The franchising business model has risen in popularity across the hotel industry in recent years. Not only does it provide operators with a cost-effective means of breaking into new markets but it enables them to scale up their operations at a faster pace.
Franchising provides owners access to a powerful brand but allows them to manage their properties themselves. The franchise business model is very effective in markets with multiple existing independent hotels looking for a competitive edge.
There is a caveat to this business model: while it provides owners the flexibility to operate their own properties under a recognised brand there are significant rules, procedures and restrictions imposed on them (i.e. “brand standards”). Most established hotel operators set strict rules that are regularly audited to ensure consistency across their portfolio and to protect the image of their brand. This has acted as a deterrent to niche operators who prefer to provide unique services that differentiate their offerings from mainstream competitors.
The industry is changing dramatically as the purchasing power of millennials increases. This demographic is renowned for seeking out unique experiences that many traditional hotel operators struggle to deliver. Niche hotel operators are benefiting from this emerging trend.
This has also given rise to the proliferation of soft brands entering the market. These brands, otherwise known as “umbrella brands”, are being employed by established international hotel operators to meet the demand for unique hotel experiences.
Soft brands appeal to hotel owners who don’t want to be beholden to the same strict standards as an established brand while gaining all the benefits of being part of a strong distribution network. Some of the best-known examples are The Autograph Collection by Marriott Hotels & Resorts and the Ascend Hotel Collection by Choice Hotels.
At TFG Asset Management we are involved in multiple operator and brand selections for our owner’s properties and it has become increasingly popular not only for existing hotels to introduce soft brands but also for developers introducing new properties to the market. It is a new opportunity for developers that may look to establish niche properties in areas dominated by established hotel brands.
Shifting market demands requires hotel operators to take a dynamic approach to the market to remain competitive. Being governed by strict operational procedures demanded by established brands can limit their ability to achieve this.
As new brands launch into the market further in-depth competitive analysis will be required by experienced asset managers to ensure existing properties maintain their competitive edge.
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