HVS: European Hotels Slowly Turning to Franchising
19 Jul 2019 - A new report from HVS suggests franchising as a means of expansion is gaining popularity across Europe's hotel sector as the big brands seek new markets across the region.
Ten years ago, approximately a third of Europe's hotel stock was branded. That number has grown to 40 percent (compared to 70 percent in the United States (a number that has held steady for five years), and the brands are consistently gaining ground as they move east, the report indicates.
"While some chains are reluctant to relinquish the control offered by management contracts for their luxury brands, particularly in flagship locations, franchising is becoming a strong, often preferred, means of expansion for mid-market properties," said report co-author Stephen Collins, senior associate at HVS London. "However, the franchise model is not without challenges as, despite an increasing recognition of the strength of a hotel brand and brand affiliation, brands that are successful in one European market might struggle to gain recognition in another. Different regulations and disclosure obligations across various European countries also mean a one-size-fits-all approach to franchise agreements is not always possible, as it is in the U.S."
Pros and Cons
The report suggests several reasons for the slow-but-steady growth of franchised hotels across Europe. For starters, the model allows owners to maintain a greater degree of control while offering brands the ability to expand their footprint rapidly with the benefit of the owner's local knowledge and connections.
Branded hotels also have a broader reach than independent hotels, particularly when it comes to implementing the newest tech trends. Larger companies also will have "specialists" who can help operators overcome a range of challenges, from marketing to IT to financing to general operations.
There also are reasons why franchised properties aren't gaining ground faster, the report noted. While the U.S. has the Federal Trade Commission to regulate the sale of franchises and make information regarding each franchise fee structure available, different European nations have different rules and regulations. Some countries—Belgium, France and Italy, among others—have specific franchise laws that clearly dictate what is required for contract summaries and commercial disclosure, the report finds, while others have no specific obligations outside the civil codes and what is considered good practice.
"The consolidation and acquisition of hotel chains has led to a sharp rise in the proportion of franchised properties in the portfolios of the top chains, and as they are now larger than ever, they will continue to rely on franchises to achieve the desired growth and remain ahead of their competition,' report co-author Sophie Perret, senior director, HVS London, said.
Over the past five years, Accor's proportion of franchised properties across Europe has increased from 37 percent to 48 percent, Hilton's has risen from 32 percent to 51 percent, and the majority of IHG's European portfolio is now made up of franchised properties. Companies such as Hyatt, which historically had no franchise presence in Europe, now have several franchised properties and are set to roll out this model for the expansion of their limited-service and extended-stay brands, according to the report.
As Lodging Econometrics noted last month, four companies account for 47 percent of franchised hotel projects and rooms in Europe's pipeline. Accor's pipeline for the region is at a record high with 256 hotels and 35,073 rooms. Marriott International has 208 hotels and 33,395 rooms in development, just short of its high set in 2018. Hilton follows with 172 hotels and 26,466 rooms, and IHG with 147 hotels and 24,483 rooms, also is just shy of its 2018 high.
The report also notes the importance of selecting the appropriate brand for each asset, particularly in terms of the impact it will have on the positioning of the hotel within the market and its capacity to maximize occupancy and achieve room rate premiums. According to the report, all of these factors will ultimately be reflected in the bottom line, making it imperative for owners and lenders alike to consider the overall benefits that a brand will bring to the hotel when assessing if the additional franchise cost is worth it.