Franchised Hotels lose Money due to Impact

The cost of impact to existing franchised hotels is substantial but it may not be crippling, based on analysis of ten years of sales results from hotels in Texas. The study, issued by Cornell’s Center for Hospitality Research (CHR), is the first to attach actual figures to the long-running discussion of impact, which occurs when a franchisor licenses a competing, same-brand hotel in a market where it already has franchisees.

Written by Arturs Kalnins, Ph.D. an associate professor at the Cornell School of Hotel Administration, the study found that existing franchised properties lose on average 2.7% of revenue when a same-brand hotel opens nearby. That figure is much smaller when a competing brand opens within the trading area, regardless of whether that brand is licensed by the same franchisor or a competing franchise organization. Although the figures are for Texas only, there is no reason to believe that these numbers are substantially different in other markets in the United States.

The study employs an unusual and useful definition of proximity. Rather than apply an arbitrary distance radius or include hotels in a particular metropolitan area or ZIP code, the study examines the impact of new chain hotels locating within a distance of ten, fifteen, or twenty hotels. This approach allows for large trading areas, as in the case of hotels on interstate highways, or for small but densely populated trading areas, such as in central cities. 

The study, which used a decade's worth of actual operating results from 1,315 hotels affiliated with eight franchised brands and two company-owned flags, found the following effects of impact:

- For same-brand franchised properties opening no more than ten properties away, revenue for the existing hotels dropped $66 per quarter for each available room.

- For an average-size hotel in the study, comprising 110 rooms, the loss translates to a revenue reduction of $7,360 per quarter, or 2.7% of the average franchised hotel's revenues.

- Competing brands in the same product tier caused a smaller revenue drop, of $36 per quarter for each available room.

Looking at those results, Kalnins commented that it’s clear that impact declines with distance. Hotels located more than twenty properties away from an existing operation, for instance, have a much smaller effect on revenues than do those in closer proximity.

“With revenue losses calculated at 2.7% it’s hard to argue for legal protection against impact,” Kalnins concluded. “However, the results presented here do emphasize the need for franchisees and the franchise systems to take the possibility of impact seriously. Franchisees opening a new hotel should expect a same-brand hotel to appear nearby in the future, even if there is none at the time of founding. Any revenue projections franchisees make should take into account a possible 2 to 3% hit at some point due to impact. If the property would no longer be sufficiently profitable after such a hit, they need to negotiate a large excusive territory with their franchisor or not develop the property at all.”

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