Tuesday, 23 July 2013

Hotel franchising – is it working in Australia?

If 80% of hotels in the US are franchised, why are only 30% in Australia?

While undoubtedly a growth sector in the Australian hotel environment – with over 750 hotels under franchise currently – industry experts at the Hotel Franchise World conference in Sydney suggested there was still a long way to go before Australia matched America and Europe.
Tony Ryan, Principal of Ryan Lawyers, recalled that in the 1970s and 1980s, when he was growing up in Wagga Wagga, he travelled past a motel with prominent Quality Inn signage on a regular basis, only to discover subsequently that the motel hadn’t actually been in the Quality Inn network for 15 years. At the time, however, there was little interest in – and even less regulation of – the franchise sector, because management companies ruled the hotel roost.

The arrival of online travel agencies (OTAs), making distribution easier for smaller and independent hotels, meant that the franchise model became more attractive for hotel owners, who didn’t have to rely so heavily on the established management companies to build business for their hotels.
The key issue for most franchisors and franchisees at the Hotel Franchise World conference appeared to be brand integrity. How do franchisors ensure that their franchisees maintain the brand standards that are more easily imposed on hotels under management contracts?

Penny Eccleston, a multi franchisee of Best Western hotels, said that brand aspects such as signage were crucial if a franchisee is to maximise the potential of a franchise arrangement. She estimated that a third of her business came from the Best Western connection, and there were still plenty who simply stopped on their way through a town because of Best Western’s brand reputation.
But it wasn’t always that way. Robert Anderson, CEO of Best Western, said that in 2007, the company parted ways with some 1000 properties because they weren’t up to standard. Since then Best Western’s Net pPomoter Score (of satisfaction) had doubled.

Panellists all agreed that it was up to both parties – franchisors and franchisees – to maintain standards.
Franchising had been far more successful in America because banks generally didn’t fund hotels unless they were aligned to one of the major companies, and many of the franchisees owned multiple properties. That is rarer in Australia, where motels are often owned by “dad and mum” operators who don’t have the capital and resources to constantly upgrade their properties.

Tony Ryan highlighted that in America institutional investors were firmly involved in the franchise sector, but they had largely ignored the Australian industry.
One of the reasons cited for this was the low returns for franchisors. While there was disagreement about what franchisors were able to charge their franchisee, StayWell’s Simon Wan suggested it was as little as 2 – 3% per revenue generated (in America it is up 10%), which made many franchise contracts unviable.

This had led companies such as Quest to look at different funding models to build their networks, with Quest having the advantage of developing most of their properties from ground up, which also ensured more uniform standards.
Where as franchised hotels were a feature of most American city CBDs, in Australia franchised hotels have largely been restricted to regional and suburban areas. However, Roland Jegge, VP Asia Pacific of Worldhotels, believed that there was a place for high-end independently operated city hotels joining a franchise network because consumers increasingly want hotels with individual style and character. However, it was essential that franchisors provide training and constant auditing through processes such as mystery shopping to ensure standards were maintained.  

The inaugural Hotel Franchise World conference ended with general optimism about the sector, though recognising that the drivers that had made franchising so popular in America still needed to be developed further and refined in Australia.

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