How We Sell Franchise and
Management Contracts
Kirk Kinsell
Senior Vice President,
Franchising and Business Development
Successful franchising requires meeting 3
simultaneous needs
z
z
z
Price / value
Meet needs for the
trip / occasion
Brand I like and
trust
What
IHG
wants
What
guests
want
z
z
z
z
More rooms
More markets
More segments
More relationships
What
owners
want
z
Cost effective access to
¾
¾
¾
¾
z
Guests
Marketing power
Capital
Markets
Long term relationship
-1-
Our primary goal is to franchise the brand
z
Sell flag first (i.e. franchise)
z
Then may sell management, depending on owner
type, profit opportunity and segment:
¾
¾
¾
z
Higher price points – more managed
Lower price points – usually franchised
Exceptions for portfolio deals, e.g., Candlewood
Our management economics make us more money
on:
¾
¾
Large assets, e.g. InterContinental / Crowne Plaza
Large, homogenous portfolios, e.g., Candlewood
-2-
Franchising is higher margin than managed
in most cases
Indicative relative economics of owned, managed and franchised
models (based on a typical midscale hotel)
O&L
Managed
Franchised
$m
$k
$k
Room Revenue
3.0
Total Revenue
4.0
GOP
1.3
EBIT
Margin
5%
3%
200
150
200
150
1.0
140
125
25%
70%
85%
6%
O&L
O&Lcontributes
contributesabout
about6-7x
6-7xaaManagement
ManagementContract
Contract
and
and8-9x
8-9xaaFranchise
FranchiseContract
Contract
Source: STR; HOST report, IHG analysis
-3-
How does an owner choose a brand?
Suitability
z
Which brand suits my
location and needs?
Availability
z
Is the brand available?
z
What can the brand and
brand owner offer me?
¾ Performance
¾ Relationship
Delivery
-4-
Large opportunity exists for new signings,
mainly in upscale and midscale
Average number of opportunities by
segment per year (hotels)
Average number of opportunities by
segment per year (rooms)
800
70,000
700
60,000
600
New Build
Conversion
50,000
New Build
Conversion
500
40,000
400
30,000
300
w
y
on
om
Ec
it h
ou
t
it h
w
id
sc
al
e
M
M
id
sc
al
e
ps
ca
le
U
pp
er
-u
ps
U
y
Source: STR; average based on rooms converted into or within
segment plus new builds 1999 - 2003
Lu
xu
ry
w
on
om
Ec
it h
w
id
sc
al
e
M
id
sc
al
e
M
U
pp
er
-u
ps
U
it h
ou
t
0
ps
ca
le
0
ca
le
10,000
Lu
xu
ry
100
ca
le
20,000
200
-5-
IHG is increasing development resources
z
Upscale Management & Franchise:
¾
Today: 5 development professionals
¾
2005: 9 development professionals
z
Midscale Management & Franchise :
¾
Today: 14 regional development professionals
3 sales management professionals
z
New Product:
¾
2005: Add 3 regional staff dedicated to Hotel Indigo
z
All sales staff supported by product, feasibility and
market planning teams located in Atlanta
z
Incentive compensation comprises 30-70% of total
budgeted compensation
-6-
Significant back-up to Development team
z
Behind this front line sales force is a wide range of
support functions:
¾
¾
¾
¾
¾
¾
z
Investment analysis team
Legal
Property improvement plan team
Market planning team
Contract administration team
Technical services
These operations are all essential to the franchise sales
process :
¾
Total approximately 56 professionals
-7-
Franchise sales process driven by new and
existing leads
z
Leads generated by:
¾
¾
¾
¾
¾
z
Direct solicitation
Prospecting
Promotions
Development seminars
Existing relationships
c.50% of sales
c.50% of sales
Opportunities measured against:
¾
¾
A distribution plan (updated annually)
Set of performance criteria, including
– Applicant experience
– Development costs/conditions
– Impact on existing and potential IHG distribution
-8-
Sales targeting based on detailed bottomup plans
z
Annual business plans are created for every market in
the US – in total 162 markets:
¾
¾
¾
z
Analyses existing inventory
– IHG
– Competitor
Assesses whether target for existing inventory is to keep
or reject
Assesses remainder of market
– Which locations does brand have potential to be in
– How can that be achieved
•
Is there a conversion opportunity
•
What development sites are available
This sets objectives for the sales force in every region
of the US
-9-
Atlanta Upscale hotels
-10-
Atlanta Crowne Plaza major competitors
and targets
-11-
Franchise negotiation process governed
for most part by UFOC
z
Franchise contract governed by:
¾
¾
z
Prospective franchisee receives:
¾
¾
z
Legal disclosure document (UFOC)
Plan review/product improvement plan
Detailed disclosure of system performance (e.g.,
Priority Club, channels);
Costs/ROI – determined by franchisee from their
projections of revenue
Regional developers negotiate agreements, with
higher authority required for material changes from
standard set of terms
-12-
Midscale success rate differs to that of
upscale for good reason
z
Midscale brands require 5-10 leads to convert to
successful sale
¾
z
Timing of project, demonstrated performance in
similar setting, capital cost and financing determines
success
Upscale brands require 10-20 leads to convert to
successful sale
¾
¾
More challenging than midscale given the increased
complexity of highest and best use for real estate
Deal structure, demonstrated performance, capital
cost and financing determines success
-13-
After the deal, new clients become a
source of future growth
z
z
Development team is directed at client rather
than market to leverage additional growth
¾
Very strong and broad relationships in mid-market
¾
Now building similar strength in upscale
Franchise operations and hotel performance
support monitor hotel quality, performance &
compliance with agreements
-14-
Many other services are provided after the
deal is done
Charge
Used to
Technology fee
$ per room
basis
Support property management software costs
(Opera and Pegasus)
Management
training
$ per
workshop
basis
Support cost of workshops
Change of
ownership fee
$ per room
basis with a
minimum per
brand
Support administrative costs of dealing with a new
owner
License
Renewal
$ per room
basis with a
minimum per
brand
Support administration costs of relicensing an
owner
-15-
Many other services are provided after the
deal is done
Charge
Used to
Property
inspection plan
fee
Per PIP
Support cost of conducting an assessment of the
property’s quality needs
Quality
inspection
Per visit
Support cost of the visit and associated reports
Guest relations
fee (payable to
system fund)
Per
complaint
Support cost of handling guest complaints about a
hotel
-16-
Franchising lets IHG use other people’s
money in two ways
Owner creates
hotel
Royalties create
direct profit stream
to IHG
Immediate
results
System fees create
revenue investment
to build our brands
Long-term
brand value
-17-
The fee model to IHG’s P&L is generally very
simple
z
Ongoing fees
¾
¾
z
Franchise – RevPAR x system size x royalty %
Management – RevPAR x hotel size x base fee + incentive fee
x GOP / NOI + accounting and technology support fees
Event-driven fees
¾
¾
Franchise
– front end fees on new growth
– F&B fees
– renewal fees on re-licensing
– change of ownership fee on property transaction
– liquidated damages from early terminations
– property inspections and compliance charges
– training at opening and ongoing during term of agreement
Management
– technical service fees
– property inspections and compliance charges
– early termination (if permitted) by contract
-18-
Franchising lets IHG use other people’s
money in two ways
Owner creates
hotel
Royalties create
direct profit stream
to IHG
Immediate
results
System fees create
revenue investment
to build our brands
Long-term
brand value
-19-
System fund assessments charged as a
percent of revenue or guest spend
Charge
Used to
Marketing and
reservations
fund
2.5-3% of
gross room
revenue
Fund cost of
¾ Awareness advertising
¾ Research and development of new or
improved services
¾ Tactical marketing programs to support
revenue enhancement
Priority Club
Rewards fund
4.75% of
member’s
total bill
Fund cost of frequency programme, (mostly the
cost of the points awarded to guests for their stay
at the hotel)
In total typically c. 5% of total hotel revenues
-20-
Conclusion
z
Focus is franchise first
¾
Management only where it makes economic sense
z
Significant infrastructure behind sales operation
z
Significant part of what we do is market planning
z
We generate c. 50% of sales from existing clients
z
The level of market understanding required, and the
relationships we have, are the product of decades of
work
¾
Generates very significant barriers to entry
-21-