Hotels, franchising and third party operators: structural trends in European hospitality operations


How third party hotel operators are unlocking the full potential of properties – and optimizing returns

In the last decade, most international hotel operators have focused on developing their brands rather than the operational management of hotels. As a result, they are now using the franchise model, apart from their upscale and luxury brands, particularly in flagship locations, where they are reluctant to lose the control that direct management ensures.

Consequently, hotel owners face a scarcity of international brands able to actually perform the operational management of their hotels with the degree of specificity and hands-on management that optimizing revenue and value creation require.

This gap presents an opportunity for third party operators. Their business model involves providing the full management of hotels, through either leases or management agreements with owners, and so obtain a franchise from international brands. They can then offer to owners the same range of marketing tools for the hotels that international brands provide. Third party operators can also combine this offer with integrated development, design and technical teams that possess the skills and local market knowledge that most international brands do not. Their assistance to owners then covers the full spectrum necessary for their (re)development projects.

The process begins with positioning a project in its environment and exploring new segments before moving to more precise definitions in the planning authorization phase. The added value of a third party is their ability to take on responsibility for incorporating all possible details of the standards and technical specifications imposed by an international brand’s franchisors, which they have become familiar with after developing hotels in similar schemes. Finalizing a project to this level of detail at the authorization phase enables owners to better negotiate contractual arrangements for construction work. This approach also significantly reduces the possibility of a band compliance dispute with the franchisor when a hotel opens.

Expanding the franchise model: new opportunities for third party operators While the franchising business model is less developed in Europe (estimated at 40%) than the USA (estimated at 70%), it’s increasingly seen by hotel chains as a way to expand their brands and a way for owners to retain full control over operations.1 At the same time, brands are key for international operators to quickly enter new markets. Brands are more important than ever because they provide owners with the resources to keep up with new technology standards where they operate.

“ Because of the relative flexibility of the franchise model, third party operators should increasingly benefit from the opportunities presented in the hospitality sector.”

As a result, the third party hotel operators familiar with certain brands have become the key to developing relationships between those international brands and hotel owners on a large scale. Ultimately, third party operators only develop relationships with a handful of brands for which they fully understand their market positioning and standards and which, combined in the portfolio of hotels they manage, make them successful in the territories where they operate.

Brands move towards non-traditional hospitality

In European cities, the rise of new accommodation offerings led by Airbnb and the enormous growth of this market have triggered the appetite of competitors in traditional hospitality segments. Indeed, international hotel chains have identified that their combined client base and marketing platforms are a substantial asset and competitive advantage to enter this market. In addition, administrative restrictions that may exist in some locations – imposing prior licensing to property agents and/or intermediaries – are likely to be overruled as a result of a decision by the European Court of Justice dated December 19, 2019. Based on the EU e-Commerce Directive that instituted free circulation of electronic services, the ECJ ruled it would be illegal for any country within the EU to impose any license for the carrying out of such activity.

Overcoming this new competition from international brands, which in some cases are marketing their hotels through a franchise, will pose a challenge for third party operators. However, their ability to adapt and develop attractive products more closely related to the markets in which they operate, combined with the economic necessity for international franchisors to protect and promote the brands on which they base their networks, should enable them to continue to grow market share.

Serviced apartments: towards ‘home-living’ style

Finally, the serviced apartment market has been the fastest-growing hospitality sector over the last few years. It went from small-scale owner/operators to being dominated by high-profile operators with new lifestyle brands. The latter offer a strong alternative to Airbnb and similar providers with their innovative concepts featuring home-living style. The market is also consolidating, with more than 50% of service residences now being branded.2

This handful of brands, emerging strongly, will be challenging competition for third party operators who are striving to develop new concepts and provide an outstanding customer experience. However, because of the relative flexibility the franchise model permits – in terms of duration and the diversity of brands available to fit with the particular positioning of each hotel – we believe third party operators should increasingly benefit from the opportunities presented in the fast-moving hospitality sector.

“ In the last decade, most international hotel operators have focused on developing their brands rather than the operational management of hotels.”