Pandemic accelerates franchising in Asia

BANGKOK – Thailand’s Fico Corp. made “a conscious decision” to move all its HMAs into franchise contracts beginning 2021. It has been an eye-opener.

Unlike in the United States or Europe, franchising is relatively new in Southeast Asia but gained its biggest momentum during the pandemic.

For one, operators – their corporate and regional offices shrunk due to cost cuts – are more willing to franchise to more experienced owners. On the other hand, those owners have been eyeing the model, not only for lower fees but to sweat their assets harder through direct control.

Fico Corp. is a good example. The Bangkok-based company gained some insights on franchising through its 2015 acquisition of Jupiter Hotels, comprising 26 franchised Mercure hotels in the U.K. Though it exited the joint venture with Singha Estate that bought the chain in 2020, those insights remained.

“We were always keen to see if we could convert our HMAs into franchise agreements, largely on the back of what we had acquired in the U.K.,” said Fico CEO Sanjay Singh in an interview with Hotel Investment Today.

Sanjay Singh

The pandemic accelerated the switch. Negotiations started in 2020 and, from 2021, five Accor properties previously under HMAs were converted to franchises. Three of them were Novotels, one a Pullman and the fifth an MGallery. In addition, from January this year, a Holiday Inn property was also converted into a franchise.

All Fico hotels currently are in Bangkok. The company has also signed two fresh franchise agreements for a Tribe hotel, which is opening later this year, and a Marriott Executive Apartments that is under development as part of its Town Hall project in the city.

In addition, it owns five Red Planet franchised hotels. In all, the company currently has around 3,000 rooms in its portfolio.

“We realized there were many areas where we as an owner could control operating expenses in a better way through franchising,” Singh said. “This came to the fore when you’re going through a crisis like COVID. You had to look into the business model differently, manage your costs carefully.”

Subsequently, Singh restructured the hospitality operations into two clusters, each with a vice president and support staff who oversee four or five properties. This removed the need for a GM in each hotel, while functions such as sales and marketing, revenue management, HR, legal, IT, engineering and accounting were also centralized. “It’s a huge amount of savings,” he said.

On lower franchise fees, Singh said “there’s a fair amount you pay on the gross revenue, but you don’t have to pay on F&B and you don’t necessarily have to pay incentives.”

The savings are from management fees, manpower costs, lower operating expenses, better utilization of some of the public spaces into retail [and other income sources], Singh added.

A source from a chain said franchise fees could work out to be 30% lower than management fees.

Early returns

It’s still early days to compute the full savings that could be achieved through franchising as business started to return only from October 2022 when Thailand fully reopened to international travelers. However, Singh is heartened to note a 15% savings thus far, although he pondered if this was due to a reduced headcount.

“Our headcount at the 325-room Pullman [Bangkok Grande Sukhumvit], for example, was 360-plus people prior to COVID. This became half. So, whether the savings we’re seeing are sustainable or not remains to be seen,” Singh said.

You are actually ensuring the properties run well and are well maintained, and that expenses are well controlled. You can’t point fingers at anyone else.

Sanjay Singh

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Singh added that Fico did put together an interim budget for six months from June to December 2022. “Everyone was a bit cautious and conservative, but we were 15% to 20% above the budget in revenue and GOP margin on the back of November and December, which were really good months,” he explained.

Singh expects a further jump in GOP margin this year.

“We've done our 2023 budget. It’s a participatory process with both the vice presidents and the respective teams so that we all are aligned in delivering the numbers to the ownership,” Singh said. “Moreover, the KPIs are set such that performers can get a fair amount of incentives and bonuses linked to the bottom line. If we hit the budget numbers, then I think we should be seeing a jump on our GOP margin.”

With franchising, Singh said, Fico is not finding holes in someone else’s model. “You are actually ensuring the properties run well and are well maintained, and that expenses are well controlled. You can’t point fingers at anyone else,” he said.

Making the switch

In making the conscious decision to move to franchising, Fico had a few things going for it. All of its operating hotels are in Bangkok, literally within a five-kilometer radius of the headquarters, and Fico was “pretty much hands on.”

The switch was also made during a slow period, allowing team members to adjust smoothly.

Having a critical mass of hotels helped in negotiations. For all their willingness to franchise, chains aren’t so eager to convert HMAs into franchise contracts.

“The brands were used to the stream of income for the duration of the management contract. Why would they want to let it go? So, it took a while to get them to agree,” Singh said.

One win-win tactic was to offer pipeline growth, as Fico did by signing the new Tribe hotel franchise deal with Accor. Marriott was reluctant to franchise the Marriott Executive Apartments as it’s the chain’s first relationship with Fico. In the end, both parties settled on a 20-year franchise contract – plus a managed JW Marriott in Samui which is expected to start construction in 2024.

As well, in cases where the HMA had just four or five years left to go, they were reset for 10 years.

But while the transition is going well, Singh is under no illusion there will be challenges. His biggest concern is talent.

“It’s a people business and you rely on the team, but it’s difficult to get people who are trained and who can deliver, especially on the F&B side,” he said. “In this model, we have to be responsible for bringing in all talent. I can’t ask Accor that, hey, this manager is not working out, better replace. We are fortunate that we have been able to find talent, but these days people change jobs every three to four years. So, we need to constantly bring in people who can be groomed.”

Accor’s senior vice president development Southeast Asia, Japan and Korea, Andrew Langdon, said 15% of the portfolio in this region is now under franchising.

“More than 20% of signings in 2022 were a franchise,” Langdon said. “We expect this proportion to steadily increase in 2023 and beyond as we expand our franchise portfolio in our midscale and economy brands.”

The migration of hotels from management to franchise in Thailand, in particular,  is “one of the biggest market shifts,” said Bill Barnett, managing director of hotel investment consultancy C9 Hotelworks. “We see this in most major Thai destinations. Many HMAs built or signed in Thai tourism boom in the early 2000s came to the end of their terms. The outcome of the last 15 to 20 years is that owners have learned the business and now have the knowledge and experience to manage the day-to-day of their hotels. What they need is global brand recognition and distribution.”

For many owners it’s the ability to drive better control of expenses and bottom-line management, Barnett added. “It’s not necessarily the fee parity but the ability to be laser focused and drive bottom lines, which matters the most,” he said.