Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J Business Development Strategies Chapter 4

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Selection (Product)  Singleness strategy  Hybrid  Product tiering  Specialization  Tailored to market(s)  Alternate branding

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Selection (Market)  Domestic  Near to far geographic  Multi-continent  Everywhere - global (opportunistic or planned)

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Selection (Method)  Ownership  Ownership + limited franchising  Joint-venture  Franchising  Alliances/consortiums/agreements

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Selection (Method) (continued)  Build and lease  Management contracts  Acquisitions Select Brand collector

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Selection (Method) (continued)  Horizontal (across sector)  Vertical (multiple components of the same segment)  Horizontal and vertical

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Selections (Organizational)  Centralized (global)  Decentralized (zone, region, country)  Combination  Market(s) served  Product categories/types/lifecycle  People strength

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Strategy Alternatives Acquisitions of companies with management contracts and franchise base Management contracts (solicitation/growth) Limited equity participation + management contracts Acquisition of brands

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Entry into Business Entry into Business: Start from scratch Buy an established business Buy a franchise

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Franchising Introduction: Overview of franchising How franchising works History of franchising Types of franchise relationships Global implications

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Franchising Statistics Four times greater chance for success than starting from scratch. Two times greater chance for success than buying a business. Of franchises opened in the last five years, 96.9% are still open. Six to eight percent growth in revenue. Franchising accounts for 1/3 of all retail sales - $760 billion in revenue.

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Franchising A franchise is a mutually beneficial financial partnership between a large organization and an independent entrepreneur. Franchisor sells the right to conduct business using the organization’s name, trademarks, products, business procedures, marketing, advertising, and everything else to the franchisee.

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Franchising (continued) Eighteenth century England and Germany tavern owners and brewers Nineteenth century product-trade name franchise Singer Sewing Machine Company Auto parts stores Beer and soft drink bottling companies Twentieth century automobile dealerships 1920’s A & W Restaurants

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Three Elements for a Successful Franchise Established identity, exclusive trade name Finely tuned business format Long-term financial relationship between franchisor and franchisee

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Franchising Rationale Faster way to market entry/share Power of advertising Brand awareness equals sales Expanding global markets

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Four Types of Franchise Relationships Manufacturer-retailer franchise Manufacturer-wholesaler franchise Wholesaler-retailer franchise Business format franchise

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Hospitality Industry Franchising Lodging facilities Food service establishments Tour operators Travel agencies

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Global Franchisor Examples McDonald’s Anheuser-Busch KINKOS Holiday Inns Carlson-Wagonlits Travel

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts “An agreement between a management company and a hotel owner for the management company to operate the hotel.”

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contract Services “Services provided by a management company or sold as a package, or separately.”

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts  Management Company Selection Independent management company Chain management company

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Process RFP = Request For Proposal

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Criteria (domestic) Past performance Actual operating results Reputation/integrity Management accessibility Marketing strength Compatibility with property type Contract terms

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Fee Structures: Basic = % of gross revenue Incentive = % related to negotiated profit or net cash flow

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts (lodging facilities - domestic) Fees Basic (1.5% to 5.0%) Incentive (varies) Terms 30 days to 5+ years 5, 10, 15, 20 years

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Technical Services Fees Separate fee Design Planning

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Pre-Opening Fees: Paid to the operators for developing a pre-opening plan, budget, and supervising pre-opening activities.

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts International Criteria: Selection criteria Contract services Fee structures Key provisions Issues

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Selection Criteria: Contracts and experience in the relevant market Availability of qualified personnel Sensitivity of local culture Integrity and reputation Standards of operation

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Selection Criteria: (continued) Proven financial record (UPS) Financial strength Training staff and management local Risk sharing (equity & loans) Performance based fees Term flexibility

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - International Fees: Basic = 2% - 8% of gross revenue Incentive= 0% - 25% of gross operating profit

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - International Contracts Term: 10 to 30 years 10-year renewals

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Financial provisions Administrative provisions Operating provisions Marketing provisions General provisions

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Key Provisions Contract term Management fee Reporting requirements Approvals Termination Operator’s investment in the property Operator’s home office expenses Transfer of ownership

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Key Provisions (continued) Exclusivity Insurance and condemnation proceeds Hotel personnel Reserve for replacement Restrictions Indemnity Technical assistance

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - International Contracts Termination Failure on agreement Option for property sale Bankruptcy or assignment Owners option without cause License suspensions or revocation Operator performance provisions

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Contracts Process Owners meetings (monthly/quarterly) Annual budget reviews Capital/FF&E reviews/meetings Legal issues

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Management Agreement Trends Shorter terms Reduced fees/more incentives Stricter operating performance standards Detailed reporting Operator accountability for charges More flexible termination clauses Greater owner control over money

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies Airlines - leasing/purchases Acquisitions Alliances Marketing Bankruptcy/restructuring Spin-offs

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies (continued) Attractions Ownership Joint-ventures Licensing Acquisitions

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies (continued) Car Rental Ownership/purchasing Joint-ventures Leasing Franchising

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies (continued) Cruise Lines Ownership/leasing Joint-ventures Acquisitions Sub-contracting

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies (continued) Food Service Franchising Leasing Acquisitions Management contracts Ownership Joint-ventures Re-theming

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies (continued) Gaming Ownership Acquisitions Re-development Localization

Hospitality Management Strategies©2005 Pearson Education, Inc. By R.A. NykielUpper Saddle River, N.J HMS - Business Development Strategies (continued) Travel Related Services Ownership Acquisitions Franchising Management contracts Alliances Joint-ventures