NO CLEAR ANSWER TO IMPACT ISSUE
The most contentious issue between franchisors and their licensees in the past 20 years has been impact, or how the performance of one hotel is affected when another property with the same flag opens nearby. A new study from Cornell Hotel School Professor Arturs Kalnins seems to ride the fence on the issue. After studying 1,315 hotels under eight brands over 10 years in Texas, he concluded that revenues go down for an existing hotel when a same-brand property opens nearby.
The study found that existing franchised properties lose on average 2.7 percent of revenues when a same-brand hotel opens nearby. Perhaps surprisingly, that figure is much smaller when a competing brand opens within the original property's trading area, regardless of whether it is licensed by the same franchisor or a competitor.
“With revenue losses calculated at 2.7 percent, it's hard to argue for legal protection against impact,” says Kalnins. “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 two to three percent 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 larger exclusive territory with their franchisor or not develop the property at all.”
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