In the ever-evolving landscape of hospitality, hotel franchising remains a compelling avenue for hoteliers, entrepreneurs, and investors seeking to capitalize on established brands and industry expertise. By carefully weighing the benefits, challenges, and emerging trends, stakeholders can navigate the complexities of hotel franchising and unlock opportunities for long-term success. In this article, Wisefields Partner, Bilal Ambikapathy, shares his insights on the rise of franchises in the region, and why this model may be one to become the new norm.
Historically, hotels across the Middle East have been managed by international operators pursuant to the terms of a hotel management agreement. Hotel management agreements place legal risk and responsibility of the hotel business on the hotel owner, while retaining operational control and management with the international operator. Hotel staff are all employees of the hotel owner and both operating and employment liability remain with the hotel owner despite the owner having no operational control or management. The operating licenses are held in the hotel owner’s name.
This approach to the apportionment of risk has long been of concern to hotel owners and the implementation of control mechanisms and oversight into a hotel management agreement remain the central focus of negotiations prior to execution of that agreement.
With the growth of portfolios of hotels held by single owners and the advent of sophisticated asset management teams within the corporate structure of hotel owners in the region, the application of the franchise model to hotel operations has become more viable and a number of international operators are now actively promoting hotel franchises across the Middle East, in particular in Saudi Arabia and Egypt.
The hotel franchise works best when the hotel owner has an experienced team of asset managers and hotel staff under its employment that can themselves perform the operational function of the hotel without the supervision and control of the international operators. This gives the hotel owner the freedom to set their own annual budget, recruit and manage hotel staff, control FF&E expenditure and capital improvements, implement more aggressive bad debt and credit control policies and importantly control bank accounts and withdrawal from those accounts.
In turn, the franchise agreement shifts the focus away from management and instead deals extensively with intellectual property, brand and brand standards, access to the operator’s booking and marketing systems, training and support, reporting and disclosure of financial information and fees.
Because of the disclosure requirements mandated by franchise laws in the region, international operators are required to disclose in full at the outset, prior to execution of the franchise agreement, the entirety of their fee structure.
