Hotel Online  Special Report

What Does a Hotel Franchise Cost?

CANADIAN LODGING OUTLOOK
August  2005 Year-to-Date


The Canadian Lodging Outlook is a joint monthly publication 
of Smith Travel Research and HVS International, 
Vancouver and Toronto, Canada
.
By: Stephen Rushmore, MAI, CHA - HVS International - New York

The selection of an appropriate hotel franchise affiliation affects a property’s ability to compete in the local market, generate profits, achieve a certain image or market orientation and benefit from referral business.  Because the success of a hotel is primarily based on the cash flow it generates, owners must weigh the benefits and services of a national franchise affiliation against the total cost of such a commitment.

The cost of a hotel franchise affiliation is based on various fees and expenses charged by the franchisor for the use of the brand’s name, logo, identity, image, good will, procedures and controls, marketing, and referral and s\reservation systems. Franchise fees normally include an initial fee paid with the franchise application, plus continuing fees paid periodically throughout the term of the agreement.

The initial fee typically takes the form of a minimum monetary amount based on a hotel’s room count, For example, in the United States the initial fee many be a minimum of US$45,000 plus US$300 per room for each room over 150. The initial fee covers the franchisor’s cost of processing the application, reviewing the site, assessing market potential, evaluating the plans or existing layout, inspecting the property during construction, and providing services during the preopening and conversion phases. The continuing fees are typically paid monthly over the term of the agreement and include the following costs.
 

Royalty Fee. Usually based on a percentage of rooms revenue, the royalty fee represents compensation for the use of the brand’s trade name, service marks and associated logos, good will and other franchise services.

Advertising or Marketing Contribution Fee. This fee covers the cost of brandwide advertising and marketing placed in various types of media, the development and distribution of a brand directory, and marketing geared toward specific groups and segments.

Reservation Fee. If the franchise brand utilizes reservation systems, the reservation fee supports the cost of operating and paying for the central office, telephone, computers and reservation personnel.

Frequent Traveler Program. Some franchisors maintain incentive programs that reward guests for frequent stays; these programs are designed to encourage loyalty to the brand. The cost of administrating the program is financed by a frequent traveler assessment.

Miscellaneous Fees. Depending on the franchise agreement, the franchisor may provide a separately charge for additional services such as training programs, travel agent commissions, global distribution system fees, computer hardware and software and software maintenance.

Periodically, HVS International reviews the franchise documents of 89 major franchise hotel companies to determine the various fees they are charging their franchisees. Three models utilizing different revenue assumptions representing the economy, mid-rate and first-class hotel brands provide the basis for determining the total cost of the affiliation over a 10-year holding period.

The table below shows the results of the HVS franchise fee survey for the two lowest and the two highest total 10-year costs for each of the three class assumptions. The table breaks out the initial cost, royalty cost, reservation cost, marketing cost, frequent traveler cost, miscellaneous cost, the 10-year cost and the 1-year cost as a percentage of the assumed rooms revenue during that 10-year term.

Obviously the cost of a hotel franchise affiliation is an important consideration when selecting a franchisor. However, other factors such as the strength of the brand, the ability of the reservation system to deliver customers, the availability of other services such as a frequent traveler program are all critical factors that go into developing a price-value relationship necessary for making the correct decision.

Note: Parris Jordan and Zubin Saxena of HVS International developed the data for the HVS 2005 Hotel Franchise Fees Analysis Guide.

Total Cost of a Franchise Affiliation
Over a 10-year Holding Period

Economy Total Initial
Cost
Total Royalty Cost Total Reservation
Cost
Total Marketing Cost Total Frequent Traveler Cost Total Misc. Cost Total 10-Yr Cost % of Total 
Room Revenue
Budget Host  US$5,000  US$71,250  US$12,000  ---  ---  US$4,900  US$93,150  0.6 %
Best Value Inn  5,000  93,000  ---  36,000  ---  2,400  136,400  0.9
Select Inn  10,000  383,086  17,053  153,234  7,994  150,385  721,752  4.7
Super 8  25,000  766,172  229,852  229,852  61,294  256,098  1,568,268  10.2
Travelodge  36,000  689,555  315,594  315,594  61,294  207,354  1,625,390  10.6
Days Inn  36,000  766,172  291,145  291,145  61,294  243,228  1,688,985  11.0
Mid-Rate Brands . . . . . . . .
Best Western  $61,000  $545,680  $292,000  ---  ---  $489,653  $1,388,333  2.8 %
ClubHouse Inn  30,000  1,961,401  164,666  ---  69,943  ---  2,226,010  4.5
Master Host Inns  6,000  1,961,401  ---  1,225,876  19,750  3,213,027  6.6
Baymont  50,000  2,189,056  980,701  1,225,876  196,140  557,663  5,199,436  10.6
Hampton Inn  95,000  2,451,752  ---  1,961,401  196,140  509,192  5,213,485  10.6
Comfort Inn  100,000  2,574,339  858,113  1,029,736  196,140  493,985  5,252,313  10.7
First-Class Brands . . . . . . . .
Omni  $50,000  $3,034,043  $1,152,936  $1,152,936  $1,152,936  $523,000  $7,065,851  7.0 %
Luxury Collection  120,000  4,045,390  954,931  1,011,348  404,539  696,044  7,232,252  7.2
Woodfin Suites  120,000  5,056,738  ---  2,528,369  ---  90,000  7,795,107  7.7
Radisson  150,000  6,068,085  2,022,695  2,022,695  239,805  454,306  10,957,587  10.8
Hilton  92,500  5,056,738  2,022,695  2,022,695  621,372  1,376,681  11,192,681  11.1
Marriott  90,000  7,888,511  648,320  1,011,348  582,536  1,010,329  11,231,043  11.1
Source: HVS International
.

CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
August 2005

.

© Smith Travel Research, 2005. Reproduction or quotation in whole or in part
without permission is forbidden. *INS - Insufficient Data
-
Contact:
Selina Lai
HVS International – Canada
2120 Queen St. East, Suite 202
Toronto, ON M42 1E2
(416) 686-2260, ext 21
(416) 686-2264 FAX
slai@hvsinternational.com
www.hvsinternational.com

Also See Basic Concepts of Co-Branding, With Examples from the Hospitality Industry Could Co-branding Improve Your Bottomline? / Peggy Yip / Canadian Lodging Outlook - July 2005 Year-to-Date
Brand Equity: Raising the Flag / Theodore Noseworthy / Canadian Lodging Outlook - April 2005 Year-to-Date
Timeshare Cash-Flow Modeling and Market Feasibility / Canadian Lodging Outlook - March 2005 Year-to-Date
Low Interest Rates and High Demand for Hotel Assets Fuels Value Gains / Canadian Lodging Outlook - February 2005 Year-to-Date
A Crash Course In Cap Rates / Canadian Lodging Outlook - January 2005 Year-to-Date
2004 Canadian Hotel Transaction Survey / Canadian Lodging Outlook - November 2004 Year-to-Date
HVS International Hotel Development Cost Survey 2004 / Canadian Lodging Outlook - September 2004 Year-to-Date
Defining a Hotelier; The Hotel Professional Has Gone Through a Major Transition Over the Past 20 Years / Mark Keith / Canadian Lodging Outlook - August 2004 Year-to-Date
Hotel Investments; The Magic, Curse Of Leverage / Canadian Lodging Outlook - July 2004 Year-to-Date / September 2004
June Results Are In And.......We’re Back! / Canadian Lodging Outlook - June 2004 Year-to-Date / Aug 2004
Hotel Life Expectancy / Canadian Lodging Outlook - March 2004 Year-to-Date / May 2004
European Hotel Transactions 2003 - Country Analysis / Canadian Lodging Outlook - February 2004 Year-to-Date / April 2004
2003 an Unbelievably Strong Year for US Hotel Sales / Canadian Lodging Outlook - December 2003 Year-to-Date / February 2004
2003 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / January 2004
2002 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / Feb 2003
How To Get The Best Sales Price; Positioning Your Hotel for Sell / Stephen Rushmore / Canadian Lodging Outlook - July 2003 YTD / September 2003
Lodging Market Impact of Hosting Olympic Winter Games; Will Salt Lake City Experience Apply to Vancouver and Whistler? / Canadian Lodging Outlook - June 2003 YTD / August 2003
Year-to-date Occupancy through April is 50.4% for all of Canada / Canadian Lodging Outlook - April 2003 YTD / June 2003
SARS and Its Impact on Tourism in Toronto / Canadian Lodging Outlook - March 2003 YTD / May 2003
Hotel Values in Europe - Current Trends / Canadian Lodging Outlook - December 2002 Year-to-Date / Feb 2003
2002 Canadian Hotel Transaction Survey / Canadian Lodging Outlook / Feb 2003
Performance Clauses Essential In Hotel Management Contract / Stephen Rushmore / Canadian Lodging Outlook / Dec 2002
Separating the Hotel Looker From the Hotel Buyer / Stephen Rushmore / Canadian Lodging Outlook / Sept 2002
Making The Ideal Hotel Investment / Stephen Rushmore / Canadian Lodging Outlook / Aug 2002
Reporting In at Six Months..../ Canadian Lodging Outlook / July 2002
The Global Approach To Hotel Valuations / Canadian Lodging Outlook / June 2002
Hotel Insurance Premiums on the Rise? / Canadian Lodging Outlook / May 2002 
Hotel Development Cost Can Determine Feasibility / Canadian Lodging Outlook / May 2002 
Hotel Internet Distribution Channels / January 2002 Month-to-Date Results / Canadian Lodging Outlook / April 2002 
2001 Was a Great Year If You Were in Edmonton! / December 2001 Year-to-Date Results / Canadian Lodging Outlook / Feb 2002 
2001 Canadian Hotel Sales / Canadian Lodging Outlook / Jan 2002 
The Effect on Capitalization Rates and Discount Factors After September 11 / Canadian Lodging Outlook / Dec 2001 
So How Bad Was September for Canadian Hotels.. Pretty Bad! / Nov 2001
So How Bad Was September for Canadian Hotels.. Pretty Bad! / The Canadian Lodging Outlook / September 2001 
Have Hotel Values in Canada Declined Since September 11th? You Bet They Have / The Canadian Lodging Outlook / August 2001 
The Popularity of Boutique Hotels / The Canadian Lodging Outlook / July 2001 
Rising Energy Costs Cause Concern in the Lodging Industry / The Canadian Lodging Outlook / June 2001 
Niagara Falls: With Supply Comes Demand / The Canadian Lodging Outlook / May 2001
Does Supply Generate Demand? / The Canadian Lodging Outlook / May 2001 
Optimism With a Hint of Caution, As Analysts Predict a Softer Year for the Canadian Hotel Industry / Mar 2001 
Limited-Service Growth in Canada - Where’s it Going? / The Canadian Lodging Outlook / January 2001 
HVS Canada in Review - Year End 2000 / The Canadian Lodging Outlook / March 2001 
Canadian Lodging Outlook / May 2000 Year to Date Statistics / HVS International - Canada / July 2000 
The Rule of Thumb Method...Does It Still Hold Weight? / Elaine Sahlins - HVS / Oct 2000
What’s Hot and What’s Not in Western Canadian Hotel Markets / Mar 2000


To search Hotel Online data base of News and Trends Go to Hotel.Online Search

Home |Welcome! | Hospitality News | Classifieds | Catalogs & Pricing | Viewpoint Forum | Ideas/Trends
Please contact Hotel.Online with your comments and suggestions.