Prioritizing fair treatment for all, AAHOA moves full speed ahead
During the depths of the pandemic, the hospitality industry’s top priority was banding together to speak with a unified voice, pressing lawmakers for aid in dealing with the existential threat of COVID-19. But, with the industry’s recovery underway, AAHOA is shifting strategies, with a renewed focus on helping franchisees better understand their franchise agreements and advocating for more fairness and transparency for the entire franchise system.
That’s encouraging news for AAHOA Members who feel as if they’ve been swimming against a cascading tide for too long. Locked into long-term franchise agreements, some hoteliers feel they have little recourse when a franchisor implements business practices they perceive as unfair, charging fees that were never disclosed, or mandating vendors that don’t provide competitive pricing or service.
In April, AAHOA revised its 12 Points of Fair Franchising (AAHOA.com/12Points), a document originally published in 1998 to establish best practices for the hospitality franchise system. This document serves as an educational primer for hospitality franchisors and AAHOA Members, steering them toward a better understanding of franchise agreements that benefit both hoteliers and hotel brands.
Looking ahead, AAHOA Members, including those on its Franchise and Industry Relations (FAIR) Committee and the 12 Points Franchise Reformation Ad Hoc Committee, are calling for the association to emphasize the 12 Points of Fair Franchising (AAHOA.com/12Points) at industry events and in interactions with hotel brands. “Many AAHOA Members, including my parents from the first generations, lacked the knowledge to read and understand franchise agreements,” said Dr. Jay S. Patel, Author (“Franchising Is it Fair? How to Negotiate an Equitable Franchise Agreement”) and AAHOA Franchise and Industry Relations Committee Past Chair. “Our second and third generations are much more educated and sophisticated and better understand what they’re signing. The 12 Points help guide prospective and current franchisees on equitable franchise agreements.”
The goal is to ensure that franchisees and franchisors alike have a sustainable business model in the long term, creating more stability for hoteliers, “the biggest investors” in a hotel’s brand, according to QHotels Management Chief Executive Officer Vimal Patel, himself an AAHOA Member. The LaPlace, LA-based company owns and operates about a dozen hotels in Louisiana and Texas.
V. Patel, the winner of the 2022 AAHOA Award of Excellence, said hotel brands had been charging franchisees excessive fees prior to the pandemic, but the issue reached a tipping point when COVID-19 sent occupancy rates tumbling, leading franchisors to seek out new revenue streams.
Last year, he was among the dozens of hoteliers who filed lawsuits in federal court against Intercontinental Hotels Group and Choice Hotels International, accusing the hotel giants of exploitative business practices.
“The brands are able to implement and enforce a lot of these changes, and the benefits are one-sided,” said V. Patel, whose suit deals only with IHG. “These franchisors keep piling fees upon fees to the point where it’s no longer a profitable business for franchisees. Those small-business owners often lack the resources to defend themselves, so I wanted to take a public stance against these unfair business practices.”
The lawsuits claim that those two hotel brands require franchisees to use specific vendors and then receive payments from those vendors in exchange for giving them preferred status. As a result, according to the suit, franchisees often pay more than their peers for the same products and services, or they receive lower-quality goods and services, Patel said.
As an example, he pointed to his company’s Holiday Inn Express & Suites, a 91-room hotel in LaPlace. Just prior to the pandemic, QHotels renovated the facility at a cost of $1.8 million, but Patel said the job would have cost only $1.2 million if the company had its choice of vendors, including furniture, fixture, and equipment vendors.
Similarly, V. Patel said some of his hotels pay more for telephone and Wi-Fi service than neighboring hotels and get lower levels of bandwidth despite using the same vendor. In addition, IHG mandates that franchisees use a specific credit-card processor even though the bank charges them 8 cents per transaction as a technology fee, he said. Meanwhile, some other branded properties using the same bank pay no fees for that service, V. Patel added.
In separate press releases, IHG and Choice said they’re committed to the success of their franchisees and dispute the lawsuits’ claims about unfair business practices. IHG said it was helping hoteliers get through the pandemic by relaxing brand standards, discounting fees, and improving procurement terms with suppliers. Likewise, Choice said it suspended some fees and permitted owners to defer others.
But, if franchisors take payments from vendors, they would be violating a “cardinal rule” of franchising, according to Joel Libava, a franchise consultant who reports on the industry at TheFranchiseKing.com. When hoteliers pay royalties and fees in exchange for a brand’s name, they should expect franchise companies to use their buying power to get them discounted products and services, Libava told ABC News last year.
V. Patel echoed those sentiments, noting that hoteliers who weathered the worst of the pandemic are now facing higher costs for labor, insurance, and essential products. Throw in excessive fees from hotel brands, and owners face an uphill battle toward profitability, he said.
“The whole objective is to level the playing field so both sides are benefiting,” V. Patel said. “We shouldn’t be beholden to the hotel brands’ stock prices or their CEOs’ incentives. Both sides need each other, so all we’re looking for is to have fair and ethical business practices and to be able to work together cohesively.”
Maulesh Patel, an AAHOA Member whose group owns and operates five hotels in New Jersey and Pennsylvania, said AAHOA’s shift in strategy takes on added importance given the recent mergers and acquisitions in the hotel industry.
During the past six years, the notable headlines include Choice’s acquisition of Radisson Hotel Group Americas for $675 million in June, Wyndham Worldwide Corp.’s $1.95 billion deal for La Quinta in 2018, and Marriott International’s purchase of Starwood Hotels & Resorts for about $13 billion in 2016.
“There has been so much consolidation recently, so these companies are getting bigger and bigger,” M. Patel said. “AAHOA Members are basically at the mercy of these large companies because they don’t have much leverage, so AAHOA is moving in the right direction by advocating for franchisees. When a franchisee signs an agreement, the hotel brand should honor it for the term of the agreement. It shouldn’t be changed midway through.”
M. Patel said hotel brands that embrace AAHOA’s 12 Points of Fair Franchising are analogous to major companies that have incorporated ESG principles into their business operations. By focusing on their environmental, social, and governance impacts, these corporations are striving to maintain profitability while operating ethically and sustainably, he said.
“AAHOA is telling franchisors, ‘Hey, pick up on these 12 Points of Fair Franchising because they’re actually good for your business,’” he said. “If you don’t treat your franchisees fairly, how can you expect your brand to succeed long term? I think it’s important for AAHOA to continue to highlight the 12 Points at events across the industry.”
Neil Patel, an AAHOA Member based in Raymondville, TX, with ownership stakes in half a dozen properties, said a number of factors are eating into sustainability, including the structure of some hotel loyalty programs. When members check into his La Quinta, for example, the hotel must earmark 5% of that revenue for the loyalty program, awarding points to members, he said.
Despite paying that fee, hoteliers may face penalties of $500-$1,000 if they fail to meet their quota for new enrollees in the loyalty program, N. Patel said. That practice penalizes hoteliers who focus on developing repeat business since they can sign up a customer for the loyalty program only once, he said.
Furthermore, if a hotel has an especially strong month or quarter in terms of signups, then the brand might establish that figure as the hotel’s new benchmark, creating unrealistic expectations and setting up the hotel to incur penalties, N. Patel added.
“The points are at the cost of the property, and we’re OK with that, but the penalties are just a stick to beat you with,” he said. “Some of the brands label it as a retraining fee or a missed-enrollments fee, but you don’t get anything in exchange for paying that fee, and it’s an arbitrary benchmark. There’s no sympathy from the brands on that issue.”
When guests redeem their loyalty points, hoteliers often get a flat fee from brands that may not even cover the costs associated with occupancy, N. Patel said. In most cases, the level of reimbursement given to hotel owners has remained flat through the years, failing to keep pace with inflation, he said.
“We’d like to see the reimbursement rate be a true reflection of today’s costs of operations,” N. Patel said.
Hotel brands typically get a share of the commission when guests book rooms through online travel agencies, so franchisors may be disincentivized from spending money to drive customers to their own websites, N. Patel said. Some brands give inventory to OTAs and may demand rate parity between those websites and their own sites. In turn, the sizeable OTA commission leaves hoteliers with a smaller slice of the pie, he said.
“The brand is making money on royalties whether the booking comes from Brand.com, a walk-in, or the OTAs, but they’re going to get extra revenue if it comes from the OTAs, and they don’t disclose how much that revenue share is,” N. Patel said. “Part of the fees we pay to brands is supposed to be used to drive direct bookings, but we don’t see any marketing nowadays.
“Before the pandemic, you would see ads on TV, online, in print publications, and on the radio,” he added. “We don’t see any of that now because they’re relying on the OTAs.”
Another area of concern is liquidated damages, or the revenue a hotel brand misses out on when an owner terminates a franchise agreement prematurely, N. Patel said.
If a hotelier exits the deal six years early, for example, the franchisor may be entitled to three to six years of lost royalties and fees. However, if a new franchisee enters that same market before the three-to-six-year period has elapsed, the hotel brand actually will get some of the money it was expecting. Still, the franchisor gets to keep the liquidated damages collected from the original hotelier, essentially double dipping in the same market, N. Patel said.
Patel, who serves on AAHOA’s FAIR Committee, said the group will continue to make recommendations to the association’s board. The Franchise and Industry Relations Committee (FAIR) is laser-focused on addressing a plethora of brand issues that AAHOA-Members consistently face while actively achieving milestones based upon an aggressive list of goals and objectives set forth for the committee,” said Pimal Patel, 2022-23 FAIR Committee Chair. “I am honored and grateful for the work that the committee is doing and their time and effort into AAHOA’s fair franchising initiatives, but more importantly, their contributions to effect meaningful change for AAHOA-Member franchisees everywhere.”
Patel praised AAHOA for shifting its focus toward franchisee advocacy and said members should benefit from the leadership of fellow Texas hotelier and AAHOA Chairman Nishant (Neal) Patel.
“Members have elected the right leaders as Officers and Board Members in AAHOA, and they’re more accountable to members now,” N. Patel said. “We’re not only an association for the hotel industry; we’re the only association for owners in the hotel industry. They understand that now, and they have our backing.”