Franchising is a proven route to the successful international expansion of businesses such as Marriott, Starwood and Ramada. However, it is not the exclusive preserve of such mega brands. It is also an international expansion method that can be used successfully by domestic and regional hotel brands with an appetite for growth. Within the UK domestic market, potential for growth is not limited. Once a hotel business has established its first 20 or 30 properties in the UK (or with some luxury concepts well before that), entering the more lively foreign markets is something that many hotel companies consider. In parallel, with continuing UK growth, the brand can generate another income stream to a franchise business model.
The well-travelled way of doing business
Franchising is an established way of expanding hospitality business internationally. Annually it accounts for turnover of US$300 billion in Europe, US$850 billion in America and US$130 billion in Australia. Together with management agreements, it is the preferred form of international expansion for many successful hospitality brands. To put it simply, international franchising works! This is why brands such as Ramada, Choice, Four Points, Holiday Inn and Hilton use it as a tool to expand business internationally into markets as wide ranging as the Middle East, China, India, South East Asia, Russia, Eastern Europe and Africa.
Benefits for all concerned
Franchising works because it offers real benefits, not only to the brand owner but also to its franchisees. It offers a number of clear advantages to hotel brands looking at internationalisation. It removes the need for the brand owner to invest capital and other substantial resources in the venture. In addition to management agreements, franchising is a form of "Asset Light" growth internationally. The advantages are clear and obvious. In order to open 10 new properties abroad, a budget in excess of US$200 million would easily be needed even for a budget brand. Management opportunities are few and far between. Franchising enables hoteliers to access the required capital and grow the business internationally without significant external funding.
Franchising also allows the brand to attract high quality local investors. These investors are highly sophisticated and have a great incentive to make the brand a success in their local market. They also have a strong understanding of the local market. So franchising not only enables the hotel brand to grow its business internationally by taking advantage of the capital and resources of local investors, but also enables the local investor to have access to the blueprint of a strong proven concept with a known brand. Few local hotel owners could develop exciting and successful new concepts that generate attractive levels of income without the trial and error that goes into building a successful new hospitality brand.
Preparing the launch
However, in order to take advantage of the potential that franchising offers, the brand owner needs to plan its approach carefully. One of the first signs of success of an up-and-coming hotel brand seems to be an influx of offers from foreign real estate developers interested in taking a franchise for Russia or China. Whilst this may be very flattering, it is important to be discerning. India's buoyant domestic hotel market was built by former Sheraton and Intercontinental franchisees? A franchise which has been well planned, structured and executed can have a substantial positive impact on a business but one that has been done as a response to an opportunistic approach from a foreign developer can be catastrophic. The reality is that on those relatively rare occasions where international franchises fail, this is usually due to corporations with poor quality franchisees. Brand owners must also take expert advice on how to structure the franchise in order to optimise its return, protect the brand and other intellectual property rights and comply with the legal requirements in the target markets. An inappropriately structured deal can mean that the most promising commercial arrangements fail. Before jumping into an arrangement with a franchisee, the hospitality company needs to ensure that its brand is fully protected by way of trademark registrations in the target market and that those marks are held in the most tax-efficient, intellectual property friendly manner. That requires some expert professional advice before negotiations start. Trademark pirates are a way of life in some markets. Additionally, there are countries where the registration of a trademark can take between two and four years. This can result in promising negotiations aborting because the trademark situation is unclear until registration has been achieved. Early planning is therefore key.
The basic structure for international hospitality franchises is straightforward. The franchisor grants the local owner the right to operate a hotel at a given location for a set number of years. A hotel franchise agreement will usually be for between 10 and 20 years. Generally, the local partner will either operate the property itself or engage a local management company to do so. Which approach is adopted depends very much on the partner and their operating experience.
If they already own and operate hotels, they do not need to engage a third party manager. If, however, they are new to hospitality, the franchisor should insist that arrangements for quality management are put into place.
In addition to the plain vanilla unit franchise for a single property, more sophisticated structures are also available and should be considered. For example, joint venture franchises are possible and some franchisors will take a limited equity stake in the franchisee with respect to strategic markets.
Development agreements are another popular form of international expansion. Here the owner of the hotel brand will appoint one partner for a target market, often a country and that partner will agree to develop a certain number of hotels over an agreed number of years (for example, 20 hotels over five years). These development schedules can often be overly optimistic and it is best that the parties set themselves realistic targets.