New Territory

Creative franchisors are cashing in on their customers' new ideas about what—and where—a franchised hotel should be.

Hotels

Mary Scoviak
Contributing Editor

Changing demographics are opening up the pipeline for hotel franchising. Consumers' passion for lifestyle experiences—both in their master planned neighborhoods and in their travels around the world—is sparking fresh thinking about how hotels should look, which amenities they have to provide and even where they need to be. The result is a new wave of opportunities for brands nimble enough to make the leap to retail thinking.

Rewriting the Rules

This era of consumer centrism is rewriting the development rules. City centers and gateways have not moved off the priority list—particularly if the "city" has the multiple-market appeal of a London or New York. But, the development track continues to veer downmarket. "With real estate prices and building costs growing faster than the Consumer Price Index, you will see a tempering of big box projects with long lead times," predicts Sam Winterbottom, executive vice president of development, Carlson Hotels Worldwide. As a result, "You will continue to see select-service brands such as Red Roof Inns being added in urban centers," predicts Bernard Rudler, executive vice president, Accor Franchising, Accor North America, Carrollton, Texas.

However, new targets are emerging as consumers create demand for hotels in regions with fast-track economies and in destinations that indulge their obsession with experiential travel. "It used to be that hotel developers looked for sites near office buildings. Now, they are looking at mixed-use projects that blend residential with a hotel, entertainment, good restaurants and interesting retail," says Ted Darnall, president, Starwood Hotels & Resorts' Real Estate Group. "More and more, we see hotels taking the place of 'anchor stores' in lifestyle centers."

It is hardly surprising that the lifestyle complex trend is spurring growth for select-service concepts that can be scaled to fit the smallest footprints. The real news is developers' renewed interest in full-service hotels. "In the last 18 months, we have seen significant opportunities for new full-service hotels—many of which will be franchises," Darnall says. The reason, he says, is that lifestyle complex locations make the numbers work. "You get a 10% to 15% premium for being at Main and Main," he adds.

"Main and Main" is not where it used to be. People and offices are moving into master-planned communities in the suburbs of the United States, as well as into secondary and tertiary markets. Kirk Kinsell, senior vice president, Americas, franchising and business development for InterContinental Hotels Group (IHG), sees expansion potential coming from "megapolitan" markets as smaller communities infill between urban centers such as Atlanta and Raleigh/Durham or between Los Angeles and Las Vegas. He also points to the upside of evolving microeconomic markets—two or three cities of 20,000 to 25,000 connected by a highway. "The cost of land, the cost of building materials and the brain drain of doing big box projects in big cities is sending some developers into the markets growing up along new highways," he says. Demand in these composite markets is broadening growth prospects beyond select-service to include strategic sites for core mid-tier concepts and, to an even greater degree, for extended-stay brands that can cater to business and leisure travelers.

In the United States, high land costs and high housing costs are pushing both residential buyers and business southward. The trend should make the U.S. Southeast and Southwest hot spots for franchisors—from Florida to the states along the Mexican border.

Global Playing Field

Winterbottom views Canada and Mexico as prime markets for franchise sales—especially in the case of Mexico, where an expanding middle class is looking for "branded hotels with an authentic Mexican flavor." Short-term, pent-up demand should drive growth numbers for franchisors' mid-scale and select-service brands.

Marco Roca, Cendant Hotel Group's senior vice president, franchise sales, maintains that the upside does not stop at the 3-star level. He predicts strong potential for upscale products such as Cendant's Wyndham brand not only in Mexico, but in Dominican Republic, Costa Rica and the Caribbean.

Internationally, the markets are still wide open for franchisors. "We have been telling investors for several months that it is a good time to go long internationally, particularly in Europe," says David Katz, director, lodging and gaming, CIBC World Markets Corp., New York City. "The upside should be greater for the next few years internationally than in North America, as growth rates in North America will be flattening. Europe and Asia are at a much earlier stage in the cycle. We believe India and China offer tremendous opportunity for strong hotel brands."

Asia's potential requires vision, patience and cash. Franchising is not a common platform for growth in the region. Japan and some Southeast Asian nations have franchising models. India has franchising regulations in place, but land is expensive and most franchisors say infrastructure "has a long way to go." China has yet to map out its franchising model. "It will take intensive investment (to establish a brand) before you see franchising become widespread in China," Kinsell says.

Reas Kondraschow, Cendant Hotel Group International's senior vice president and managing director, does not see the wait as being that long. "True, China and India have very few brands represented. Most that are there are on management contracts. There is substantive opportunity for a lot of franchising in China because, to date, not many brands have been aggressive about franchising," he says.

From China and India to Europe, growth will be about select-service for the near term. "Europe is still a developing market for franchisees," says Russell Kett, managing director, HVS International, London. "There is a reluctance to franchise upscale hotels. European franchisees remain skeptical that a franchise can deliver added value in terms of bottom line earnings. So, franchisors need to raise their game to make this bet a certainty. They need to think more about bottom-line earnings and not just about revenue generation."

Kett sees barriers to entry for new brands and brands that are new to Europe. Unless franchisors invest their own capital—at least in a few pilot hotels, he foresees "the uptake will remain slow at best." Still, he maintains that Europe has "huge potential."

New Products, Consumers

Customizing product to deliver what consumers and developers/owners want will be a deciding factor in who wins the race in Europe—and around the world. "Franchisors need to loosen the reins a little more. If not, they will not get the increased distribution they are seeking," Kett says.

David Pepper, senior vice president, franchise growth and performance, Choice Hotels International, says franchisors are doing just that. "You have to adapt your product to fit the culture. Not having food and beverage (F&B) operations is accepted in U.S. mid-market hotels, but it is expected in other cultures.

One of the challenges facing all brands experiencing international growth is maintaining consistency in amenities packages, Pepper says. The rule of thumb for now is to match the offer to the market. "Offering local amenities is the cost of doing business. It is all about what mid-market means in that country," Pepper adds.

The mandate holds true for basic core product as much as exported concepts. Extensive consumer research convinced Choice that its Cambria Suites should enlarge suite space 25% above the industry average; increase public space flexibility by creating zones defined by design elements rather than walls; and re-invent the F&B concept around a combination of comfort foods and healthy fare, sit down and grab-and-go, a full bar menu and a barista coffee bar.

An eye on consumer trends resulted in Cendant's hiring of iconic architect/ designer Michael Graves to "help us design experiential features" for its Wyndham brand, as well as the decision to upgrade Ramada's bedding, introduce a SolTerre shower experience at Days Inn and enhance Wingate Inn's deluxe continental breakfast, says Tony Berger, Cendant Hotel Group's chief operating officer. Consumer-centric thinking has influenced Starwood's loft-like aloft, the residential space plan of the new Hyatt Place, the sleek coffee bar/lobby bar and integrated breakfast rooms in Carlson Hotels Worldwide's Country Inns and Suites, and Red Roof's new Business King rooms that include not only the expected desk, but a microwave, a refrigerator and European-style rounded shower curtains that, according to Dean Savas, senior vice president, Accor franchising, "allows for more elbow room."

To compete successfully, Winterbottom points to the need for a consumer-centric model. "We conducted focus groups. We looked at a lot of research. The conclusion we came to is that you cannot be in denial about what customers want. They want high-speed Internet connections, just like they have at home, and they do not want an upcharge for the service. They want showers instead of bathtubs in many markets. They want more cross-use space in the public areas to make it feel more communal," Winterbottom says.

These demands are fueling growth for retail-chic products such as aloft, Cambria Suites, Hyatt Place and IHG's Indigo, which can be positioned at higher price points. "The trend toward growing franchise opportunities at higher price points is hardly surprising given that higher-end properties within each market segment have seen RevPAR growth at above average rates for the last few years," says Matt Quinn, senior hotel analyst, Zacks Investment Research, Chicago. "However, none of the new brands—Cambria, aloft or Indigo—will be significant contributors to their respective companies for a number of years given the substantial property portfolios each already has established."

Boutiques are not the only types of hotels proliferating on Main Street. A back-to-basics philosophy grew Wichita, Kansas-based Value Place by more than 350 franchise commitments in less than two years. "The trend today is to add more and more amenities. I do not think that will pay off. Our concept is about letting residents choose—and pay for—exactly what they want," says Gina-Lynne Scharoun, president, Value Place Franchise Services.

More and more, what consumers say is that they want a home-away-from-home experience with hotel services—whether in the pay-as-you-go apartment/hotel template of Value Place, sleek suites or homey extended-stay. Bill Fortier, senior vice president, development, Hilton Hotels Corp., sees this trend creating new growth tracks for condo-hotels. "Condos are hot for full-service," Fortier says. "The biggest hurdles to financing are in the large, full-service hotel segments. Building condos seems to be the best way to make those projects work today."

"When it comes to providing amenities at an economy level, there is a big difference between 'no frills' and basic expectations," says Roger Bloss, CEO and president, Vantage Hospitality, Chagrin Falls, Ohio. Since the value-added benefits of certain amenities differ by market, Bloss developed the Freestyle Lodging Membership Model, which allows owners to choose the amenities they feel are necessary to remain competitive in their region.

Home away from home is not only changing the layout of hotels, it is changing space allocation as well. "The needs of customers will be met as much by evolution and adaptation by existing brands as they will by new concepts. F&B is already a growing feature in the select service segment. Again, what will be provided will reflect what customers actually want, and that is different today than it was 15 years ago. For example, Courtyard offers guests access to food 24/7 through our Market offering, reflecting an expectation in that segment that did not exist in the past," says Nick Kellock, Marriott's senior vice president, franchising.

Who's Buying In

New markets and new opportunities are escalating growth predictions among the major brands. It is not uncommon to see projected pipelines of 50,000 or more rooms.

Franchisors are leaving nothing to chance. Most are courting new pools of prospective franchisees with tailor-made incentives: from programs developed specifically to help minority investors to money-saving prototypes. To support its "aggressive pursuit of new properties west of the Mississippi," Red Roof offers franchisees flexibility in development, partnerships and help with operations. Carlson Hotels Worldwide will consider fee concessions, help franchisees find capital support and make available very short-term management contracts of as little as two years' duration so that the franchisee can learn side-by-side with a seasoned manager. Programs that lend operational expertise are particularly valid for brands that want to attract the new generation of developers crossing over from malls and retail or for investors transitioning out of a corporate world and into an entrepreneurial role.

The new franchisees investing in the economy sector are from non-hotel systems such as McDonald's, Subway, Ponderosa, self-storage operations, shopping centers and homebuilding, says Mike Leven, CEO, US Franchise Systems, Atlanta. Like most franchisors, USFS is seeing greater interest from the Hispanic and African American communities. "Previously, almost all franchisees going into new hotel construction had hotel and/or development experience. Today's financial standards are the same, but no longer require hotel experience. Seventy percent of the franchises we now sell are coming from these new resources," Leven says.

Brands also are looking for ways to counter amenity creep by paring away unnecessary features that drive up development costs. Hilton's Embassy Suites recently rolled out a Design Option III that does away with the largest atrium. "It was an expensive option. Franchisees asked if they could build the brand without it, so we worked with them over the past two years to come up with a new design that should reduce the total project cost significantly," Fortier says. He takes issue with those who contend that franchise growth will be choked by rising construction costs. "RevPAR increases should allow owners to pay for increases (in construction costs)," he says. "We are always looking at ways to reduce costs, but we do not need to do it to spur new construction for most of our brands."

Fortier also questions how necessary financial help is at this point in the cycle. "Franchisors should help with financing in bad times. But, in today's market, they really do not need to do it."

Financing always will be there for the right project. What is "right" depends on the market, the product and the developer. How eager will lenders be to back new products? "The strength of new concepts such as aloft, Indigo and Hyatt Place lies in the companies behind them," says Greg O'Stean, senior vice president, hospitality finance, GE Capital, Scottsdale, Arizona. "The added advantage is that, given the competition in the marketplace, you will not have 12 other developers opening a hotel with one of these flags in your market. The downside is that we have yet to see a budget that shows exactly what one of these brands costs to build and open."

Select-service brands and mid-tier brands with limited or no F&B are the types of projects that rise to the top of the pile for O'Stean. Projects with a corporate base generally win out over leisure. "We prefer a simpler business model. Select-service is less impacted by downturns; rate has less room to fall," he says.

Smaller properties also make sense at a time when real estate costs are rising and site size is contracting. "One of the biggest challenges is how to get a certain number of rooms and adequate parking onto a small site. Franchisors cannot insist that the brand can only be built as a square when developers are having to deal with rectangles," O'Stean says.