酒店特许经营协议和管理（Franchise Agreements and Management）
12 Franchise Agreements and Management
This Chapter at Work
From the perspective of the traveling public, perhaps one of the most misunderstood aspects of hotels is the question of who owns them and who manages them. This is due to the fact that in most cases, hotels are owned by a business entity that elects, for the good of that business, to affiliate with a group of similar hotels and operate under the name of that hotel group. These hotel groups are called brands, flags, or chains. The company administering and directing the brand itself is not, in most cases, an owner of hotels, but rather, as a franchise company, it is responsible for the growth of the brand.
Hotel operations can be further complicated by the fact that the business entity owning the hotel and choosing brand affiliation may also elect to hire a management company that will actually select a G.M. and operate the hotel. Thus, a typical traveler is likely to be staying at a hotel owned by one business entity that has elected to affiliate the hotel with a brand (a second entity) and entrust the management of the hotel to a management company (a third entity), who actually hires the G.M.
Good G.M.s are operational professionals who may, at various times, find themselves working directly for those who own the hotel and, at other times, for a management company selected by the owners to operate the hotel. In most cases, a franchise company will be involved also. Because that is true, it is important for G.M.s to know about both the relationship that exists between a hotel's owners, (the franchisee) and the hotel brand {the franchisor) when both parties sign a franchise agreement and the special relationship that exists between owners and a management company when a management contract is in place.
In this chapter you will learn about major franchise companies and the brands they operate. The owners of hotels often ask experienced G.M.s their opinions about the best brand to be selected for a specific hotel. Therefore, you will also learn how to evaluate alternative brand options with the goal of choosing the best brand for a specific hotel. Managing a franchised hotel presents special challenges to the G.M. This chapter reviews the advantages of brand affiliation from the perspectives of both the owners of a hotel and the franchisor with an emphasis on how the franchise agreement, which is the legal document governing the relationship between the hotel and the managers of the selected brand, affects the work of the G.M.
Just as brand affiliation influences the activities of the G.M., so, too, does the special situation in which the G.M. is employed not directly by the hotel, but rather by the management company selected to operate the hotel. In this chapter you will learn about how some of the major hotel management companies operate. In addition, you will review how the management contract, which is the legal document governing the relationship between the owners of a hotel and the company selected to operate the hotel, affects the day-to-day responsibilities of the G.M.
Chapter 12 Outline
THE HOTEL FRANCHISE RELATIONSHIP
Hotel Franchising
Origin and structure
Governmental regulations related to franchises
The Franchise Agreement
Major elements
Advantages to the franchisee
Advantages to the franchisor
Selecting a Franchisor
Basic considerations
The franchisor questionnaire
The product improvement plan (PIP)
Negotiating the franchise agreement
THE HOTEL MANAGEMENT COMPANY RELATIONSHIP
Management Companies
Origin and purpose
Hotel management company structures
The Management Operating Agreement
Major elements
Advantages to the hotel owner
Disadvantages to the hotel owner
Issues Affecting the General Manager
Managing the franchise relationship
Managing for a management company
HOTEL TERMINOLOGY AT WORK GLOSSARY
ISSUES AT WORK
THE HOTEL FRANCHISE RELATIONSHIP
Franchising is a business strategy that allows one business entity to use the logo, trademarks and operating systems of another business entity for the benefit of both. As a result, franchising is a network of interdependent business relationships that allows a number of people to share a brand identification, a successful method of doing business, and, hopefully, a strong marketing and distribution system.
For the franchisee, franchising helps reduce risk. Proven operational methods, developed by the franchisor, arc used to manage the business. The franchisee gives up the freedom of being completely independent to become part of a group committed to building a brand and increasing their group's market share. A franchise system can (but may not) also provide group-buying power to reduce the franchisee's operating expenses. The trade-offs for the franchisee are the fees paid to the franchisor for the operating license and the restrictions that are imposed by the franchisor. For the franchisor, franchisees and their financial capital expand the brand faster than it would ever be possible for the franchisor to do so alone.
Hotel Franchising
One of the biggest challenges faced by those who would buy or build a hotel is that of which flag, if any, the property should "fly." The question is an important one both to the owners of the property and to the G.M. who operates it.
HOTEL TERMINOLOGY AT WORK
Flag: A term used to refer to the specific brand with which a hotel may affiliate. Examples of currently popular flags include brands such as Comfort Inns, Holiday Inn Express, Ramada Inns, Hampton Inns, Residence Inns, Best Western, and Hawthorn Suites. The hotels affiliated with a specific flag are sometimes referred to as a chain. For example, "Which flags are you considering for your new hotel project?"
A hotel franchise relationship exists when the owners of a hotel choose a flag and enter into a franchise agreement with the managers of that specific brand.
HOTEL TERMINOLOGY AT WORK
Franchise: An arrangement whereby one party (the brand) allows another (the hotel owners) to use its logo, name, systems, and resources in exchange for a fee.
Franchise Agreement: The legal contract between the hotel's owners (the franchisee) and the brand managers (the franchisor), which describes the duties and responsibilities of each in the franchise relationship.
It is important to note that, unlike some other franchise industries, the majority of hotel brand managers (franchisors) do not operate hotels. They operate franchise companies. Hotel owners (the franchisees) and their G.M.s are the operating entities in nearly all hotel franchise relationships.
Origin and structure
Franchising has long been a part of American business. The history of hotel franchising, however, is relatively short. Many in the hotel industry believe that the first significant hotel franchising arrangements began in the 1950s with Kemmons Wilson and his Holiday Inn chain.
In a combination of what may well be part historical fact and part hotel lore, the story is told of how, in 1951, Wilson, a resident of Memphis, Tennessee, loaded his wife and five children into the family ear and drove to Washington, D.C., for a vacation. He was quite unhappy with the motel accommodations he found along the way. The rooms he encountered were, he believed, too small, too expensive, and in many cases, not clean. Wilson returned to Tennessee convinced that he could build a chain of hotels across the country that would operate under the same name and provide the traveling public with a lodging experience they could count on to be clean, comfortable, and moderately priced. He hired an architect to draw up the plans for a prototype hotel. The architect, according to legend, was watching an old Bing Crosby movie titled Holiday Inn while he was working, and sketched that name on the top of the plans he was drawing. Wilson, upon seeing the plans, liked them and the name at the top as well. As a result, the Holiday Inn was born. The first Holiday Inn opened in Tennessee in 1952 and the 400th Holiday Inn franchise began operation in December 1962. Today, Holiday Inns franchises its name as part of the InterContinental hotel group that consists of over 1,500 properties worldwide, including the brands Inter-Continental Hotels, Holiday Inn, Holiday Inn Select, Holiday Inn Express, Holiday Inn Crown Plaza, and Staybridge Suites.
Today hotel owners increasingly elect to affiliate their hotels with other hotels under a common brand name. In fact, as we saw in chapter 1 (Figure 1.6), the great majority of hotels in the United States currently operate as part of a regional or national brand. Many of these brands arc grouped under a common brand management group. For example, Choice Hotels International manages the Clarion, Quality, Comfort Inn, Comfort Suites, Sleep Inn, Main Stay Suites, Roadway Inn, and Econolodge brands. Cendant, as of the time of writing this book, manages the Amerihost, Day's Inn, Howard Johnson, Knights Inn, Ramada, Super Eight, Travelodge, and Wingate Inn brands, as well as other franchised names including Avis (car rental) and Century 21 (real estate sales).
While the actual brands managed by any single franchisor change as these brands are bought and sold, the ten largest brands at the time of this writing are included as Figure 12.1.
Each brand will, depending on the parent company's structure, have a brand manager or president responsible for growing the number of hotels in the brand and maintaining the quality standards that have been established for that brand. It is important to understand that in the overwhelming majority of cases franchise companies do not actually own the hotels operating under their brand names. Companies such as these own, instead, the right to sell the brand name and determine the standards that will be followed by those hotel owners who do elect to affiliate with their brands.
With the ownership of a hotel vested in one business entity and the responsibility for brand standards resting with another business entity, it is not surprising that conflict can arise between the hotel's owners and the brand managers. For example, assume the managers of a given brand decide that the logo for their brand, and thus the exterior building signage identifying the brand to the traveling public, has become dated and is in need of modernization. The brand managers may have the authority, because of the franchise agreement, to require affiliated hotel owners to update their hotel signage. The owners, however, facing significant purchase and instillation costs for replacing signs that are in perfectly good working order but that have been declared "dated" by the brand managers, may well attempt to resist the purchase of the new signs. In fact, these hotel owners may disagree with the brand managers about numerous operating issues.
FIGURE 12.1 Ten Largest Brands
(images P408)
As a G.M., it is important for you to understand that if you are operating a branded hotel, you have a responsibility to your employer; however, you also have a responsibility to abide by the franchise agreement signed by your hotel's owners. That agreement will always include a section that requires your best efforts in maintaining the established standards of the brand. Conflicts can and do arise between hotel owners and brand managers. As a G.M., it is your responsibility to balance the legitimate interests of your hotel and the brand in a manner that reflects positively on your own professionalism.
Unlike the history of some other industries, the history of hotel franchising does not include widespread cases of franchisor fraud or deception. Despite that fact, hotel franchise relationships are subject to the same federal and state laws that have been enacted to protect franchisees from unscrupulous franchisors in all industries.
Governmental Regulations Related to Franchises
In the past, some companies offering franchises to individual business owners did so in ways that were unscrupulous and often illegal. In an effort to level the playing field between those who sell and those who would buy franchises, the Federal Trade Commission (FTC) in 1979, issued regulations with the full force of federal law. This set of laws are titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures." Commonly referred to us the "Franchise Rule," the rules spell out the obligations of franchisors when they attempt to sell their franchises to potential franchisees.
HOTEL TERMINOLOGY AT WORK
Federal Trade Commission (FTC): The FTC enforces federal antitrust and consumer protection laws. It also seeks to ensure that the nation's business markets function competitive^ and are free of undue restrictions caused by acts or practices that are unfair or deceptive.
THE INTERNET AT WORK
To read the entire "Franchise Rule" developed by the FTC and to familiarize yourself with the requirements placed upon those who sell franchises, go to:
www.ftc.gov/bcp/franchise/16cir436.htm.
Essentially, the Franchise Rule requires that franchisors:
• Supply potential franchisees with a disclosure document at the earlier of the first face-to-face meeting or ten business days before any money is paid by the franchisee to the franchisor
• Provide evidence, in writing, of any earnings claims or profit forecasts made by the franchisor
• Disclose the number and percentage of franchisees achieving the earnings rates advertised in any promotional ads that include earnings claims
• Provide potential franchisees with copies of the basic franchise agreement used by the franchisor
• Refund promptly any deposit monies legally due to potential franchisees that elected not to sign a franchise agreement with the franchisor
• Not make claims orally or in writing that conflict with the written disclosure documents provided to the franchisee
In addition to federal laws and regulations, most states also have franchise investment laws that require franchisors to provide a presale disclosure document known as an FOC (franchise offering circular) to potential franchisees.
HOTEL TERMINOLOGY AT WORK
FOC (Franchise Offering Circular): A franchise disclosure document that is prepared by a franchisor and then is registered and filed with the state governmental agency responsible for administering franchise relationships in that state.
These states prohibit the sale of a franchise inside their borders until a franchisor's FOC has been filed with the proper state authorities. While these states, like the FTC, impose disclosure requirements on franchisors, neither verifies the accuracy of the information in the disclosure documents. Verification of a franchisor's claims is the responsibility of the buyer (franchisee). For example, a hotel franchise company can make a claim that its 800 number provides the average franchisee with fifty sold guest rooms per night. This claim will not be verified as accurate by either the FTC or the state in which the franchisor files an FOC. The potential franchisor should seek verification of any item in the FOC that is questionable prior to signing a franchise agreement.
FOCs are typically designed to comply with both the laws of the state in which they are filed and the FTC's Franchise Rule and will generally include information about:
• The name of the franchisor and the type of franchise it offers for sale
• The business experience of the franchise company's officers
• Fees arid royalties that must he paid
• Initial investment requirements
• Rights and obligations of the franchisor and franchisee
• Territorial protection offered by the franchisor
• Required operating policies
• Renewal, transfer, and termination procedures
• Earnings claims
• Current franchisees
• A sample franchise agreement
• Specific information required by each state in which the FOC is to be filed
• The name and address of the legal representative of the franchisor
It is important to remember that hotel franchise FOCs must be prepared to meet the same requirements as those in any other industry. Companies issuing FOCs should be honest, but those who read them should be prepared to verify every important claim made in the document.
THE INTERNET AT WORK
Potential franchisees can learn a great deal about buying and operating a franchise by joining the International Franchise Association (IFA). To review the type of information they pro-wide to their members, go lo:
www.franchise.org.
The Franchise Agreement
When a hotel's owners elect to affiliate their hotel with a brand, they will sign a franchise agreement with the franchisor's brand managers. The franchise agreement will spell out, in great detail, the responsibilities of both the brand managers (franchisors) and the hotel owners (franchisee). In the past, many owners within the hotel community felt that brand managers had too much power to control the terms and conditions contained in the franchise agreements. More recently, vocal groups of owners, led chiefly by the Asian American Hotel Owner's Association (AAHOA), have proposed, and actively campaigned for, fundamental changes in the basic franchise agreements that have long been in use. These proposed changes seek to give hotel owners more control over the content of franchise agreements and a more equal say in the operation of their hotels.
HOTEL TERMINOLOGY AT WORK
AAHOA (Asian American Hotel Owners Association): An association of hotel owners who, through an exchange of ideas, seek to promote professionalism and excellence in hotel ownership.
THE INTERNET AT WORK
The Asian American Hotel Owners Association (AAHDA) has been at the forefront of promoting fairness in hotel franchising. Their associate members interact with many brand management companies. To learn more about AAHOA and to review their 12 Points of Fair Franchising, go to:
www.aahoa.com.
Major Elements
A franchise agreement is simply a written contract between a franchisor (the brand managers) and a franchisee (the hotel owner). While each brand will develop its own franchise agreement, the following information is typically included:
•Names of the parties signing the agreement. In this section, the name of the legal entity representing the brand as well as the corporation, partnership, or sole proprietor owning the hotel is listed.
•Detailed definitions. In this section, any definitions used in the agreement that could be subject to misinterpretation by the parties to the agreement are defined. For example, many franchisee agreements base the fees to be paid by owners on the gross room revenue achieved by the hotel. In this section of the agreement, the franchisor would detail exactly what gross room revenue means. The following is an example of a definition that describes the term in great detail and is of the type found in this section of the document: "Gross rooms revenue" means the revenue from the rental of sleeping rooms and meeting rooms at the hotel. It does not include revenue from Internet access fees, telephone calls, in-room safes or minibars, vending machines, food and beverage sales, or room service.
•License grant. Here the franchisor will describe the manner in which the hotel owner is allowed to use the brand's logos, signage, and name in the operation of the hotel.
•Term (length of agreement). The beginning and ending date of the agreement will be spelled out in detail. The most common franchise agreements are written for a length of twenty years. Most, however, also contain a window at the fifth, tenth, and fifteenth, years. More recently some agreements have been written with early outs as franchisors aggressively seek to entice hotel owners to choose their brands.
HOTEL TERMINOLOGY AT WORK
Window: A clause in a franchisee agreement that grants both the franchisor and the franchisee the right, with proper notification, to terminate the agreement.
Early Out: A clause in a franchisee agreement that grants both the franchisor and the franchisee the right, with proper notification, to terminate the agreement after it has been in effect for a relatively short period of time. When this clause exists, a window may be granted after only one, two, or three years.
• Fees. This section details the fees the franchisee must pay to the franchisor. While each brand is free to set its fees as it wishes, the typical fees in a hotel franchise agreement will include:
• Affiliation fees. These are flat fees, paid up front (upon signing the agreement), to affiliate with the brand.
• Royalty fees. These fees are paid based upon an agreed upon formula and are typically tied to the level of revenue generated by the hotel.
• Marketing fees. These fees are also determined by the hotel's revenue levels and are to be used exclusively to advertise the brand name. Such marketing efforts may include ads placed on national or regional radio, magazines, newspapers, or television.
• Reservation fees. These are collected to operate the brand's reservation system (800 number).
• Reports. This section lists any monthly or annual reports that must be provided by the hotel owner to the franchisor and when such reports are due. Examples may include reports related to room revenue generated, occupancy levels, and occupancy taxes paid and average daily rate (ADR).
HOTEL TERMINOLOGY AT WORK
Occupancy Tax: Money paid by a hotel to a local taxing authority. The room revenue generated by the hotel determines the amount paid. This tax is also known, in some areas, as the "bed" tax. For example, "In our city, the occupancy tax is 4 percent."
•Responsibilities of the franchisor. This section details the obligations of the franchisor under the agreement and lists what the hotel owner will receive in exchange for paying fees and royalties. It will include items such as Inspection schedules, marketing efforts, and brand standards enforcement.
•Responsibilities of the franchisee. This section details what the hotel owner will do in exchange for the right to use the name of the franchisor's brand. It will include items such as signage requirements, operational standards that must be implemented, and payment schedules that must be met.
•Assignment of agreement. Here the ownership transfer and its affect upon the agreement are detailed. In most cases, the hotel owner must have the approval of the franchisor to transfer (assign) their rights in the agreement to another; however, the franchisors are typically free to assign the agreement to any business entity they choose without the approval of the franchisee.
•Termination or default. The events that permit a termination, or define a default, by either party are detailed in this section. In most cases, a default on the part of the franchisee will result in penalties that must be paid by the franchisee to the franchisor.
•Insurance requirement. To protect both parties, the hotel owner will be required to provide insurance. In this section the types and amounts of required insurance will be listed. Typical requirements include proof of general indemnification policies, automobile insurance, and mandatory workers' compensation (injury) insurance.
• Requirements for alteration. This section details the rights of the franchisor to change the agreement.
• Arbitration and legal fees. In this section, the responsibilities of each party related to legal disputes are detailed. Also included in this section is information about the geographic location of the court where such disputes are to be resolved. In most franchise agreements, disputes arc to be resolved in the state in which the franchisor is incorporated.
• Signature pages. The authorized representatives of the brand, as well as the owners of the hotel, will sign the franchise agreement.
Advantages to the Franchisee
The primary advantages to a hotel of buying a franchise arc that doing so allows the hotel's owners to acquire a brand name with regional or national recognition and to connect the hotel to the Global Distribution System (GDS). As seen earlier, connectivity to the GDS is, in today's hotel market, a necessity. An independent hotel can, in fact, purchase this connectivity; however, if is costly.
Affiliation with a strong brand increases the hotel's sales and thus its profitability. The total fees paid by the hotel owner to the brand managers are related to the strength of the brand name and the revenue that the name will bring to the hotel. While the fees related to a franchise agreement are sometimes negotiable, they will, on average, equal from 3 to 15 percent of a hotel's gross room revenue.
In addition to increased sales levels, affiliation with a brand affects the ability of a hotel's owner to secure financing. When owners seek financing from banks or other lending institutions, they find that these lenders will, almost without exception, require an affiliation with an established brand prior to considering the hotel for a loan.
Additional advantages, depending on the franchisor selected, may include assistance with on-site training, advice on purchasing furnishings and fixtures, reduced operating costs resulting from vendors who give brand operators preferred pricing, and free interior design assistance.
Advantages to the Franchisor
The greatest advantage to a franchisor of entering into a franchise agreement with a hotel owner is the increase in fee payments to the brand that will result from the agreement. Like all businesses, franchise companies desire growth. The greater the number of hotels that operate under a single brand name the greater, in general, the value of the name and thus the fees that can be charged for using that name. In addition, each additional hotel that affiliates with a hotel brand helps to pay for the fixed overhead oi operating that brand. Therefore, additional hotel properties operating under the same brand name result in greater profits for the franchise company. As a result, franchisors are aggressive in soliciting agreements with hotel owners even if these owners are affiliated with another brand. As well, franchisors actively pursue those owners developing new hotels who have not yet selected a franchise brand.
Selecting a Franchisor
Perhaps one of the most useful services a hotel G.M. can provide to an owner is that of assistance in the selection of a hotel brand when such assistance is requested. It is simply true that an experienced G.M., more so than an inexperienced owner or the franchisor (who has a vested interest in the sale), is in the best position to provide advice about how well a given brand name will "fit" a specific hotel property. It is also true that many hotel brands go through a life cycle that includes early buildup, in which nearly every property entering the system is newly built. Later in the development of the brand, and in an effort to promote unit growth, brand managers may allow conversions.
HOTEL TERMINOLOGY AT WORK
Conversion: As a verb: The process of changing a hotel's flag from one franchisor to another. Also known as " reflagging." For example, "We need a G.M. experienced in managing a hotel conversion."
As a noun: The term used to describe a hotel that has changed its flag from one franchisor to another. For example, "Has this hotel always been a (brand name], or is it a conversion?"
Conversions can be beneficial to a brand because they allow the brand to grow more quickly. They can be a detriment to the brand, however, if the converted properties do not have the features and quality levels of the hotels already in the brand.
For a hotel's owners, purchasing a hotel franchise is actually very much like purchasing the long-term services of other professionals, such as attorneys or accountants, who help the owner maximize the value of their asset. For example, when selecting a franchise, there will be a number of companies (franchisors) offering the service. These service providers offer a variety of experience, skills, and knowledge. In addition, the prices charged for their services will vary. Last, as is true in many relationships, the franchisor is likely to have a unique "style" of doing business that attracts (or detracts!) potential franchisees.
Basic Considerations
As a G.M. advising an owner about franchise selections available, it is important to know as much about a potential franchisor as possible so that your advice will be as accurate as it can be. As we have seen, franchisors arc required, by law, to disclose a great deal of information. This information should be reviewed carefully by potential franchisees. Even more information can be obtained through a diligent process of investigation and interview. For the purpose of illustrating the procedure of selecting a franchise brand, assume that you are approached by an investment group that has decided to build a new ISO-room limited service hotel. They want to hire you to advise them on selecting the best possible brand for the hotel. While you will have much to investigate, some of the factors that you would certainly want to consider before making a recommendation would be:
• The quality and experience of the brand managers. Brand management, like hotel management, is complex. Those brand managers who are experienced in their work will operate the brand better than those who are not. In addition, when brand managers are experienced, it is possible for the hotel's owners to see a track record of success (or failure) on the part of the managers. The relationship between a franchisor and a franchisee is not, despite the claims of the franchisor, a true partnership because, in the ease of losses incurred by the hotel, the brand and its managers are not financially responsible. In fact, no brand available today bases the fees it collects on the achieved profits, rather than the achieved revenue, of its branded hotels. As a result, it is the hotel owners, not the brand managers, who bear the financial risk of poor brand management. Because that is true, it is critical that the brand managers be experienced and talented and that they demonstrate great integrity in dealings with their franchisees.
• Perceived quality/service level of the brand. Travelers associate some brands with higher quality, service levels, and cost, than other brands. A Holiday Inn Crown Plaza, for example, will likely be perceived by most travelers as having more services (and thus a higher ADR) than a Holiday Inn Express. In most cases, franchisors, in an attempt to offer a franchise product that appeals to hotel owners at a variety of desired investment levels, will offer brands at a range of quality and guest services provided. Those hotel owners who elect to operate the highest quality brand offered by a franchisor will spend, on average, more to build or renovate each of their hotel rooms than if they selected a lower quality level. In addition, total operating costs are likely to be higher with brands that offer guests more services, although ADRs are also likely to be higher in these cases. Of course, a well-managed, lower-cost, limited-service brand can be more profitable for an owner than a poorly managed, limited-service brand property with a higher systemwide ADR. Hotel owners that seek to maximize their return on investment must select a brand that is both well managed and that is appropriate (meets quality/service expectations) for the travelers to which the hotel is marketed.
HOTEL TERMINOLOGY AT WORK
System-Wide: The term used to describe all hotels within a given brand. Used for example, in: "Last year, the system-wide ADR for the brand was $115.20, with an occupancy rate of 63.7%."
• The amount of fees paid to the franchisor. Far too many hotel owners, when evaluating alternative franchisors, focus only on the fees the hotel will pay to the brand. While the fees paid to a franchisor are certainly one factor to be considered, it is not the only factor, nor is it even the most important. Nearly all hotel owners feel the franchise fees they pay are too high; conversely, nearly all franchisors feel that what their franchisees receive in exchange for their fee payments is a great value to the hotel. In fact, the fees paid to a franchisor are a negotiable part of the franchise agreement and should be considered seriously only after the hotel owner has narrowed down the list of potential franchisors to those that meet other criteria the owner has established for selecting the brand.
• Direction of the brand. By far the most important factor in the long-term success of the franchisor/franchise relationship is the future direction of the brand. Obviously, it is impossible to predict the future, yet knowing how a brand will be perceived by the public in five, ten, or twenty years is important when signing a franchise agreement for that same number of years. Clues to the future success of the brand can be detected by asking the franchisor about
• The number of hotels currently operating under the brand name.
• The percentage of hotels, on an annual basis, that have elected to leave the brand in the past five years.
• The number of new properties currently being built under the brand's name.
• The number of existing hotels converting to the brand (if conversions are allowed).
• The ADR trend for the last five years in comparison to the ADR trend for the industry segment in which the brand competes.
• The occupancy rate trend for the last five years in comparison to the occupancy rate trend for the industry segment in which the brand competes.
• The percentage of total hotel room revenue contributed by the brand's reservation system and the percentage of hotels within the brand that achieve that average rate of contribution.
The Franchisor Questionnaire
One way for a potential franchisee to begin the process of narrowing down the number of prospective franchisors to he selected is through the use of a structured series of questions to which all franchisors under consideration must respond. Lists of and addresses for hotel franchise companies can be easily obtained on the Internet.
THE INTERNET AT WORK
Lists of hotel franchisors, their mailing addresses, and the individual(s) responsible for each brand they manage can be quickly obtained on the Internet. For one such source of hotel franchisor contact information, go to:
www.franchisehelp.com.
Once a list of potential franchisors has been obtained, it is possible to begin the selection process. Figure 12.2 shows a survey that could be used to search for a franchisor.
HOTEL TERMINOLOGY AT WORK
Area of Protection (AOP): The geographic area, which is designated by a franchisor, and granted to a franchisee, in which no directly competing franchisees will be sold. Used, for example, in, "The AOP the franchisor is proposing consists of a five-mile radius around the hotel and lasts for five years."
While the questions that are important to any specific hotel owner will determine the information requested on the franchisor survey, using the results of the information gathered in a survey such as that presented in Figure 12.2, owners of the prospective hotel would contact, and then interview in person, the franchisor finalists.
The Product Improvement Plan (PIP)
While a large number of hotels are built each year, an even larger number of brand conversions are undertaken each year. A brand conversion may occur for a variety of reasons, including a franchisor/franchisee dispute, because the owners of the hotel decide the future prospects for the brand they are currently affiliated with are not good, or because a new brand appears to offer a better financial return on the owner's investment.
Selecting a new franchisor when converting a hotel from one brand to another is complicated by the fact that the new brand managers are likely to impose renovation, repair, or upgrade conditions on the hotel's owners. For example, a new franchisor may agree to enter into a franchise agreement only if a hotel's owners are willing to replace older carpets and furniture in the hotel's guest rooms with new carpets and furniture. Brand managers want to make sure that each hotel converting into the system will meet the brand standards established for the brand they manage.
FIGURE 12.2 Franchisor Survey
(images P419)
(images P420)
HOTEL TERMINOLOGY AT WORK
Brand Standard: A hotel service or feature that must be adopted by any property entering a specific hotel brand's system. Used, for example, in, "The franchisor has determined that 'free local telephone calls' will become a new brand standard effective January 1st."
In some cases, the renovation and replacement requirements imposed upon a hotel will be quite extensive. Major construction, room additions, and far-reaching facility upgrades may be required. In all cases, installing new outdoor signage and purchasing new and removing old logo items required by the previous franchisor would also need to be done. In general, a conversion will always require some facility modification and, in some eases, these can be quite costly.
Some hotels are reflagged because the hotel's owners have determined that it is not in their best interest to continue to meet the brand standards enforced by the brand managers in charge of their current flag. These owners will take advantage of the windows or early outs available to them to end their relationship with their current franchisor and switch to a new brand, in cases such as these, the owners will often seek a franchise that has lower brand standards. These lowered standards may include everything from a reduced weight of the towels that must be used in the guest bathrooms to the quality of carpet used in corridors. Lower standards generally mean the owners are unlikely to incur large expenses for improving the property prior to joining the new franchise. In fact, reflags such as this can happen in a matter of only several weeks or months because the main changes involve replacement of some interior signage and the logos on guest room items. Even in these cases, however, the hotel's owners will typically he required to complete some physical modifications of the property (e.g., new exterior signage) prior to being accepted into the new franchise system.
Since all conversions will require at least some property change and improvement, owners contemplating a brand conversion will want to know the extent of the changes they must implement prior to being accepted by the new brand. When a potential franchisor inspects a hotel property whose owners are interested in a conversion, a PIP (product improvement plan) will be prepared.
HOTEL TERMINOLOGY AT WORK
PIP (Product Improvement Plan): A document detailing the property upgrades and replacements that will be required if a hotel is to be accepted as one of a specific brand's franchised properties. Used, for example, in, "We estimate the PIP on the property to be $4,000,000 if we decide to go with that brand."
While hotel franchisors will not, as a rule, estimate the expenses required for implementing the PIPs they prepare, the hotel's owners must do so to obtain a true total cost of the improvements necessary for converting to the new flag. An aggressive PIP can increase an owner's conversion costs by many thousands of dollars, therefore, a thorough review of the required PIP is always crucial prior to beginning the franchise agreement negotiation process.
Negotiating the Franchise Agreement
The franchise agreement is, in the final analysis, simply a contract between the brand's managers and the hotel's owners. As such, it is negotiable. The stronger the position of each side, the more power each will bring to the negotiating process. It is always in the best interest of the hotel's owners, as well as the G.M. advising them, to be represented by an attorney during the franchise agreement finalization period because these agreements are detailed and complex. In the opinion of many in the hotel industry, franchise agreements, which arc drafted by the franchisor, tend to be written in the favor of the franchisor. Because this is true, owners should carefully read every line of the franchise agreement to determine exactly what the hotel must do to stay in compliance with the agreement, as well as the penalties that will be incurred if the hotel does not stay in compliance.
Owners should certainly evaluate all components of their proposed franchise agreements; however, one area of special concern, especially to those managing and investing in a hotel, is the relatively new matter of the impact study, that is, when these studies should be undertaken, and who should pay for them.
HOTEL TERMINOLOGY AT WORK
Impact Study: An in-depth evaluation of the effect on occupancy percent and ADR that a new hotel in a given market will have on an existing hotel(s) in that same market.
To illustrate, assume that, in our example, J.D. Ojisima and the hotel's owners, after a thorough investigation, select the "Sleep Well" brand as the franchise affiliation for their proposed 150-roorn, limited-service hotel. Assume also that the "Sleep Well" brand is managed by the same corporation (Excalibur Hotels) that manages the "Sleep Better" brand. The "Sleep Better" brand is also a limited-service hotel; however, unlike a "Sleep Well" hotel, franchisees selecting tins brand must offer a swimming pool, as well as provide guests a complimentary hot breakfast each morning. Neither of these requirements exists for a "Sleep Well."
If the AOP granted J.D.'s group excludes only the building of additional "Sleep Well" properties within the protected area, it may be the opinion of Excalibur Hotels, after seeing how well the original hotel performed in the market (recall that franchisors have a right to review the revenue records of their franchisees), that it is in the best interest of Excalibur Hotels to franchise a "Sleep Better" hotel directly across the street from J.D.'s hotel. Of course, a question then arises as to the potential "impact" such a decision will have on the hotel franchised by J.D.'s group. The issue of negative impact has become increasingly important as brand consolidation places more and more hotel brands in the hands of fewer and fewer franchisors. Increasingly, hotel owners have demanded that impact studies, prepared by an independent part}', be undertaken and paid for, when appropriate, by the franchisor. This is because impact studies are most likely to be needed when a franchisor that manages two similar hotel brands seeks to grant franchise rights to one brand, within the AOP granted to another brand's franchisee. If the impact study indicates that the granting of a competitive franchise could damage the value of the original franchisee's hotel, compensation for that damage should, in the opinion of many hotel owners, become a negotiable part of the franchise agreement.
Franchise agreements are complex and are increasingly important. They should be entered into only after a great deal of consideration and with expert assistance. The fact, however, is that only a few hotels can survive without a nationally recognized brand name. As a result, G.M.s must become adept at operating hotels in the best interest of their owners, as well as in compliance with their owner's franchise agreement.
MANAGERS AT WORK
"We wanted to get your input, J.D., because you are closest to the operation," said Daniel Flood. Daniel, known to J.D. as "Dan," was the head of the investment group that owned the 350-room full-service hotel at which J.D. was the G.M.
"As you knew," continued Dan, "we have a window coming up on our franchise agreement with Premier Hotels. If we are going to switch flags, we need to make a decision within the next sixty days."
J.D. was aware that meetings had been held between the owners of his hotel and an alternative franchise company. In their efforts to secure a franchise agreement with Flood's group, the new franchisor was offering very attractive reductions in royalty and reservation fees for the first three years of the agreement.
"What we need to understand better," said Dan, "is exactly what the impact would be of changing flags. We are especially concerned about conversion costs in their PIP and the new franchise company's short-term ability to drive revenues through their 800 number."
What are some of the factors J.D. should discuss with the hotel's owners? How do you think a name change would affect the hotel's management staff? How would it affect guests? How could it affect the hotel's standing within the community?
THE HOTEL MANAGEMENT COMPANY RELATIONSHIP
If you are a G.M. in the hotel industry for very long, you will likely work, or have the opportunity to work, for a hotel management company. As discussed in chapter 1, a management company is an organization formed for the express purpose of managing one or more hotels. Hotel owners sign management contracts that clearly establish the fees, operating responsibilities, and length of time for which the management company will operate their hotel. When a management company secures a contract to operate a hotel, it must provide a G.M. In such a situation, the management company itself, rather than the hotel's owners, employs the G.M. As a result of the popularity of management companies, most G.M.s will spend at least a portion of their careers working, not directly with a hotel's owners but rather directly for a management company.
HOTEL TERMINOLOGY AT WORK
Management Contract: An agreement between a hotel's owners and a hotel management company under which, for a fee, the management company operates the hotel. Also sometimes known as a management agreement.
Management Companies
In many cases, those who invest in hotels are not the same individuals as those who want to manage the hotels. These nonoperating hotel owners can either hire individual G.M.s to direct their hotels, or, if they desire, they can hire a management company to do so. In some cases, the owners of a hotel have absolutely no interest in managing or even in the continued ownership of the hotel. For example, assume that a bank has loaned money to a hotel owner to develop a property. The owner opens the hotel, but, over time, fails to make the required loan repayments. As a result, the bank is forced to repossess the hotel. In a case such as this, the bank, which is now the owner, will likely seek a management company that specializes in distressed properties to manage the hotel until it is put up for sale and purchased by a new owner.
The hospitality industry, because it is cyclical, sometimes experiences falling occupancy rates and ADRs. Sometimes these cycles result in properties that tall into receivership and lenders who face the consequence of becoming involuntary owners. In cases such as these, effectively managing a hotel may simply mean optimizing the property's value while offering it for sale. Management companies that specialize in helping lenders maintain repossessed properties until they can be resold will:
• Secure, and if it has closed, reopen the hotel
•Implement sales and marketing plans to maximize the hotel's short-and long-term profitability
• Generate reliable financial statements
• Establish suitable staffing to maximize customer and employee satisfaction
• Show the hotel to prospective buyers
• Report regularly to the owners about the hotel's condition
Clearly, in the situation above, a management company provides a vital service to the bank. While an individual G.M. might be able to provide the same services (and usually at a lower initial cost), many hotel investors and owners prefer to hire management companies.
While the actual number of hotels managed by any single management company varies from year to year, the ten largest management companies based on annual revenue and the number of properties they manage at the time of this writing are included as Figure 12.3.
Origin and Purpose
The financial success of any lodging facility is dependent, in large measure, on the quality and skill of its on-site management. In the time period before the mid-1950s, the owners of a hotel hired the best G.M. they could find to operate the hotel(s) they owned. If they needed a manager with a specific level of skill or experience, they would try to find one. Even talented G.M.s, however, may not have had experience in specific tasks that owners needed to be undertaken. When that was the ease, the result was often less than satisfactory for both the owner and the hotel's G.M.
In the 1950s and later, as more hotels became franchised and as hotel owner groups purchased ever larger numbers of hotels, these owner's inability to actively recruit, train, and supervise the many G.M.s they required to manage their properties resulted in the growth of companies that were formed simply to manage hotels under ordinary as well as out-of-the ordinary circumstances. Today, with the advent of large (and small) management companies, owners often find that, because a hotel management company employs many managers, one or more of those managers has the exact experience that the owner is looking for. In many cases, owners face special circumstances in the operation of the hotels they own. Some of these special situations include:
FIGURE 12.3 Ten Largest Management Companies
(images P425)
• Reflagging a hotel from a lower quality brand to a higher one
• Reflagging a hotel from a higher quality brand to a lower one
• Managing/directing a major (complete) renovation of a hotel
• Operating a hotel in a severely depressed market
• Bankruptcy/repossession of the hotel
• Managing a hotel that is slated for permanent closing
• Managing a hotel as a result of the unexpected resignation of the hotel's G.M.
• Managing a hotel for an extended period of time for owners who elect not to become directly involved in the day-to-day operation of the property
HOTEL TERMINOLOGY AT WORK
Depressed Market: The term used to describe a hotel market area where occupancy rates and/or ADRs are far below their historic levels. Used, for example, in, "The permanent closing of the military base in that town resulted in depressed market conditions in the entire county."
As a G.M., it is important for you to fully understand the relationship that exists when a hotel owner signs a management contract with a hotel management company. One way to understand the relationship better is to contrast the restaurant business with the hotel business. In the restaurant business, the owner of a restaurant who elects not to operate it, but wishes to continue ownership, will often lease the space to another restaurateur. In that situation, the person(s) owning the new business entity that leases the restaurant pays the restaurant's owner an agreed-upon amount and assumes responsibility for all the expenses associated with operating the business. If the restaurant makes money, the benefit goes to the person(s) who leased the space. If the restaurant loses money, the same person(s) are responsible for the loss.
Unlike the restaurant business, in most cases hotel owners find they cannot lease their properties to management companies. Rather it is the management company that receives a predetermined monthly fee from the hotel's owners in exchange for operating the property, and it is the owners who assume a passive position regarding operating decisions, while at the same time assuming responsibility for all working capital, operating expenses, and debt service. The fees charged by management companies to operate a hotel vary, but commonly range between 1 and 5 percent of the hotel's monthly revenue. Thus, regardless of the hotel's operating performance, the management company is paid the fee for its services and the hotel's owners receive the profits (If any) after all expenses are paid.
In some cases, hotel owners do negotiate contracts that tie, at least to some degree, management company compensation to the hotel's actual operating performance. In some cases, this is acceptable, especially with hotels that are proven profitable. In other cases, however, it can take months or even years to turn an unprofitable hotel into a profitable one. Often, it is the owners of unprofitable or distressed market hotels that seek the assistance of management companies. Understandably, however, few hotel management companies are willing to enter into risky management contracts that may result in them financially subsidizing investors who own a hotel that either has been poorly managed in the past or that is not likely to be a profitable hotel in its current condition.
Hotel Management Company Structures
Hotel management companies can be examined from a variety of different viewpoints. One way to view management companies is to consider whether they are first tier or second tier. The term "tier" refers simply to whose name is on the hotel the management company is operating. Tiering does not refer to the quality of the management operating, or G.M.s working for, the management company.
HOTEL TERMINOLOGY AT WORK
First Tier: Management companies that operate hotels for owners using the management company's trade name as the hotel brand. Hyatt, Hilton, and Sheraton are examples.
Second Tier: Management companies that operate hotels for owners who have entered into an agreement to use one ol a franchisor's flags as the hotel brand. American General Hospitality, Summit Hotel Management, and Winegardner and Hammons, Inc. are examples.
Another way to examine management companies is by the number of hotels they operate. Because a hotel management company that operates one resort hotel with 750 rooms is likely to employ more managers and have responsibility for higher revenue than another hotel management company that operates three limited-service hotels, each of which consists of 100 rooms, historically hotel management companies have been ranked (in size) by the number of "rooms" they manage, rather than the number of hotels they manage. The hospitality trade press publishes rankings of the largest hotel management companies periodically.
While the size of a hotel management company may indeed say something about the successfulness of the company, it is often more useful to segment hotel management companies by the manner in which they participate, or do not participate, in the actual risk and ownership of the hotels they manage. As a result, these companies can be examined based upon their participation in one (or more than one) of the following arrangements.
• The management company is neither a partner in nor an owner of the hotels they manage. In this situation, the hotel's owners hire the management company. This is common, for example, when lenders involuntarily take possession of a hotel. In other cases, the management company may, for its own philosophical reasons, elect to concentrate only on managing properties and will not participate in hotel investing (ownership).
• The management company is a partner (with others) in the ownership of the hotels they manage. A common arrangement within the hotel community is that of a management company, partnering with an investor(s) to jointly own and manage hotels. Frequently, in this situation, the management company either buys or is given a portion of hotel ownership (usually 1%-20%), and then assumes the management of the hotel. Those hotel owners who prefer this arrangement feel that the partial ownership enjoyed by the management company will result in better performance by them. On the other hand, if the hotel experiences losses, the management company may share these losses, and this fact can also help serve as a motivator for the management company!
• The management company only manages hotels it owns. Some management companies are formed simply to manage the hotels they themselves own. These companies want to participate in the hotel industry as both investors and managers. Clearly an advantage of this situation is that the management company will benefit from its own success if the hotels it manages are profitable. If the company is not successful, however, it will be responsible for any operating loses incurred by its hotels.
• The management company owns, by itself, some of the hotels it manages, and owns a part, or none at all, of others it manages. Some management companies will vary their ownership participation depending on the hotel involved. Thus, a given management company may:
• Own all of a specific hotel as well as manage it
• Manage and be an owning partner in another hotel
• Manage, but not own any part of, yet another hotel property
Each of the above structure types has advantages and disadvantages both to the management company and to those with whom it partners. If a management company employs you as a G.M., it is important for you to know your company's ownership participation level in the specific hotel you are managing so that you can better understand the company's operating philosophy, as well as advise your staff about the ownership of the hotel.
THE INTERNET AT WORK
Management companies concentrate on a variety of specialty areas. Swan Inc. is one of the most technologically advanced. To view its site and services, go to:
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The Management Operating Agreement
There are as many different contracts between those who own hotels and the management companies they employ to manage them, as there are hotels under management contract. Every hotel owner will, depending on the management company selected, have a unique management contract, or operating agreement, for each hotel owned. In some cases, these contracts may include preopening services that are provided even before the hotel is officially open. Preopening activities may include hiring and training staff, purchasing inventories, and other operational activities that must be done before the first guest can be housed. Because you now understand the business relationship that can exist between an owner of a hotel and a management company, it is important that you, as a G.M., know about the basic elements found in a management company's operating agreement.
Major Elements
In his 1980 book, Administration of Hotel and Restaurant Management Contracts, James Eyster detailed many of the components typically included in a management agreement. Considered a classic work in the field of hotel management contracts, it is an excellent addition to the serious G.M.'s personal library.
While times have changed, and certainly each specific management contract is different, many of the negotiable issues identified in Eyster's book
THE INTERNET AT WORK
To order a copy of James Eyster's book Administration of Hotel and Restaurant Management Contracts, published by Cornell University Press, go to:
www.amazon.com.
In the "Search" field, enter "Books" and then enter the author's name or the hook's title.
must still be addressed by owners and prospective management companies when they are discussing a potential management agreement. Today, major elements of management agreements include:
• The length of the agreement
• Procedures for early termination by either party
• Procedures for extending the contract
• Contract terms in the event of the hotel's sale
• Base fees to be charged
• Incentives fees earned or penalties assessed related to operating performance
• Management company investment required or ownership attained
• Exclusivity (Is the management contract company allowed to operate competing hotels?)
• Reporting relationships and requirements (how much detail is required and how frequently will these reports be produced)
• Insurance requirements of the management company (who must carry insurance and how much)
• Status of employees (Are the hotel's employees employed by the hotel owner or the management company?)
• The control, if any, that the owner has in the selection or removal of the G.M. and other managers employed by the management company and working at the owner's hotel
Advantages to the Hotel Owner
A variety of benefits can accrue to hotel owners who select a qualified management company to operate their hotels. Among these are:
• Improved management quality. In some cases, a management company is able to offer talented G.M.s a better employment situation than that afforded by an individual hotel owner. A G.M.'s opportunities for advancement, increased training prospects, and employment security arc frequently enhanced by working for a management company. As a result, owners benefit from the efforts of G.M.s who art more highly skilled. In addition, a management company may have specialists on staff that can assist the property G.M. in areas such as hospitality law, accounting, and food and beverage management. In many cases, the hotel's owners could not supply these additional resources.
• Targeted expertise can be obtained. Some hotels have special needs. Reflagging, renovation, and repositioning skills are not equally possessed by all G.M.s. A management company may well have managers on its staff that are experts in these areas, and this expertise can be used to the hotel owners' advantage.
• Documented managerial effectiveness is available. Banks, mortgage companies, and others who are asked supply investment capital to owners want to know that the hotel the owners are purchasing or for which loans arc sought will, in fact, be operated with professional hotel managers. The selection of an experienced management company with documented evidence of past success in running hotels similar to the one for which investment is requested adds credibility to loan applications submitted by hotel owners.
• Payment for services can fie tied to performance. While most management companies charge a revenue-based fee to operate a hotel, owners can negotiate additional payment incentives that help assure the very best management company performance possible. In this way, all of the resources of the company can be utilized in ways that benefit both the company and the hotel. Good management companies welcome such arrangements because they allow for above average fees to be carried in exchange for above average management performance.
• Partnership opportunities are enhanced. Many hotel owners are involved in multiple properties. When that is the case, an established management company and an ownership entity can work together in a variety of hotels. The management company will become knowledgeable about the owner(s) and the goals the owner has for its hotels. The owner will become familiar with the abilities as well as the limitations of the management company. A long-term partnership can, in cases such as these, be synergistic.
Disadvantages to the Hotel Owner
Despite many advantages, hotel owners face some disadvantages inherent in the selection of a management company. These include:
• The owner cannot control selection of the on-site G.M. and other high-level managers. Throughout this hook we have tried to demonstrate the importance of the G.M. to the success of a hotel property. When using a management company, the hotel's owner (who may be allowed some input) will not typically choose the hotel's G.M. As a result, the quality of G.M. employed may be related more to the choice of G.M.s available (currently employed by) the management company than to the quality needed by the hotel. Experienced owners know the importance of quality on-site management and should insist upon the best G.M. (as well as other managers) that the management company can provide.
• Talented managers leave frequently. Assume you were the owner of a hotel management company. You have contracts to operate large hotels (that pay you large fees) and smaller hotels (where the fees you earn are less). One of your G.M.s shows considerable talent operating a smaller hotel. The owner of the property is very happy with her. An opening for a G.M. arises at one of your larger hotels. Do you move the G.M.? In many cases, the answer is probably "yes." In those eases, hotel owners may experience frequent turnover of G.M.s, especially if the hotel owned is smaller, is in a less popular geographic location, or for some other reason is not viewed as desirable by G.M.s within the management company that has the contract for operating it.
• The interests of hotel owners and the management companies they employ sometimes conflict. On the surface, it would seem that the interests of a hotel owner and the management company selected to operate the hotel would always coincide. Both are interested in operating a profitable hotel. In fact, disputes arise because hotel owners typically seek to minimize the fees they pay to management companies (because reduced fees yield greater profits), while management companies seek to maximize their fees. As a result, hotel owners who hire management companies often have serious disagreements with those companies over whether the hotels are indeed operated in the best interest of the owners. Examples of such disagreements arc evident in news reports such as that in Figure 12.4, a story reported on www.Lodgingnews.com, the Web site of the American Hotel and Lodging Association.
• The costs of management company errors are borne by the owner. Unlike a lease arrangement, in a management contract it is the owner, not the management company, that is responsible for all costs associated with operating the hotel. As a result, the unnecessary costs incurred as a result of any errors in marketing or operating the hotel are borne not by the management company making the errors, but rather by the hotel's owner.
• Transfer of ownership may be complicated. The term (length) of a management contract, especially if the hotel is large, can be several years. As a result, if the owners decide to put the hotel up for sale during the life of the contract, those potential buyers who either operate their own hotels, or use a different management company, may not be interested in buying. If the contract is written in such a way as to have a buyout of the contract, the cost of the buyout may be so high that the owner can only sell to those potential buyers willing to pay the very highest price for the property, which limits the number of potential buyers.
FIGURE 12.4 Example of Hotel Owners and Management Company Disagreements
(image P433)
HOTEL TERMINOLOGY AT WORK
Buyout: An arrangement in which both parties to a contract agree to end the contract early as a result of one party paying the other an agreed-upon financial compensation.
Issues Affecting the General Manager
As a professional G.M., you are likely to find yourself, at one time or another during your career, managing a hotel in one of the following situations related to franchisors and management companies:
MANAGERS AT WORK
"I wanted you to know up-front, J.D.," said William Zollars to J.D. Qjisima, the manager of a 350-rooni full-service hotel.
J.D. was meeting for breakfast at William's request, and the purpose of the meeting had become clear almost immediately.
As the regional vies president for sales, it was William's job to secure new management contracts for Richerland Hospitality, one of the largest management contract companies in the United States.
"Thanks for letting me know Bill," said J.D., "but I had already heard from our hotel owners that you were going to present a proposal." In fact, the owners of the hotel had let J.D. know that Richerland had approached them with the idea of assuming the management of the hotel. Because the hotel J.D. operated had high visibility in the city, and because it was very profitable, it was not unusual that a management company would attempt to secure a management contract for it. It happened almost every year.
"Don't be concerned, J.D.," continued William. "Our proposal will recommend that we keep most of your management team in place, including you of course."
What factors would cause hotel owners to think about selecting a management company to operate their hotel rather than hiring J.D. directly? What types of owners' groups do you believe are best served hiring management companies? Do you believe J.D. should inform the others on his management team that a proposal for a management contract is being submitted to the hotel's ownership? Why or why not?
• The hotel is operating as a franchise.
• The hotel is operating under a management contract.
• The hotel is a franchise operating under a management contract.
When franchise agreements and/or management contracts exist, they will affect your role as a G.M., as well as how you perform your job. In this section we examine how working in a branded property affects the G.M., as well as how working for a management company can impact the G.M.'s daily efforts.
Managing the Franchise Relationship
Most hotels are affiliated with a franchise. This is especially true of hotels with more than seventy-five rooms. As a result, it is likely that yon will manage a hotel where the owners and a brand's managers have signed a franchise agreement. As the G.M., this agreement will affect your relationship with:
• The hotel's owners. It is a simple fact that hotel owners often find themselves in conflict with, or at the very least in disagreement with, brand managers about how to best operate the brand itself, as well as how to operate the individual hotels making up the brand. Unfortunately, when these disagreements occur, it can put the hotel's G.M. in the middle of the conflict.
Assume, for example, that the brand managers for your hotel have, as a brand standard, established breakfast hours for the hotel's complimentary continental breakfast to be from 6:00 A.M. to 9:00 A.M. The hotel's owners, however, instruct you to begin the breakfast at 7:00 A.M., rather than 6:00 A.M. on the weekends, to reduce labor costs. If you follow the directive of the brand managers, you violate your owner's wishes, however, if you follow the instructions of your hotel's owner, you will be in violation of a brand standard.
When owners instruct G.M.s to violate or ignore brand standards, the resulting influence on the hotel's relationship with the brand can be negative. Alternatively, when brand managers seek the G.M.'s compliance with acts that may be in the best interest at the brand managers, but not the hotel's owners, difficulties may also arise. Issues regarding loyalty to owner/employers and ethical standards for functioning as a professional G.M. are always present, but these take on extra complexity when a hotel is operated as part of a franchisee chain.
• The hotel's franchise service director (FSD). Each franchise company assigns an individual to monitor the franchisee's compliance with the franchise agreement. The title of the individual who performs this task is the FSD (franchise service director).
HOTEL TERMINOLOGY AT WORK
FSD (Franchise Services Director): The representative of a franchise hotel brand who interacts directly with the franchisee hotel's G.M.s.
While the title of this individual may vary somewhat, the position is always responsible for the day-to-day relationship between the franchisor and the franchisee. In some cases, the FSD may perform the quality assurance inspections required by the franchisor. Other routine tasks include assisting the hotel's sales effort, monitoring and advising about the hotel's use of the franchise-provided reservation system and advising the franchise on the availability and use of franchisor resources.
Legitimate differences of opinion and conflicts can arise between a hotel G.M. and the franchisor's representative. The personal relationship, however, that ultimately develops between the FSD and the G.M, is an important one. When the relationship is good, the FSD is viewed as a valuable resource. When it is not good, conflicts between the FSD and yourself could escalate to the point that they negatively impact your ability to effectively operate the hotel.
• The brand. Even when a hotel's owners do not initiate brand-related conflict with a G.M. and the G.M.'s relationship with the FSD is good, personal conflict may still arise between a G.M. and the brand's managers. Assume, for example, that those brand managers responsible for selling franchises to owners were successful in convincing those who own your hotel to reflag the property to their brand. After one year of operation, the owners complain to the franchise company that the number of reservations received through the franchisor's national reservation center is not consistent with the amounts promised by the sales representatives. In fact, complain the owners, the volume of reservations received is only one-half of that promised. In cases such as these, it is not at all unusual, and in fact is most likely, that the brand managers will claim that it is the G.M., the work of the EOC (Executive Operating Committee), and the operation of the hotel itself that is the cause of the shortfall. Not surprisingly, as the hotel's G.M., you are highly unlikely to agree with this assessment. The potential for resulting conflict is clear.
While the example above is simply one instance of possible brand conflict, there are certainly many others. The important factor to remember in cases such as these is that the hotel industry is relatively small and G.M.s (as well as brand managers) can quickly develop reputations that will follow them throughout their careers. As a professional G.M., it is always in your best interest to approach any potential conflict situation with brand managers in a way that is credible, principled, and straightforward.
• Your staff. Your staff will also be influenced by the requirements of your franchisor. Examples of this are numerous, from standards related to the appearance and content of room attendant's carts, to emergency equipment that should be available in hotel shuttle vans, to the hours room service must be available, brand standards will affect every department in the hotel. In some cases, these standards may conflict with your instructions to your staff. When they do, you must manage that conflict.
Assume, for example, that a guest checks in to your hotel. The guest is tired and irritable. The hotel is busy because a tour bus, with many check-ins arrived just before this guest and as a result it takes nearly ten minutes to get the guest checked in. The guest complains to the FOM about the time it has taken to get registered. The FOM, realizing that the front desk staff was working at their top speed, apologizes, explains that other guests had arrived first, but takes no other action. When the guest demands that his room be "comped," the FOM declines to do so. The guest, upon arriving in his room, calls the brand's national guest service telephone number, to complain that check-in took nearly "thirty minutes," and demands, according to the brand's "satisfaction guaranteed" program, that his room be "comped." Depending on the brand managers decision about this guest, as a G.M. you may well have to explain to your FOM that his or her decision must be overturned In order to comply with the brand standard of "satisfaction guaranteed."
This example is simply one of many in which the policies used and decisions made by staff may be influenced by the requirements ol a brand. As the hotel's G.M., it is part of your job to blend the operating policies that you and the hotel's owner prefer with those dictated by the brand and explain your actions to your staff if conflict between the two approaches should arise.
• Your guests. Kemmons Wilson's vision for Holiday Inn was a chain of hotels where arriving guests knew exactly what to expect from their stay. This same vision exists in the minds of most brand managers today. In fact, however, hotels as well as those who operate them can and will vary. As a result, guest experiences can vary also. When the guest's expectations are exceeded, this variation can be good. Unfortunately, that same guest may expect the same experience at the next hotel affiliated with the brand, and they may, in fact, be disappointed.
For example, assume a hotel brand allows hotel owners to charge guests for local telephone calls (some brands do not allow this). As the G.M. in a competitive market, you determine that many of your guests will expect free local calls because that is what your competitors offer. If you implement the free local call policy, your guests will be pleased, but these same guests may be unhappy if they later stay at one of the other hotels in your chain that does not offer complimentary local calls. These guests may, in fact, be disappointed because they believed, and justifiably so, that all hotels affiliated with your brand offered tree local calls. As a G.M., when it is your own hotel that falls short of a feature offered by another hotel within your brand, you may be challenged to satisfy a guest whose expectations exceed that which your hotel is able to meet.
Managing for a Management Company
As we have seen, sometimes a management company owns the hotel it operates. When that is the case, the property G.M. is, of course, working directly for the hotel's owners. In many cases, however, the management company does not own the hotel it operates. When that is so, the G.M., because he or she docs not work directly for the hotel's owners, may be faced with special challenges. These can include:
• Career management challenges. When you work for a management company, advancement in your organization comes through satisfying the desires of the company, not necessarily the owners of the hotel you are managing. An example that involves positive conflict points to one of the challenges you may face in your own career working for a management company. Assume you are a talented G.M. operating a 350-room hotel. Your management company has just gained a ten-year contract to operate a 550-room hotel in your hometown. The hotel will require a G.JVL, and it is a position you would very much like to assume, yet the owners of your current hotel are adamant that they want you to remain and have even threatened the management company that they will not renew the management contract when it expires if you are allowed to transfer. This problem (and it is a good one!) as well as others like it can occur when long-term career advancement with your management company conflicts with the desires of the hotel owners for whom you are currently managing. In a situation such as this, your company will evaluate your long-term employment worth (just as you also must evaluate it), as well as the course of action that is best for the long-term growth of the management company. Clearly, however, it will not be possible to, at the same time, satisfy your desire for promotion with your hotel owner's desire for G.M. stability.
• Dual loyalty issues (owners vs. management company). As the G.M. of a hotel operated by a management company, there may be times that the business interests of the owners of the hotel you are managing conflict with the business interests of your employer. It is important to remember that, in these cases, you will most often be rewarded for loyalty to your management company. For example, 'assume that the contract for managing the hotel at which you are the G.M. is up for renewal. Most unbiased observers would maintain that it is in the best interest of the hotel's owners to negotiate as short a contract length as possible and one that holds the management company responsible for financial results that fall short of expectations. These same observers would likely state that it is in the best interest of the management company to negotiate as long a contract as possible and one that holds the hotel's owners, not the management company, financially responsible in the event that hotel operating performance does not meet anticipated levels. As a G.M. working for a management company, you may not, at all times, be in a position to advise the hotel owner of their best course of action because, in fact, that course of action works against the best interests of your own company.
• Strained EOC relationships. An important part of a G.M.'s job is to assure each member of the EOC that he or she is a valuable partner in the hotel's ultimate success. Certainly this partnership is easier to maintain when the management company is not threatened by the loss of the contract to manage the hotel. When the management company is in danger of loosing the contract, the partnership the G.M. wishes to develop may be strained by the fact that some members of the EOC enjoy greater job security than others.
Consider, for example, the hotel in which an owner is considering changing a tier-two management company. If the change takes place, it is likely that the G.M., the director of sales and marketing, the controller and, if it is a full-service hotel, the food and beverage director will be replaced. Other department heads, such ay the FOM, the executive housekeeper, and the maintenance chief are much less likely to be replaced. This is true because a management company winning a new contract does not, as some believe, replace every employee at the hotel. In fact, to do so would disrupt the hotel tremendously. Thus, depending on the size of hotel and philosophy of the management company assuming the contract, the G.M. (almost always), as well as some number of managers (but generally not all), will be replaced.
The result is that, despite the fact that the same management company currently operating the hotel employs all EOC members; some may feel more loyalty to the hotel and its owners than to the company. As a G.M., it is not hard to understand these managers' perspective, yet as the leader of the hotel operating team, you must do your best to prevent this dichotomy of interests from influencing the experience that guests in your hotel receive.
• Affected and concerned employees. G.M.s working for management companies know to whom they directly report and generally will be familiar with the employment policies and procedure of the management company employing them. Hourly employees may not be as familiar with the management company, and this can be a real concern when an owner chooses to employ a new management company. When, for example, an owner decides to allow one management contract to expire and elects to choose a different management company, the hotel's employees will likely, under the terms of the contract, be terminated by the first management company and "hired" by the new company, even though they may have been at the hotel for many years. A variety of employment-related issues may arise. For example, assume that Maria, a housekeeper, has been at the hotel for fifteen years as an employee of Management Company #1. That company loses its management contract to Company #2. As a result, Maria's employment with the first company is terminated. As a fifteen-year employee of Management Company #1, Maria was entitled to three weeks' paid vacation per year. Management Company #2, however, views Maria as a new employee, and under its policies Maria will qualify for only two weeks' vacation per year. In fact, she must be employed by the new company for a minimum of six months before she is allowed any vacation at all! The impact on Maria is obvious, as are the resulting challenges a G.M. faces when a new management company must implement its benefit, pay, seniority, and related employment policies in place of those of a previous management company.
•Conflicts with brand managers. Some management companies have excellent relations with the brands they manage for owners but others do not. As a G.M., you may find that some of the wishes or even the directives of the brand managers are in conflict with those of your management company. For example, a franchise company may, in an effort to promote business, send to the hotel large, exterior banners that advertise a special rate or hotel feature. Obviously, the brand would like these signs displayed on the property. The management company's sales philosophy, however, may not include hanging exterior banners because it believes such banners cheapen the image of the hotel. As a result, the banners are not displayed. It is likely that the FSD will complain to the G.M. who was, quite rightly, simply following the directive of the management company to whom he or she reports.
Conflicts with brand managers can range from the very minor to the very serious. As the owner's representative to the brand, virtually any conflict that could arise between a franchisor and an owner could arise between a franchisor and the owner's management company. As a professional G.M., you must be aware of these potential conflicts and be ready to act in the long-term best interests of your employer.
HOTEL TERMINOLOGY AT WORK GLOSSARY
The following terms were defined within this chapter. If you are not familiar with each of them, please review the segment of the chapter that contains the term.
Flag
AAHOA
Buyout
Franchise
Window
Brand standard
Franchise agreement
Early out
PIP (product improvement plan)
(FTC)
Federal Trade Commission Occupancy tax
Impact study
FOC (franchise offering circular)
Conversion
Management contract
Second tier
Systemwide
Depressed market
FSD (franchise services director)
Area of Protection (AOP)
First tier
ISSUES AT WORK
1. Some G.M.s believe that they can best further their careers by choosing to manage only hotels affiliated with a specific brand (i.e., Hyatt, Westin, Holiday Inn, etc.). Other G.M.s believe they are most marketable if they have experience managing several different hotel brands. Assume you were a hotel owner. Which type of G.M. do you think would be most valuable to your hotel? Would the brand with which you are affiliated affect your decision? Would your opinion he altered if you were considering changing the flag at your property? Why or why not?
2. Some hotel managers believe that the "brand" name on a hotel is critical to its success whereas others feel profitable hotels can still be operated as independents or that the brand name on the hotel is actually less important than it once was. What do you believe are the major obstacles faced by independent hotels? How can an effective management team overcome these? Do you believe the trend toward an increased number of hotels affiliated with brands will continue? What is the likely impact on independent hotels?
3. Product segmentation in the hotel industry is typically good for franchise companies because it allows them to maximize the number of hotels they have in a given geographic area and thus maximize the fees they receive. Critics contend, however, that excessive product segmentation unfairly pits hotel owners against other owners operating virtually identical hotel products (albeit with different brand names) within the same franchise group and in the same geographic area. As fewer and fewer franchise companies own increasingly larger numbers of brands, this debate will likely intensify. As a G.M. concerned about guest satisfaction, how, if at all, does this issue affect guests? Consider both positive and negative impacts. Do the positives outweigh the negatives? Why or why not?
4. Traditionally, management companies have been paid a monthly fee (usually a percentage of gross rooms revenue) to manage a hotel. More recently, management fees are tied to actual hotel performance as measured by RevPar indexes; generated by the STAR Report (sec chapter 10). Critics of this newer approach contend that, while the STAR Report measures the sales ability of the management team, it does not measure the team's ability to control costs and maximize profitability. If you formed a management company, would you propose to manage hotels for A percentage of the gross rooms revenue, for a tee determined by your STAR Report results or for a fee determined by the hotel's profitability? Why? Which do you believe would appeal most to hotel owners? As a professional G.M., under which system would you most like to manage?
5. G.M.s sometimes face difficult decisions when they are employed by a management company and operate a branded hotel. In such a situation, the G.M.'s loyalty can be tested because of the conflicting interests of staff, guests, the brand, the management company, and the hotel's owners. Consider a situation in which the financial interests of two (or more) of these groups directly conflict (e.g., management companies seek to maximize management fees while hotel owners seek to minimize them). What would be in the best interests of each party in your example? To whom do you believe G.M.s owe their greatest loyalty? Why?
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