Chapter 4 Notes and Questions
Page Object.
Franchising in the hospitality industry is a concept that allows a company to expand more quickly by using other people’s money, rather than acquiring its own financing.
Under a franchise agreement, the company or franchiser grants certain rights – for example, the right to use the company trademark, operating procedures, reservation systems, marketing know-how, purchasing discounts, etc. – for a fee. In return, the franchisee agrees to operate the restaurant, hotel, etc., within guidelines set by the franchiser.
Holiday Inn, Ritz-Carlton, and Howard Johnson’s all grew in the 1950s and 1960s through franchising. One of the key factors that led to the success of Holiday Inn was that they were the first company to enter the midprice range and that they were located near important freeway intersections and in the suburbs. Budget hotel properties (Motel
6, Days Inn) grew during this time period.
Franchising was the primary growth and development strategy of hotels and motels during the 1960s through the 1980s. Challenges to the franchise arrangement include the maintenance of quality standards and the financial stability of the franchisee. Franchise fees can vary tremendously and are often negotiated between the franchiser and the franchisee. The average agreement is 3% to 4% of room revenue.
Franchising presents both benefits and drawbacks. Careful consideration should be given to these factors.
It is predicted that more than half of retail sales in the U.S. (including restaurants) will soon be transacted through franchised units. There are jobs working directly for a franchiser, a franchisee, or you might buy a franchise yourself.
Management contracts have helped stimulate the growth of the hotel industry since the
1970s. They are popular because little or no up-front financing or equity is involved.
Even if the hotel corporation is involved in the construction of the hotel, ownership generally reverts to a large insurance company. This has been the case for several hotels.
The management contract usually allows for the hotel company to manage the property for a period of years. In return, the company receives a management fee determined as a percentage of gross or net operating profits.
Hotel companies have increasingly entered into management contracts because less
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capital is “tied up” in managing the properties than is required in owning properties.
Current trends seek to increase the equity commitment on the part of the management company and an increase in their operational decision-making options. This is in response to threats from falling real estate values, the high cost of debt service, and the economic downturn.
REITs are companies that own properties for the purpose of generating profits for their stockholders. Patriot American Hospitality and Starwood Lodging are the two leasing
REIT corporations in the hospitality industry.
Page Object.
According to the American Hotel and Motel Association (AHMA), the U.S. lodging industry consists of 46,000 hotels and motels, with a total of 3.3 million rooms.
There is no formal government classification of hotels in the U.S. However, the American
Automobile Association (AAA) and the Mobile Travel Guide have both established rating guides.
Hotels may be classified by location, price, and services provided. Hotels may also be segmented according to price.
City center hotels meet the needs of business and leisure travelers. They offer a range of accommodations and services.
Often city hotels were constructed with support and assistance from city governments seeking to stimulate urban renewal.
Resort hotels developed initially with the growth of rail travel, which enabled the “city folk” to travel to vacation areas conveniently and at a reasonable expense.
Many resorts began as seasonal ventures, but with the increase of air and automobile travel, many resorts have become year-round destinations.
Today, there are numerous resort hotel properties that cater to the needs of many segments of the population. Some resorts are family friendly, whereas others seek to create a quiet get-away for the adult. Many resorts actively work to attract conventions and conferences to increase occupancy, especially in the off-season.
Vacation ownership is the fastest growing segment of the US travel and tourism industry.
A variation of the “time share” model is the vacation club.
Consumers earn points toward vacation benefits. Flexibility is a key advantage of this type of program. Hotel companies have found this segment of the industry to be extremely lucrative. As a result, many leading hoteliers are entering into it.
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Fees such as yearly maintenance fees are required in addition to vacation ownership charges.
Time share ownership lets owners save on the rising costs of vacation accommodations over the long term, while providing the space and flexibility to meet the needs of any size family or group.
Time shares also provide the possibility of worldwide travel by means of ownership exchange.
In general, airport hotels have high occupancy rates because of the large number of travelers arriving and departing from major airports. Some properties have added meeting space to cater to business people who need to fly in, meet, and then fly out on a very tight schedule.
These hotels are usually full service and have 200 to 600 rooms.
Freeway hotels and motels grew most quickly in the 1950s and 1960s. They provided a convenient place to stay that was reasonably priced with few frills.
The casino hotel industry is a significant segment of the entertainment industry because the fastest growing sector of the entertainment field is gaming.
Casino hotels are becoming increasingly family-friendly and are also marketing themselves as business hotels to attract conventions.
Convention hotels offer facilities that meet the needs of groups attending and holding conventions. These facilities may include large public areas and banquet facilities, a business center, a travel desk, and an airport shuttle, as well as other amenities.
Hotels may be classified by the degree of service offered: full-service, economy, extendedstay, and all-suite hotels.
Full-service hotels offer a wide range of facilities, services, and amenities for both the business and pleasure traveler. Examples: Hilton, Hyatt, Four
Seasons.
The full-service market may also be subdivided into upscale and midpriced properties.
These properties provide clean, reasonably sized and furnished rooms without “frills.”
Economy hotels focus on selling beds. They do not offer meals or meeting rooms, as a general rule.
These hotels provide accommodations to guests staying longer than 5 days. Rates are
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usually decreased based on the length of the stay. Guests are usually a mix – professionals, business people, and families that are relocating.
Extended-stay hotels offer full kitchen facilities and shopping services or a convenience store on the premises.
All-suite hotels usually offer more space per room, for the same rate as a regular hotel in the same price range. The additional space is usually dedicated as a lounge or kitchenette, or both, within the room.
These hotels are attractive to guests who may be relocating, attending training seminars, or are on work-related projects.
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Bed and breakfast operations offer variety in accommodation and in cost. Although not all
B&Bs are owner occupied, they provide an alternative to the traditional lodging experience.
Page Object.
Vertical integration is a relatively new trend. Companies realized that guests have needs at various levels. By offering more than one type of accommodation, hotel companies can serve guests within various segments.
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A marketing consortium or referral organization is a group of 157 1 independent properties that refer businesses to one another. The benefit of this arrangement is that independent hotel operations are able to compete with chain operations.
The Ritz-Carlton and Canadian-owned Four Seasons are rated the highest quality chain hotels. 158 4
Unusual hotels include The Treetops in Kenya, the Ice Hotel in Swedish Lapland, and the underwater hotel at Great Barrier Reef.
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Page Object.
The global economy is segmented into large trading blocks such as the European
Economic Community (EEC) and the North American Free Trade Agreement
(NAFTA). Such agreements reduce limitations on the transfer of goods and labor. This can lead to increased travel, tourism, commerce, and industry.
Growth is expected to continue under the EEC and NAFTA. The Pacific Rim is also growing dramatically in the realm of tourism.
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In developing countries, once political stability has been established and maintained, hotel and tourism development follows closely.
Topics include capacity control, safety and security, technology, new management, globalization, consolidation, diversification, spas, and gaming.
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1) Questio n: What main factor changed the nature of the hotel industry? What impact does it have today?
Answer: Improved transportation has changed the nature of the hotel industry from small, independently owned inns to big hotels and lodging chains operations by such concepts as franchising and management contracts.
2) Question: In your own words, define franchising and management contracts.
Answer: Answers will vary but should be similar to text’s definitions.
Franchising: A concept that allows a company to expand quickly by allowing qualified people to use the systems, marketing, and purchasing power of the franchiser.
Management contracts: Written agreements between an owner and an operator of a hotel or motor inn by which the owner employs the operator as an agent (employee) to assume full responsibility for operating and managing the property.
1) Question: Give reasons why you would like to build, manage, and own your own hotel. According to the book, what are the reasons people build, manage, and own hotel properties?
Answer: Answers for this will vary with the main reasons being:
 Pride of ownership or ego
 Profit from building, promoting, financing
 Appreciation in property value
1) Question: What characteristics do the following hotel segments encompass? a. City center hotels b.
Resort hotels c.
Airport hotels d.
Freeway hotels and motels e.
Full-service hotels f.
Economy/budget hotels g.
Extended-stay hotels h.
Bed and breakfast inns
Answer: a. Location is key; hotels provide a range of accommodations and service to leisure and business travelers. b.
Fast transportation to formerly remote destinations allows these hotels to provide leisure and recreational activities.
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Large numbers of arriving and departing visitors who need accommodations, saving a trip to downtown. d.
Reasonable, convenient, few frills. e.
A wide range of facilities, services, and amenities, especially in the luxury category. f.
Clean, no frills, no restaurants. g.
Cater to business travelers and relocating families. h.
Simple processes, homelike atmosphere.
1) a) Management contracts have the advantage of requiring little up-front financing and usually allow the hotel company to manage the property for several years, whereby the company receives a percentage of the net operating profit as a management fee. This allows for the rapid expansion of the hotel market, especially since increased competition among management companies has decreased the management contract fees. b) The concept of franchising allowed for the rapid expansion of hotels and motels. Franchising allows franchisees to use the brand names and services of a franchiser in exchange for a fee. This has the advantages of involving less up-front capital, a centralized reservation system, national advertising, and increased market recognition, but it also includes the challenges of maintenance of quality standards and avoidance of financial failure on the part of the franchisee.
2) a) Resorts are usually located at exotic places with spectacular scenery, offering relaxation and recreational activities. The Treetop hotel located in one of Kenya's wild animal parks is architecturally built on the tops of trees, whereas the Cocoon Hotel in Japan offers guests an affordable alternative space of about seven feet by four feet with just a bed and television. b) Airport hotels offer extended room service and restaurant hours to accommodate early and late arriving and departing guests. c) Vertical Integration is the trend of having properties in all segments of the market: luxury, mid-scale, and economy.
3) Vacation ownership is more commonly known as time-sharing. Vacationers buy the "right" to use a hotel room/condominium/cabin/apartment, etc., for a given amount of time each year. The destination and the
"unit" may be fixed or may be flexible. Vacation clubs provide the greatest amount of flexibility as members can choose from various member destinations.
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