Franchised Franchised Hotels Hotels and Their Relation to Market Value Spring 2014 California Hotel & Lodging Association 7 A hotel’s brand identification is definitely a large factor in its market value. Simply identifying what brand works for a particular market can be very complex. The brand that’s chosen will ultimately have a large bearing on the success or failure of any hotel. Why Franchise? Much has been written on branding and brand equity. A brand’s value rests mainly with the customer, and is based on the customer’s brand awareness and loyalty. Brands initially create value for a customer by offering consistent quality. After a customer becomes loyal, owners can capitalize on the brand’s value through increasing rate and increased market share. Hotel branding is meant to provide added value to both the guest and the hotel owner. It has been reported that 85% of business travelers and 76% of leisure travelers prefer branded properties over independent hotels. A reason for this is that a guest relies on the brand name to reduce the risks associated with staying at an otherwise unknown property. In this regard, strong brands enable hotel chains to differentiate themselves in the minds of the customer. From the hotel owner’s point of view, the level of brand equity positively relates to the hotel’s financial performance. In addition to the benefits of branding to a hotel owner, it is perhaps even more important to a lender. Most hotel lenders believe that a strong franchise is imperative to be competitive in today’s market. Hotel lenders also strongly believe that financing a franchised hotel carries less investment risk versus an independent property. As a result, many buyers that desire to own their own independent hotel are often stymied by the financing. Lenders simply prefer not to consider unbranded hotels. Advantages vs. Disadvantages We already touched on two of the main advantages of franchising— brand loyalty and the availability of financing. OTHEr ADVAnTAgES inCLUDE • rEDUCED riSK Owner can seek corporate assistance • ECOnOMiES OF SCALE Ability to tap into the franchise buying network for more favorable rates, e.g. third party web sites • SKiLLED MAnAgEMEnT Access to quality training, ongoing support and advice • ADVErTiSing National and regional DiSADVAnTAgES • COnTrOL Subject to control and regulation by the franchisor • LiMiTED ArEA OF prOTECTiOn Allows direct competition from the franchisor’s other brands • rEpUTATiOn Franchisee reliance on the power of the franchisor’s trade name could be a liability when the franchisor, through mismanagement or a drop in standards, allows the brand to be tarnished • prODUCTS A franchisee is often tied exclusively to the supplier of certain products. Can be forced to add services, e.g. free hot breakfast, free internet access, etc., at no cost to franchisor. • rigHT TO SELL A sale is subject to the franchisor’s consent. The franchisor can insist on an expensive PIP (property improvement plan) and require a new buyer to hire a professional “approved” management company. This can impact resale value. • LiQUiDATED DAMAgES If a buyer does not want the brand, the franchisee can be responsible for payment of liquidated damages or if the franchisee does not maintain the property to brand standards. In determining what franchise is best for a property, a number of factors are taken into account: f Why Franchise? f Advantages vs. Disadvantages f Costs f Value Hotel branding is meant to provide added value to both the guest and the hotel owner. It has been reported that 85% of business travelers and 76% of leisure travelers prefer branded properties over independent hotels.
CHLA Spring 2014
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