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Hotel franchising finds growth beyond U.S. borders


Published:

Philip F. Zeidman

Illustration by Jonathan Hankin

Dateline: Shanghai

The lodging industry has always been a linchpin of cross-border franchising, but recent months have been exceptionally active ones for international hotel franchisors opening in a wide swath of foreign destinations, or announcing plans to do so, as the co-author of this article, Tao Xu, and I observe.

The deals are not always franchised, or wholly franchised (some are management agreements, some joint ventures, even some totally company-owned), but the movement toward franchising is unmistakable. Consider only a recent sampling, selected almost randomly:

Marriott—in China, Colombia, Costa Rica, France, Germany, Hungary, India . . . and the list spans the globe.

InterContinental—principally Holiday Inn Express, as far as the eye can see . . .

Hilton—Multiple brands in multiple countries (in one notable announcement, four brands in Peru alone) . . .

Choice—the Middle East and elsewhere, a significant move for a company that only a few years ago was almost entirely domestic . . .

Hyatt—Austria, Germany, UK, Spain, and elsewhere in Europe; Argentina, Brazil, Nicaragua, Uruguay, and elsewhere in Latin America; China and elsewhere in Asia…

Starwood—almost a dozen different brands.

And, of course, nothing could illustrate the globalization of the industry more than one very recent development, the acquisition by the Chinese conglomerate HNA Group of Carlson Rezidor Hotel Group, owner of the Radisson and Country Inns & Suites chains.

What’s going on?

What are the factors that lend themselves to this upward movement in cross-border franchising of international lodging brands? Experts have a range of explanations, but the recurring themes are pretty clear: recovering economies in a number of markets; an increase in travel in almost all of them; indisputable growth in receptivity to Western brands.

Finally, a less measurable but intriguing explanation: as international chains develop “families of brands” to target different demographic and geographic markets, the possibilities open to “flood the zone” in a number of countries.

Several of these themes can be seen vividly in China, as a recent trip there, including a lodging industry conference, underscores.  Just before the start of the two-day China Hotel Investment Conference 2016 in May in Shanghai, the Global Business Travel Association reported China has overtaken the United States to become the biggest business travel spending market, with an estimated spending of $291.2 billion in 2015, which is projected to grow by another 10.1 percent in 2016. And 95 percent of that business travel spending is for trips taken entirely within China, a fact that is surely not lost on the international hotel brands.

The early decades of hotel development in China saw concentrated efforts by the international hotel brands in the so-called Tier 1 cities and some coastal cities that were aimed at inbound international travelers. That development by no means has stopped or even slowed down.

China may no longer be the top recipient of foreign direct investment (by some measures, India overtook China in 2015), but the supply of five-star hotels (which are dominated by international hotel brands) continues to grow at a rapid rate (compound annual growth rate reached 10.5 percent  between 2006 and 2015), even in Beijing and Shanghai, which are still trying to catch up to the supply level in cities like New York and Los Angeles.

Therefore, naturally one of the two hottest topics for conversations at the China Hotel Investment Conference 2016 was Marriott’s acquisition of Starwood. Starwood has long been considered as the market leader in the luxury segment in China, a position that was thought to have been a factor in Marriott’s decision to acquire Starwood. It was clear to various conference speakers and participants that this acquisition will vault Marriott ahead of the pack in terms of room counts and pipeline in the luxury segment.

However, the more interesting story is the robust growth in the “middle,” whether in terms of hotel star-rating (such as the 3 and 4-star hotels), the size of the markets (such as the Tier 2, 3 and even 4 cities), or the geographic reach (such as the interior areas of China). Traditionally (and by that, we mean in the last 10 years, which counts as ancient history in China speed), the Chinese domestic brands dominated this segment, and a significant source of demand came from the government-related travel spending.

A pivotal year

Now, with the growth of the domestic business travel in China, the international brands are competing to capitalize this “new normal.” And one of the growth models that they are deploying will surely sound very familiar to U.S. hoteliers—franchising.  A few examples:

Hilton announced an “exclusive license agreement” with one of China’s leading hospitality groups, Plateno, to “rapidly launch and develop” the Hampton by Hilton brand in China;

Marriott and one of China’s fastest growing hospitality groups, Eastern Crown Hotels Group, signed an “exclusive development agreement” to bring the Fairfield by Marriott brand to China;

InterContinental Hotels Group went so far as creating a new franchise model, called “Franchise Plus,” for its Holiday Inn Express brand in China, which provides its Chinese franchisees with “additional benefits and features from IHG’s managed model.”

Against this backdrop, it is no surprise that the other hot topic at the China Hotel Investment Conference 2016 was hotel franchising. Everyone was talking about it; everyone seems to be ready for it.  When we look back, 2016 may prove to be a pivotal year for hotel franchising in China and beyond.

Philip Zeidman is a senior partner in the Washington, D.C., office of DLA Piper and an expert in international franchise law. Reach him at philip.zeidman@dlapiper.com. This article is co-authored by Tao Xu, a partner at DLA Piper in Reston, Virginia. Reach him at 703.773.4181; tao.xu@dlapiper.com.

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