with certain brand “refreshes” occurring yearly, and franchisees on the hook for a bill in the tens of thousands.

Make no mistake about it, this pandemic is our industry’s modern day Armageddon, dooms day planners be damned. No financial or lender stress test could have possibly accounted for every single hotel across a portfolio to experience next to zero percent occupancy.

Millions of our employees have been furloughed or laid off, yet in a shameless hijacking of franchisee partner agendas and rebuke of their so called brand partners, hotel industry CEOs instead touted our small business employees as their own during a recent visit to the White House.

Only a handful of brand CEOs even mentioned their franchisees in the short, but critical gathering. Curiously absent from this meeting, were hotel owner associations whose sole mission is to advocate for their franchisee and non-franchisee members.

As global markets continue to plummet, the $2 trillion stimulus bill and subsequent relief funding will provide some essential reprieve for many. Americans will benefit from the immediate cash in their hands to cover short-term expenses, but the franchisee small business owner is not out of the woods yet. While the federal government and key vendors have stepped in to offer us some relief, our brand partners have been less generous, to put it mildly.

Being deemed “life-essential” businesses by most state governors, hotels around the country are fielding calls from local hospitals and government agencies requesting use of our accommodations for those in desperate need. One unnamed brand, in a tone deaf response to this civic duty, asked a franchisee to cover up all brand signage, at their sole expense before helping local authorities. Not to miss an opportunity for their financial benefit, this same franchisor claimed that they would still be entitled to franchise fees, if the hotel owner leased their hotel to the local authorities! This begs the question, have brands become so morally bankrupt that they do not want to be associated with a franchisee who extends a helping hand to our fellow citizens and country in need?

Some brand leaders such as David Kong of Best Western International and Arne Sorenson of Marriott, gained widespread praise and admirers for their heartfelt messages to owners in the past several weeks. In an example of collective unity and shared sacrifice, Best Western International executives voluntarily slashed their executive compensation by half and reduced brand royalties and fixed franchisee expenses by the same amount. Mr. Kong represents a rare breed of corporate leader, and to demonstrate his vested interest further, he pledged his company-sponsored 401K funds to help support the Best Western brand during a time of drastically reduced revenues. This act of humility and compassion will be rewarded for decades to come by franchisee small business owners who value personal connection over corporate bureaucracy.

The Covid-19 black swan event has further exposed a franchising model that was already under severe distress. It has the potential to completely change the hospitality landscape forever, and we must seize this opportunity to bring fair franchising back into relevance. State legislators are already taking note of the unfair and unethical brand practices that are gripping the hospitality industry. Several New Jersey congressman have co-sponsored a bill currently awaiting approval, called A-2682, which centres on regulating hospitality franchise agreements. Hoteliers are hopeful that this bill will make its way across the United States, and help level the playing field once and for all.

With some hotel owners staring at the brink of bankruptcy and potentially at risk of losing their assets, something greater will come out of this crisis that will shape our industry for decades to come. And that is more vocal, activist hoteliers who will demand fairness from corporate giants that choose the preservation of profits over franchisee partnerships.

 

Sagar V. Shah is a second-generation hotel owner and real estate executive with a hospitality and senior living portfolio. He is a vocal member of AAHOA (Asian American Hotel Owner’s Association) and lifetime member of the Fair Franchising Initiative (FFI).