Exclusive: Interview with Vantage Hospitality's CEO
Stanley Turkel, a well-known business consultant for the hospitality industry, says of Vantage, "This chain focuses on giving franchisees an even break and it is obvious to all from their growth that franchisees would rather do business with Vantage than with Marriott."
Want to know how out of the ball park this company's franchise innovations are? Consider this: Each franchisee votes to instruct management what to do and where to invest. The list of innovations in response to franchisees goes on from there.
Industry insiders are awed. Some set Vantage's franchise agreement aside by classifying it as a "membership agreement" as they figure out how to compare it to what prevails in the rest of the industry.
Americas Best Value Inn is very supportive of the largest independent franchisee association in the hotel industry, Asian American Hotel Owners Association. Vantage is a platinum sponsor.
Fred Schwartz, the president of AAHOA, praises Vantage Hospitality. He says, "Americas Best Value Inn has a great membership model, with many [protective] provisions in their [franchise] agreement. The hotelier is a real success story." Schwartz observes that the franchisor is very involved in developing strong bonds with the association's hotel owners. "They hit a home run when it comes to relationships," he declares.
[Sniegowski] You recently answered questions on how Vantage is in compliance with the Asian American Hotel Owner Association's 12 points of fair franchising, one of the toughest benchmarks to determine if a franchise agreement is friendly to franchise owners. Why is AAHOA and its 12 points of fair franchising important to Vantage Hospitality?
[Bloss] AAHOA and Americas Best Value Inn are in synch because of my background in franchising with other large companies. When I was an officer of other franchise companies, I repeatedly heard what people liked and disliked about franchising companies. I knew if I was going to launch a brand amongst 325 other brands, I had to believe in what my direction was. Knowing the cyclical side of the industry, I was intent on creating a model that worked during up and down economic cycles.
I was working on the same path as AAHOA but not knowing it. I created a lot of things that upset hoteliers and that’s why I created my model as a membership model rather than a franchise model. It gave me the latitude to base my company’s direction on what I thought was right.
We do not take a percentage of gross and we do not have long-term contracts. Everything we do strives to be parallel to AAHOA’s twelve points.
[Sniegowski] Where do such points of a fairer agreement fall in the overall scheme of knowing where to invest?
[Bloss] These points of fair franchising are hugely important. If you are buying a hotel, our traditional transaction has been a multiple of gross room revenue. So if you are buying at 2,3 4, or whatever multiple of gross revenue, you are buying a business that has a revenue stream. Now if you put a franchise on it, you are going to pay an application fee, an initial fee, an ongoing royalty and marketing fee based on gross room revenue. If you bought the hotel in January and you decide to flag it (have it branded) in February, you will pay franchise fees on a business you just bought. That franchise had nothing to do with that base of revenue business. In essence the franchise owner is paying for it twice.
Now you are going to pay 8–14% of gross room revenues [in royalties], that’s about 30–40% of a hotel's net profit. So now you have a 50/50 partner where the franchisor has literally no skin in the game from day one. You are taking a risk that this brand, which is taking 8–14% of franchise fees, is going to deliver enough business to compensate for what you paid for that revenue stream when you bought the property and the increased cost of flagging it with a brand. Now as you continue to operate it, you will invest capital and sweat equity and engage sales forces, billboards, marketing and Web sites. Regardless of what effort you put forth, the parent company franchisor still gets a piece of your effort without any skin in the game.
They are going to capitalize on the owner’s success.
You do this for three or four years and then a buyer offers two million dollars more for the property. So now you want to sell it. Now you are going to pay liquidated damages to get out of the business whether they were successful in getting you to that point or not.
[Sniegowski] What fees are there in the hotel industry for liquidated damages?
[Bloss] A rule of thumb is about $2,000 per room liquidated damages. If you have a hundred room property, the franchise owner will need to pay $200,000 [for leaving the brand].
Beyond that, you paid the brand, now you want to exit it and you pay liquidated damages. Or you exit at the end of your contract but all that time they had a proprietary reservation system in your property. You want to leave. You will pay the liquidated damages. But the buyer of the hotel bought on a hotel revenue stream but decides he wants to use a different brand or independent. The brand will then take all that proprietary information that came with the property management system, walk across the street, and say, hey, Mr. Smith, how would you like to have all that business that was across the street? I’ll transfer all the customer data over to that other business. If your customer is a loyal brand customer, there’s a chance you could lose some of that.
So you’ve paid them for this business multiple times and at the end of the day, the franchise owner still doesn’t get to keep the business.
It’s a never-ending payment plan as long as you are part of that brand, whether they had any successes or not in what you’ve accomplished.
[Sniegowski] Let's talk about Vantage. Your chain has grown so quickly. Inc. Magazine has you as one of the fastest growing private companies for 2006, 2007, and 2008. Vantage now has some 800 properties. What's the secret to your success?
[Bloss] We have been franchising for nine years. We began in August of 1999. And we are the fastest growing chain in the history of the industry. Out of nine million businesses, we are the only hotel company to achieve such a ranking in Inc’s list.
Why? We understand the hotel. We know what it’s like to make a mortgage payment. We know what it’s like to make payroll. We know what it’s like to make taxes. We know what people need in a bundled package. We bundle our services, all the components that a hotelier needs to be effective in today’s competitive world, having bundled them cheaper, more efficiently and with superior attitude than anyone can do individually.
We have a model of being in business for yourself and not by yourself. We do not mandate how your hotel is run. How you do your business. How you set your rates. All those things.
Do we guide you? Advise you? Manage and help you?
Of course.
Picture yourself. If you are pushed and pushed [by your franchisor], at some point you are going to push back. What we said was that if we can educate and motivate you but allow you to do it your way, then you are more apt to follow and buy into this process than if you were pushed and mandated, and charged an exorbitant fee on top of that.
Let our operators decide what is best for them as a group rather than we decide [for them] as a parent. We also know that what works well in Florida doesn’t necessarily work well in Ohio or Los Angeles.
[Sniegowski] You bring up a good point about franchise owners leading your franchise system. How? Are you like most other franchisors in that you select franchisees into a franchise advisory council?
[Bloss] We do it totally differently.
First off, we are the only company that does not compensate our advisory board in any fashion whatsoever. They pay their own expenses to come to the meeting. Imagine if someone is providing you assistance versus where you are paying your own expenses, which way are you apt to lead? I think if you pay your own way and raise your hand that you want to be a part of this solution and you're willing to donate your time that the buy-in to the business is much more dramatic.
Not only do we have an advisory board, but also our advisory board is elected by franchisees. Any member in good standing has a right to run for this position.
[Sniegowski] You are speaking about how franchise systems will often select franchise advisory council members from franchisees as more a function of having such appointed members disseminate company directives to franchisees.
This is where we are really different than any other company. As president, I cannot mandate changes to the brand without our advisory board agreeing to it and our members voting on it. It takes 66% of our membership to pass or fail any initiative.
[Sniegowski] That sounds like a democracy and not the traditional franchise system structure. I can see some CEOs in the franchise industry reading this and wondering what you are smoking.
[Bloss] I’ll never forget this. We were standing at our first conference. We had a flat fee just like we have today. I showed them what we did for them and the members applauded. I said, “Imagine what I could do for you if I knew what the funding would be for expenditures. I could plan marketing initiatives in advance so that I could have buying power and strategic alliances, time to do due diligence. I stood up on the stage and my partner, Bernie Moyle [COO and CFO of the Vantage Hospitality Group], with his law practice background, looked at me in surprise thinking I was out of my mind because I wanted to let our members vote on how much they will pay us."
“There’s no one on earth who will vote to raise their own payment with you,” Moyle said.
I replied, “I beg to differ with you. These people are sitting on multi-million dollar assets.”
So I got up and said to our franchisees, "I will show you on an annual basis what I can do for you as part of your fees."
We went to vote and they agreed to raise their fees so that I could devote more resources and marketing initiatives for the brand. The vote passed by 98%. I turned to Bernie and gave him one of those looks like, “I told you.”
Then one member stood up and asked, “Are we going to have to do this every year? This is something that should be planned years out."
The members [franchise owners] suggested that we vote every three years on what the fee structure should be.
I’ve been told that I’m the only franchisor membership organization in the hotel industry that allows its franchisee members to vote on how much they pay the parent company.
[Sniegowski] What if someone is buying a franchise but wants to negotiate a better deal with lower fees than the rest?
[Bloss] We tell them thank you but no thank you. First off you don’t understand who we are. But I cannot overrule 800 members voting. What is created is a very level playing field in which we are the only brand that doesn’t negotiate their fees.
If you are on a plane and you know the guy next to you paid $98, while you paid $398, how does that make you feel?
[Sniegowski] Unless he's stowed in the overhead bin, I would not feel good about it.
[Bloss] I don’t care if a member has 1 or 25 properties in the system. I don’t care if you have a property in Chicago or Nowhere, Iowa. Everyone is in the same boat on the same level playing field, paying the same fees with the same foundation.
It blows people’s minds when I tell them that I do not set the fee structure.
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