With business nearly down the tubes, hotel franchisees turn to their franchisers for relief from fees and costly brand mandates. While most franchisers have instituted cost-saving measures, many owners say the cuts don’t go far enough.
“I think there’s going to be a revolution here. I think it’s going come to that.” Michael Leven, retired hotel executive
Earlier this year, a large group of hotel owners began to organize a comprehensive pushback at the hotel franchising model.
Little did the organizers of the Fair Franchising Initiative know when it held its launch conference on March 5 in Edison, New Jersey, that the spread of the coronavirus was looming as the biggest health and economic crisis in a century.
The following week, the World Health Organization declared COVID-19 a global pandemic and President Trump issued a national emergency declaration.
A few days after that, on March 17, Patrick Pacious, CEO of Choice Hotels International, joined fellow hotel-industry leaders in a meeting with President Trump to ask for $150 billion in financial relief for the lodging sector.
He told Trump Choice Hotels has “6,000 hotels in the US, that’s one out of every 10 hotels flies our flag.” Most of Choice Hotels’ branded properties are in secondary and tertiary markets, he said. “We may be the only hotel in a small town.
“Those owners have two kind of key concerns. One, what do they do with their employees when they’ve got zero occupancy, and two, how do they pay their mortgage? So it is this question of employee retention and liquidity, so they can get through this period.”
Pacious went on to outline how the Small Business Administration can help owners by raising the amounts of emergency loans and increasing the number of properties for which a hotel ownership group can apply for aid.
Many took to social media to laud Pacious for focusing on owners in his comments. But the praise was drowned out by a louder contingent of owners blasting Choice Hotels for a memo sent to franchisees three days before the White House meeting. The franchiser said it was suspending quality assurance reviews and PIPs for “at least” the next 30 days.
Soon after, an online owners’ petition went out saying “Choice franchisees and team members were expecting more relief than what has been offered to date.” It noted other franchisers such as Hilton and Marriott suspended mandated PIPs for a year and quality assurance reviews for three to six months.
Since then, as the crisis choked the entire U.S. economy, Choice sent out another round of licensing concessions including waiving fees and certain brand standards and extending the suspension of quality assurance reviews to June 30th and PIP inspections to December 31st.
LISTEN: Episode 265 of Lodging Leaders podcast examines how the COVID-19 crisis has amplified hotel owners’ dissatisfaction with franchisees. It features interviews with current owners and hospitality veterans who foresee ‘a lot of pain’ ahead for franchisees.
Long Live Lodging sought comment from major hotel franchisers about their plans to help owners. Choice Hotels and Marriott International did not respond by deadline.
Choice Hotels posted a news release on the SEC website on April 9. The company reduced Pacious’ salary by 20 percent. It also noted steps it was taking to temporarily restructure franchise agreements. It noted 90 percent of its franchised hotels continue to operate, albeit at occupancies ranging from 26 percent to 33 percent.
The company said it was working to “drive business to the franchised hotels in its system across a wide variety of industries and government and emergency-management agencies,” noting many of its franchised hotels have discounted rooms or have donated them to essential workers in such as those in health care, construction, first responders, the National Guard and displaced military families.
“The majority of the company’s domestic hotels are in small towns, suburban and interstate locations and have experienced less severe occupancy declines related to COVID-19 than hotels in urban centers or resorts. Choice Hotels’ brands have been performing ahead of the upper-midscale, midscale and economy chain scales, and the company’s hotels have experienced relatively stronger same-store RevPAR share gains versus their local competition for the past five weeks,” the company said.
Here are what franchisers are doing in response to the crisis:
Wyndham Hotels & Resorts
Wyndham Hotels & Resorts on Monday shared an update it sent to franchisees on April 9. It has reduced reservation and PMS fees by 50 percent. It has also deferred fees through Sept. 1 and suspended finance charges. It is flexible with quality assurance inspections in March through May and has waived fees for those months. Through the end of the year, it has eased up on breakfast requirements and deferred all other brand standards, with the exception of health and safety.
“Wyndham’s team is dedicated to helping its franchisees during these challenging weeks and months ahead, and is taking steps to support their business in order to help them be in the best possible position when travel begins to pick up again,” said a company spokesperson in an email.
A Hilton spokesperson said in an email on Monday: “Although we consider the specifics of our relationship with franchisees confidential, I can say that we are very sensitive to owner concerns. In the current low occupancy environment, they are hurting, which means Hilton is hurting.
“Since March 17, when our CEO visited the White House, we have been a vocal advocate in industry lobbying efforts focused on supporting their liquidity. Hilton has no plans to seek direct financial support from the government, but we are doing what we can to support franchisees as they apply for Small Business Administration loans provided by the CARES Act. Our support of the owner community has also included sharing enhanced hygiene and cleanliness protocols, adjusting marketing spend, and relaxing certain brand standards and capital expenditure requirements.”
Franchisees shared a March 11 letter they received from Martin Rinck, EVP and chief brand officer at Hilton, outlining temporary changes in licensing agreements. Hilton has more than 5,400 franchised hotels.
Through the end of June, hotels can scale back breakfast buffets to à la carte or grab-and-go, depending on the brand. The memo recognizes the hotel’s need to reduce staff. Rinck said Hilton would “adjust the frequency” of quality assurance reviews “to accommodate the current business climate.” And “PIPs will be addressed on a case-by-case basis” with Hilton giving owners “the highest level of flexibility.’
On March 26, Hilton announced actions it was taking at the corporate level. President and CEO, Christopher Nassetta, waived his salary for the rest of the year. His annual base salary is $1.25 million. The executive team took a 50 percent pay cut. On April 4, Hilton began to cut hours of corporate employees and reduce their pay by 20 percent. It also planned to furlough workers up to 90 days. It is working with large retailers such as Walmart, Amazon and grocers to place some in temporary jobs.
Marriott CEO Arne Sorenson said during a March 19 call with analysts the company will help owners evaluate if they need to close their hotels. Many are deciding their own courses of action. He said owners and the franchiser are in “uncharted territory.” The company has closed most of its 2,000-plus owned and leased hotels and furloughed employees.
It has instituted some concessions for its more than 5,200 franchisees. In a March 13 memo to owners, Sorenson said routine mandated PIPs that were due this year have been extended into 2021. The company has also deferred required funding of FF&E by six months and has halted brand-standard audits until June 30.
Marriott planned to lay off employees at its owned and leased properties and in corporate levels. It employs 175,000 around the world.
The company owns or leases more than 2,100 properties around the world. Plans are to temporarily close the hotels’ retail F&B outlets, close off floors to reduce needed staff and in some cases close hotels.
Both Sorenson and J.W. “Bill” Marriott, executive chairman and chairman of the board, reduced their salaries to zero. Sorenson’s annual base salary is $1.3 million. Marriott’s total compensation is $3.2 million. Senior executives will see their salaries cut by half.
InterContinental Hotels Group
InterContinental Hotels Group did not announce fee reductions or suspensions. It gave guidance related to operational changes and relaxed brand standards through the end of June.
In a memo to owners, Jay Caiafa, COO Americas, said F&B outlets can limit operations or close and offer delivery options or provide individually wrapped items at the buffet. It suspended PIPs until September and waived renovations and capital reserve requirements until June 2021.
Best Western Hotels & Resorts
Best Western sent a news release on Monday announcing special rates for essential workers and other perks. The release linked to a March 19 news release that outlined waivers, suspensions and concessions in Best Western licensing agreements. The not-for-profit company is a mix of membership-based licensing agreements and franchising contracts with more than 2,500 hotels in the U.S.
Red Lion Hotels Corp.
In mid-March, Red Lion Hotels Corp.’s Harry Sladich said the company would suspend PIP requirements for the time being. Since then, Red Lion also has deferred loyalty marketing fees and reduced other fees. On April 7, Interim CEO John Russell shared the company’s plans with franchisees in a video.
Red Roof is privately held. In a March 27 letter to franchisees the company said, for six months it will reduce fees according to the year-over-year decline in room revenue. A decline of 10 percent to 20 percent results in a half-percent reduction in fees; a 41 percent to 50 percent decline in room revenue triggers a 1.25 percent cut in fees; a drop of more than 51 percent in room revenue will result in a 1.5 percent cut in fees.
The company also suspended fees in credit-card payments, IT support, quality inspections and other services.
In the letter, Red Roof President Andrew Alexander wrote: “We are in this together, and in order to get through this together, we all must do our part. In the past, when your business was strong, the entire system benefitted. Now with the recent significant revenue declines at many inns, the entire system suffers: your pain is our pain.”
‘UNLIKE ANYTHING WE’VE EVER SEEN BEFORE’: Arne Sorenson, president and CEO of Marriott International was among 10 hotel CEOs who visited the White House on March 17 to seek financial aid for the lodging industry. In a March 23 video, Sorenson, spoke about COVID-19’s impact on its business in a video posted March 23 on LinkedIn. Sorenson, 62, is bald from undergoing treatments for pancreatic cancer.
AAHOA Steps In
While Choice’s updated guidance is a relief to many franchisees, the earlier sparring spotlighted the frustration franchisees have long had with franchisers. Social media channels continue to hum with owners’ protests.
To get a clearer picture of the issue, AAHOA has asked members to participate in a survey aimed at gauging the current situation.
In an earlier interview with Long Live Lodging, AAHOA CEO Cecil Staton said the association understands that the coronavirus crisis is unprecedented and everyone, even the hotel companies, is trying to figure out how to do business.
Last week, AAHOA launched a survey to gauge members’ sentiment about franchisers’ responses and to gather specific information about how their businesses are faring with brand waivers and fee reductions.
LISTEN: ‘DARK TIMES’: In Episode 256, Lodging Leaders podcast featured Cecil Staton, president and CEO of AAHOA who talked about the ‘heartbreaking’ decisions hotel owners face as they see business come to a near halt since the COVID-19 outbreak in America.
Sawan Patel of Houston, Texas, is a director at AAHOA. He and his father, Hasu Patel, own about six hotels across different brands. Sawan has promoted AAHOA’s survey on Facebook.
He and other members of the association came up with the idea of the survey after hearing members say franchisers were not doing enough to help them weather the crisis. “We feel it’s important to get our members’ feedback,” he said, adding franchisers “may genuinely not be aware” of franchisees’ frustration and angst. The survey, he said, will help AAHOA gather facts and hopefully the association, its members and franchisers can act based on the results.
“We want concrete feedback from members and use that leverage better relief efforts for our members.” Patel sees relief as “a combination of four things: short-term government assistance, long-term government assistance, relief from lenders and relief from franchisers.”
Since the White House meeting with hotel CEOs, the federal government enacted a $2.2 trillion bailout called the CARES Act with $350 billion going toward SBA funding programs.
Meantime, hotel franchisees continue to push for relief from their franchisers.
Robert Zarco, a Miami lawyer who specializes in franchising disputes and has represented countless hotel owners over his nearly 40 years in business, says whether or not franchisers have an obligation to ease up on licensing agreements during the COVID-19 pandemic is a complex question.
“The franchiser typically does not have a legal obligation based on the manner in which the contracts are written to take certain action and provide financial assistance to franchisee,” he said. The franchiser is not obligated to guarantee the success of a licensee. But the franchiser must provide an appropriate system, act in good faith and cannot maliciously harm the franchisees’ business.
However, the contracts do include provisions in the franchise agreement called force majeure which are activated by such things as acts of God, theft, fire or government intervention that prohibit the franchisee from doing business and meet the provisions of the franchise contract.
Zarco said one of the problems franchisers face is the COVID-19 crisis has impacted different markets throughout the country in different ways. And states and local municipalities have rolled out travel and social-distancing mandates in varying levels at different times.
The entire situation forces franchisers to decide each licensing agreement on a case-by-case basis. It’s a tough call for the franchiser but, to be sure, the franchisee will ultimately bear the burden.
If the franchiser is financially able to help franchisees, it should do so, said Zarco. Not because the franchiser is compelled by contract or by law but because saving the franchisees’ business will benefit the franchiser in the long run.
One longtime industry leader says the viability of the franchiser-franchisee relationship has been poised for a challenge for several years. The current crisis is the fuel that has turned the spark of discontent into a raging fire.
Michael Leven was involved in the hotel industry for 50 years, first as a franchisee then as a franchiser, serving as president of Holiday Inn and co-founder of U.S. Franchising Systems which owned Microtel and Hawthorn Suites.
He is a co-founder of AAHOA and was involved in its original fair franchising initiatives. He also sits on the board of Hersha Hospitality Trust, a lodging REIT that owns branded and independent properties primarily in gateway cities in the U.S.
While the increase in licensing fees and oft-mandated PIPs are concerns for owners, the industry’s creeping encroachment is an even bigger issue, Leven said. He’s watched franchisers can get away with it by creating new brands and letting them go up in existing owners’ areas of protection.
“I think there’s going to be a revolution here. I think it’s going come to that.”
Leven said he believes CEOs of the hotel companies are decent people but the enterprises have grown so large with so many brands the upper echelon don’t know what’s truly going on at the brand level. “The bureaucracy below them, the brand management, is out of control,” he said. CEOs at smaller companies tend to be more in touch with their customers, “which are the franchisees.”
The COVID-19 crisis will force franchisers to ease up on fees and mandates because owners will have little to no capital left in reserve. “They’re out of business this year, next year and maybe even the year after,” Leven said.
If major hotel franchisers do not satisfy their franchisees – their customers – “there’s going to be a lot of noise and a lot of pain.”
Fair Franchising Initiative
A large group of hotel owners are indeed making noise. A new organization called the Fair Franchising Initiative held a launch conference on March 5 in Edison, New Jersey. Lodging Leaders reported on the conference in Episode 253, which aired the day the World Health Organization declared COVID-19 a global pandemic.
Fair Franchising Initiative is promoting a legislative proposal in the New Jersey General Assembly that would significantly curb franchisers’ efforts to increase fees and alter the initial licensing agreement with new brand standards in services and design.
LISTEN: Episode 253 of Lodging Leaders podcast covers the March 5 inaugural conference of Fair Franchising Initiative. Comprised of mostly Asian American hoteliers, the organization plans to address franchising issues through legislation.
The measure was schedule for a committee hearing in mid-March just as COVID-19 was declared a global pandemic and President Trump declared a national emergency.
Asian American hoteliers comprise the group. Prakash Shah, a hotel financier and a former owner, is president of Fair Franchising Initiative.
Shah said he believes the New Jersey proposal will pick up steam once the crisis has eased because the issue of fair franchising goes beyond the pandemic.
The crisis, he said, “is something that has driven home the issue” of fair franchising.
Owners were already “under the gun” and struggling with maintaining a profit under franchiser mandates, Shah said. “It’s a bad model that’s been twisted out of context into a very bad situation. The problem was there; it’s been building a long, long time; it just got aggravated through the crisis.”
Shah and other FFI members have said their major concern is that the playing field has changed since the advent of OTAs and their growing power in the booking game. The third-party agents are driving a lot of the business to hotels in the midscale to economy segments, practically rendering franchisers’ efforts obsolete. Yet, franchisers are not altering their fee structures, and franchisees are paying the price.
He noted that 10 years ago, brands could drive the majority of a hotel’s business through their reservation and marketing systems. The contribution was valuable and worth the cost of franchising, Shah said.
Today, however, OTAs are the drivers of business – up to 60 percent in some cases. Brands contribute less than 20 percent. Add the cost of local sales and marketing efforts such as billboards, websites and sales staff, and hoteliers generate the remainder of the business.
In the meantime, Shah said, franchisers continue to “increase their stake” by increasing and adding fees and generating income through penalties and extra charges levied at the franchisee. “It’s an untenable situation,” Shah said.
When the economy is healthy, both franchiser and franchisee see financial benefits. “And you can gamble” on the business, Shah said. “But the moment the tide turns, it’s going to sink a lot of our people because there’s just no margin left.”
Editor’s note: This article was updated on April 16 to add the information about Choice Hotels International’s news release filed with the SEC on April 8.