The franchisor-franchisee relationship is often a “push me - pull you” affair. Whether the relationship is dominated by pushing or pulling varies from one year to the next, depending largely on the franchisor’s brand strategy and deal flow. Franchisees that are savvy to the specific business challenges of a particular brand on a smaller scale, and the economics of the industry on a larger scale, can leverage their knowledge to gain concessions that otherwise would not be attainable.
From 2007 to 2010, the major hotel brands saw their deal flow slow to a trickle. Brands’ franchise sales executives struggled to meet development goals. Companies downsized their development departments. With bonuses and jobs on the line, the surviving sales executives stood up to their company’s internal brand managers and pushed through deals that, in better times, would not have made the cut. This increased pressure to meet development goals translated into relatively good leverage for prospective franchisees. New franchisees who understood and used this leverage met with unusual flexibility from brands. There were many examples of this flexibility—some new owners were permitted to provide full service F&B outlets in limited service brands; others succeeded in obtaining value adjustments on brand finishes and amenities.
Similarly, during the past three years franchisor brand managers faced difficult choices. In good times, with a strong deal flow, they are quick to cull the system of the weak and sick. But the “Great Recession” weakened almost all franchisees. With little opportunity to replace a weak or sick hotel in the system, many franchisor brand managers elected, when faced with losing a location, to grant deferrals of mandated standards and Cap Ex.
As the economy recovers, the brands are seeing more deals in the pipeline. With improved deal flow, the brand sales executive has less incentive to go to battle for you. As a result, the leverage is shifting back to the brands. We have observed a return to tighter brand standard control for both prospective and existing franchisees.
A recent example of tighter brand controls recently occurred when a new franchisee installed mattresses that exceeded the brand standard. He claimed that the increased quality was necessary to be competitive with the product offered within the surrounding competitive set. The brand made the owner remove the mattresses. Why would the brand reject the mattresses? After all, they are not visible to the guest, and higher quality mattresses should improve quality assurance scores. The answer is that currently franchisors are using proprietary brand standards to lock the owner into the flag. This is an example of the brand using tighter brand standard controls to make any future effort to change the flag prohibitively expensive.
Similarly, we are finding that brands are now requiring existing franchisees to immediately remedy deficiencies and strictly adhere to PIP schedules. With the improving economy, the brands’ owners must “catch up” or risk default.
With the improving economy the brands are “feeling their oats” again. However, with the assistance of a knowledgeable advisor, concessions for new owners and deferrals for existing owners are still possible. Although the brands have an obligation to be tough publically, the hotel business is still relationship driven. The franchisee should be prepared and understand the strengths and weaknesses of the brand, its market penetration, and the deal flow. If the franchisee prepares a good plan that argues for brand concessions, presents it with credible third-party advisors, and proceeds with open communication and transparency, the franchisee may succeed even in the improving economy.
Although the economy is improving, the franchisor community is still under pressure to do deals and to maintain a healthy system that reflects its current brand positioning and message. As a hotel owner seeking a brand, or as an existing franchisee under pressure to catch up on new brand standards or deferred capital, there is still an opportunity to work collaboratively to achieve a balance in the “push me – pull you” world of franchisor-franchisee relations.
Irv Sandman and Russ Savrann together have over forty years of experience within the hospitality industry representing, owners, management companies, franchisors and franchisees, as in-house and outside counsel. Sandman Savrann PLLC represents owners, managers and vendors exclusively in the hospitality industry throughout the United States, Canada, Caribbean and Latin America with financing, development, workouts and franchise relationship issues. www.sandmansavrann.com