1.
guest column
Nov-Dec 2016HotelConnect14
Choosing
between
Franchise
and
Management
Contract
For a Hotel Owner, Brand Selection Process can be cumbersome and ambiguous due
to wide level of information asymmetry that exists between the owners and brands.
Undoubtedly by rightly branding a hotel, its chances of success can be improved due to
several strengths that a brand may bring along by default. But it is critical to first analyse
most appropriate and best suited format of engaging a brand.
By | Beni Agrawal, Founder, GK Hospitality Services

2.
guest column
15Nov-Dec 2016HotelConnect
M
ost common asset
light branding
formats that are
currently available
in the market are –
i) Management Contract - which
represents branding along with
management of the hotel, or ii)
Franchise Contract - which aims
at only branding the hotel while its
management continues to remain
at owner’s disposure. This article
highlights key differences between
both engagement formats.
In order to further understand
this difference, let us bisect
hospitality business in two steps.
Creating market perception about
the hotel, setting expectations
among consumer base and
bringing business through website,
sales offices and other central
distribution channels are parts
of Step 1, while delivering on
expectations, maintaining service
standards, staffing and overall
routine functioning at the property
level are parts of Step 2. In other
words, Step 1 is ‘Promise’ and
Step 2 is ‘Delivery’. A management
contract arrangement takes care
of both Step 1 and 2, while
franchising only facilitates to Step
1 with an assurance that the owner
will well take care of Step 2 and
maintain the perceived standards.
In franchising, brands usually have
very little or no involvement in the
operations of the hotel at property
level. However, certain brands
do have a guiding mechanism
to remotely support the owner
on as required basis, some of
which comes for extra costs while
other as courtesy. Franchising
demands shared responsibility
of both parties, and therefore
one of the first ingredients that
brands look for in any franchising
opportunity is - owner’s capability
in professionally managing the
hotel operations as per the
standards that are prescribed
by the brand. In fact certain
top level international brands,
mostly in upscale positioning
upwards, insist on hiring a third
party management company to
professionally manage the hotel
under their brand name. The
concept of third party management
is popular in the West; however
it hasn’t seen much success in
India so far perhaps because of
higher fee levels and conflicting
liabilities due to involvement of
multiple parties. Also, since most
brands in India offer management
expertise, management contract
may make greater sense than dual
contracts with a franchisor and a
third party operator. To simplify,
since managing a hotel can be a
full time involvement, owners with
experience of hotel operations
and the same being their core-
business can find better value
in taking up a brand franchise
as opposed to a management
contract. The brand can help in
enhancing the market perception
of the hotel and give access to
an established customer base
and extensive reservation and
marketing system.

3.
guest column
In management contract
scenario, the owner has to step
back and make the brand in-
charge of all matters related to
hotel operations. All operating
controls including management
of bank accounts are passed on
to the brand together with the
responsibility to perform, increase
revenues, manage expenses, and
ensure that the agreed financial
budget is achieved. Responsibility
and authority go hand in hand,
and the same is bestowed upon
the brand. Franchising can be an
interesting option for certain hotel
owners who do not wish to let go
of the control and remain involved
in the routine day to day small
and large matters related to hotel
operations. So, as long as they
can justify to the brands of their
hotel operations capabilities, they
may rather opt for franchising and
keep the control in their hands.
One of the key drawbacks of
franchising is brand’s little or no
involvement in making Annual
Financial Business Plan and
therefore having no performance
liability towards the hotel.
Though it is highly probable
that with the marketing support,
established customer base, and
central distribution channels,
the performance may see
improvement, but there remains
no liability.
In terms of cost or fee, franchise
contracts may cost just about
half of management contracts.
Typically, the combined quantum of
management fee for most brands
may vary anywhere between 6
to 8 per cent of Gross Revenue.
Choosing a franchise as opposed
to a management contract may
end up into saving 3 to 4 per
cent of fee, however, it is critical
for any owner to well analyse all
other aspects of both forms to
determine the correct need.
This article is contributed
by Beni Agrawal, Founder, GK
Hospitality Services, GKHS is
a Hotel Owner Advisory Firm
specializing in all aspects of hotel
development including, Feasibility
Studies, Hotel Branding and Hotel
Asset Management.
Nov-Dec 2016HotelConnect16