Franchised operations by major international hotel brands increased by 10 percent in the past decade from roughly 70% in 2010 to 80 percent in 2019. Most established hotel brands are now international franchises according to STR and JLL Research.
Major hospitality brands continue to shift away from real estate ownership to a new model where they scale through franchise agreements. This allows them to benefit from a consistent revenue stream while in expansion mode.
“The growth of the franchise model is facilitated by the fact that Wall Street rewards parent hotel companies that have a more asset-light strategy, as they typically boast strong balance sheets since they have less leverage,” says Geraldine Guichardo, Global Head of Research, Hotels & Hospitality Group, JLL.
“These companies no longer need to take on debt to buy hotels, which is rewarded with higher stock prices,” Guichardo says.
The increasing popularity of franchises in the hospitality sector is a departure from the industry practices of the 1980s, when most major hotel operators sough to acquire or invest in hotel developments through debt financing.
Even after disposal of those assets, hotel companies would negotiated terms with the new owners allowing them to continue leveraging the brand name.
In recent years, having little to no real estate debt on their books allowed franchisors like Marriott International to build a more buoyant balance sheet, making for easy expansion across markets without requiring significant capital outlays.
“This made brands more ubiquitous and recognizable,” said Guichardo.
“Growing their franchise business allowed major hotel companies to focus on operating hotels, which is what they are inherently good at and what their business was first created to do,” he added.
Increasingly, flagship hotel brands are now looking to cash in by licensing out their name to established properties or seeking investments from external parties to develop properties.
Franchisors receive a percentage of revenue from the franchisee and are able to avoid hefty up-front costs. They are also able to tap into the franchisee’s familiarity with local market dynamics e.g. local clients seeking unique local experiences.
“There are a lot of good reasons to become a franchise owner, particularly having the backing of a huge parent company, leadership training and technical support. It brings a lot of value to the table,” said Guichardo