As owners look for resilience and stability in an increasingly competitive market, major hotel groups and legal experts are reporting growing interest in franchising opportunities. Baker McKenzie Partner Graeme Dickson shares key trends and important considerations when it comes to hotel franchising.
Hotel franchising has increased in popularity in leaps and bounds. Marriott, IHG, Accor and Wyndham all conduct substantial franchising operations in Australia.
Franchisors provide most of the benefits to hotel owners which are provided by hotel managers – branding, centralised services (such as reservations, customer and employee surveys) and technical support. Importantly, franchisors do not offer services relating to oversight of hotel operations. This is attractive to some owners who desire to have a hands-on role in relation to hotel operations.
Franchise fees usually consist of an application fee, ongoing licence fees based on a percentage of gross room and food and beverage revenue. There may also be marketing fund contributions, reservation system and loyalty programme fees and, in the case of new builds, a technical service fee. The franchise term is usually between 10-20 years. Franchises usually do not contain any restrictive area provisions which means that the franchisor can effectively grant as many franchises in any geographic area as the market will allow. This can complement a growth strategy in gateway cities which are already saturated with hotel management agreements with extensive restrictive area provisions. There is usually little or no negotiation of the franchise documents which keeps legal and other fees and expenses to a minimum.
In Australia, the Franchising Code of Conduct provides a number of benefits to franchisees, including initial and ongoing disclosure regarding the franchised brand and contractual protections. This represents a significant ongoing compliance burden for the hotel franchisor. Franchisors are also closely scrutinised by the Australian Competition and Consumer Regulator.
The increasing popularity of franchises may also accelerate the take up of manchises – management agreements with an owner option to convert to a franchise. It gives an owner the flexibility to engage professional operational expertise during the ramp up period of hotel operations and then take over day to day control when hotel operations stabilise. This arrangement also deals with one of the significant management agreement issues – how to effectively deal with sustained and profound operational underperformance without recourse to legal action regarding questionable performance termination provisions which are commonly found in management agreements.