Franchised Hotel Unit Revenues Can Be Made to Equal Corporate

ANN ARBOR, Mich. (Blue MauMau) – New research shows that if a franchisor follows the right model, corporate units and franchised units can result in the same unit revenues. Professors Francine Lafontaine of the University of Michigan’s Ross School of Business, Renáta Kosová of Cornell University and Rozenn Perrigot of University of Rennes 1 in France studied a single hotel franchisor with multiple brands and thousands of units, running the gamut from budget to luxury. They collected data to determine whether organizational form for each hotel has an effect on any of three outcomes — monthly revenues per available room or what the industry calls "RevPar"; price or yield, the average room rate per month; and monthly occupancy rates.

Across all three variables, Lafontaine and her colleagues found that franchising does not have a statistically significant effect. (An example of equalizing the RevPar between a franchised unit and corporate can be seen in the graph above.) The study does not compare return on investments, since the team did not have access to hotel unit costs, but rather it shows that top line revenues can and sometimes are equalized.

Professor Lafontaine says the study demonstrates, “It can matter considerably for a franchisor to be thoughtful on which unit to franchise and which to be corporate. It is worth investing in good models because it can matter to the bottom line in terms to how much revenue that each type of property can generate. This result is important as it suggests that when firms can choose, they indeed adjust organizational form in such a way that there are no real differences in outcomes."

Lafontaine shares one way in which revenues can be equaled. She observes, “We see that they use franchising more for hotels that are further away. Franchisees in such local markets are able to develop the business well enough to be equivalent to corporate units in terms of occupancy rate and revenue.”

But Stan Turkel, a New York-based hotel consultant specializing in hotel franchising issues, stresses that franchisees shouldn’t be penalized because they are more motivated to work harder at obtaining better revenues than corporate-owned units. Turkel replies, “It appears that the upshot of this research is that the franchise company keeps the best locations for corporate-owned hotels and franchises the rest.”

Professor Lafontaine stresses that it is important to realize that franchisors for various reasons can equalize hotels. Lafontaine observes, “Once I look at the [study's] statistics to figure out when the firm wants to use corporate units or franchised to maximize yields, prices and occupancy rates, they [franchisor management] internalize properly what the incentives of the franchisee are going to be and so the hotels end up not being fundamentally different in these measures based on just how they are organized.”