Q2) Agreements of Franchising, Management Contract and Vacation Ownership of Hotel Business: Details and real-life examples

Franchising

Franchising allows a franchisor or hotel group to expand their market share and brand name by using franchisees' monetary assets. The franchisor grants the rights to their franchisees, such as rights to use its trademark, signs, operating systems and procedures, reservations system, etc. The franchisees would sign the franchise contract and follow the guidelines set by the franchisor, to operate the hotel business and/ or franchised outlets.

Franchising is one of the win-win solutions for both franchisor and franchisees.

For franchisor, they can expand the business rapidly, increase market share and recognition, and receive up-front fees.

For franchisees who have sufficient financial support but lack technical expertise and recognition, they could gain exposure to potential customers by listing in the franchisor's directory and through international advertising. Moreover, there would be a set of plans and specifications, and centralized reservation system for them to follow and apply, which make the operation process more efficient. They can also gain volume discounts for procurement and enjoy low fee percentage charged by credit card companies.

Franchising, began in 1907 by The Ritz Carlton, was the primary growth and development strategy of hotels and motels during the 1960s, 1970s, and 1980s. From 1960s, Hilton and Sheraton began to franchise their names. However, there are two main challenges for the franchisor, which are maintenance of quality standards and avoidance of financial failure on the part of the franchisees. Franchising is still a prevailing form of expansion in North America and other places, while there are examples that a few properties who lose their right to franchise by not maintaining standards.

Examples:
Wyndham Worldwide of Parsippany, New Jersey, is the world's largest franchisor of hotels, with more than 5,000 hotels.


Choice Hotels International, is the second largest franchisor of hotels with more than 4,500 hotels.


InterContinental Hotels and Resorts is the third largest franchisor with more than 3,000 hotels

Management contract 

Management contracts have been a great trend in the hospitality industry since the 1970s because little or no up-front financing or equity is involved. Hotel management companies usually form a partnership of convenience with developers and owners who may not have the desire or are incapable to operate the hotel. The management company provides operational expertise, marketing, and sales clout, often in the form of a centralized reservation system (CRS). Some companies manage a portfolio of properties on a cluster, regional, or national basis.

The management contract would allow the hotel company to manage the property for a period of five, ten, or twenty years. The company would receive a management fee, usually a percentage of net operating profit, about 2 to 4.5 percent of gross revenues.

Recent management contracts have called for an increase in the equity commitment on the part of the management company. Owners have increased their operational decision-making options to allow them more control over the property.

Besides, management companies are seeking sustainability and a bigger share of the business. With international expansion, a hotel company entering the market might actively seek a local partner or owner to work within a form of joint venture.

Examples:

The largest management companies are:
InterContinental Hotels, with more than 500 thousands guest rooms
Wyndham Hotel Group
Marriott International
Hilton Hotels
Starwood Hotels and Resorts

Vacation ownership

The World Tourism Organization said timeshares/ vacation ownership has been the fastest growing segment of the US travel and hospitality industry, increasingly in popularity at the rate of about 15 percent each year.

Vacation ownership offers consumers the opportunity to purchase fully furnished vacation accommodations in a variety of forms, such as weekly intervals or in points-based systems, for a portion of the cost of ownership. For a one time purchase of a yearly maintenance fee, purchasers own their vacation either in perpetuity or for a fixed number of years.

Vacation clubs provide the flexible use of accommodations in multiple resort locations. The number of points needed to access the resort accommodation varies by the members' demand for unit size, season, resort location and amenities.

Examples:

Wyndham Vacation Ownership is the world’s largest vacation ownership company. It markets, sells and finances vacation ownership interests, provides property management services to property owners’ associations and develops vacation ownership resorts. It has more than 500,000 owner families around the world.



Interval World is a vacation exchange network formed by more than 2,000 resorts and more than 1.6 million member families worldwide.


Indiana-based Resort Condominiums International (RCI) has more than 2.8 million member families living in 200 countries.

Evaluation

What we have learnt from this lecture were the recent trends, challenges, and importance of franchising, management contract company, and vacation ownership. We realized the differences among these three types of hotel business, where vacation ownership has become more and more popular.

References

Walk, J.R. 2010. Introduction to hospitality management. Pearson Prentice Hall. New Jersey. 3rd ed.

https://www.myclubwyndham.com/ffr/inside/products.do