How Big Hotel Chains Destroy Their Business When They Franchise

Hotels have a brand. Customers – in theory – know who they are and what they stand for, and what to expect. When customers want that, they go to the chain’s website to search for rooms and make reservations. It’s that brand capital which represents most of their value, along with some context, data, and strategy for efficiently running a hotel and pricing its rooms.

The major chains have gone ‘asset light’ meaning they sell the real estate and make money on fees.
There are basically two arrangements:

  • Managed. They sell the real estate but still run the hotel, using their own employees.

  • Franchised. They sell the hotel, and the owner runs it, following the chain’s standards

There are gradations between the two. A hotel owner might use some but not all of a chain’s central services, and they may follow most but not all of a brand’s standards.

Once the chain moves to a franchised model, they still need it to run as if it were managed, following all of their standards and having employees think like they’re part of the chain. Otherwise the guest experience will be different, and the value of the brand will be eroded. Guests will no longer be able to count on getting the same experience every time that they relied on when making the booking in the first place. That erodes the value of the chain itself.

In fact, employees of a franchised hotel are often part of a different chain – their ownership group’s. Many owners have hotels in several markets, or several hotels in the same market. And these properties fly the flags of numerous brands. An ownership group may have Marriotts, Hiltons, and Holiday Inns, and their employees might move across them.

So the answer that a guest got, trying to book a long stay at the Thompson Chicago, struck me as both funny and telling.

They were looking for 30 – 60 days, and sometimes that doesn’t come up properly on the website. For instance a hotel might not have the exact room type for one night of the stay, and the system can’t process it. They also were looking for a favorable rate.

The hotel told the potential guest to buzz off – and instead of this “Hyatt” property suggesting a Hyatt extended stay (like Hyatt House) they told them to head over to a Hilton-branded hotel.

That’s a new one
by u/rpnye523 in hyatt

The Thompson Chicago isn’t owned or managed by Hyatt. Oxford Capital Group acquired it in summer 2021, adding to its portfolio of Chicago hotels that is runs itself. This is a franchised hotel.

The company’s hotels arm will take over management of Thompson Chicago immediately, adding it to its nine-property Chicago portfolio of 2,160 rooms, including the Godfrey Hotel, LondonHouse, Hotel Julian and Le Meridien Essex Chicago. Oxford also owns and operates other hotels under those names and others, such as Hotel Lexington in New York and Sir Frances Drake in San Francisco, and in other cities including Boston, Tampa and Los Angeles.

Thompson Chicago doesn’t see itself as a Hyatt and has no reason to refer guests to other Hyatts, because their ownership group doesn’t own Hyatt extended stays in the area (though Hyatt has them to offer).

This is the same issue guests face with hotels delivering promised benefits of a loyalty program. A hotel chain’s real customers are property owners, and guests are the product not the customer.

When chains actually owned the hotels that they marketed, there was better alignment of incentives for maintaining and extending their brands (and they found it much easier to deliver promises to guests on-property). Managed hotels are usually though not always better than franchised properties. An ‘asset light’ model where the chain simply rents out the brand (franchised) can work – but needs a laser-like focus on defending and growing the value of the brand, not merely living off of and depreciating it.

(HT: Ryan C.)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. @Gary: Are any brands actually 100% franchises? What % is franchised in the big 4 chains?

  2. It’s been well understood for decades now: the hardest trick in the travel and hospitality world is getting franchised hotel operators to deliver on the brand and service promises framed by Corporate. There are literally no enforcement tools between toothless threats and the nuclear option, e.g. deflagging. All brand HQ can do in response to bad experiences is apologize to customers and dole out bonus points.

  3. Anytime you franchise a product/service you really need to maintain inspections of the product otherwise it is hit or miss.

    For a long time I used to eat out, mostly at fast food places and depending where I was living I could usually find 1 or 2 places where it was obvious the person in charge ran a tight ship and many other places the quality suffered greatly. KFC seems to have a particular issue with its franchises and poor management, while places like Chick Fil A are run more consistently. I think part of CFA success is that an owner is only allowed to own one restaurant. Someone could own multiple McDonalds and then aren’t there on a daily basis and the product suffers.

  4. @Tom – that’s not the case. All comes down to the details in the franchise agreement. I’d be surprised if this response from the Thompson IF the franchisee also owns the Embassy Suites, didn’t break the franchise agreement (as it’s likely there is a clause prohibiting the franchisee from promoting other brand chains even if they own them). As a parallel example, most fast food places franchise extensively. And most are the same because the franchise agreement is so rigorously detailed, and gives the franchiser broad latitude to remove a franchisee for continued non-performance. But, to Rich’s point, an agreement is one thing; inspection and action for infractions has to accompany that.

  5. One just needs to look at limited service properties
    Look at Hyatt Place and Hyatt House many smell have mold and are worn down like a bad Motel 6.Complete dirty stink holes.The vast majority of the Amerisuites conversions are the worst of all.Hyatt lets owners run flophouses with their name attached to it

  6. I suspect this sort of ownership and franchising is becoming more common across various industries. For example, just 6 media companies own 90% of the American market. (AT&T, Disney, Comcast, Sony, Paramount and Fox.) After a while it gets to the point that without some digging you don’t know who controls what. (A few years ago Fox “News” sued The Simpsons for making fun of them. The action was dropped when somebody realized that both were owned by the same corporation.)

  7. @ khatl The most casual survey of chain property conditions and service levels will prove the giant gulf between brand promise and service experience — and the gulf widens as you go downmarket. I’m not talking about a 4+ Marriott refusing to produce a 50-cent bottle of water for an elite, per the table of promised benefits; I’m talking about disrepair, dirt, garbage in the halls, broken furniture, MIA housekeeping, security issues, skeletal overworked staff, etc., etc. Corporate may or may not be “inspecting” these derelict brand-name properties, but even if they are, there’s no evidence of corrective action — HQ doesn’t want to nuke the relationship with the operator and lose the rooms in a given location, even if they are terrible. I grant you some brands have this problem worse than others — and some are genuinely deplorable — but it’s all evidence of the slow cratering of the industry’s compact with its customers.

  8. I am writing this from the crowne plaza dallas downtown
    I have NEVER stayed in any IHG property so run down as this place
    it is an absolute dump, looks like a senior housing complex in ohio, falls apart, bad internet, dirty carpets
    If IHG visits this place it will be deflaged faster than you can spell bedbugs

  9. Can you please name the hotel chains that own and manage the real estate?
    How about the ones that still manage the hotels?
    To avoid dumps, I look at TripAdvisor reviews with a 3 or 4 (out of 5) rating.

  10. It’s getting somewhat late on a Friday at the end of a long week, but I’m not entirely grasping…why is it a cardinal sin that an employee blindly referred a guest to a property owned by the same ownership group, but all would be well if the property were owned by the chain itself and the employee blindly referred the guest to another property owned by the same chain? Seems like six one way and a half dozen the other.

    Also, since you’re a “markets ‘n competition ‘n stuff” guy, couldn’t one argue that this is a positive by increasing competition amongst brands? That is to say, the employee in the example you gave actually encouraged the guest to switch brands, which, if effective, would break down blind loyalty to one brand and open up consumers to considering multiple brands, driving a need for more competitive offerings by each brand?

  11. In North America, only Hyatt owns or manages the vast majority of its properties across all brands. The big exception within Hyatt are Hyatt Place and Hyatt House.

    Hyatt Place is almost exclusively franchised and either operated directly by the franchisee or a third-party like Aimbridge. Aimbridge properties across all brands share the same problems; specifically, a lack of good management, and poor asset management. You see the same maintenance problems repeatedly themselves across Aimbridge properties.

    IHG manages almost none of their properties, except Kimpton and Intercontinental. I would guess the number of Holiday Inn or Crowne Plaza properties in North America and the UK that are managed by IHG are less than a dozen.

    I’ll give IHG credit. Between 2009 and 2012, IHG de-flagged a lot of old Holiday Inn properties from the 1970s or 1980s. The ones that stayed were required to essentially gut the buildings and re-build. That was courageous as a good number of old Holiday Inns were de-flagged and became Best Western, Quality Inn (Choice) or Magnuson properties.

    Unfortunately, many of the Holidays Inns that were newly built or extensively renovated between 2009 and 2012 are starting to really show their age in 2023. Once again, Holiday Inn is very unreliable. If I have to stay at IHG, I almost always stay at Holiday Inn Express now as most HIEs are newer and nicer than the nearby Holiday Inn.

  12. @CW: So, the owner of a Burger King franchise should refer customers to the Subway or McDonald’s that he also owns?

    McDonald’s is surprisingly consistent. Marriott should hire their franchise enforcement management.

    Starbucks doesn’t franchise, although it does license to grocery stores and airports. Still, they are remarkably consistent.

    Why Marriott, IHG or Hilton can’t do this is beyond me. It’s not that hard.

  13. I’ve said this elsewhere. I think one of the reason why US hotels are so bad compared to the same brands in Europe or elsewhere are the quality of managers and employees.

    Outside the US, working in a hotel (let alone a big branded international hotel) can be a prestigious job. You have to get a specialized degree. Many of the managers speak multiple languages. Even guest-facing front desk staff are often hotel school graduates working their way up the ranks. Working at a hotel is a profession — a career.

    In the US, not so much outside Four Seasons, Ritz-Carlton, etc. You have restaurant managers at full-service brands that don’t know the basics of wine, for example.

    One of the things that Peninsula does well is that every new employee gets a free weekend stay so they can experience what the guests experience and expect. Housekeepers are paid $10-12 an hour in the US, outside big cities with unionized hotel staff. You can make more money at McDonald’s and you don’t need to clean toilets.

    What kind of room cleaners are you getting for $10 an hour? No wonder so many hotels are dirty. Especially when owners are trying to eliminate daily housekeeping across the board but then don’t give housekeepers more time to clean the room when do service it.

  14. @Franz Christian: I think you missed my point. First off, there wasn’t a “should” anywhere in there; everything I said was basically rhetorical / musing.

    To your specific (rhetorical) question (“the owner of a Burger King franchise should refer customers to the Subway or McDonald’s that he also owns”, my answer is…it depends. If he is a good operator, and has more faith in his operations than he has blind faith in the ability of a fast-food corporation that owns all of its locations to maintain a higher standard than he can, then maybe.

    My second point was that – if he did, and if a bunch of franchisees did, it would actually create increased competition. If McDonald’s customers were being actively crosswalked to Subway, etc. instead of just being kept within the brand ecosystem, then those brands would have to create more differentiation to actively keep the customers on board through product, price, etc. rather than just relying on the channel partners to do so.

  15. There is one way Marriott handles this: They publish star ratings for all their properties in their portal, and they usually have enough properties in an area that as. Marriott elite I can pay a little more for a property that doesn’t have crappy reviews. Marriott keeps the revenue either way and the franchise’s ability to charge good room rates declines.

  16. Side note, I’ve also been walked from the Aloft Chicago to the Hyatt Place next door owned by the same ownership group. Don’t event have to go outside to get there.

  17. @Rich.. just an FYI regarding
    Chick-fil-A there are no individual owners. All Chick-fil-A’s are owned by the Cathy family. They allow the operator to just operate one unit. I know this because I used to have a Chick-fil-A in my supermarket.

  18. Your lack of understanding of the hotel business as shown by this and several other articles is baffling. There is language in both franchise and management agreements that address competition, territory, etc. The sales director did nothing wrong here by directing the guest to another property that more closely suits their needs and Oxford Capital doesn’t even own any Embassy Suites properties so I’m not sure where the notion that they were directing them to another property in their portfolio is coming from. Furthermore, World of Hyatt has 36 million members that make up 42% of all bookings and it’s not unusual for big chains like Hyatt and Marriott to see up to 70-80% of bookings come though the brand’s owned channels. Providing a one off example of a guest being referred to another brand is probably the weakest argument against hotel franchising I’ve ever heard. As much as you would like to believe you do, you don’t know better than the big chains. There’s a reason they make billions of dollars every year and have hundreds of millions of rewards members between them.

  19. @Anthony “The sales director did nothing wrong here by directing the guest to another property”

    How to miss the point completely. Or rather how to make my point.

  20. Hyatt absorbed one of the very worst junk fee offenders when it bought Dream Hotels.

  21. Another thought…given that this customer was asking for specific terms, concessions, etc. and the sales director had more information than we do, perhaps the sales director was intentionally pulling a Herb Kelleher (“Dear Mrs. Crabapple, We will miss you”) by walking a problem customer to a competitor…

  22. @Gary How to prove my point yet again that you don’t know anything about the hotel business. They don’t do extended stay at that property. That would be like if someone walks into a Subway and orders a pizza and the manager tells them they’d be better off at Papa Johns. But hey, I guess you know better than the people literally running some of the most successful hotel businesses in the world.

  23. @Anthony – again, missing the whole point of the piece that the property is independent of the chain and thinks independent of the chain, which means that the guest doesn’t get the consistent experience that they expect, and that degrades the value of the brand.

    When you said they were doing exactly what they were allowed to do, that’s right. And when you’re saying they don’t own an Embassy Suites, that’s right too.

    The relevant question, if you want to look at Papa Johns vs Subway is, are they executing on a consistent experience? Though the Subways shop would, I bet, try to sell them on a meatball sub with cheese.

    In the context of the hotel though, the chain does have extended stay, but this hotel doesn’t suggest one within the chain’s set of brands. And that’s fine from the perspective of their incentives. But again, it just illustrates the point that the properties are truly different and independent and not a unified whole.

    That’s great for the individual hotel owner, bad for the chain, because what the chain is selling is the brand proposition. Hotel owners lease the brand and benefit from it, but don’t sustain it, and then the value erodes. And that is a business mistake NOT ON THE PART OF THE INDIVIDUAL OWNER but on the part of the chain itself. They franchise without full enforcement to ensure uniformity.

  24. Gary, Hyatt is making a percentage of gross revenues. They’re every bit as incentivized to have every property making as much money as possible as the owner and they do benchmark properties to peers in the market, take a look at an FDD for Hyatt, it’s all laid out there. What’s good for the owner is good for Hyatt. How is selling the guest a room without extended stay amenities for a month protecting the brand image? Instead, the sales manager has led the guest to a more appropriate accommodation and sold the room to a guest that only needs it for 3 nights. Part of protecting brand image means realizing you can’t be everything to everyone. Of course there are going to be instances where there are competing interests, but to go from there to jump to the franchising business being broken or to suggest this somehow automatically damages their reputation (again 36 million loyalty members) is just a weak argument. Let me ask you a question: You’re the sales manager at this property. You’ve just overrode the booking engine and manually blocked off a room in the CRS for one month at $150 per night so as not to lose the guest. Turns out there are 4 major concerts in Chicago that month with weekend nights going for $300 per night. Oxford Capital’s asset management team is on the phone and would like to know when the Thompson became an extended stay brand and who authorized the booking. What are you going to tell them?

  25. @Anthony – “Gary, Hyatt is making a percentage of gross revenues. They’re every bit as incentivized to have every property making as much money as possible as the owner”

    It’s a short-term squeeze versus long-term maximization question. If Hyatt loses an owner they lose near-term revenue. Marriott lets owners get away with just about anything these days, unless the owner gets caught and there isn’t as much checking as there used to be. Or over to IHG where there’s less enforcement still.

  26. I don’t understand the criticism of the author in the comments. The article is informative and appears well researched like other View From the Wing articles. Keep up the great work Gary.

  27. @Anthony – I’m not seeing your analogy to ordering pizza at a Subway. What’s so special about extended stay? We’re talking about hotel rooms. Any given room is still going to physically be in this hotel next week, next month, next year. It’s not going to fall off the edge of the hotel and vanish, it’s not going to magically change into an elevator, an atrium, or a double-decker bus, it’s going to continue to be a hotel room. Will it still be rentable then – most likely, barring disaster or renovation. So why not rent it to me for now through then?

  28. @Gary Again, you’re making assumptions that fit your hypothesis with no actual evidence to back up the claims. The franchise system was literally designed to address the problem of a lack of quality standards in post WWII America where a more mobile public was travelling more. If you go through any FDD there’s hundreds of pages addressing almost any issue that could possibly arise. Is it perfect? Of course not. When you have 6000-7000 properties in your system it is going to be tough to examine each with a microscope but, the fundamental assertion you’re making, that the system itself leads to more diverging interest than common is just plain wrong. Your initial explanation of the different systems, even, is wrong. The chain is not selling any physical property. A private developer submits a plan, comes to an agreement with the chain, privately acquires the land and then either licenses the brand only or signs a long term management agreement with the chain. The latter accounts for a significant percentage of properties so saying that a property owned by a private investor with a 30 year mgmt agreement with the chain would favor short term gains for the investor and not the chain doesn’t make any sense.

  29. @Paul L – In the hospitality industry, yes, extended stay is a different product catering to (primarily) a different customer segment. It would be like saying pizza and a sandwich are both food so are the same. If I’m the Subway owner, my ingredients are going to go bad anyways so might as well sell the sandwich. THAT, would be detrimental to the chain and not the owner, not the other way around as Jeff indicates. Trying to sell a product the customer doesn’t want is not how you promote a brand. Extended stay properties tend to be in slightly different geographical locations, outside of often quite expensive core urban markets so that the guest can get a good deal on the room and so that they are more accessible to the broader market as opposed to city centers. They usually feature ample free parking, ready access to interstate systems and amenities such as a separate living room and kitchenette which don’t make sense in more space confined urban settings. The value proposition of traditional hotels in urban or vacation settings is to sell short term stays which can be dynamically priced to reflect changes in demand almost instantly whereas the core operating model of extended stay lies in less change in pricing and more in providing core commodities at an accessible price.

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