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Lessons from the Field
A Common Sense Approach to Success in the Hospitality Industry
By Dr. John Hogan, CHA MHS CHE, March 2009

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Getting the Most Out of Your
Hotel Franchise Investment
(Part 1 of 3)

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By Dr. John Hogan CHE CHA MHS 
March 3, 2009 


“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.”
Jeff Bezos, founder, president, chief executive officer
and chairman of the board of Amazon.com

Understanding the business model and its evolution

In 2009, franchising and branding continue to be integral parts of the hotel and hospitality landscape, with an estimated 28,200 of the 49,500 hotels (roughly 56%) in the US belonging to a branded or franchised organization. Another calculation projects that an estimated 68%+ of the more than 4,600,000 US hotel  rooms (or 3.1 million) are somehow brand affiliated, when management agreements and brand owned and operated hotels are included.

A variation of franchising practices goes back to the Middle Ages, when feudal lords granted rights to hold markets or to operate ferries.  Common law evolved from the practice and in certain western European countries, the notion of buying product from a single source became prevalent if, for example, a tavern owner needed a line of credit or a competitive edge.

In the US, the foundations of modern franchising first began in the 1850s, with Singer Sewing Machines dividing distribution rights and then service responsibilities for their product.  The auto industry followed the business model of sharing distribution costs and profits, with General Motors and Ford among the first to use this concept to get the physical product to their customers.

After World War II, many other industries recognized the potential of this form of business and hotel distribution exploded with franchises and referral organizations. In the 1960s and 1970s, literally dozens of brands were created in the hotel and motel industry  alone.  Government regulations in the 1970s were introduced to address and prevent fraudulent practices.  Specific disclosures of  franchise ownership and registration requirements were adopted.  

In 1979, the Federal Trade Commission was given authority over franchising (Rule 436) due to the interstate commerce nature of the industry.  This act had 20 sections dealing with Franchisor background, business experience, litigation and/or bankruptcy history and the overall obligations of the Franchisor to the Franchisee. 

The reasons franchising became a norm are the proven formulas for likely success.  If a franchise has a solid track record in many different locations , chances are stronger that this model can be replicated.   While success is not a guarantee,  the tendency of the traveling public to patronize familiar brands in the 1970s-1990s boosted operator perception of franchising.

Changes in the law and the economy

The economy tends to go in cycles. The 1986 changes made to the tax codes by the US Congress had a resounding effect on a number of well-known hotel franchise companies.  The tax code changes also affected many banks holding real estate loans that were under-funded from an equity perspective and these banks experienced many defaults.

The Resolution Trust Corporation (RTC) was a temporary federal agency established in 1989 to oversee the disposal of assets from failed savings and loan (S&L) institutions. It was created by Congress in the wake of the 1980s S&L crisis, in which hundreds of depository institutions slipped into insolvency due to unsound banking practices. By the time the RTC closed in December 1995, it had managed some 747 S&L closures and sell-offs valued at $460 billion in assets and $225 billion in deposit liabilities. The RTC's work affected no less than 25 million U.S. bank accounts, and while it was in operation, it operated the federal government's fourth-largest off-site records system.

Among the assets in the RTC's inventory were office complexes, retail shopping centers, bank branches, mobile home parks, storage facilities/mini-warehouses, industrial park/warehouses, restaurants, parking garages/lots, medical facilities/private hospitals, nursing/retirement homes, hotels/motels, resorts/golf courses, apartments, office condominiums, and mixed-use zoned land. 

As hotels were involved, a good number of established franchise companies were acquired by other companies or, in some cases, entered into bankruptcy.  Major names like Howard Johnson, Days Inns, Ramada Inns, Knights Inns, Travelodge, Rodeway Inns, Econo-Lodge, Friendship Inns, Royal Inns and others either changed ownership or disappeared , some more than once in relatively short time periods.  The challenge was not necessarily with the franchisors’ quality, but frequently the domino effect caused by lenders calling loans on undercapitalized properties.  If the property could not meet the call in this period of economic uncertainty, the fees owed to the franchisors could often not be paid either.

The industry experienced challenging years in the 1985-1995 period, but emerged stronger due to more experienced operators with better equity positions.   

Franchising was strengthened and consolidated as illustrated by the following examples in the 1990s and into the first decade of the new century:

  • Hilton acquired the Promus Group, which had Hampton Inns, Homewood Suites, Embassy Suites and Doubletree Hotels. The Hilton Garden brand sought to fill a mid-market niche, while the Conrad brand targeted larger international locations. Hilton later was purchased by Blackstone and went from a publicly traded company to a private company, which includes franchising La Quinta.  
  • Marriott continued to create its own brands, but selectively acquired Residence Inns, Renaissance and Ritz Carlton. A partnership with boutique hotelier Ian Schrager with the name Edition Hotels is among the newest franchise options.
  • Intercontinental became the global name for a rapidly changing Holidays Inns that became Bass and then Six Continents before finalizing IHG.   Holiday Express was born successfully among a number of additional Holiday named sub-products.  Acquiring Candlewood Suites and Cambridge Suites as additional brands allowed flexibility in certain markets, and they launched a lifestyle brand, Hotel Indigo.
  • ACCOR, well known in Asia and Europe for 4 and 5 star brands, entered the US and Canadian markets with the acquisition of Motel 6 and Red Roof Inns.  Red Roof was sold in 2008.
  • Carlson acquired the names of Regent and Park Inns and Plazas, while adding their own Country Suites brand to their initial hotel brand, Radisson.  
  • CHOICE  Hotels, the original product segmentation group, added Sleep Inns, Clarion, Econo-Lodge, Rodeway and others by acquisition, as well as launching their new life style hotel Cambria.
  • A new entity, Hospitality Franchise Systems acquired over the years the franchising rights to Days Inns, Howard Johnson, Knights Inns, Ramada Inns, Travelodge, Super 8 and Villager, while establishing a new brand of its own, Wingate.  HFS evolved into CENDANT, which moved into time-share giant RCI and other related venues and again changed business model and name when it acquired the name and some real estate of Wyndam Hotels.  Wyndham also acquired Hawthorn Suites and Microtel from Hyatt, as well as Baymont Inns from the Marcus Corporation (which would phase in most of their AmeriHost Inns brand)
  • Another new entity, Starwood, acquired Westin, Sheraton and Four Points and proceeded to solidify them while adding the W brand, the Luxury Collection, the St Regis Collection, time shares and in the past two years Aloft and Element.
Part One of the Getting the Most out of your hotel franchise investment series is meant to offer a high-level overview of the business matters that directly link to the running of a hotel.   Business gets more complicated every year and the evolution of the global marketplace make it even more complex. The next two portions of this series will address some of those marketplace challenges.
Part Two – Evaluating the franchise business model as a potential franchisee
Part Three– Working with your franchisor for everyone’s success

  
Feel free to share an idea for a column at johnjhogan@yahoo.com anytime or contact customized workshops, speaking engagements or me regarding consulting. 

Autographed copies of LESSONS FROM THE FIELD – a COMMON SENSE APPROACH TO EFFECTIVE HOTEL SALES can be obtained from THE ROOMS CHRONICLE www.roomschronicle.com and other industry sources. 

All rights reserved by John Hogan and this column may be included in an upcoming book on hotel management.   The opinions expressed in this article are those of the author and do not necessarily reflect the views of this publication

John Hogan, a career hotelier and educator, is frequently invited to participate at franchise meetings, management company and hospitality association industry events.  He is a successful senior executive with a record of accomplishment in leading hospitality industry organizations at multiple levels, with demonstrated competencies as a strong leader, relationship builder, problem solver and mentor. He conducts mystery-shopping reviews of quality in operations and marketing, including repositioning of hotels.

He writes weekly columns for a number of global online services (hotel online.com, eHotelier, 4 Hotels, Hotel Resource, etc) and has published more than 400 articles & columns on the hotel industry.  He co-authored (with Howard Feiertag, CHA CMP) LESSONS FROM THE FIELD – a COMMON SENSE APPROACH TO EFFECTIVE HOTEL SALES, which is available from info@smartbizzonline.com, ROOMS CHRONICLE www.roomschronicle.com  and other industry sources.  He resides in Phoenix, Arizona and expects to publish in 2009 his 2nd book based on his dissertation – The Top 100 People of All Time Who Most Dramatically Affected the Hotel Industry.

Hogan’s professional experience includes over 35 years in hotel operations, food & beverage, sales & marketing, training, management development and asset management on both a single and multi-property basis, including service as Senior Vice President of Operations in a specialty hotel brand for six years.

He holds a number of industry certifications (CHA, CHE, MHS, ACI) and is a past recipient of the American Hotel & Lodging Association’s Pearson Award for Excellence in Lodging Journalism, as well as operational and marketing awards from international brands.  He has served as President of both city and state hotel associations.

John’s background includes teaching college level courses as an adjunct professor at three different colleges and universities over a 20-year period, while managing with Sheraton, Hilton, Omni and independent hotels.  He was the principal in an independent training & consulting group for more than 12 years serving associations, management groups, convention & visitors’ bureaus, academic institutions and as an expert witness.  He joined Best Western International in spring of 2000, where over the next 8 years he created and developed a blended learning system as the Director of Education & Cultural Diversity for the world’s largest hotel chain. 

He has served on several industry boards that deal with education and/or cultural diversity and as brand liaison to the NAACP and the Asian American Hotel Owners’ Association with his long-term involvement in the Certified Hotel Owner program.  He has conducted an estimated 3,200 workshops and classes in his career. 

Expertise and Research Interest
• Sales Management and training
• Turn-around and revenue management
• Professional Development & Customer Service 
• Hospitality Leadership and Executive Education
• Making Cultural Diversity Real
• Accreditation & Developing Academic Hospitality programs

Service to the Industry and Hospitality Education includes working with the Educational Institute Certification Commission of the AH&LA, the Hospitality Industry Diversity Institute, the AH&LA Multicultural Advisory Council, the Accreditation Commission for Programs in Hospitality Administration, the Commission for Accreditation on Hospitality Management Programs, the AH&LA and AAHOA Education and Training Committees, the Council of Hotel, Restaurant and Institutional Educators (CHRIE), the International Hotel Show and the Certified Hotel Owner program for the Asian American Hotel Owners’ Association.

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Contact:

Dr. John Hogan, CHA MHS CHE
johnjhogan@yahoo.com

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Also See: Four Steps: How to Make More Sales Calls than Any Other Way Or Trade Shows Can Be Invaluable If. . . / Dr. John Hogan / February 2009
A Baker’s Dozen of Strategies for Hotel Chief Engineers / Dr. John Hogan / February 2009
"A Baker's Dozen" of Strategies for Hotel  Banquet Managers / Dr. John Hogan / February 2009
Making New Year's Sales and Marketing Resolutions Real and Practical / Dr. John Hogan / January 2009
Planning in a Challenging Economy - Probing Hotel Expenses / Dr. John Hogan / December 2008
Planning in a Challenging Economy - Fundamentals of Hotel Sales Planning / Dr. John Hogan / December 2008
A Message for Hoteliers: Giving Thanks - and Not Just One Day Each Year! / Dr John Hogan / November 2008
Hoteliers Must Remember the Lessons of Reasonable Care! / John Hogan / November 2008
Enthusiastic and Sincere Attitudes Will Pay Off For Hotel Salespeople / Hotel Common Sense / John Hogan / November 2008
Unleash the Potential! Recognize the True Value of Your Front Line Sales People / Hotel Common Sense / John Hogan / November 2008
Defining Hospitality - Readers Respond with their Insights / Hotel Common Sense / John Hogan / October 2008
Understanding the Value and Power of Breakfast / Hotel Common Sense / John Hogan / October 2008
A Bakers Dozen of Strategies for Hotel Restaurant Managers / Hotel Common Sense / John Hogan / October 2008
A Bakers Dozen of Strategies for Hotel Food and Beverage Directors / Hotel Common Sense / John Hoganv/ September 2008
My Definition of Hospitality. What’s Yours? / Dr. John Hogan / September 2008
Principles for Success as a Hotel Manager: 6 Observations on Finding and Employing Problem Solvers / Dr. John Hogan / September 2008
10 Hotel Sales Action Steps to Succeed in Today’s Competitive Marketplace / Dr. John Hogan / September 2008
10 Hotel Sales Mistakes to Avoid in Today’s Competitive Marketplace / Dr. John Hogan / August 2008
Ways to Identify and Build Repeat Guests / Dr John Hogan / August 2008
Principles for Success As a Hotel Manager - Maintaining Relationships Throughout the Organization / Dr John Hogan / August 2008
Principles for Success As a Hotel Manager - Part four: Communicating with Clarity and Candor / Dr. John Hogan / July 2008
Principles for Success As a Hotel Manager - Part three: Using your management style effectively / Dr. John Hogan / July 2008
Principles for Success As a Hotel Manager - Part Two: Motivating the Team / Dr. John Hogan / July 2008
Principles for Success As a Hotel Manager Part One: Understanding the Organization / Dr. John Hogan / July 2008 
Updating Hotel Marketing and Sales Strategies Mid Year NOW Is Essential / Dr. John Hogan / June 2008
Don’t Underestimate the Impact of the Hotel Sales Office / Dr. John Hogan / June 2008
Factors for Successful Interviewing Potential Hotel Sales Candidates / Dr. John Hogan / June 2008
The Importance of Meaningful Sales Team Job Descriptions / Dr. John Hogan / May 2008
For Hotels with Limited Service, Fewer than 100 Rooms - How Do You Determine if You Need a Person Dedicated to Selling / Dr. John Hogan / May 2008
Extending Your Sales Team or Make Travel Agents A Regular Part of Your Sales Programs / Dr. John Hogan / May 2008
Finding Business Leads Can Be Easier Than You Think / Dr. John Hogan / May 2008
Understanding the Differences Between Marketing and Sales / Dr. John Hogan / April 2008
Identifying Your Customers / Lessons from the Field A Common Sense Approach to Success in the Hospitality Industry / Dr. John Hogan / April 2008
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