Hotel Franchises Compared to Auto Dealer Franchises

The large hotel franchise companies do not grant “areas of protection” (AOP) to their franchisees. At best, some of them utilize third-party impact studies to try to quantify the effect of the proposed new hotel on the existing franchisee. The results of these impact studies are highly subjective.

How different from the franchise situation in the automobile business.

Early in the last century, General Motors and Ford adopted the franchise dealer system because they thought that it would expedite expansion and save money.  They believed that a dealer who owned his business would invest his own capital, work harder than an employee and would not require a lot of outside supervision.  But, as it turned out, the franchising of dealerships costs the car companies a lot in terms of flexibility and control. 

For example, in every state these local franchises are protected by so-called “franchise laws” which restrict G.M.’s freedom to open a new Cadillac dealership a few miles away from an existing one.  Just like the hotel franchise companies, G.M. is in a different business than its dealers.  G.M. makes its money on new car sales and on the financing of loans. 

Dealers make most of their profits on servicing cars and selling used ones.  So dealers can thrive even when auto manufacturers suffer. On the state level dealers often have more political clout than automakers do. 

Historically, the automakers have not been good partners.  For example, in the 1930’s during Great Depression, G.M. and Ford kept their factories running and forced thousands of dealers to buy new cars that they had little chance of selling.  The dealers provided a cushion against hard times by eating the inventory.  There are now many cost-saving steps that G.M. can’t take (like discontinuing Buick or Pontiac) because they do not own the dealerships. 

It is said that the automakers made a devils bargain some eighty years ago and now they’re stuck with it.

Author: Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services.  Turkel’s clients are hotel owners and Franchisees, investors and lending institutions.  Turkel serves on the Board of Advisors and lectures at the NYU Tisch Center for Hospitality, Tourism and Sports Management.  He is a member of the prestigious International Society of Hospitality Consultants.  His provocative articles on various hotel subjects have been published in the Cornell Quarterly, Lodging Hospitality, Hotel Interactive, Hotel-Online, AAHOA Lodging Business, etc.  If you need help in negotiating a franchise agreement or with a problem such as encroachment/impact, termination/liquidated damages or litigation support, call Stanley at 917-628-8549 or email stanturkel@aol.com.