To the uninitiated, sighting a Hyatt or Marriott hotel might lead to the assumption that the company owns and brands the hotel. However, the reality is that many global hotel groups operate a management or franchise business model, where they either manage or just brand the hotel, while the physical building is actually owned by a different party. This allows the hotel groups to focus on the business of building brands, global growth, and strong delivery systems while leaving the real estate ownership (as well as the returns on investment) to local parties who have that expertise.
…global hotel groups largely operate a management or franchise business model…while the physical building is owned by a different party.”
The management model means that the hotel company brands, markets, and manages the operations and distribution networks of the hotel. They are directly involved in the day to day operations of the hotel, while the hotel is owned by another party, who are charged a management fee.
The franchise model allows the hotel company to contract its brand name to a hotel owner, for a fee (with adherence to brand guidelines). The franchised hotel will also benefit from the marketing and reservation systems of the hotel company. However, the hotel company is not directly involved in the daily operations of the hotel. The hotel owner can either manage the hotel himself or appoint a third-party to manage it. The franchise model has led to the rise of white-label management companies who are skilled in managing hotels of various brands to the standards and expectations of those brands.
Whether the hotels are franchised or managed by a major hotel group, is largely dependent on the local market. For instance, in more mature markets, such as in the US and Europe, a larger proportion of the hotels are franchised. This is the preferred model as it allows the brands to grow with minimal investment and effort, and in turn, increase the base for franchise fees much faster. The owners have more operational control on their investment (they can have their own asset management team), but also benefit from increased access to the market, with the use of established brand names and distribution networks. Also, the franchise business model increases the market base, thus allowing local third-party management companies to build skills, employ locally, and earn income.
In African markets, particularly in the sub-Saharan markets, the managed hotel model is more ubiquitous. When global hotel brands enter or expand their presence in a new market, they primarily do so with the managed model. These brands want more operational control, and the emerging nature of African markets means a lack of sophistication and the absence of strong local third-party operators who will manage to the standards and delivery that is expected of their brands.
Hence, this recent announcement signing of an agreement between IHG and Valor Hospitality is a positive indicator for African markets. IHG currently operates 26 hotels in only eight African countries (Algeria, Egypt, Ghana, Kenya, Mauritius, South Africa, Tanzania, Zambia & Zimbabwe). Its dominant brands on the continent are Holiday Inn, InterContinental and Crowne Plaza. The deal with Valor could mean adding more than 1,000 hotel rooms in South Africa, Mauritius, Zambia, Kenya, and new countries such as Botswana, Mozambique, and Ethiopia. In 2018, Valor merged with PMR Hospitality Partners, a then South Africa-based full-service hospitality advisory and management company. The merger strengthened Valor’s African presence and built the groundwork for this recent franchise deal.