Battling for marketshare, hotel franchisors explore new products, locations and partnerships.
As Elliot Bloom sees it, synergy is finally coming to the hospitality industry.
Bloom, a corporate spokesman with Parsippany, N.J.-based HFS Inc. -- which franchises such well-known brands as Avis, Days Inn, Resort Condominium International (RCI) and Ramada -- notes that the pending merger with CUC International Inc., a leading member services and direct marketing organization, will provide a boon to consumers as well as the hospitality industry.
"A family who stays at an HFS Days Inn in Delaware on their way to Florida can have a room at their next stop booked by the hotel," he says. "And because of the database and vendors CUC has, we can print a coupon book that will give them discounts at restaurants, gasoline stations and even their next hotel stay. We could offer $30 to $40 in discounts geographically -- all from the same database."
Not only that, but if a CUC member stays at an RCI timeshare property, they can pick up an Avis car and stay at a Days Inn before their RCI stay starts, Bloom adds. The average vacation trip for RCI is 10 or 11 days, so HFS is selling incremental room nights -- some 42,000 additional room nights -- providing incremental income for HFS franchises such as Days Inns.
"Whatever we can do incrementally for a franchisee increases the franchisee's profitability," Bloom says. "We're AT&T's second-largest customer. We have 500,000 hotel rooms, so we get rock-bottom prices, and we get additional marketing dollars. That's a savings we pass on to our franchisees. We think this enormous distribution we have gives us a competitive advantage."
Obtaining the competitive advantage is the name of the game in hotel franchising today. The rush to franchise hotels -- from bare-bones budget to lap of luxury properties -- continues unabated in the global hospitality industry, as companies continue to introduce new brands, battle for marketshare with mature flags and continue to open new properties at a dizzying pace.
"Many hotel lenders believe that in order to be competitive in today's hotel market, a strong franchise affiliation is essential," says Stephen Rushmore, president and founder of HVS International, a global hospitality consulting organization based in Mineola, N.Y. "Customers want to know the level of quality for which they are paying and would rather not risk an unpleasant surprise from a 'no name' lodging facility. Hotel lenders also typically insist on a franchise affiliation of some type because it reduces the perceived investment risk. The big question is: Do you opt for a Best Western at 1.67% of rooms revenue or spring for a Days Inn affiliation at 9.02%?"
Richard C. Conti, principal in the hospitality industry consulting group at Coopers & Lybrand in Cleveland, says there has been an aggressive push for new franchises by some well-established firms such as Hilton and Doubletree.
"In the midprice segment, HFS' Wingate is a hot product, and Hampton Inns are still franchising like there's no tomorrow," Conti says. "With all the Marriott products -- the Fairfields, the Courtyards, the Residences Inns -- there's a continued franchise push. The new franchises are trying to get critical mass -- 100 to 200 hotels -- fairly quickly. You have to look at everything by segment. We've seen a lot of new development in the last two years in the economy and midprice segments. The upscale segments seem to be fairly strong."
Not everything is a franchise, however. Extended Stay of America and Studio Plus aren't. The reason, Conti says, is that the company has the capital to build as many as it can build on its own. "We think there are a lot of opportunities in extended stay; it's still one of the hot items," says Conti, "but we're seeing other types of products being built, too."
The franchising of Hilton Garden Inns, described as four-star lodging at a three-star price, is exceeding expectations, according to James Abrahamson, senior vice president of franchising for Hilton Hotels Corp. of Beverly Hills, Calif. About 80% of Hilton Garden Inns will be new construction, with the remaining portion being conversions of existing properties.
"We now have 50 Hilton Garden Inns under contract," Abrahamson says, "and the pace has accelerated this year because of the economy and the hotel industry enjoying continued prosperity. Lenders have returned to the market, and they're soliciting business, although they're still gun shy of full-service hotels."
Hilton has its own financing program with Nomura, he adds, but other lenders have also become involved and local franchisees are able to arrange funding. The company's original goal was to open 100 Hilton Garden Inns by the end of 2000. Abrahamson says he expects to have 50 under construction by the end of the year.
The reason for the success? "The brand is performing extremely well," Abrahamson explains. "Our marketing and operational programs are very strong, and that's really brought attention to Hilton. When a franchisee is investing $7 million to $10 million, it's a critical decision. A lot of factors go into that decision and investors want to be involved with a company that is moving up, rather than one that doesn't have a strong identity."
Abrahamson notes that with some 300 markets identified for the product, there are more opportunities for Hilton's midpriced product. "We've done a great job of identifying the market, and the overall design scheme of Hilton Garden Inns is appealing," he says. "It has a high business function but with a strong residential appeal so we can capture both business and leisure traveler. Other competitors focus only on one group."
Choice International Hotels of Silver Spring, Md., focuses on many groups, including extended stay. Last year, Choice successfully launched its midpriced extended-stay product, MainStay Suites. "It has been a very successful launch," says Joe Lavin, a senior vice president at Choice. "Our first company property is almost a year old, and it has exceeded all expectations. Now we have 14 more under construction. We have plans through our real estate company to build as many as 20 MainStays a year."
Lavin says that within the United States, Choice has a strong array of seven brands. "We feel we're going to be spending a lot of time putting together an expansion of international locations, because we believe there is significant untapped potential outside the U.S.," he says. "Obviously we want to respond to trends in the U.S. and probably will add brands in the future. Now we're in 33 countries, but we haven't always been as successful as we'd like, because we haven't focused as much resources as we would have liked."
He notes that Choice is the largest franchise in Canada and has excellent brand recognition in the Caribbean and Mexico. The company owns part of the Friendly hotel company in the United Kingdom, he adds, and the Choice franchises in Scandinavia have increased from 15 to 90 hotels.
"We have a good presence in the Far East and look to leverage that, but our focus will be on the two or three other areas, likely within Europe," Lavin adds. "We'll be there with the Quality, Comfort and Clarion brands, and there'll be some Sleep Inns mixed in. We'll be focusing with our partners in gateway cities to build brand name recognition."
Choice Management and Realty Services is expected to be spun off later this year, he adds. "Today MainStays are company-owned properties; after the expected spin-off, they'll be franchises of Choice International Hotels," he says. "They will have total autonomy. Since they will be solely a real estate company, they will likely accelerate the expansion of MainStay Suites."
Expansion is definitely on the mind of ITT Sheraton Corp. Robert Morse -- who, as president/franchise, is responsible for worldwide franchise development of Four Points Hotels and for North American franchise operations of the company's 200 franchised Sheraton Hotels & Resorts, Four Points Hotels and Sheraton Inns -- notes that two years ago, Sheraton rolled out Four Points as a premium midpriced, full-service product positioned at the high end of the midpriced market.
"It isn't a customer niche as much as a pricing niche," Morse says. "There are only so many markets that can support an upscale hotel; more markets support a midpriced product. The name of the game is distribution. We're at 60 properties now, will have 85 up and running by the end of the year and have signed additional deals, both new construction and renovation."
Morse adds that the big push for Four Points product will be internationally, with places such as India and the Far East initially targeted. "India is a huge market, and it is growing," he says. "We feel Indonesia is a strong market too, and we're very close to announcing developments in the Philippines. We have our first contract in Australia. For the push in Asia, we'll be calling the hotels 'Compass,' after our logo. The critical mass is key to our success."
He adds that the hotel business has continued to become more sophisticated through the understanding of customers' requirements. "What you're seeing now is the industry going through asegmentation process to meet individual travelers' needs," says Morse. "When you think about how old the industry is, it's surprising to find that the all-suite, limited-stay, extended-stay and so forth brands all happened in the last 10 years. Now, instead of saying, 'I'm going to build a hotel on the corner,' hotel companies are saying, 'I'm going to build a hotel to attract a certain segment of the market.'"
Other hospitality companies are also embarking on expansion plans to fill niches. Carlson Hospitality Worldwide acquired the rights to the Regent International Hotels and Resorts brand last year and has embarked on an ambitious global growth strategy to expand the Regent name to new locations around the world.
Curtis Nelson, president and CEO of Minneapolis-based Carlson Hospitality Worldwide, notes that the company has a wide array of offerings through its four-star Radisson brand and its three-star Country Inns & Suites By Carlson. "It seemed obvious we needed a luxury brand, so we searched the world over and found that Regent had phenomenal brand recognition and is respected as one of the best brands in the world," he says. "Working with Four Seasons, we were able to bring that brand on board."
Nelson says Carlson will offer both franchising and management opportunities with Regent, with potential participation in some projects. "We feel there is a big opportunity in the five-star market for franchising," he says. "There are some truly magnificent independent operators out there who are realizing now they have to have a global marketing capacity and will have to spent technology. Carlson has both. Our company will spend $500 million on technology in the coming years."
He adds that Carlson is in the final stages of negotiating several Regent franchises, including conversions and new construction. "We see tremendous opportunities with conversions," Nelson says. "As some of these fine independent luxury hotel operators start to see the value of the level we create, we will be quite successful in converting them. Domestically, we see there are more conversion candidates, but we envision a mix of conversion and new-build worldwide."
Expansion is also on the mind of officials at Marriott, considered one of the hospitality industry's trend setters. The Marriott franchising juggernaut will proceed, says Michael Collins, vice president/franchising for Courtyard and Fairfield for the Marriott Corp. "We will continue to franchise aggressively in our brands such as Courtyard and Fairfield," he says. "We still see a great deal of opportunity in expanding our brands, and franchising is a key method of expanding. We're one of the leaders in the lodging industry, and we're making sure we lose no time or advantage in gaining as much distribution as we can."
Collins says Marriott is looking for different locations for its products. "Franchising is a terrific way to do that, to spread the risk," he says. "Courtyards have expanded so much already. I don't think anyone could have foreseen we'd have 320 of them today. We find ourselves building in secondary and tertiary markets that we wouldn't have thought feasible five years ago."
Today, he adds, there is tremendous competition for franchising. "There is an increasing level of competition for sites as well as for competition for franchisees," he adds. "We put our product in places where people go. We operate 200 of them ourselves, and we are still very enthusiastic. At the end of this year, we will have opened 50 new Courtyards and plan to continue that kind of pace."
At the same time, Marriott's purchase of Renaissance Hotels fills a strategic need for the company internationally. "We have an opportunity to expand with Renaissance," Collins says. "It gives us another full-service brand that can expand where we have the market covered with Marriotts. There are more than a couple of markets where Renaissance has full-service hotels near full-service Marriott hotels. If the market can hold that much product, there is no reason not to think we can expand the Renaissance brand."Collins notes that the company's last three years have been its best. "Whil e it's difficult to predict when it could change or soften, as I sit here today, with as much new supply as we're opening -- and opening strong -- we believe there's still a good deal of development to be done," he says.
Franchising is relatively new to Doubletree, says Gus Boss, senior vice president/franchising for Doubletree Hotel Corp. in Phoenix. "We were basically a management company when Doubletree, Guest Quarters and Red Lion were combined. We had very few franchises. But we started franchising in January 1995, and today we have 10,000 rooms franchised. Our plan is to do 30% franchises with Doubletree Hotels and Doubletree Suites. At Club Hotels by Doubletree -- where we're pretty selective who we franchise with -- we want to do about 70% franchise and 30% company managed."
The concept of Club Hotels by Doubletree is to take several well-known monikers and brand them together under the Doubletree banner -- Au Bon Pan for food services, Steelcase for office furnishings, and Office Max for business supplies and services, he says. The product is aimed at the midmarket business traveler.
According to Boss, Doubletree now has 19 Club Hotels open, a dozen being renovated and 40 in the pipeline. "We said we'd have 25 or 30 open by year's end, and we expect to have 100 by the year 2000," Boss notes. "The key is the hotel comes under the umbrella of the Doubletree brand. There's a lot of competition in franchising. With Doubletree, the fact that so high a percentage of properties managed by Doubletree means the brand is going to remain strong and healthy. We have pretty direct control. It's a huge difference when a brand is controlled by the parent. We have much more at stake. Consequently, it assures our brand partners that we're going to make sure the brand stays healthy and upgrade them."
Boss adds that more companies have the capability of overseeing a three-star rather than a four-star brand. "It's easier to manage a three-star brand because there's not the extensive F & B [food & beverage] operations or the large banquet facilities and meeting components," he says.
Where will this franchising frenzy take the hospitality industry? It's too early to tell, say observers, but the end doesn't appear to be in sight -- yet. As long as demand fundamentals are moving in the right direction, and there doesn't appear to be an oversupply yet, there seems to be room for new hotels, points out C&L's Conti.
"The industry is still very strong, but growth appears to be slowing down, coming closer to equilibrium," he says. "As long as supply doesn't exceed demand by a wide margin, it should be OK."
Mike Sheridan is a Houston-based writer who contributes frequently to NREI.
What segment of the hospitality industry could become one of the hottest markets in franchising today?
Would you believe the luxury market? After years of concentrating in the economy and midscale markets, hotel companies are now taking a hard look at the upscale sector -- and are liking what they see.
"Franchising has always been seen as a downscale strategy," explains Stephen Rushmore, president of Mineola, N.Y.-based HVS International. "It hasn't been played much in the upscale market, but we expect to see some more upscale franchise brands. Just the other day, we met with a midsize hotel company that has an upscale brand not many people know about. We recommended they build critical mass through franchising. I think you'll see three or four upscale brands that will be franchises."
Chuck Ross, vice president of Smith Travel Research in Hendersonville, Tenn., notes that up until a few years ago, the upscale hotel brand came with management. "If you wanted Ritz-Carlton, you had to have the Ritz-Carlton management contract," he continues. "But today, many luxury hotel companies are looking at franchising as a legitimate growth strategy. It's still not done on as broad a scale as other segments, mainly because of the importance of adhering to high service standards."
Ross notes that up until recently, Westin owned most of the hotels it managed, but now "has gotten into franchising fairly heavily. Hyatt typically brought the Hyatt name to a facility through a management contract, but they are considering franchising."
Perhaps one of the most significant franchising transactions in the luxury market has been Carlson Hospitality Worldwide's purchase of the Regent moniker. "There's a tremendous opportunity out there for a lot of four and five star hotels to become part of a major chain," says Rushmore. "Up until now, many have been members of Leading Hotels or Preferred Hotels, which are organizations that don't have much brand awareness. Some of these hotels could become Regents."
Hong Kong-based Regent is a five-star brand that was an independent hotel management company until it was acquired by Four Seasons, Rushmore says. "But Four Seasons didn't want the Regent brand diluting the Four Seasons name, so they essentially made the Regent brand dormant, then agreed to franchise it to Radisson."
He adds that many independent luxury hotels have not become a part of a hotel chain because owners want to keep ownership and keep management. "But with franchising," he adds, "they could benefit by being part of a chain."