Franchises have existed in Europe for a number of years, but now some of the industry’s largest chains are progressively seeing the model as the way to push further into Europe against the backdrop of a U.S. market that is almost at its saturation point.
LONDON—Franchising has become the major business model in Europe for international chain hotel companies on a push to expand, according to sources.
While franchising is not wholly new to the continent, the business model in Europe is quickly getting converts from companies such as Marriott International and Hyatt Hotels Corporation, firms that not so long ago were wary of anything that did not involve ownership or management.
Felicity Black-Roberts, VP of acquisitions and development, Europe and North Africa at Hyatt, said the Chicago-based firm entered the franchise game in Europe just three years ago.
“It’s definitely something we need to step up,” Black-Roberts said during a session at the Hotel Operations Conference titled “Global major expansion strategies: To franchise or to manage.” “Our hotels are 75% owned and operated, but our pipeline in that model is only 35%. The rest will be franchised.”
Marriott is largely steering a similar course, said Tim Walton, regional VP of Western Europe and international hotel development.
“Our development team in Europe now numbers 25 people, and we’ve found franchising the most efficient way to grow,” Walton said. “Emphasis is on international region, certainly as in the U.S. we have reached near blanket coverage. It is the same for us. We were very much a management company. So yes, we, too, are Johnny Come Lately. Fifty percent of our portfolio will be franchises in the next few years, but across our overall pipeline, 80% will be franchises.”
Walton said the farther east in Europe the portfolio grew, the more emphasis there was on management, largely due to those markets being less mature.
“In the west (of Europe), there are more third parties, and the higher up the food chain, the harder it is for us to franchise,” he said. “Also with resorts, it becomes more complicated, and we are not as comfortable. That is not to say we cannot do it, as we have.”
Despite Hyatt’s further intrusion in the model, the presence of excellent third parties in Europe meant the firm wanted to be more protective of its investment in brands such as Hyatt Regency and Grand Hyatt, Black-Roberts said.
“Also with (brands) Andaz and Park Hyatt, the inclusion of third parties would dilute our capital investment,” Black-Roberts said. “We are still owners.”
Walton said third-party franchises are something he is continually interested in growing, but that not all third parties are created equally.
“Our owners need to be able to trust us in who we’re working with,” Walton said. “We have to be rigorous and maintain the integrity of the brand promise.”
But often there cannot be created the right rapport because both sides have different aims and goals, Black-Roberts said.
“We need to work with partners who might prefer leases in mainland Europe, and we have to give operators increased support, almost as much as you would with a management contract,” she said.
Franchising also is not limited to rooms, Black-Roberts added.
“We are looking into how we can make F&B more flexible so as to bring in revenue, and this is something we are more willing to relax control on,” she said.
Please, no leases
One thing that is not so popular is a lease agreement, panelists said.
“We’ve done a few, such as when the Berners Hotel (in London) changed to an Edition, and we sold it with a long-term management agreement,” Walton said. “Overall, leases are just more complicated.”
The W Barcelona, another jewel in the Marriott portfolio, also has a lease agreement.
“And it is one of our most profitable hotels,” Walton said. “It was one adopted via Starwood, but (leases are) a difficult structure to recycle and sour debt capacity. Once you are in it, it is difficult to get out of.
“Even in a good situation, it is just a higher-risk profile.”
Matthew Duncombe, partner at legal firm DLA Piper and the moderator of the panel, said such concerns have seen a rise in hybrid leases or managed and franchised properties.
Another type of model seeing more interest from new and institutional investors is ground leases, in which during a stated lease period operators are permitted to fund development before returning land and developments to the owner.
“I’ve not seen any deals where ground leases are in place,” Black-Roberts said. “My first question would be as to whether the underlying economics are sustainable.”
One deal of this ilk mentioned in the session was the recent Grange Hotels’ acquisition of four London hotels with 1,345 rooms by Queensgate, which Black-Roberts said she knew about because Hyatt had considered the deal.
“Franchise and management deals are getting more complicated to pay heed to all the different stakeholders in the stack. In the U.S., it remains less complicated,” Walton said.
There is no doubt pressure on commercial terms, Black-Roberts said. Fees are going up in the U.S., but it remains to be seen if Europe will follow suit, she said.
“But be it management or franchise, a contract essentially is a bag of legal terms, and they all have levers,” she said. “You have to be flexible in any situation that presents itself. It’s like a car that can get 80 miles per gallon, but then you just drive it at 56, but, hey ho, we gave you the manual. … We are many light years from getting this right, having the right support for operators.”
Walton said Marriott continues to find new ways of growing its portfolio.
“It is a constant quest to find different, creative ways of aiding the balance sheet,” Walton said.
Hyatt’s sights are set on similar goals.
“Of importance is to continually prove we are competitive and have more choices,” Black-Roberts said.