Franchising in The Chinese Mid-market Hotel Industry

There is a need to explore the dimensions that influence some of the decision-making processes of Chinese mid-market hotels as they get into franchises. It is necessary to conduct a benefit analysis of franchising as a means of participating in hotel operations in the Chinese market. This encompasses all the businesses in the hotel industry that are either making an initial entrance or expanding operations from their present Chinese base. Some of the greatest drawbacks, also doubling up as negative dimensions, include adapting to the preferences and tastes of the market, acquiring reliable business partners, and protection against IPR violations. The other further dimensions include stiff competition, value added services, the legal environment and customer service.

Introduction

Franchising, despite having enjoyed a relatively obscured existence in the early 90s, has experienced a wildfire success in the recent years. This article shares some of its findings from reliable retrospective studies on franchising in the Chinese mid-market hotel industry. With over 10% of its hotel industry having been taken over by franchised hotel chains, China currently has one of the world’s fastest growing franchise industries in the world. Additionally, the country enjoys playing the world’s largest host of the franchise industry with over 200,000 franchised retail outlets belonging to almost 2600 international brands (Chao, 2008).

Led by the historical success of brands such as Lining and Nike sportswear, the Chinese franchising industry has been expanding at an intriguing rate of over 35 percent per annum over the past decade. Hotel industry franchising hit Chinese popularity in the early 00s as businesses in the sector began reaping the benefits of the model. Franchises act as strategic corporate alliances that facilitate an investor’s capability to participate and operate in an established organization with a heavy customer base (Altinay, 2003). A company could also have other desirable characteristics such as successful business plans, efficient distribution systems, and financial commitments. There are a lot of world-renowned hotels such as the Hilton and Intercontinental Hotels that utilize the franchise system. Unlike China, the US hotel franchise industry booms at a record high of over 70%. These work as a chain of properties interconnected together through a single brand name with central management (Hoover & Ketchen, 2003).

A majority of American entrepreneurs who purchase and open hotels realize the many advantages of belonging to a single franchise. They include instant brand recognition for new properties and the credibility of association with renowned entities. Whether in China or the US, investors are faced with the urge of selecting the best franchise from selected list. They consider, among others, issues such as location, the target market, the cost of franchising, general reputation, and the financial standing (Hu & Meng, 2004). The following are the dimensions that influence the decision making process of adopting franchises by mid-market hotels in China.

Available Background Information on Franchises

Choosing a hotel franchise in China requires an adequate amount of background research. This calls for the creation of a foundation that will see the adequate analysis of the property in question. It is, therefore, vital that hoteliers consider additional dimensions such as location and the target market. Therefore, a majority of hotel owners in China would think twice about franchising with brand names notable only to the western world. Similarly, hotels seeking to identify themselves with the middle class usually avoid franchises renowned for the rich and the famous. This is reason enough why mid-market hotels in China avoid brand names such as Serena, Intercontinental, and Hilton Hotels (IHG, 2012).

The franchising royalty fees and other expenses, inclusive of the general system reservation, required prior to franchising can prove steep. It is, therefore, worth conducting a background check on all existing chains to ascertain which one offers the best value for franchising. Startup costs in China tend to vary vastly depending on a chosen brand’s value and global reputation. The global hotel industry consists of a number of notable companies that offer services that assist franchisees evaluate their affiliation options (Inma, 2010). When performing their cost-benefit analyses, it is vital to consider the number of new consumers a given affiliation can attract. Background studies can reveal areas that would expose a franchisee to unfavorable regulations hidden in the franchise contract. Different hotel franchises have been noted to poses unique policies identified to affecting the operations of an interested hotel property. A majority of franchises, for instance, usually require a service of standardization that might not rule in the advantage of potential owners (JLJ, 2007).

Similarly, most franchises usually poses regulations attached to the prominent placement of the franchise logo in a way that might affect the brand of the given property. Furthermore, prior research would reveal that immature termination of franchise contract usually results in dire penalties. Similarly, legal documents associated with franchising and licensing often shields the affected franchisor from court battles. Therefore, the above dimension should always be considered when selecting a hotel franchise in the Peoples Republic of China (Jackson, 2006).

Financial and Economic Health of Potential Franchisors

Affiliating with a given hotel franchise has historically proven to be a lifetime investment. The economic health of potential franchisors should be considered prior to entering into affiliation agreements. This dimension is important in a way that it reveals that long-term reliability of the business deal under binding. The future of a franchise, for instance Premier Inns, and its growth potential are vital dimensions when evaluating for a possible affiliation. These work as the centralized benefits that the brand would offer its new hotels (Paswan & Kantamneni, 2004).

Globally recognized franchised contracts act as long-term deals; usually extending to several years. This implies that the long-term viability of such a franchise contract among, say Premier, Accor and Ibis, is very vital. It has also become helpful that hotels contact potential franchisees and utilize the available online resources when evaluating Chinese hotel franchises. The decision to adopt and affiliate with a given brand would likely pose a huge effect to the future of a hotel property. Therefore, dire consideration of the above dimension and effective due diligence would assist in forging a solid business relationship (Zhang & Pine, 2005).

Competition

The current Chinese economic success has led to the rise of a fast growing middle class with the hankering of vast domestic travel. Cashing in on such tour booms are hotel chains that are rising so fast. Indeed, franchises are coming up and affiliating on daily basis. One such player is Budget hotel franchise: Hantings Inns. This is a chain founded by Chinese business mogul Ji Qi almost a decade ago. Presently, the company enjoys a vastness of over 100o hotel properties all over China distributed across four leading brands (Mak, 2008). The Hantings Inns boss expects his business empire to have become the world’s biggest hotel franchise by the year 2020. As competition would have had it, the franchise takes an adequate amount of inspiration from leading low cost western chains that accommodate business travelers such as Accor, Ibis, and Premier Inns. The competitive nature of the Chinese hotel industry has led to the growth of other low cost hotels. They all aim at keeping everything simple in such a way that clients have a lot to choose from at affordable prices (Tang, 2004).

Entrepreneurs, therefore, choose those franchises that notable for investing more in their rooms thus coming up with a competitive strategy that is cost effective. The increased scale and rate of development within China over the past two decades has prompted global investors to watch the market with interest. The number of people travelling in and out of China has increased to over 60 million per year. Therefore, China is currently Asia’s number one source of franchising investors. This implies that international hoteliers are slowly but surely moving into China to tap into the hotel franchising industry (Zhang & Ray Pine, 2005). For instance, Accor has tried to acquire a stronghold in the Chinese market with Grand Mercure regionally known as Mei Jue. Similarly, hotel chain Marriott has devised an investment plan that would see its affiliate hotels double over the years. All these franchises are targeting the average Chinese traveler in a bid to win their loyalties. The loyalty that brands struggle to build is translated to the loyalty of Asian travelers around the earth (Li-Tzang & SooCheong, 2010).

However, foreign investors find it difficult competing with the likes of Hantings for the Chinese mid-market. Domestic hotels would find this an interesting dimension to consider when seeking an entrance into an affiliation with either domestic or international franchises. However, some of the good news would be that with many partners to choose from, the cost of franchising will sure start dipping. This seemingly favors local brands since they are faster, cost effective and knows their Chinese consumers better (Yung, 2007).

Value Added Services

Individual hoteliers and their customers have their own expectation when picking between hotel brands and products. This is based on relevant historical backgrounds of various trading experiences of parent brands in the past. As a shopper, the independent hotelier seeks the maximum value for his intended affiliations. Therefore, they are not confined to low-level satisfaction but the ultimate joy in the newly acquired deal (Phillips, 2006).

Over the years, Hantings and other franchises have set the benchmark for their partners’ services in key Chinese cities. Similarly, the Holiday Inn Hotels developed value added services such as the inclusion of a call center and a Chinese language website for potential partners and customers. Presently, Holiday Inn Hotels and Resorts boast of being one of the best mid-market hotel brand names in China. The emergence of Chinese Hotel Awards has also influenced the growth and development of franchising in a way that only the best brands are chosen (Moore, Ratneshwar, & Moore, 2012). High-end hotels such as the Intercontinental Hotels have also assisted in providing benchmarks for value added services in the mid-market hotels. Presently, mid-market franchises have been revealing their best in ensuring that their brand promises are delivered to their customers and potential affiliations. Having researched on the nature of relationships and investment in the Chinese people, potential partners show a strong affinity in further selecting only those brands that touch and deliver on demand (JLJ, 2007).

Managing and franchising of hotels in China proved much simpler before the Beijing 2008 Olympic Games since there were a few choices. However, hotel demand increased with an increase in room inventory and disposable incomes. Overtime, new hotel chains came up leading to the present of incredible franchises. The most visible factor has been in operation costs, especially regarding labor and energy (Tuunanen, 2011). As these two aspects rose significantly, they posed a great effect on the nature of the hotel industry. The major challenges in China remain keeping teams adequately motivated and using the hotel’s value added services to fill it. It is challenging individual hoteliers to forge excellent relationships with franchise that insist on the quality of service and overall hygiene. It seems encouraging enough that individual hoteliers look for helpful franchises with excellent work ethics (Su, 2006).

A lot of research and training needs to be conducted to ascertain each franchise’ commitment to success. Beijing, China’s second largest city has seen the rise of new hotels and developments on beaches and luxury areas. The challenging factors remains, however, the competitive environment that has seen many hotels crop up. This has led to cut throat competition in value added services such as extra advertisement and room service (Xiao & Wang, 2009). Additionally, such competition provides an opportunity for franchises to rethink their competitive bargains in new and innovative products. These come as challenges of managing and affiliating hotels in China. However, if they can get the desirable partners, the hoteliers would be able to provide excellent value added services that retain customers (Miles, 2006).

Customer Needs

The Chinese hotel industry comprises of many faces. To the workers it is a source of employment. To the owners, hotels exist as an entire empire that has to keep moving forward. To customers it comprises of everything from their beds during travel to a part of their temporary homes during vacations. While catering for the needs of the public could be difficult, doing so in the hotel industry has with it a number of challenges (Noone & Mattila, 2009). Besides learning the likelihood of delivering exceptional customer services, franchisors also look for partners that preach on the skills that deal with the needs of every customer. Beyond the décor and hotel amenities that contribute to the satisfaction of customers’ needs, nothing should be able to ruin the experiences of franchisors than poor customer service from the franchises trying to host them. In such strategic times, mid-market hoteliers usually discuss the key characteristics of effective customer service and activities that exceed their customers’ expectations (Okoroafo, Koh, & Liu, 2010).

They also concern themselves with discovering the level to which their decisions to franchise can affect their businesses and personal lives. All affiliated parties know that some of the best ways of offering excellent customer service is through effective communication with domestic clientele. As logic would have it, this dimension exposes the franchises’ need to work out an informative consumer need diagnostic technique (Qui, 2004). Using this as a guide to selecting potential partners, hotel franchises then try their best in identifying their individual communication techniques and those of their customers to attain the best possible outcome for satisfaction. Based on the form of franchise in question, supporters of such alliances argue of the probability that customers remain allied to brands they feel comfortable with. Taking, therefore, a franchising approach equips individual hotels with the best work force that adjusts to various changes in customer tastes and preferences. Franchising also provides for hotel franchises to adapt more effectively to changing customer regulatory requirements (Moore, Ratneshwar, & Moore, 2012).

Presence of IPR Violations

It is the greatest challenges Chinese business environment currently face. The widespread of IPR violations has slowed the process of making decisions on hotel franchising. While clear regulations on Intellectual Property Rights have been put in place, their enforcement continues to grow weaker by the day. The responsibility to explore and track various kinds of brand violations falls squarely on property owners (WTTC, 2006). Many Chinese hotels have fallen prey to franchising copycats that utilize logos to attract customers. They find it important to assess the genuine details of franchises before entering into an affiliation. Most of the large chain brands also encounter many imitators racking in billions of under their brand names. Some of these copycats and fraudsters are usually ex-franchisees whose contracts are terminated for falling short of meeting laid standards (Saunders & Riordan, 2009).

Although registering brands would not guarantee most franchisors the recourse coming from IPR violations, failure to adhere to this would lead to dire outcomes. China is notable for granting logos and trademarks on a first-come-first-serve basis. This has sparkled the existence of scenarios where individuals register other organizations’ trademarks and go ahead to demand due fees for their use (Pine, 2003). Individual hotels would want to equip themselves with the knowledge of the existence of such fake franchising deals to reach out for the best affiliations. It would prove a matter of importance for individual hotels to register their trademarks, brand and domain names before entering into a franchising deal. They should also do the same, including the registration of patent rights, before going into the Chinese hotel industry (Zhu, 2008).

Legal Environment

The government’s initial attempts to develop legal guidelines for franchising in China were the 1997 Franchise Rules. These were issued in 1997 through the Ministry of Commerce then known as the Foreign Trade and Economic Cooperation Ministry. As hotel businesses seeking to get into franchises would note, the rules appeared to be the initial steps in offering guidance for such business models in new China. Unfortunately, these initial regulations only favored the domestic franchises (Li-Tzang & SooCheong, 2010). This, thereby, locked out any foreign franchisor willing to invest and operate in China. This shows the governments protection of domestic franchisors at the expense of their foreign counterparts. A further move towards this ensures that foreign entrepreneurs look for equally effective local brands when getting into the Chinese Mid-market hotel industry (Liu & Qiu, 2005).

Major international hotel franchisors have began to enter the Chinese market and proceeded to develop and acquire scores of hotel units throughout the economy. It was not until the mid 00s that China came up with a legal implementation, which ensured that foreign companies established legal entities in China. This commercial legalization of foreign investment encourages foreign hotels with western ideologies to spread across the country through franchising (Chen & Liu, 2003). The 2004 Commercial Measures, however, were general in nature and favored domestic franchisors at the expense of their domestic counterparts. They only had themselves in structuring ways in which they could develop and implement their systems in accordance to Chinese law.

The following are some of the vital elements of the current Chinese franchise regulations that firm follow when choosing to affiliate (Dant & Kaufmann, 2003).

First, the scope of the Chinese franchise regulations has become drafted in such a way that it applies to all affiliation activities taking place within Chinese territory. This provision covers all domestic and foreign franchisors/franchisees intending to do business in China. This does not imply that the Chinese legal system is strict when dealing with foreign investors (Terry, 2007). However, it has been very common for new laws to be implemented without amending the existing regulations dealing with the similar areas. Such a situation should cause utter confusion within the hotel business community or other entities affected by the same laws. Mid-market hotel owners should always consult with the relevant legal authorities before entering into affiliations (Altinay & Okumus, 2010).

Secondly, the regulations ascertain that no unit other than registered enterprises should get into the franchising business as franchisors. This implies that franchisees could comprise of natural individuals. However, potential franchisees would view this regulation as one in need of further clarification on the nature of business enterprises (Altinay & Brookes, 2012).

Lastly, the law obliges all franchisors to offer franchisees with all possible operational information. These would comprise of long-term guidance, support, training and other value added services prior to deal signing. However, potential franchisees should note that the law does not clearly state what is mandatory in such material. Therefore, they are always on the lookout for franchisors that include all the information franchisees need to know when starting a franchise chain of hotels in China (Guo, 2006).

Availability of Reliable Partners

Mainland China swarms with entrepreneurs that are more than willing to invest in franchised hotels. However, almost a handful of them have proven competent enough to manage them. This means that most domestic franchisees and potential franchisees lack adequate understanding of the franchising ideology. This follows the lack of modern and informative management experiences. For instance, popular Chinese franchises now face the risk of closing up businesses for failure to meet various quality and management standards (Altinay, 2006).

Most brands, despite having painstakingly been developed over the past decade, have become damaged by their poor product quality, inferior infrastructure, and subpar quality of service. The provision of long-term guarantee on business guidance and training has rose into becoming a critical area of concentration for most hotel franchisors. Hantings Inns, which is currently one of China’s fastest developing mid market hotels, requires all of its franchises to undertake various seminars and trainings. These essential training courses bring managers of potential franchisees up to the company’s regulation (Doherty, 2007).

Conclusion

Franchising came as an opportunity for smaller hotels to gain considerable amounts of financing. This assisted them to expand faster through the employment of a highly charged workforce. These individuals then enhanced the running of business operations from specified locations ensuring that the parent received royalties from all returns. The benefits of hotel franchising reflected the overall objective of franchising; to dominate global markets through acquiring and maintaining as large a customer base as possible (Alon, 2012). For individual hotel property owners, franchising requires low financial risk compared to opening and running independent businesses. A franchise usually poses small startup expenses for entrepreneurs as well as absorbing much of the risks and uncertainties associated with starting a hotel business. Franchisees, therefore, pay for an entrepreneurs’ hard work in creating a renowned business model.