332 | ‘Enough is Enough’: New and small franchisers rewrite the book on fair licensing agreements

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REEVALUATING LICENSING: Franchisers of legacy brands are rethinking the traditional licensing model. The answer may lie in new and small hotel franchisers determined to build positive business relationships in which owners and franchisers can equally benefit.

‘New norm’ in franchising is ahead, says Sonesta exec

Hoteliers are seeking fairer licensing agreements as the coronavirus crisis has pulled back the curtain on long-simmering owners’ discontent in franchiser-franchisee relationships. The answer may lie in new and small hotel franchisers determined to build positive business relationships in which owners and brands can equally benefit.

Center stage in the fair-franchising play is Sonesta International Hotels Corp. of Boston, which in March acquired Red Lion Hotels Corp.

Sonesta has absorbed the franchise company’s brands as well as transitioned it into a private entity. It also has introduced Sonesta to the business of franchising.

Also in *March, Sonesta named Keith Pierce executive vice president and president of franchising and operations.

Pierce’s first franchising job was in 1986 with Hawthorn Suites in Boston. He went on to run franchising development in the Americas for Wyndham Hotels & Resorts, overseeing the growth of 12 brands.

Before being assigned his new role at Sonesta, Pierce helped lead the Sonesta-Red Lion deal to the finish line.

Before the merger and acquisition, Sonesta had 300 managed and owned hotels under five brands. The Red Lion deal added eight brands and 900 franchised assets to its portfolio.

Of course, those franchised hotels have owners, mostly small business operators who depend on their enterprises to provide an income and a return on investment.

‘ENOUGH IS ENOUGH’: Carols Flores, second from left, president and CEO of Sonesta International Hotels Corp., participates in a plenary session on July 26 at the Americas Lodging Investment Summit or ALIS in Los Angeles. With its March acquisition of Red Lion Hotels Corp., Sonesta is entering the franchising business for the first time. Flores said he’s aware of fractured franchiser-franchisee relationships, noting the traditional methods of brand licensing need to be re-evaluated. Episode 332 of Lodging Leaders podcast features Keith Pierce, president of franchising and operations at Sonesta, and Patrick Mullinix, founder, president and CEO at Advantage Hotels Inc., who talk about the touchy business relationship between hotel brand franchisers and franchisees. Joining Flores on the panel were, from left, Roger Dow, president and CEO of U.S. Travel Association; Greg Friedman, CEO of Peachtree Hotel Group; and Gordon Sondland, founder and chairman of Provenance Hotels and former U.S. Ambassador to the European Union under the Trump Administration.

Rocky History

Previous to the pandemic and the Sonesta acquisition, Red Lion Hotels was working to heal fissures in its relationship with franchisees. In 2019, the company terminated 274 licensing agreements. The company said the terminations were mostly Knights Inns and Americas Best Value Inns.

In November 2019 CEO Greg Mount parted ways with Red Lion Hotels. John Russell stepped in as interim CEO and Red Lion Hotels announced a program focused on retaining franchisees and growing its base. (Russell was named CEO in June 2020).

Pierce said Sonesta is mindful of the recent rocky history. The coronavirus crisis has challenged the relationship industrywide.

“The franchiser-franchisee relationship is very much a partnership. The franchisers only make money when franchisees make money,” he said. “Over the course of my three decades, in general, franchise owners have done a good job of working closely with what I call our customer, the franchisee, during difficult times.”

Though most franchisers granted owners concessions and abatements on licensing fees, eased brand standards and postponed scheduled property improvements, both owners and company leaders may agree in hindsight that franchisers did not do enough to help franchisees deal with the economic downturn caused by the pandemic.

“This is nothing like we’ve ever seen before, for sure,” Pierce said. “Could the franchisers have done more? Could there have been more relief? It’s a tricky situation. We are running businesses as well … and there were decisions that we need to make to protect our business through this horrific period of time.”

In a panel discussion on July 26 during the Americas Lodging and Investment Summit or ALIS in Los Angeles, Sonesta CEO Carlos Flores said the even before the pandemic the relationship between franchisers and franchisees was undergoing reevaluation. Stakeholders, including owners, investors, shareholders and brand leaders, were rethinking the value of today’s licensing agreements.

“A bit of chasm was already there before we had to face the global pandemic and what came as a result. And I think that is something that’s only going to get heightened as we have to reconcile, fortunately, going forward,” he said, noting he’s optimistic issues will get resolved as the industry recovers post-pandemic.

Sonesta is rewriting franchise disclosure documents for Red Lion Hotels’ brands as well as creating inaugural FDDs for its proprietary brands.

Pierce said he expects the fee-per-room model used by ABVI and Knights Inn to give way to more traditional franchise agreements.

License terminations

ABVI was founded and owned by Vantage Hotels Group, which Red Lion Hotels acquired in 2016.

Vantage licensed its brands under a membership model, where owners paid a set fee per room. Red Lion kept the licensing structure in place. In 2018, Red Lion acquired Knights Inn from Wyndham Hotels & Resorts. That brand, too, operates under a fee-per-room model.

However, under Red Lion’s ownership, economy-brand owners saw licensing costs increase, in some cases doubling their monthly royalty fees. As a result, many franchisees decided to de-flag their properties. And most of them did before Russell and his team rolled out an initiative to stop the drain by cutting licensing costs.

NEW OFFICE OPENING: Sonesta International Hotels Corp. on June 29 celebrated the opening of its Shared Services Offices in downtown Orlando, Florida. The office has created 100 new jobs and is working with STRIVE, a local program dedicated to recruiting employees from underserved communities. Participating in the ribbon-cutting ceremony are, from left, Regina Hill, city commissioner; Carlos Flores, Sonesta president and CEO; Buddy Dyer, mayor of Orlando; Robert Stuart, Orlando commissioner, District 3; and Tim Giuliani, president and CEO of Orlando Economic Partnership. (Photo: Sonesta)

Besides a plan to drive business to owners’ hotels and reduce their dependence on OTAs, Pierce said Sonesta plans to offer a whole package of services in its franchising agreements.

“A franchise is much, much more than just one aspect,” he said. Franchisers create value for owners through marketing and booking channels but they also offer owners, operators and employees training on essentials such as brand standards that ensure consistency in customer service. The brand works with owners to assure quality and health and safety.

And it works “on constant improvement of the brand over the course of time and years and decades so it remains relevant in the consumer’s mind,” Pierce said.

Though ABVI and Knights Inn have unique licensing agreements, Pierce said franchise agreements overall have not changed much in the past 20 years.

However, post-pandemic, he believes brand standards will change for such things as relaxed housekeeping schedules and fewer items on breakfast buffets. “All those things went away during the pandemic and we’re actually doing quite well.

“Our counterparts are really re-evaluating and ultimately we could find ourselves in a new norm that will be a lower cost of operation.”

Fairer Agreements

Brands that strive to keep operational costs as low as possible attract the small-business owner, the working-class hotelier or the first-time franchisee.

Patrick Mullinix of Austin, Texas, hails from that genre of franchising.

His career in franchising development mostly was spent in the economy and midscale segments, including Super 8 by Wyndham; Vantage Hotel Group, parent of Americas Best Value Inn; Red Lion Hotels; and Cobblestone Hotels, where he helped launch its brand licensing scheme.

In June 2019, Mullinix founded Advantage Hotels Inc. after acquiring midscale Vista Inn & Suites and economy-scale Select Inn from Advantis Hospitality Alliance, which was a small company founded by Asian American hoteliers and shareholders.

Ramesh Gokal was president and COO of Advantis. Gokal joined the group in 2007 after serving with Knights Inn when it was under the Wyndham banner.

At the time, Advantis CEO and chairman Dr. Suresh Saraswat said the plan was to grow the brands’ presence by attracting hoteliers disillusioned with the current state of franchising.

Apparently, not much has changed over the past 15 years.

And Mullinix recognizes the ongoing franchisee discontent.

“Fair franchising not only embodies fees that are reasonable, but fair franchising also embodies the level of service that you provide your franchise owner in turn for those fees,” Mullinix said. “What’s happening is over the past number of years in the industry as a whole a lot of services and a lot of things that were normally provided to franchise owners have been scaled back because of cost.

“A lot of the legacy brands have done away with things like local sales and marketing. That may not sound like a lot to some people, but it is.”

He notes that many hoteliers need help in promoting their properties to other businesses in their communities – a service the franchiser used to provide. As the internet and social media have taken the place of in-person promotions, brands have reduced or eliminated such marketing programs.

The cost of technology is borne by the owners who see no end to the growth in the expenditure in marketing as well as booking channels and reservation costs.

Both Pierce and Mullinix say OTAs’ commissions are too costly for owners to sustain.

Mullinix goes further and says the overall cost of acquiring a guest – including what the franchiser charges owners either for direct bookings or on top of OTA transactions – has gotten too high.

Many large franchisers have turned reservations into a profit center.

The solution to lowering the cost of bookings lies in technology.

Advantage Hotels is using technology to eliminate or reduce the cost, Mullinix said. “And that’s a trend I think hoteliers have long wanted. With the pandemic and the rates being so sensitive right now, it’s time to look at cost. It’s time to look at the expense of things like guest loyalty, along with transaction costs, along with the commission costs, because, at the end of the day, it affects the profitability of the hotel operators.”

FLORIDA LOCATION: Vista Inn & Suites Lake Tarpon in Palm Harbor, Florida, is among the franchised assets of Advantage Hotels Inc. in Austin, Texas. In June 2019, Patrick Mullinix formed the company after acquiring Vista Inn and Select Inn brands from Advantis Hospitality Group. Advantage Hotels has franchised properties in five states. Mullinix is working to grow the brands through licensing agreements he believes are built upon the classic tenets of fair franchising.

Full Disclosure

Much of the cost of franchising a hotel brand should not be a complete surprise to owners. After all, the brand’s franchise disclosure document details the fees and ongoing costs in licensing.

But Mullinix said many franchisees do not thoroughly read the FDD nor do they seek outside guidance on the fine print.

“If you take all of the program fees and third-party fees in the franchise agreement, it will equal or be more than the cost of just the royalty and the marketing fee combined,” he said. “Very typically a franchise agreement is going to have 5 or 6 percent royalty and 3 or 4 percent for advertising and marketing. So let’s round it up to 9 percent as an average.”

Add to that another 9 percent in other program and reservation fees and “your real affiliation cost is about 18 to 19 percent. That’s a very hefty number.”

When an OTA sells a room at a discounted rate, a $75 room rate will net out $39 to $42 per room.

“That’s what owners are upset about. They’re upset about these layered costs and how it’s affecting their profitability,” Mullinix said.

He believes brand-licensing agreements need to be easy to understand. Currently, Knights Inn and Americas Best Value Inn FDDs are nearly 250 pages each. An Econo Lodge by Choice Hotels International is more than 300 pages. And a Super 8 by Wyndham is 450.

Advantage Hotels’ FDDs are fewer than 50 pages.

“I’m an advocate for change within the industry because I love the industry. I want it to succeed. I want this industry to recover and be better than it was. I think all of it’s too complicated and I think it needs to be simplified where the average person at a glance can understand the related obligations and costs,” Mullinix said.

“Another aspect of fair franchising is getting people to understand what it is that they’re going to be paying for and what they can expect in return.”

Road-Trip Revelations

Last spring, at the height of the pandemic shutdowns, Mullinix took a road trip and visited hotels throughout south Texas. He discovered many owners of branded and independent hotels and motels were not adopting COVID-19 clean-and-safe protocols nor did they understand the implications the crisis would have on their businesses.

The situation Mullinix observed has improved over the past 12 months – both in owners’ awareness of the crisis as well as travelers’ return to the industry. But what is still uncertain is the future of the industry as it pertains to the thousands of properties operated by single owners or by small groups of family-owned assets.

Hotel franchisers can actually make a positive difference in the futures of these owners if they, too, recognize and adapt to the challenges created and in some cases revealed by the coronavirus crisis.

“I think there’s a lot of things ahead. I speak to other CEOs and presidents and executives throughout our industry and many of them are just amazingly bright people. People I respect and admire.

“I think a lot of them will tell you privately and after hours what they wouldn’t say publicly is franchising is at an iteration where it’s going to change drastically because of the damage the pandemic has caused financially to the liquidity and profitability of hotels.

“The prediction is – and I tend to agree with it – that franchising may become much shorter agreements without liquidated damages. And there may be a movement in place right now to make it a more performance-based of type of royalty or fee structure. What that means, quite simply, is it’s tied to profitability of the hotel not the gross room revenue, where there’s some fairness and equity in the relationship. Because as it stands today, many, many hoteliers went through a lot of financial hardships. Franchise companies still make money even when hotels lose money. Is that in the spirit of having a long-term and equitable relationship? Is that fair? It’s not.”

If franchisers do not dramatically re-work licensing agreements, Mullinix foresees a revolt when owners “simply resist and remove themselves from those adverse situations.”

“But the reality is what you see right now. You see major lawsuits being filed against legacy brands where franchise owners are saying enough is enough. They feel mistreated, overcharged and accessibly burdened by these third parties and mandatory programs.”

(*Editor’s Note: To clarify the timeline in Episode 332 of Lodging Leaders podcast, Sonesta named Keith Pierce executive vice president and president of franchising and operations in March, the same month it closed on the acquisition of RLH Corp. In December, Sonesta announced Pierce had joined the company to help with the RLH Corp. merger and acquisition.)

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