From uniformity to flexibility: the shifting landscape of hotel franchise model

The global hotel franchise model was first fashioned in 1954, focusing on the rigorous standardisation of physical elements and services across hotels. However, current owners and investors are less interested in fixed standards as hotel guests become more discerning of authentic hospitality products in markets like Europe, Middle East and Africa (EMEA). Several owner-operator brands are developing their platforms with a looser definition of international standardisation, creating hotels with concepts that are hyper-localised to their cities or neighbourhoods. As such, a hotel franchise partnership's original value proposition - standardised offerings and services - is now challenged.

The pandemic accelerated the growth and normalisation of franchise hotel agreements globally, while the hotel franchise model continues to change with time. Looking at the largest international hotel chains, the percentage of global franchise rooms grew by 4 ppts from 2019 (59%) to 63% by YE2022. The evolution of the international franchise operating model will likely continue to mirror its growth journey in North America initially and be the preferred operating model for most international brand affiliations.

Chart 1: Ownership type evolution based on the largest international hotel chains (2019 & 2022)

The growth in franchise properties signifies that hotel owners and investors trust the franchise business model to deliver superior returns. Based on our conversations with industry experts, hotel owners and investors continue to lean into franchise partnerships to benefit from their commercial distribution capabilities. Overall, there are three key scenarios where brand standardisation has a greater appeal, than the flexibility of the product, to owners and operators: specific locations such as airports and business parks, affordable limited-service assets, and operating in a less developed hospitality ecosystem with the aim to service the international market. Otherwise, franchise hotel owners in mature markets are now valuing these partnerships for their flexibility over standardisation.

The shift towards flexibility and autonomy

The idea of flexibility provides franchise investors and operators with greater autonomy over their operations and investment returns. The growth of white-label operators and the increased number of franchise contracts have created a pool of more experienced franchisees. Additionally, hotels also have more competitive and knowledgeable partners to choose from, besides the franchisors’ proprietary or designated third-party solutions. The growing maturity of the franchise ecosystem has levelled the power dynamics between the key stakeholders, challenging franchisors to share with franchisees their traditionally exclusive responsibilities and influences, such as brand value and guest experience programming.

“Aimbridge Hospitality’s portfolio has grown to over 1,500 hotels under almost 80 sub-brands, including all asset types and chain scales. Across Europe, Aimbridge experienced a particularly strong rise in enquiries, as investors realise the benefits of third-party operators with a strong international track record. Over the past six months, our active projects in Continental Europe more than doubled, led by BeNeLux and DACH, and especially Italy and Spain where activity tripled. Private equity funds entering new markets have driven demand for white label operators like Aimbridge that provide flexibility and an owner-focused approach.”

Sabina Wyss di Corrado, Vice President Development, EMEA, Aimbridge Hospitality

Chart 2: Key contributions and considerations of the hotel franchise ecosystem

The change in power dynamics is more visible with the soft-branded franchise model: a partnership that principally relies on the franchisee’s creation of their own localised brand identity, but that is similar to the franchisor’s affiliation concept. The soft-branded franchise model has created a flexible substitute for a previously more fixed structure by providing increasing room for collaboration instead of enforcing all the rules, regulations, or strong brand identity.

Embracing change and innovation

Franchisors and franchisees still share the same long-term vision of profitable hotels and superior bottom-line returns. Yet, both parties have opposing short-term priorities; franchisors are more concerned with premium top-line performance, while owners and operators are invested in the bottom line as they also oversee the operational feasibility of the business. The franchise community can further maximise long-term returns for all stakeholders and bridge their short-term differences by giving different partners influence over distinct line items across the Profit & Loss statement. For example, franchisors can collaborate with hotel investors and operators to re-evaluate perceived limitations of franchise agreements such as, required property management systems and infrastructures, procurement for brand programming and compulsory operating model subscriptions, in order to drive increased appeal and buy-in from franchisees.

Chart 3: Generating different types of potential from different franchise agreement elements

Franchise operating models and structures are likely changing to better recognise each stakeholder’s increasing contributions. These changes are happening in areas where a franchisor’s corporate operations and structures cannot compete with franchisees’ ability to create more value, given their expert knowledge and connections in local markets. Between 2020 and 2021, the hospitality industry experienced a decline in revenues due to travel restrictions. In 2022, record Average Daily Rates (ADR) were evident in most markets, largely driven by inflationary conditions as businesses passed cost pressures onto consumers. Today, the rising cost of debt and increased difficulty to secure debt for the hospitality industry continue to be a pressing issue for many. These events can serve as the catalyst to rethink the way fees and costs are accounted for in franchise agreements, possibly focusing more on performance contributions instead of line items across the P&L.

“The franchise model brings us strong brands with the respective potential of their customer base. Today’s brand landscape offers a large spectrum of flexibility levels that allow us to respect local needs and to be creative with market-specific needs.”

Beat Ganz, Vice President DACH Region, Sophos Hotels SA

Future trends in franchise agreements

As the EMEA franchise ecosystem matures, franchise agreements will likely change and could potentially adopt the following trends: new fee structures as franchisors see increasing opportunities of involving the whole ecosystem to drive brand equity; increased ‘stickiness’ as the franchise hotel brand community takes on a more personal stake in the equity and development of the franchise hotel brand; and the development of more diverse types of franchise agreements based on franchisors and franchisees’ capabilities, influences and interest in different locations, asset types and service types.

Chart 4: Possible franchise trends in the future

The pandemic and subsequent economic uncertainties have brought more clarity to hospitality organisations as they try to stay afloat by driving more value through their business and operating model. This creates a good foundation for hotel chains to rethink and restructure how franchise partnerships are fashioned. Instead of relying on the franchisor for driving change and innovation, other stakeholders can also take the lead to create more value by building on the collective power of the franchise community.