Selling Out – Is franchising the new model for hotels in tougher times?

What do sewing machines, cola, hamburgers and motor cars have in common? Answer: They made their success through franchising.

True. In 1856, when Isaac Merritt Singer needed to expand his sewing machine empire, his funds were exhausted from messy legal action over control of patents. Instead of paying his salesmen salaries to sell the new mass-produced device, he sold the rights to territories for which the owner (franchisee) paid a commission to Singer for each sale. Thus the modern concept of franchising was born.

Hamburger chains, automotive dealerships, soft drink bottlers and hotels followed suit and some the greatest brands in corporate history were born.

Hotels and accommodation chains took off after World War II, particularly in the USA. But like so many other franchise operations around this time, they suffered from lack of regulation. In 1979, the US Federal Trade Commission was given authority over franchising (Rule 436) and the market settled to allow familiar and reliable brands to flourish.

It wasn’t until the 1970s that franchising made serious inroads into Australia when the US fast food chains KFC, McDonalds and Pizza Hut landed – some would say invaded. Yet today, these brands are as much a part of Australian life as kangaroos, meat pies and … well, you know the rest.

In 2008, the Franchise Council of Australia (FCA) estimates 63,500 business format franchised units now operate together with 7,900 company-owned units, producing a total of 71,400 units in business format franchise systems. Approximately 8000 fuel retail outlets and 2500 motor vehicle retail outlets exist with around 413,500 persons employed in business format franchise systems. Growth of franchise operations for the last two years was almost 15 per cent.

Homegrown Success

One of the most successful franchise stories in Australia is the phenomenon of Gloria Jean’s Coffees. Australian owned and locally operated since 2004, the company now holds the international master franchise brand and roasting rights globally and currently has agreements to operate in around 50 countries.

The company has won multiple franchise awards and continues to grow at about 20 per cent annually in Australia and has opened 915 stores and signed 36 Master Franchise agreements across 35 countries worldwide.

To export a franchise model is rare as the vast majority of cases involve the arrival of brands to our shores as is the case for hotel and motel chains.

One example of domestic brand success is the 100 per cent Australian-owned Quest Apartments who have progressively moved to a franchise-dominated model since beginning to 1988.

“It was clear that company-owned properties were not performing. They lagged significantly behind the performance of franchised properties and generally sapped human resources and drained working capital,” says Nick Suriano, General Manager-Franchising, “and since our change of strategy in 2002 to franchise, we’ve seen average franchisee profits grow by 50 per cent over the last four years.”

Suriano also notes that 85 per cent of current investors are hungry for more action within the brand and that on average, 13 qualified applications are received for each opportunity. Despite the current overall downturn, Quest’s growth strategy is still on track and the brand hopes to add ten new properties each year.

Franchising not for everyone

However, for every franchise success, there seems to be at least an equal number of horror stories, indicating that franchises should not be undertaken lightly and the franchise model is anything but one-size-fits-all. A recent case just concluded by the ACCC left several former bakers anything but delighted when the Commission found in favour of the franchisor.

The commonest complaint against franchisors concerns the practice of “churning”, where franchises are repeatedly sold, reacquired, then resold in territories known for failures. Franchisors cite poor management, ineptitude or a refusal to follow the franchisor’s business model as reasons while franchisees claim collusion, intimidation and withdrawal of support.

Todd Wynne-Parry, Director of Development Australia, New Zealand, South Pacific for IHG, claimed to be “the world’s largest hotel company” (by number of rooms), urges caution.

“IHG believes the management option still provides the best path for all parties. Finding a franchise brand that will deliver the additional income required to service the agreement is difficult in all but a few circumstances.”

A large portion of IHG’s US network – particularly its Holiday Inn hotels – are franchised, however the majority of its Australian properties operate under management contracts. Wynne-Parry cites Holiday Inn Rooty Hill and Crowne Plaza Pelican Shores as two properties that successfully leverage their franchise association based on their very specific locations and assets.

NZ’s Heritage Hotel Management operates a mix of Qualmark 4-star owned, managed and franchised properties with majority of properties under management. “With the current economic climate, we anticipate more management arrangements struck with currently independent hotels, as they seek to reduce fixed costs and secure the support of a recognised brand with a consistent product offering,” says COO, Jeff Shearer.

Linda Wells, Franchise Manager with Constellation Hotel Group, an Australian company that owns and operates more than 70 hotels across Australia and New Zealand, agrees that some franchise models are too expensive and restrictive.

“Owners fearful of inflexible, high royalty franchise deals should probably test the market for other options, something flexible and pay-for-performance in nature,” advises Wells, “Some hotels want a huge amount of input from their group, but some just want a sign, a loyalty program and a webpage. Those operators can get a simple brand license that allows them to do just that – forget about the branded tea bags and sugar sachets!”

Franchising in the new economic climate

In the space of less than twelve months, the world economies are in turmoil. Banks, brands and borrowers of all types are floundering and the security and safety of known quantities are being questioned.

FCA Executive Director Steve Wright believes there is optimism in the franchising sector, which has a history of faring better in tough times, relative to other small businesses.

“There is a resilience in the strength of the franchise brand, the franchise support network and the bulk buying and marketing capability of franchise systems.

“We believe there is significant pent-up demand for franchise business expansion which has been hampered by the employment boom in the past few years. Franchising now has something very attractive to offer the economy in that it can provide a self-employed solution for entrepreneurial people displaced by corporate redundancies and otherwise finding it difficult to get another PAYE job. This has the double benefit of increasing production output and reducing unemployment.”

Wright’s sentiments are shared by General Manager Accor Franchise Hotels, Dino Mezzatesta.

“If ever there was a right time to franchise, it’s now. Incoming enquiries are flooding in like never before as people realise that in tougher times they can’t do it on their own,” says Mezzate
sta, “Leveraging the brand strength and purchasing power of a global name is a definite asset in this climate.”

David Bayes, CEO, Choice Hotels Australasia, concurs. “We’re not immune to the global economic climate but many properties are deciding they would be better off aligning with one of our global brands to access the benefits of dedicated field support, service, market segmentation, global alliances and partnerships, global reservations services and the sales and marketing force that Choice Hotels offers.

“It can be lonely running an independent accommodation business. In an increasingly complex and electronic world our franchisees gain great support from networking and common solutions and an alignment with a strong strategic direction supported by equally strong tactical solutions. The case for franchising is strong in the best of times – it’s even stronger in uncertain times!”

On the matter of “uncertain times”, Mr. Robert Anderson, CEO, Best Western Australasia, believes adversity can open doors.

“Opportunity can also be found in times of crisis. Consumers tend to favour mid-market hotel brands when economic conditions tighten. Last year Best Western bookings increased by 8.5 per cent over the previous year, the majority of these through our own Best Western website,” says Anderson.

“It is also in times like these that we can best assist our members. We are working even harder to maintain our increase in bookings and to ensure our members (property owners) come out of this economic situation favourably. We have increased all our marketing activities, re-launched our new-look loyalty program and implemented new industry-leading training courses that maximise our members’ skills and property revenue. “

Making the franchise decision

The Franchise Council of Australia advises prospective franchisees that with any business there are risks involved but they are reduced if you research effectively.

The FCA warns that buying a franchise is a major decision and that the commitment in capital and borrowings can be significant. Any new entry needs to consider the process very carefully, remembering that franchising is not a guarantee for success, rather an opportunity to establish a healthy rewarding business with the support of a network focused on success. Such a franchise is an example of true synergy where “the whole is greater than the sum of its individual parts.”

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