Hotel chains warm up to franchise model

Two months ago, the management of the Tata Group's budget hotel brand Ginger set up a special six-member task force. It's been entrusted with plotting Ginger's rapid growth through franchising, something the brand hasn't attempted before.

"So far Ginger has grown through greenfield developments, but now we are studying the different facets of the franchise model to scale up our presence," said PK Mohankumar, MD and chief, Roots Corporation, the Tata-run Taj hotel group subsidiary that manages Ginger Hotels.

Executives at Indian and international hotel chains are warming up to the franchise concept as it's turning out to be a viable growth model for hotel brands and asset owners. It's also less prone to the risk of going awry than management contracts, although the latter generate more revenue.

Ginger plans 80 hotels by 2016-17, up from the current 30, and the bulk of these will be franchises. Franchises account for a third of the 15 properties in the portfolio of mid-market chain Keys Hotels.

"It helps in ramping up business and to scale brand visibility more quickly," said Sanjay Sethi, managing director and CEO of Berggruen Hotels, which owns the Keys Hotels brand. Global chain Hilton Worldwide opened the Double Tree by Hilton in Pune under a franchise agreement with city-based Panchshil Realty. "We would consider franchising in instances where the owning company of a hotel has strong credentials in managing a hotel to the highest standards," said Rajesh Punjabi, vicepresident, development, India, Hilton Worldwide.

In the last few years, there have been several cases of owner-brand ties turning sour under management contracts. The franchise model bridges the gap between the owner's cost concerns and the hotel brand's expansion ambitions.

"There is lesser friction because if you are not managing the hotel then the owner cannot do the finger pointing," said Dilip Puri, India managing director of Starwood Asia Pacific Hotels and Resorts, which recently converted two of its existing five-star hotels in the south that were under management contracts into franchises.

But brands also need to ensure that standards are maintained. "Some owners develop the capability of managing the hotel well and it is in these cases we consider changing from a management contract to a franchise," Puri said. Under the franchise model, the hotel company gets a fixed fee for licensing its brand while the owner operates and manages the hotel.

"It helps in reducing the operations cost structure and puts the onus of performance on the asset owner without sacrificing fees for the hotel brand company," said Priyakant Amin, director, Convention Hotels India (CHI), which owns and builds hotels. Typically, a management contract entails a hotel brand getting a fixed percentage of the revenue and operating profits whereas a franchise involves only the brand licensing fee.

"The brand takes up almost 10-12 per cent of the top line in terms of all the charges in a management contract, whereas under a franchise we can save almost 5 per cent of that cost on the top line," said a Bangalorebased hotel owner who has plans of converting his upscale hotel into a franchise property.

However, the revenue earned by a hotel brand under this model is only around 40 per cent of what it gets in a management contract.