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CARROLLTON, Tex.— New research by the numbers reveals the five worst national hotel chains for franchise owner terminations. These worst offenders range from the worst of the worst, Motel 6, to fifth worst, Knights Inn by Wyndham, according to Franchise Disclosure Document data sorted by Blue MauMau and compiled by FranchiseGrade.com.
The rates of franchise terminations do not cluster into a narrow range across the board. The worst rates are considerably higher than those of the safest harbors of franchisors that hold on best to their franchises. For example SpringHill by Marriott terminated less than 0.1 percent annually of its total number of franchises in the four-year period from the beginning of 2010 to the end of 2013. In comparison the worst, Motel 6, with 557 hotel properties at the beginning of 2014, terminated its franchises at a rate of 4.8 percent each year over the same period. Motel 6's rate is nearly fifty times the termination frequency of the safest national hotel franchisor.
What is striking is that of the entire range of hotels, running from luxury to mid-scale to economy-priced rooms, it is economy franchisors that overwhelmingly fill the ranks of the worst terminators: Motel 6, Red Roof, Rodeway Inn by Choice, and Knights Inn by Wyndham. Mid-rate hotel chain Howard Johnson, a Wyndham brand, is the lone exception to that group.
A brand can have many good reasons to end a relationship. A franchise that does not adhere to brand standards can pull down customer visits to all the other franchises in the system. A franchisee may stop paying royalties to the franchisor. Or it could make the morning papers by engaging in money laundering or by breaking slave labor laws. Both franchisor and franchisees want those kind of owners out of their system.
On the other hand critics point out that franchisors can be frivolous in terminating franchisees—not just in the United States, but elsewhere as well. An Australian court even upheld that simply criticizing a franchisor was grounds for franchise dismissal, even though the franchisee had acquiesced and followed the new operating standard, albeit grumbling and whining along the way.* Supported by the legal system, franchisors can crack down on a franchisee simply for not having the right attitude.
One chief executive officer of a major hotel chain thinks that high termination rates can be the tip of the iceberg for deeper structural problems in a chain. Roger Bloss, CEO of Vantage Hospitality, sees terminations as a signal from hotel owners of a clueless franchisor, which is constantly demanding upgrades of hotel properties as it desperately experiments with franchisees' money in the hope of discovering a brand's niche in the marketplace.
Older hotel properties can have antiquated architecture, equipment and furniture. Bloss comments that franchise systems with older hotels that haven't been on top of managing change can be burdened with mature hotel units in which it is now too costly to keep up. "We can see a lot of terminations because franchisees are not putting the new brand initiatives into the properties that the brands want and at the frequency that the franchisor wants," says Bloss.
New York-based attorney Paul Steinberg thinks that the lowest of economy hotels may be attracting the dilapidated and displaced. "There may be a selection bias," he says, explaining that these worst terminators may have a penchant for recruiting and recycling the poorest hotel owner-operators. "Once the basic-level franchisors accept a tired property into the fold, they demand renovations," says Steinberg. The attorney suggests that meager revenues from a poorly maintained property that travelers avoid will not support upgrades and image refreshment. "Of course there either is no money and/or the franchisee does not want to put money into an upgrade. That triggers friction and a termination," he notes. Steinberg goes on to explain that the terminated franchise owner then goes on to look for the next hotel flag to help fill rooms, bringing poverty along in a vicious cycle to the next chain.
At an individual level a high franchise termination rate represents major business risk and cost for a franchise owner. "Termination by the franchisor is very costly to the franchisee, which must find a new brand name and market it to their guests," says hotel consultant Stanley Turkel, a hospitality historian and author of Built to Last: 100+Year-Old Hotels East of the Mississippi. Turkel points out that at a minimum, terminated hotel owners have lost opportunity by not being connected to a brand's room booking system.
Besides lost opportunity costs of now empty rooms, there are real upfront costs too. "There are significant post-term penalties that await the franchisee that can be devastating," says Massachusetts-based attorney Seth Stadfeld of law firm Weston Patrick, speaking of how a hotel would quickly feel a monetary dig into its pocket once it was terminated. Stadfeld states that hotel franchise contracts have liquidated damage clauses which gives a franchisor the right to two or three years of estimated future royalties from a franchised hotel even if the franchise has been terminated from the system.
Consultant Turkel thinks such heavy cost upon termination is an arrangement carefully designed through time by franchisors and an army of attorneys. "It was no accident. Franchisors were able to create a system where they have no fiduciary duty [to franchisees] and collect large fees [from franchisees] with no investment [by the hotel franchisor]," says Turkel.
Despite being the worst terminators of franchises, the franchise salespersons in these five brands have managed to grow the number of franchise units in their chains (see chart). The exception is Wyndham's Howard Johnson, which has been shrinking at an annualized rate of 4 percent from the beginning of 2010 to the end of 2013. It is growth in number of units that is typically what franchisors tout to stockholders or franchise candidates about the health of their system rather than termination or franchise unit turnover rates.
Why do hotel owners want to know which brand terminates the most or the least? After all, there are other categories of franchise turnover, such as franchises that ceased operations, didn't renew their franchise contracts, were acquired by the franchisor, or sold their hotel property. In compiling this report, this journal has spoken with multiunit hotel owners, hospitality consultants, a franchisor executive and the CEO of a major chain. "For many hotel owners, the transfer rates, non-renewals and acquisition rates that are bundled together into one take considerable thought on the statistical implications," said a franchisee leader about keeping benchmarks clean and simple. The consensus among experts that this journal spoke with was that measuring terminations was the cleanest single benchmark.
Data from the beginning of 2010 to the end of 2013 on the terminations of 90 hotel franchise chains was compiled by FranchiseGrade.com. The information was extracted from the 2013 Franchise Disclosure Documents, which are the most up to date. Other turnover rates, such as franchises that ceased operations, transferred or failed to renew, can be purchased from researcher FranchiseGrade.com.
Franchisees that we spoke with were much more interested in the large chains. Moreover the figures from small chains could strongly swing one way or another by change in just a few units. For these reasons this list is limited to individual brands that have over 200 franchised hotel properties.
Here is the formula that was used:
Annual termination rate (percent) = Annual franchise terminations 1/1/2010 to 12/31/2013 X 100
Avg. total franchise outlets per year during period
*Note: Court case cited on page 156 of Beguiling Heresy: Regulating the Franchise Relationship, by Paul Steinberg and Gerald Lescatre, Penn State Law Journal, Volume 109, 2004.