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IRVINE, Calif. — A magazine explains how it decides what is the best franchise to buy. But what comes out is a clearer explanation of what franchisor shares to invest in.
Hampton was named this week as Entrepreneur magazine’s number one choice for a franchise buyer. “The company rolled out 120 other upgrades--including a free hot breakfast (with a to-go option), free high-speed Internet in every room, and little touches like a curved shower curtain rod,” explained the magazine about why buying a Hampton was good for a franchise wannabe. “These efforts bumped Hampton into the top spot as a value leader for midpriced hotels and put it in an enviable position when the recession hit in 2008.”
What strikes some as strange is that Hampton, a division of the Hilton Worldwide, has been blessed by Entrepreneur Magazine as a wonderful investment for a franchise buyer because the franchisor has been able to demand, and get, continuous upgrades at the expense of its franchisees during one of the toughest credit crunches in living history.
Stanley Turkel, hotel consultant, author of Great American Hoteliers: Pioneers of the Hotel Industry, and who at one time oversaw the Sheraton Corporation of America, explains what is great for a franchisor shareholder isn’t necessarily so great for an owner-operator of a franchise. “Franchisors are not constrained by the credit crunch,” he says. Franchisors aren’t constrained because they can ask their franchisees to come up with the upgrades – or else. That’s because franchisor Hampton receives revenues from royalties that a franchisee pays from its top-line room sales. Franchisor Hampton incurs little in upgrade costs. Turkel explains, “Franchisees do not negotiate as equals when they sign the license agreement. They are presented with a take-it-or-leave-it proposition without even the right to have area protection or negotiating rights to upgrade proposals by the franchise company.”
Florida-based Hospitality Solutions' CEO Steve Belmonte, a former CEO of Ramada Hotels, understands the burdens that upgrading more than the competition can place on franchisees. “Sometimes the franchise demands placed on franchisees by Hampton are tough to swallow, especially during the tough economic times that prevail,” he says.
Hampton and other Hilton brands have franchisee advisory councils that can provide a word to the wise for a franchisor who wants to listen. But it lacks independent franchisee associations and cooperatives in which franchisees are responsible for national functions such as purchasing, supply-chain management or marketing. These organizations prevent an overly eager and aggressive franchisor from pursuing its interests at the expense of franchisees. With franchisees handicapped by not having these critical governance structures, the franchisor is unfettered in dictating to them to expand and to upgrade the brand to astronomic levels.
Belmonte believes that at the end of the day it is outstanding consumer services that will provide the best return on investment for a franchisee. “That’s where Hampton and, frankly, a few other competitive brands earn their keep,” he observes. “Hampton is one of the most well-recognized brands by consumers as an affordable, clean and consistent product. The tough standards they employ pay off tenfold. Consumers know no matter where they travel, a Hampton will meet their expectations and seldom disappoint. That kind of consumer confidence converts to the bottom line in the form of rate and occupancy.”
Turkel has seen for himself while researching this summer that Hampton Inn provided the best service in its class. “Hamptons have better-designed and more spacious dining areas, provide hot and continental breakfasts, sometimes provide free bottled water and late afternoon snacks, permitted us to heat up take-out food from a nearby diner. The guestrooms were larger and newer than other budget motor inns. And they were the first to provide free high-speed Internet access in every room,” observes Turkel.
But there's a balance. Great consumer experience can be exacted at a great cost to franchise owner-operators because the franchisor doesn’t feel the pain in its own pocketbook. For example, Entrepreneur Magazine’s #3 ranked McDonald's asked franchisees to spend over $100k to upgrade to equipment needed for its new line of premium burgers, lattes and smoothies. When its franchisees balked because money and loans are difficult to obtain in this credit crunch, even for McDonald’s franchisees, McDonald's Corp announced that it would pay 50 percent of the upgrade cost. That level of collaboration is seldom seen in franchising.
Would an investor interested in a franchised business prefer Entrepreneur’s third ranked McDonald's or number one Hampton's?
“I do not think you can lump a QSR [quick service restaurant] franchise in with a hotel franchise and then start making comparative/competitive and targeted conclusions,” retorts Belmonte. “The models vary in so many ways it simply isn't productive in my opinion to make comparisons.”
Entrepreneur Magazine’s top ten list is filled with a variety of different kinds of franchise buys – from convenience stores, quick service restaurants, all the way to janitorial services. But in addition to its top 10 list, it also tries to name what it considers top franchises by industry sectors, like hotels.
“The franchise companies that work hard at maintaining quality and consistency throughout their chain will ultimately garner the biggest rewards and maintain a dominant place in the industry,” insists Belmonte. He thinks that is not only good for the franchisor, but also eventually good for its franchisees.