Management versus franchise

Recent trends strongly suggest that hotel chains prefer the management route instead of the franchise model to ensure the mushrooming of their business. By Dinkar Farwaha

Industries globally have grown phenomenally by using the 'franchise' model of business. To fuel their expansion, branded companies have consistently offered franchise services, which have often proven to be a win-win situation for both the franchiser and the franchisee. In the hospitality industry too, franchising has proven to be a profitable business endeavour. Consistency in product, coupled with strict regulations by the government on hygiene and health has helped the business flourish, especially in western countries. However, in India, the franchise model itself has not been a sure-shot success. Let's first look at how the franchise model made its foray into the Indian hospitality sector.

Venture of franchise

Franchising as a concept evolved in the Indian hotel industry in the1990s. In the last decade or so, various companies in the country have gone in for the franchise route. In the food and beverage (F&B) sector, Vam organic group signed an agreement in the mid-'90s with US-based Domino's Pizza Inc, that gave it authorisation to franchise the brand in the country. Post the mid-'90s, the F&B business (especially theme-based restaurants) flourished under the franchise model. Then Pizza Hut made its foray into the country with the opening of its first franchise outlet in Pune. The new millenium witnessed restaurant chains like Nirula's, Copper Chimney, Geoffrey's and Kamat's expand their business portfolio by means of franchising. More and more restaurants started expanding their business in the country through this model. Moreover, many local restaurant chains like Rajdhani gained a foothold in the western market by offering franchise services.

In the lodging sector, Sarovar hotels started the franchise trend in the country when they became the master franchisee for Carlson hospitality in India for a period of 50 years. Many hotel chains followed its footsteps and aggressively expanded in the country through this route. However, chains like Taj Palaces, Hotels & Resorts and Oberoi Hotels & Resorts, continued to follow the management route, almost ignoring the franchise model owing to the probability of product inconsistency and further quality management issues. With the passage of time, chains like Six Continents Hotels, Carlson Hospitality and the Inter Continental Group (IHG) also withdrew the franchise service from the Indian hotel sector, sticking solely to management tie-ups. Says Paul Kirwin, president-Asia Pacific, Carlson Hospitality Worldwide, "Our original strategy to fuel expansion in Asia was to follow the franchising route. That worked well until Asia's 1997-99 financial crisis, but when we reviewed our strategy, we decided to come back as a manager rather than a franchiser. We should have done that a lot earlier." Kirwin's remarks and the recent trends strongly suggest that the franchising model of business has taken a backseat especially in the hotel segment. It is quite clear that the management concept has a clear advantage over its franchise counterpart, especially in the context of the Indian hotel sector. A vital question that emerges is what will future trends. Will the franchise model of business fall by the wayside? Will a franchise arrangement coupled with management be the recipe for success for the hotel industry?

Reckoning the future

Sanjay Sethi, CEO and managing director, Berggruen hotels, is of the opinion that the future clearly lies in the management contracts. "Hotel operation is a critical process where efficiency has to be spot on and this is where the management model stands out," he says. According to Sethi, there is another factor that will tend to force management contracts to grow, i e there are number of properties developing that have a fewer number of operators. "There would be a challenge for the owner to get the right management partner in order to ensure that the hotel business results in profitability, else in the long run, owners with inferior management knowledge would find it harder to achieve targets," adds Sethi.

Further, Indian management companies, especially those who have vested interests in the country with their own managed properties, elaborates Sethi, will become stronger as compared to those who are merely hotel management companies with investment gone into the process. "In the former case, management companies will be conscious of the results, and therefore reputation, that will build their brand image. This accountability factor coming from within will also help owners of properties secure a stability they are always looking for from their investments," he added.

Factors like ability to maintain standardisation at all levels, high service standards, strong sales and marketing network solutions and quality assurance will continue to offer management model distinctive advantages over its franchise counterpart and therefore more and more hotels would go in for it. However, because of it's ability to set up a larger number of business units in a comparatively shorter time period and offer a higher return on invested capital, the franchising model would also very much continue to be utilised by the lodging sector. Market recognition, value attachment and an assured market will drive the properties to follow the franchise route. Furthermore, in the case of smaller properties and also in the heritage segment, a franchise agreement would be the in-thing. Says Rakesh Mathur, president, WelcomHeritage, "In the heritage segment, franchise is a model is as strong as the ownership model. Owners are usually associated with these properties in a sort of more direct manner and therefore expand their business by using the franchise model."

Only time will tell whether companies will prefer the management model over the franchise agreement to expand their portfolio. But the fact of the matter is that for growing their business, a fairly large number of companies will continue to take the management or the franchise route rather than going for complete ownership.

As Anil Madhok, managing director, Sarovar Hotels, concludes "Most hotel companies have and will continue to take the management and franchising route with a few opting for complete ownership. It is not possible to expand one's portfolio extensively without choosing either the management or franchising route."