(Written by G. Angelini for a Professional Publication, China, March 2011)
Franchising & Management Agreements
Given the importance of branding and need of globalization, it’s not surprising that franchising and management agreements will continue to play a strong role in the future. This formula has been successful for both parties and has created respectability in the industry.
In future, it is expected that franchising will also penetrate into more upscale products. Management agreements will also prosper and fees will be more and more based on performance incentives or IBITDA.
Global hotel chains will keep offering new line of products/services/brands to developers making it difficult for the regional or local operator to respond/compete at the same level.
Product: What will we build/ develop in future?
Build it and they will come, no longer applies.
Rapid market changes and the explosion in require in designing the hotel product of the new technologies not only support, but require designing the hotel product of the future.
Decision about hotel product must be seen through the “lens” of changing customer’s demands. The focus must be on the customer as the primary asset of a hotel organization. To remain competitive, hotel companies must offer consistent products and services that are perceived to be of high quality and value to the customer.
We cannot get away that, in some cases, hotels are built for different reason and purpose and unfortunately in such cases the customer is not taken into consideration, this is a big mistake. Even small family or seasonal hotels must take the customers’ needs as a base to develop their properties.
Hotels are long term investment and must have the specific objective and product to continuously attract the highest yield business in the market, there are the hotels that will be successful in future.
Financing of a hotel should be based on long term, not based on a few years with objective to an early exit (sale) as soon as there is profit to be made. Sad but in many instances this has been the norm. (Quick profit is very attractive to many.) This has been the problem with the so called “financial sharks”.
We have started the 21st century with some overbuilding in a number of places/cities/countries and in some cases the market has difficulty to absorb the capacity. We have seen this many times before and most probably will see it in the future. Therefore the building of a quality, efficient/functional branded hotel capable to compete in any market situation is the way to go. Extensive feasibility studies/surveys are necessary before embarking on a new hotel project.
We also have seen too many expensive “Full Fledge” 5 star hotels developed in the past. The market may not be prepared to pay for the prices that these hotels need to charge for a decent ROI. Therefore the industry may have to consider developing less expensive hotels in future to respond to the new class of travelers (exceptions of course will always be there).
A fundamental consideration for any hotel developer is the cost of land (regardless if the land is freehold or lease). With an expensive piece of land, it would be very difficult to produce a respectable ROI.