FRANCHISE FEES ARE increasing faster than RevPAR, due primarily to royalty payments, according to an analysis by Robert Mandelbaum, director of research information services for CBRE Hotels’ Americas Research. As a result, hotel owners are reassessing the costs they incur to grow revenue, Mandelbaum said.
The compound annual growth rate for franchise fees between 2010 and 2016 in a sample of 1,587 U.S. hotels was 6.5 percent, according Mandelbaum. By comparison, RevPAR for the hotels in the same sample saw a CAGR of just 5.5 percent.
Of the four components of those franchise fees (royalty payments, loyalty program fees, marketing assessments and reservation system fees), in 2016 royalty payments made up the greatest percentage of the fees at 29.5 percent. They were followed by loyalty program fees at 27.9 percent, marketing assessments at 25.6 percent and reservation fees at 17 percent, Mandelbaum said.
That is a change from the first year of the study, 2010, when guest loyalty program fees led the costs with 27.3 percent while royalty payments were 26.8 percent. “The increase in franchise fees has clearly been driven by the royalty payment component,” Mandelbaum said. “From 2010 through 2016, franchise royalty payments have grown at a CAGR of 8.1 percent. This is 260 basis points greater than the growth in rooms revenue during the same period. Guest loyalty program payments (6.8 percent) also increased at a greater pace than rooms revenue the past seven year. Lagging in growth were marketing assessments (5.9 percent) and reservation fees (4.2 percent).”
The limited potential for revenue growth over the next few years is causing hotel owners to pay more attention to costs associated with earning revenue, Mandelbaum said. “They want a better understanding if the investments they are making in distribution channels, management and their brand are providing a sufficient payback,” he said. “When assessing the return they are getting for the franchise fees paid to their brands, owners also have the ability to dissect the value of the individual components. This enables them to make more specific comparisons to alternative brands, reservation systems, referral sources, management options or even soft-brand alternatives offered by the franchiser.”