What’s Ahead for the Next Gen of U.S. Hotel Franchisees?

Grey Raines’ family got into the hotel business in the 1950s.

At 38, he is carrying the mantle as president of Raines Hospitality, which will have 20 hotels by early 2020. The Florence, South Carolina-based company has Marriott, Hilton, Hyatt, and Choice hotels in its portfolio.

Raines started out in the family business as a short order cook at a Courtyard Marriott when he was 15 years old. Since then, he has seen dramatic changes in the industry.

The proliferation of brands, new technology, and competition from online travel agencies and home sharing businesses such as Airbnb have made being a hotel owner more difficult, presenting unique challenges for the next generation of hotel franchisees.

“There’s been so much disruption in our industry that is constantly changing the model,” Raines said.

Franchisees are the heart of the hospitality industry. Increasingly, hotels have adopted an asset-light model as a way to reduce debt and to grow more rapidly. Accor, for instance, sold 55 percent of its portfolio for $5.4 billion in 2018. The company has 40 brands including Fairmont and Raffles.

The next generation of hotel owners are young, diverse, and facing challenges their parents and grandparents never encountered in the early days of hotel franchising. That disruption is also what makes hotels want to focus on managing properties rather than owning them.

According to market research firm FRANdata, as of 2018, there were 32,818 total hotels in the United States, 93 percent of them franchised. That’s a total of 30,650 franchised units.

Wyndham, which calls itself the world’s largest hotel franchising company, said that about 95 percent of its 9,200 hotels globally are owned by others. The portfolio consists of about 5,900 hotel owners.

As of the third quarter of 2019, more than 80 percent of InterContinental Hotels Group’s 5,795 properties are franchised. About 87 percent of Hilton’s 5,980 hotels are franchised.

Marriott International, the largest hotel company in the world by room numbers after its acquisition of Starwood Hotels in 2016, owns only 14 of its more than 7,000 hotels worldwide.

“Our job today is to make sure we find the best real estate partners, align ourselves with them and then provide a great system program that they can drive great results and great experiences for our guests,” said Eric Jacobs, chief development officer of select service and extended stay brands in the U.S. and Canada.

Like a Marriage

But there can be friction between owners and hotel companies.

Owning a hotel doesn’t mean that an owner can do anything he or she wants to. There are brand standards they have to abide by.

“Once you sign with the franchise, it’s like a marriage,” said Azim Saju, a managing member and general counsel of HDG Hotels in Ocala, Florida, which has 17 hotels and one more under construction.

The hotel companies think very carefully before franchising for fear of losing complete control. They are more likely to franchise cookie-cutter brands such as Holiday Inn Express than a luxury Conrad. Think of Marriott’s recent purchase of the W New York Union Square. In an effort to re-invent the flailing W hotel brand, Marriott has taken over the property to transform it into a once-again coveted place for travelers.

Tony Capuano, Marriott’s executive vice president and global chief development officer, said that the company prefers to manage its luxury properties.

“Historically, we have managed our luxury properties because operating luxury hotels is very specialized, and there haven’t been many management companies with the experience to ensure our guests receive the luxury experience they desire,” he said.

More qualified and experienced management companies are entering the segment though, and the company has lately been more willing to franchise The Luxury Collection and JW Marriott.

Sometimes lenders will even require owners with little or no experience in the hotel business to bring on third-party operators or asset managers to help them navigate the industry.

Hotel franchising in the U.S. began about 80 years ago with a cooperative of motor court owners called Quality Courts United that formed the basis of what is now known as Choice Hotels International. Choice now franchises more than 7,000 hotels in more than 40 countries and territories.

Kemmons Wilson solidified the concept in 1951 when he was on vacation with his wife and five children. They were taking a road trip from Memphis to Washington, D.C., and could not find any roadside lodging that would not charge them extra for each child. On top of that, the accommodations were cramped and uncomfortable. When he returned to Memphis, he came up with the idea to build 400 motels across the country with standardized features.

Wyndham followed in 1954 with the creation of the Howard Johnson brand, which was originally a restaurant chain.

Lending Support

Hotel companies realize the challenges of owning a hotel. As a result, they are providing more leadership training and tech support to owners.

Choice Hotels offers its 12,000 franchisees training through its Choice University.

Hilton for the first time in 2019 held global owner conferences in cities such as Orlando, Bangkok, and Dubai to help franchisees navigate such topics as corporate responsibility and branding.

“We do better when our owners are doing better,” said Max Verstraete, vice president of owner experience and engagement of Hilton. “We are a franchise business so we want them to perform as best as possible.”

They are also trying to encourage younger members of families to continue the tradition of developing and managing properties. Diversity among owners is also a goal of many companies.

Encouraging Diversity

Marriott regularly reaches out to groups such as the Asian American Hotel Owners Association (AAHOA) to help diversify its group of owners. AAHOA says that its 18,000 members own about half the hotels in the U.S. Companies such as Marriott encourage them and provide leadership training and internships to potential owners.

The company tries “to present to high net worth individuals who are thinking about real estate investment to make sure they know that hotels are another form of real estate they can own,” Jacobs said.

Mary Beth Cutshall, executive vice president and chief business development officer of HVMG, which manages several hotels among various brands including Marriott and Hilton, runs a group called Amara Capital that encourages women to invest in hotel real estate.

“Our vision really is to give female investors a seat at the ownership table and create wealth by being involved in hotel real estate,” she said. “I came to realize it’s pretty homogenous on the ownership side…. I thought it would be good not only for women’s wealth creation but also it would be healthy for the industry to have that voice at the table.”

Last year, Choice executed 19 franchise agreements with underrepresented minority and veteran owners. And recently, the company finalized six franchise agreement to organizations led by African-American women for hotels in the U.S. and the Caribbean.

But as hospitality becomes more complex, the owner’s job is well beyond just putting heads on pillows. Hotels are no longer just hotels, but mixed-use properties, with more food options, retail, and entertainment. Tomorrow’s franchisees face the challenging of managing that all, as competition hits them from all sides.