SPECIAL REPORT : FRANCHISING
FINANCIAL STRUGGLES
HAVE FORCED FRANCHISORS AND FRANCHISEES TO FIND COMMON GROUND , BUT THE ERA OF COOPERATION MAY BE COMING TO AN END .
By Adam Kirby , contributing editor
The economic turmoil of the past four years left even the best-prepared franchisees in a fiscal malaise , causing operators to file away property improvement plans and delay capital expenditures in the name of staying afloat . Franchisors had been lenient about enforcing PIPs and relaxing brand standards to help property owners find breathing room during three straight years of plummeting RevPAR , leading to a period of cooperation between the two sides . But after a full year of gains in occupancy that have driven a slow but steady recovery in revenue and ADR , the big brands ’ patience is beginning to wear thin .
Not surprisingly , conversion brands are thriving as lenders remain gun-shy about backing large developments ; Choice Hotels International , for instance , expects about 85 % of its portfolio additions this year will come from conversions . Meanwhile , across much of the economically unstable Eurozone , independent hoteliers are seeking shelter from the debt crisis fallout with international brands , leading to significant branding inroads .
Walking the floor at Wyndham Hotel Group ’ s global conference in March , Executive Vice President of Brand Operations Keith Pierce felt optimism among franchisees and vendors . “ When you ’ ve been doing this for a long time , you can just sense the mood ,” Pierce says . “ Here , the mood is a lot stronger than it was just a year and a half ago .”
Inn Express Oklahoma City-Penn Square , Oklahoma , says members of his franchisee organization are struggling to raise room rates to keep up with general inflation and doubledigit percentage increases in vendor costs from overseas supply bases . “ We ’ re coming back from a demand standpoint ,” Hembree says . “ However , costs seem like they ’ re moving higher than our ability to increase revenue .”
Franchisors , meanwhile , continue to lament difficulty in securing financing for new projects , conversions and renovations . Burgeoning markets like China , India and Brazil aside , relatively little financing is available for large-scale developments . Regional banks are beginning to ramp up lending for projects of about US $ 15 million and below , but franchisors report difficulty in winning loans for would-be franchisees who are relatively new to the hotel industry . Franchisees with a track record of success are having a much easier time getting approved for loans in the current fiscal environment .
The financing picture is frustrating for franchisors , but they admit it could be worse . “ The financing window is opening ,” says Phil Cordell , head of focused-service brands for Hilton Worldwide , which received approximately 25 % more franchise applications through the first
Louvre Hotel Group ’ s Tulip Inn , Turin , Italy
Easing the pain Such enthusiasm is tempered by ongoing capital challenges among franchisees , however . The pain has eased considerably since 2010 , thanks to increasing demand , but ADR is not recovering as quickly as supply costs are growing .
Mike Hembree , chairman of the IHG Owners Association and principal owner of Holiday www . hotelsmag . com June 2012 HOTELS 25