A tempest is brewing in the hotel-franchise business. Whether it turns out to be of the teapot variety or a full-blown storm remains to be seen.

This particular ill wind swirls around the fact that consumers are increasingly using the Internet to book hotel reservations, and, conversely, decreasing their use of chains� toll-free numbers to make them over the phone. Perched directly in the eye of the storm is Buggsi Patel, president and CEO of Lake Oswego, Oregon-based Buggsi Hospitality Group and 2000 chairman of the Asian American Hotel Owners Association. Patel contends that since chains� central reservation systems (CRS) are generating fewer reservations, franchisees should see a similar decrease in their reservation and marketing fees.

Internet bookings set to explode

Franchisors readily acknowledge that consumers are using the Internet more�and toll-free res services less�and say there is little doubt that the trend will continue into the future.

�My educated guess is that all the chains are showing anywhere from 1% to 10% of their reservations coming from the Internet in some way, shape or form,� says Dan Daniele, president of Baymont Franchises International. �I see the figure climbing to 20% in the near future.�

Others confirm Daniele�s industrywide estimate. John Paul Nichols, executive vice president of sales and marketing for Cendant�s Hotel Division, says Cendant�s brands have increased their Internet-generated reservations from 3% in June 1999 to 10% as of June 2000, and that Internet traffic as a whole is increasing 150% annually. Choice Hotels International�s Don Brockway, vice president of worldwide reservations, says 11-12% of Choice�s reservations come through some facet of the Internet, and that the rate has doubled year over year.

�If you follow that rate through into the future,� Nichols said, �it�s getting real big real fast.�

Patel, whose company owns and/or operates properties under various franchise flags, including Cendant and Choice brands, says he thinks that within five years, fully half of all chains� reservations will be generated through the Internet. Thus, he questions whether the true value of the typical chain�s CRS warrants the 3-4% of franchise fees that go to reservations and marketing.

Patel contends�and franchisors agree, to a point�that it costs franchisors far less when reservations are made via the Internet compared with the cost of maintaining and staffing a CRS.

�My question is about that 3-4% reservation/marketing fee,� Patel said. �We wonder what (franchisors) are offering us if the cost of doing business is going down for them. We�re saying shouldn�t they be reducing our fees? Are we getting the bang for our buck?�

Franchisors say the res buck remains the same because the res bang is just as big, regardless of whether bookings are made via the various Internet sites or traditionally through toll-free res numbers.

Internet not �free,� franchisors say

�What we see is our overall res contribution going up, not down,� Nichols said. �What�s changing is that more are coming through the electronic channels as compared with the 800-number channels. The amount of fees franchisees pay us stays the same�we aren�t charging them any more in res fees and marketing fees, even though the reservations are up.

�Is the Internet a cheaper channel for us to drive reservations? The answer is yes, but that means we are now able to spend the money we save on more marketing and advertising efforts elsewhere.�

Furthermore, Brockway says, while the cost of Internet-generated reservations is less than that of reservations driven through the toll-free channels, there is significant expense in maintaining and upgrading computer networks.

�I may reduce labor costs on the voice side,� he said, �but on the electronic side, there is a lot of cost involved. A lot of the money that went to reservation operators now goes to training people on computer skills and maintaining all (Internet) channel connections, software and hardware to make the total system seamless to the consumer. We�ve had to hire more support people on the electronic side, plus there are fees we pay for our presence (on various Internet sites).�

Patel says that if Choice and other chains with which he does business are putting the money they save on res costs toward upgrades and more advertising/marketing efforts, he isn�t aware of it. In short, Patel wants accountability.

�They should tell us what upgrades they�re making,� he said. �They don�t give us a proper accounting of what they�re doing with our fees.�

While lack of accountability, according to Patel, is an issue with all franchise chains, he says �Choice is the biggest culprit.�

�Choice is in dire straits with their res/marketing funds,� Patel said. �We give our money to franchisors for reservations and marketing, and we want them to use it in the right way. Choice will charge other things to the res/marketing fund, and that�s not right. What I�m hearing is that their marketing fund is in deficit, that they�ve been having trouble with it ever since they went public, that they�ve been allocating charges to it that they shouldn�t be.

�We�ve tried to start a dialogue with them,� he added, �but as far as I know, the IOC�s (International Operators Council, Choice�s franchise organization) attempt to start a dialogue haven�t been listened to. We just want them to tell us�all of us, not just the IOC representatives�where the money is going.�

Choice�s Brockway says that Patel�s allegations regarding poor communications and lack of accountability are inaccurate.

�We�ve had some conversations and concerns about the funds,� Brockway says. �We have a group of IOC members who are on committees to go through what the money is being spent for and how the funds are being handled. We�re still going through the process, we�re working hard to change the overall perceptions the franchisees have of what we�re doing, and the results will be transmitted to <I>all</I> the franchisees�not just IOC members�when the process is complete. We need to keep the lines of communication open not just with the IOC, but with the larger body of franchisees. We�re all trying to get better at it.�

As for the Internet�s impact on the reservations aspect of franchising�and on that aspect�s value�Nichols has this observation: �My sense is that any time you have change, it�s difficult for some to see the pros as well as the cons of that change. This is a question of brands evolving so that we can provide value in both the traditional and the new electronic media. It�s not a change in the value of a brand�it�s the natural friction that arises in the management of that change. This is an educational issue with our franchisees as well as within the corporation.�

Patel would agree with that statement�to a point.

�It�s all about education and training,� he said, �and we don�t think we�re getting much of either.�