In previous years this publication has given an insight into the asset light strategies of global hotel operators, an overview of some of the trends in hotel franchising and provided a brief appreciation of the issues affecting hotel franchising. This year we have retained some of the “quick to view” educational references and the focus on technology inter-operability issues within hotel franchising as well as looking at the current economic environment. We hope you find this 2014 Guide an interesting read! THE MARKET Looking back at 2013, the by-word seems to have been “momentum”. In general terms the momentum gained in 2013 has created a positive outlook and a favourable transaction climate for 2014 across the globe. There will always be regional variances, however we are now seeing transactions coming to the market that in the recent past may not have been concievable. Looking forwards the challenge for hoteliers is still the need to build, manage and differentiate their brands across all market segments and territories and in doing so to understand what customers are looking for to gain the all-important brand loyalty. GAME CHANGERS The power of brands (and thus the draw of franchising) remains a key influence on the hotel sector and whilst there are numerous challenges facing global hotel operators, these operators remain best placed to face those challenges. As we are all becoming increasingly aware, the volume and richness of data and information now available to consumers (and to the operators themselves) is huge. Traditional media (such as print) is no longer important, digital platforms like Expedia and Google Hotel finder are where the action is at. Add to this consumers’ requirement for mobile bookings and the rise and rise of social media platforms disseminating information (“likes”; “dislikes” and twiterrati followers), it is easy to come to the conclusion that innovation will be the focus for the hotel industry in the coming years. Innovation can come at a micro or macro level, however for obvious reasons (namely resources), the large hotel operators are best placed to take advantage of the technological revolution that has become embedded in the travel industry. The majority of global hotel operators are engaged in programmes to decipher real time information and experiences and to define their particular brands with consumers. A well-defined brand plus meeting customer expectations in terms of their experience are the cornerstone of the franchise system, therefore hotel franchising will remain critical to growth and geographical expansion in the hotel sector. Whilst adoption of technological change is seen as “a must”, the legal implications of doing so are numerous. The bigger players have the resources to invest in new media platforms, mobile booking systems, data harvesting and Wi-Fi access but they will have to be cognizant of the e-commerce, privacy and data protection, licensing, security, cookies and numerous advertising issues associated with it. Our series of “Shifting Landscapes” articles (www.dlapipershiftinglandscapes.com) provides an excellent overview of the main legal challenges organisations face in the context of new and emerging IT and digital technologies. Innovation can also be seen in the context of eco-friendly policies. Today’s consumers are increasingly environmentally aware and expect the brands they affiliate with to be likewise engaged. The combination of regulatory pressures and guest requirements for sustainable and value for money options make the hotel industry extremely challenging. Implementing sustainability policies across a portfolio of franchised hotels is particularly demanding for hotel operators and achieving the right blend of eco-friendly brand, with commercial realities and local regulatory compliance is no mean feat. Towards the back of this guide we also consider other areas of innovation that may yet impact on the hotel industry and what this might mean for franchised hotels.
The key question for owners is “will my asset benefit from brand affiliation?” There are significant benefits of association with a brand, including a higher likelihood of success, brand awareness, increased access to financing and access to centralised systems. Taking a franchise is one of the quickest and simplest methods of achieving this, whilst allowing the owner to retain control of its asset.
From the operator’s perspective, particularly when considering the current global economic climate, franchising is very appealing. It offers a method of quickly expanding a brand, it is lean and it generates a consistent revenue stream. Franchising does, however, leave open the question of who will operate the hotel. Most owners will not be in a position to manage the hotel and thus require the services of a third party, the non-branded management company, that will manage the day-to-day hotel operations. Such arrangements are now commonplace, with non-branded management companies offering major operators crucial local market knowledge. In countries where operators are in the process of establishing their presence this is vital for early success, and in certain markets franchising offers a mutually beneficial partnership for local non-branded management companies and established global operators with a brand to promote.
Theme Franchise Agreement Management Agreement What is granted? Hotel owner is licenced a package of IPRs, essentially relating to the “brand” of the hotel operator. These IPRs are to be used in the management and operation of the hotel. Centralised marketing, advertising and reservation services are provided for a further fee (see below). Management and operation of the hotel remains the obligation of the owner. Operator will: Manage and operate the hotel on behalf of the owner; ■■ Provide technical services (eg in relation to the design and development of the hotel); ■■ Licence its brand; and ■■ Provide centralised advertising, marketing and reservation services. Clearly under this structure the hotel benefits from the “hands on” experience of the operator. What are the owner’s obligations? Whilst overall management of the hotel remains with the owner, the owner is required to: ■■ Adhere to the operator’s “brand standards manual” in terms of both the brand and the standards applicable to that brand; ■■ Participate in group marketing and advertising; ■■ Participate in the group’s reservation system; ■■ Where the hotel is being constructed or renovated, obtain the operator’s approval for the relevant plans and specifications; ■■ Open the hotel on the specified date (some operators may require “grand opening event(s)”; ■■ Prepare and maintain records and accounts to be shared with the operator; and ■■ Comply with all legal requirements and provide the operator/franchisor with protection against any claims. Although management and operation of the hotel is provided by the operator, the owner will remain responsible for: ■■ Compliance of the hotel with the operator’s brand standards (and the cost of renovations associated therewith); ■■ The cost of maintenance and repairs; ■■ Insurances; ■■ The employment of non-management employees; ■■ Obtaining regulatory licenses for hotel operation, such as liquor licence etc; ■■ Real estate issues, such as lease renewals, zoning requirements, etc; ■■ Although not an obligation per se, owners will often seek the right to approve annual budgets, capital and FF&E budgets, approve key personnel positions, review the hotel’s accounts, apply performance tests and for a reasonable non-compete restrictive covenant.
Theme Franchise Agreement Management Agreement What is provided by the operator? The operator will typically provide: ■■ Training on the operation of the hotel according to the “system” (some training may be incorporated in the fees, some may involve additional charges); ■■ Providing and updating the brand standards manual(s); ■■ Occasionally pre-opening services (which may form part of the fee structure or could be payable separately); ■■ Access to the operator’s marketing, advertising and reservations system; and ■■ Technical services may be provided on other areas albeit this is likely to be for additional fees. The operator will typically: ■■ Operate the hotel according to the Brand Standards; ■■ Include the hotel in the operator’s marketing, advertising and reservations system; ■■ Have authority to conduct day-to-day operation of the hotel including purchasing goods and services, conducting litigation, managing staff etc; ■■ Provide technical services relating to the design and development of the hotel (this is often subject to a separate technical services agreement and fee). What are the fee structures? A typical fee structure involves: ■■ An initial fee (this is often linked to the size of the hotel). In some cases this fee is non-refundable; ■■ Continuing or royalty fees – this is based on room revenue. Typically this is between 3% and 5% of room revenue; ■■ Advertising/marketing contribution – again commonly based on room revenue. This fee generally goes towards a fund for group (not necessarily local or regional) marketing. Typically between 2% to 4% of room revenue; ■■ Reservation fee(s) (can be combined with above) – supports cost of operator’s reservation and/or loyalty system(s). Rates and calculation vary between different operators and the systems they operate. A typical fee structure involves: ■■ “base fee” – typically between 2% to 4% of gross revenue; ■■ “Incentive fee” – typically around 10% of gross operating profit; ■■ Technical services fees – lump sum or payable on a time and materials basis for relevant services; ■■ Centralised services fees – often made up of: – Marketing fees – typically in the region of 2% of room revenues; – Reservation fees – calculated per room or against room revenue; – Loyalty and other programmes provided. Standards applicable Hotel operators commonly have a brand standards manual or operating manual. Compliance is key. Brand standards manual. Again compliance is key. Applicable restrictions Whilst post expiry/termination restrictive covenants can be enforceable in a franchise agreement, the underlying principle is that the restriction must be reasonable. In the context of an asset run as a hotel it is difficult to consider a situation where it would be reasonable to place such a restriction on the hotel/ owner. HMAs typically contain a restriction on the operation of similar hotels within a prescribed area. Personnel As management and operation of the hotel remains with the owner, the owner will employ all people associated with the operation of the hotel. Operator will usually provide key management personnel (at a cost to the hotel). Most operators will require that the owner remains the employer of the remainder of hotel staff.
Theme Franchise Agreement Management Agreement Personnel As management and operation of the hotel remains with the owner, the owner will employ all people associated with the operation of the hotel. Operator will usually provide key management personnel (at a cost to the hotel). Most operators will require that the owner remains the employer of the remainder of hotel staff. Legal requirements Franchising is a regulated activity in a number of countries and the franchisor or brand owner is commonly required to disclose detailed information about the franchise it offers. See overleaf for more detail in relation to European disclosure requirements. The HMA is a contractual document that is not regulated by specific laws, however, local laws will apply notwithstanding the governing law of the HMA. Multiple operations Whilst it is common for operators to offer a “direct franchise” (ie between hotel owner and operator), franchising also offers the potential for operators to grant third parties with a “master franchise” or “development rights” for a specific territory. Term Typically between 5 to 15 years but can be more. Often includes options to renew. HMAs are typically between 15 to 25 years and often incorporate renewal provisions.
From this table it can be seen that management agreements generate more revenue per hotel for the operator. However, the costs associated with managing hotels, particularly on an international basis, is an awkward fit with the rationalised, lean model which is currently preferred. This said, there are still many instances when management agreements are preferable. Flagship hotels, new and emerging brands and hotels in emerging markets are more likely to flourish under the tighter brand controls offered by a management agreement.
FRANCHISING & DISCLOSURE
Country (Regulations) Disclosure Obligations Contract Summary Commercial Disclosure Italy (Law Number 129/04) The law does not require a specific summary. However the contract must contain details concerning key elements including: ■■ the fee and investment expected of the franchisee; ■■ the territory granted to the franchisee; and ■■ a description of the know-how and services to be provided by the franchisor. ■■ the franchisor’s balance sheets for the three previous financial years; ■■ documentation relevant to the franchisor’s trade marks; ■■ a list of all the franchisees belonging to franchisor’s network. Netherlands There is no specific regulation. General contract rules still apply and best practice is to disclose. Norway There is no specific regulation. General contract rules still apply and best practice is to disclose. Poland (Article 56 KC) No specific regulation but under general principles of civil law franchisor has a duty to disclose key facts of the franchise offered. Portugal There is no specific regulation, however general Portuguese contract law protects franchisees and therefore best practice is to disclose material facts on the franchise offered. Romania (Government Ordinance 52/1997) Contract summary not legally required, however “full awareness” requirements suggest early contract disclosure (or a summary). Romanian regulations provide for general duties of disclosure on the franchisor such that the franchisee is in “full awareness” of its participation in the relevant franchise. The regulations also provide for specific requirements in the context of the Franchise Agreement itself. Russia There is no specific regulation. General contract rules still apply and best practice is to disclose. Slovakia (s.43 of the Civil Code) No specific regulation but again the Civil Code implies a duty of “good faith” and “fair dealing”, meaning that although disclosure is not a strict legal requirement, it is recommended to disclose key facts to avoid claims of misrepresentation later in the relationship. Spain (Law 7/1996 and Royal Decree 419/2006) ■■ no specific requirements, must comply with basic contractual requirements. ■■ franchisor’s statutory identification data (filing details, register number); ■■ description of the franchisor’s experience (starting with the date the franchisor company was incorporated and describing the different phases of the network’s development; ■■ a general description of the franchise (system, knowhow and the technical assistance that the franchisor will provide); ■■ proof of ownership of the relevant IPR; ■■ an estimate of the investment the franchisee will have to make.
Where a hotel operator seeks to licence its brand by offering franchises it may be required to meet certain mandatory regulatory requirements depending on the jurisdiction in which the franchise is to be offered. The US market is highly regulated, and operators or franchisors are required to provide a franchise disclosure document to owners looking to bring their hotel under the particular flag. Aside from the US, a number of countries across the globe have specific franchise laws (for example, Australia, Belgium, China, France, Italy, Malaysia and Spain) but even in countries where specific franchise laws do not exist there still may be a requirement (or good practice) to disclose information on the franchise being offered. In jurisdictions where a franchisor is a member of a franchise association, such association may impose a disclosure obligation on its members through a non-statutory code of practice. Outlined below is a high level summary of the disclosure obligations in some key European jurisdictions.
Country (Regulations) Disclosure Obligations Contract Summary Commercial Disclosure Belgium (The Law of 19 December 2005 as modified on 27 December 2005) ■■ summary of the obligations of the parties (including consequences of not meeting them); ■■ description of non-compete clauses and all exclusive rights granted; grounds available for early termination; ■■ summary of the conditions which apply to a renewal of the franchise. ■■ details of the franchisor’s identity; ■■ summary of the nature of the activities of the franchisor and the IPR rights; ■■ annual accounts of the last 3 years; ■■ summary of the historic development of the franchised network and the number of franchisees; ■■ description of the investment required to be made by the franchisee and the period of amortisation; ■■ a market study. Czech Republic (Civil Code) No specific regulation but again the Civil Code implies a duty of “good faith” and “fair dealing”, meaning that although disclosure is not a strict legal requirement, it is recommended to disclose key facts to avoid claims of misrepresentation later in the relationship. France (Loi Doubin Law/ Commercial Code) ■■ term and renewal conditions; ■■ termination provisions; ■■ transfer clause and the scope of the exclusivity granted. ■■ details regarding the company granting the franchise and its directors; ■■ banking references; ■■ summary of the professional experience of the managers; ■■ copy of the accounts for the last two years; ■■ details of investments and expenses to be borne by the franchisee; ■■ a market study. Germany (s.242 German Civil Code) No specific requirement but “good faith” obligations under the Civil Code would make it advisable for early contract disclosure (or a summary) All important information and documents relevant to the franchise relationship should be disclosed within a reasonable time span prior to the signing of the contract. For example, relevant IPR, investment requirements; general information on the brand and associated standards. Greece (Civil Code) There is no specific regulation although the Greek authorities have long discussed implementing specific regulations. As with other jurisdictions, the Greek Civil Code implies a duty of “good faith” which itself implies a duty on franchisors to disclose key facts. Hungary There is no specific regulation but the Hungarian Civil Code will apply. Note that Hungarian laws draw heavily on the German and Austrian legal systems and so again disclosure is recommended.
Country (Regulations) Disclosure Obligations Contract Summary Commercial Disclosure Sweden (Disclosure Act 2006) ■■ information on in term and post term non compete clauses; ■■ information on the term, conditions for amendment, renewal or termination; ■■ information on how contractual disputes are to be resolved. ■■ description of the franchise; ■■ information on the fee to be paid by the franchisee; ■■ information on the categories of goods or services that the franchisee is required to purchase; ■■ information regarding the IPR. Switzerland There is no specific regulation. General contract rules still apply and best practice is to disclose. Turkey There is no specific regulation. General contract rules still apply and best practice is to disclose. Ukraine (Commercial Code/ Civil Code) ■■ must be a single written document; ■■ contain summary of the obligations of the parties; ■■ general contract rules still apply. There are no specific rules governing the disclosure in franchise agreements and best practice is to disclose. United Kingdom There is no specific regulation. General contract rules still apply and best practice is to disclose.
OUTSIDE EUROPE This section of the publication focusses on European Disclosure requirements, however, it is widely accepted that the genuine growth markets are further East. Franchise and disclosure laws across Asia are a mixed bag. China for example has had franchise laws since 2007 which were updated just over 12 months ago, and is seen as a tight regulatory environment. Malaysia has one of the most comprehensive franchise legislation systems outside the US, fraught with complexities for the foreign operator entering the market. Vietnam, another hotspot for growth and development has established franchise disclosure laws which are broadly based on the Australian (as opposed to US) approach. A little closer to home, we also understand Abu Dhabi is considering implementing laws applicable to all franchisees operating in the Emirate.
HYBRID AGREEMENTS A global “one size fits all” approach to hotel management styles does not work. Franchising is the mainstay in the US, whilst in Europe there is a broad mix of leasing, ownership, franchising and management agreements. International operators in China and other emerging markets currently favour management agreements as they allow tighter brand control, though recently we have seen experimentation with different approaches which may or may not become preferable. “Franchise light” or “minifranchises” are being offered in Continental Europe. These agreements give the owner the benefits of “system affiliation” associated with an established brand, but based on softer branding than that envisaged under a standard franchise with a big operator and at considerably less cost. Whilst this is clearly a reaction to the current economic climate and the nature of the European market, given the compromises that need to be made on branding it is questionable how attractive the concept is to major operators. “Manchising” is, as the name suggests, a hybrid form of franchise and management agreements. The forms of contract can vary from a complete combination of both forms of agreement, to one that is initially a management agreement but which after an initial term, say five years, moves to a franchise relationship. The rationale behind manchising is that the operator has greater control over the operation of a hotel through their management at the outset of the relationship, which is not the case with a “pure” franchise agreement. This approach has clear advantages for operators launching new brands and/or entering new territories. TASTY COMBINATIONS At the start of this guide we talked about “game changers”. The most obvious at the current time is operator engagement with the technology revolution but another, which is highly relevant to franchising, is partnering with other “brands” (most notably food & beverage related) to enhance the guest’s experience. Examples abound, from the likes of celebrity chefs such as Gordon Ramsey to Dunkin Donuts and Costa Coffee. Many of these brands are operated on a franchise basis and give the hotel a point of difference to its competitors. However history is full of failed examples and the message has to be to ensure that brand partnering is mutually beneficial. VIRTUAL BOUTIQUE EXPERIENCE In the new era of mobile shopping and brand inter action maybe hotel operators will become cognizant of offering a retail experience to its customers within the walls of the hotel itself to further enhance the customer’s experience. “Click & Collect” branded stores already exist in the retail space, maybe the concept could be extended to City hotels? After all, this is merely an extension of partnering in the context of food and beverage and luxury commissions are already a part of the hotel industry’s DNA. GETTING CONNECTED There was a time when technology in a hotel was better than that at home. This trend has somewhat reversed lately due to the domestic spread of technology such as smartphones and tablets tied with the significant infrastructure costs for hotels to “get connected” and offer guests the experience they now take for granted. The prospect of seeing guest tablets in rooms now seems to be the future and research suggests there are potential benefits for operators – where used data suggests guests are more likely to use services such as room service or treatments where the services are electronically made available via tablet app or similar. The possibilities for operators (and/or their partners such as the luxury boutique owners per the above) seem vast and it will be interesting to see how operators seize the initiative.