Spending on hotel brand marketing funds, which are utilized to deploy commercial strategies, was much simpler 30 years ago. By understanding that history, hotel franchisors can retake some measure of control.
The health of a hotel brand is measured by its ability to maintain segment leadership as well as strong owner loyalty.
To achieve strong brand health, franchisors need a centralized marketing strategy and, of course, funds to benefit the system of hotels. Hotel owners contribute to these marketing funds every month, thereby supporting the growth of their investment. Through continuous, efficient spend strategies by the franchisors, revenues are generated for the hotels. Over time, a portion of these revenues also cycle back into the marketing funds for reinvestment.
From an owner’s point of view, the franchisors are stewards of the marketing funds that deploy commercial strategies, which deliver revenues to the hotel. A good steward delivers these revenues at the lowest fees.
However, modern-day franchise agreements explicitly state that the franchisors have no direct responsibility to a given franchisee to invest funds from an owner of “hotel brand X” into that brand’s marketing fund. The funds can be distributed across multiple brands, and also used for a wide variety of “marketing activities” at the sole discretion of the franchisor, including administrative costs.
In addition to this potential dilution of the marketing funds, especially for the larger brands, there are other complexities that have come into play in recent years which have brought the management of the marketing funds into the spotlight.
Let’s once again study the past to understand the future.
Here’s a brief history: Marketing funds have always existed. However, marketing fund spending was far simpler 30 years ago. If there was an expense, it was either paid for by the franchisor or the marketing fund. For example, research costs to launch a new brand were paid by the franchisor (i.e., costs that produced intellectual property), while advertising campaigns were paid by the marketing fund. Over time, as competition grew, franchisors started to create more brands to support their shareholders, and they took many of their brands to new markets. This required a larger marketing infrastructure, more innovation to remain competitive, more people to support that infrastructure, and technologies to support those people and brands. As costs and complexities increased, franchisors had to decide whether certain expenses were paid (1) by the franchisor, (2) by the marketing fund, or (3) by sharing the cost between the franchisor and marketing fund.
In theory, the shared payment of an expense should benefit both the franchisee and the franchisor. Also, the franchisor’s shareholder value is impacted positively or negatively by this decision.
To further add to these complexities, while the franchisors were balancing the use of the marketing funds to support their growing platforms, the online travel agencies emerged.
As I shared in my last column, OTA growth was largely left unchecked, because franchisors earn revenue on a topline basis. A decade later, franchisors realized that OTA contribution could very well pass brand.com contribution. Large OTAs exceeded a $20 billion market cap, and it became difficult, if not impossible, to take back control. As it is commonly said, “you can’t out-OTA the OTAs.” The OTAs’ strength not only diminished owners’ margins, but changed the cost of digital marketing astronomically.
The marketing funds were already fully leveraged and couldn’t afford to compete with the OTAs on the digital turf, so franchisors decided to employ a fourth costing method: passing the digital marketing costs to owners. Under this model, franchisors continue to enhance their businesses, intellectual property portfolios, technologies and shareholder value, while the owner is subsidizing marketing activities through additional pass-through fees beyond the monthly assessment. (And yes, we know that competing brands—or competing systems—perform differently from one another.)
Today, most license agreements look the same and charge very similar fees. Arguably, the difference between highly preferred and less preferred brands is the ability of each franchisor to effectively and efficiently manage their respective marketing funds, like a low expense ratio mutual fund, to produce premium RevPAR, RGI, margins and eventually higher asset valuations for owners. Anything less overburdens the marketing fund, becomes self-defeating, and eventually impacts that system’s ability to remain competitive.
The equitable strategy, management and deployment of marketing resources, whether in the form of traditional assessments or the newer pass-through costs, is critical to the success of any franchise system, including the hotel owners. Owners will build brands with the highest potential to grow their money, and an effectively managed marketing fund is an important part of that equation.
Deepesh Kholwadwala is the President & CEO of Sun Capital Hotels, owning and managing multiple brands, with specialization in in hotel feasibility, planning, financing, construction, and operations. Deepesh is also serving as the 2018 Chair of the IHG Owners Association and can be contacted at email@example.com.
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