Hotel Online  Special Report

 A Simple Solution for Hotel Chains
to Deal with the Impact Issue

May 2006

The Canadian Lodging Outlook is a joint monthly publication 
of Smith Travel Research and HVS International, 
Vancouver and Toronto, Canada
Reprint - By Steve Rushmore, MAI, CHA

Choice Hotels recently announced the hiring of a consultant to evaluate the companyís impact policies and recommend ways they can be improved. I hope Choice didnít pay very much for this study, because I have a simple solution to this hotly debated issue.

Every time a hotel company adds another property to its chain, that action has some impact on existing hotels. While some might argue that an additional hotel can create a positive impact on the entire chain by increasing its overall brand awareness, most impact disputes focus on the potential loss of business when a traveler has a choice between two hotels with identical brands.

Hotel companies, particularly those that franchise extensively, are intent on growing their brands. Big is better for franchisors since each additional hotel adds brand value and franchise fees.  Although new chains can expand into many markets, eventually hotel companies begin to add more hotels to areas where they have existing product. These existing hotels are susceptible to the adverse effects of same-brand competition known as impact.

Most hotel chains attempt to deal with the impact issue by commissioning independent consultants to perform impact studies that allegedly measure the adverse effect on the existing hotelís revenue (usually based on occupancy and room rate) from adding same-brand competition to a particular market. If impact from the proposed same-brand competitor is above a certain level, the franchise application is denied. While these studies are generally performed by highly skilled hotel market analysts (including HVS), the results are at best educated guesses.  Itís like trying to guess what the Dow Jones Industrial Average will be a year from now. With all the data available tracking and projecting this important index, the answer should be fairly simple. But it isnít.

I donít think you can project future impact with any reasonable degree of accuracy. I donít even think you can measure historic impact; there are just too many factors that affect a hotelís revenue performance. So the solution isnít to try quantifying impact, but rather to head off the problem before it occurs. Here is my solution:

Starting today, all new hotel franchise agreements should contain a defined geographic area in which the hotel chain could not franchise, operate or invest in a hotel having either the same or a competitive brand over the term of the agreement. Prospective franchisees not satisfied with the stipulated exclusive territory could seek another affiliation. The impact issue would therefore be solved.

Existing franchisees (with no exclusive territories) should be given an option either to negotiate a territory or accept the use of impact studies over the remaining life of their agreements. If they decide to go the exclusive territory route, they should first attempt to negotiate an agreement, and if that fails, there should be a binding arbitration provision that puts the matter before an independent arbitrator. Franchisees who are not satisfied with the findings of the arbitrator should then be allowed to terminate the franchise without payment of liquidated damages.

Franchisees who decline the exclusive territory route an opt for the use of impact studies should have the right to terminate the franchise without paying liquidated damages if they do not agree with the findings of an impact study.  By immediately implementing this logical approach to solve the impact issue, hotel chains will quickly eliminate one of the major sources of disagreement between franchisor and franchisees.


May 2006

May 2006 YTD

.© Smith Travel Research, 2005. Reproduction or quotation in whole or in part without permission is forbidden. *INS - Insufficient Data

Selina Lai
HVS International Ė Canada
2120 Queen St. East, Suite 202
Toronto, ON M42 1E2
(416) 686-2260, ext 21
(416) 686-2264 FAX

Also See Some Long-term Trends that Might be Adverse to the Future of the Hotel Industry / Steve Rushmore / Canadian Lodging Outlook - April 2006 Year-to-Date
Hotel Feasibility/Market Demand/Valuations and Appraisals /Betsy MacDonald and Steve Rushmore / Canadian Lodging Outlook - March 2006 Year-to-Date
When Will The Bubble Burst? / Stephen Rushmore / Canadian Lodging Outlook - January 2006 Year-to-Date
Low Cap Rates Drive Gains in Hotel Values / Suzanne R. Mellen / Canadian Lodging Outlook - December 2005 Year-to-Date
Now Is The Time to Buy New Orleans Hotel / Stephen Rushmore / Canadian Lodging Outlook - September 2005 Year-to-Date
What Does a Hotel Franchise Cost? / Stephen Rushmore / Canadian Lodging Outlook - August 2005 Year-to-Date
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.......Weíre Back! / Canadian Lodging Outlook - June 2004 Year-to-Date / Aug 2004
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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
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Performance Clauses Essential In Hotel Management Contract / Stephen Rushmore / Canadian Lodging Outlook / Dec 2002
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Canadian Lodging Outlook / May 2000 Year to Date Statistics / HVS International - Canada / July 2000 
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Whatís Hot and Whatís Not in Western Canadian Hotel Markets / Mar 2000

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