The past few years have seen rapid growth in franchised soft brands, which offer hotels a route to market through their distribution and loyalty schemes, but without the additional costs of having to take on a hard brand and all the investment and adherence to brand standards that go along with that.
Technically, there should be significant upside for owners, with greater flexibility and reduced brand costs; there are, however, pitfalls which need to be considered, particularly in the case where the brand is not able to deliver any form of distribution premium.
For the luxury market, where owners have often already invested heavily in their hotels, soft brands appear to be a good choice; why have to undergo extensive renovations when you already have a high-end hotel with its own clear identity just to make it fit with a specific brand?
This hybrid between an independent hotel and a hard brand has been embraced by the sector, in particular by the global brand stables who have launched a number of these brands, with a focus on our area of specialism — the luxury segment.
For the brand stables, the advantages are clear; they have been able to add hotels and maintain their pipelines, without being encumbered by operations or the rigors of policing brand standards. These hotels are plug-and-play, quickly slotted into their portfolios and adding to their credibility as they court future owners with proof of their global reach.
Unlike branded agreements in the rest of the luxury space, soft brands are usually signed under franchises, a model traditionally associated with flexibility and one which would seem to fit with the ethos of the soft brand.
It has been to my surprise that the opposite is true. These agreements are surprisingly rigid, skewed to the benefit of the brand owner. We are currently negotiating with one of the global brand stables and, after I sat through the presentation about how fantastic it was and how much it would do for the hotel, I asked about inserting a performance clause, in case their proposed distribution channels failed to deliver.
Their response? “No, there are no performance clauses on franchises.”
Now yes, these brand companies have been in business for a long time, but many of the soft brands are new, untested, have very few hotels and very low brand recognition. They have been pushed out there to fill a gap and help to keep these pipelines ticking up and supporting the parent company’s share price. We are taking a leap of faith based on the parent company, nothing more, but they want me to pay a 4% to 5% franchise fee for a brand that nobody knows of and may not deliver.
We can understand franchising brands that you know are going to deliver for you, but if the brand doesn't deliver, there should be a realistic mechanism that measures performance. And if this level of performance is not met, owners should have the right to walk away from it and find something else that delivers for the asset. Otherwise you're just paying for nothing.
The large hotel groups typically won't franchise their luxury brands, and the reasons for this are understandable in terms of brand and quality control, so if you want a luxury option, this is your only one. And if there is no system delivery, then the owner should have the right to say, thanks very much, but we'll muddle on by ourselves rather than paying you these extra fees.
There is a distinct feeling that, because of the flexibility on brand standards, the offset is no performance clause. But these are 20-year agreements, so this is not a small matter. It brings into relief the value of a brand and whether it is worth even having one if you’re going to spend 20 years paying fees for no real material gain in competitive performance.
Soft brands are not without additional investment. Typically, to connect, you have to buy into the nominated IT system (property management system) and there may also be some property improvements/renovations as well; you can easily find yourself out $700,000 before you’ve even started. And all I have is the PowerPoint presentation they’ve given me at the beginning telling me how amazing it is.
Of course, we should be happy to pay the franchise fee if the brand is delivering. But if it's not, then owners should have the right to terminate based on poor production. At the moment, these so-called flexible brands are anything but.
Douglas Louden is a senior asset manager with Global Asset Solutions and based in Vietnam.
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