The word ‘franchise’ comes from old French, meaning ‘privilege or freedom’. In the Middle Ages a franchise was an actual privilege or a right; the local sovereign would grant the right to a monopoly for a certain type of commercial activity, such as holding markets or fairs, operating the local ferry or hunting on his land.
Over time the regulations governing franchises became a part of European Common Law. Over the centuries the franchising concept has evolved as the economies of the nations of the world have evolved. In the 1840s in Germany some of the major ale brewers granted franchises to certain taverns, giving those taverns the exclusive right to sell their ale. This was the beginning of the concept of franchising as we know it today.
Around the turn of the century, oil refinery companies and the automobile manufacturers began to grant the right to sell their products. At this stage in the evolution of franchising it was essentially granting the right to distribute and sell a manufacturer’s products. Business format franchising, which is the dominant mode of franchising today, came onto the economic scene after World War II in the US with the return of the millions of servicemen and servicewomen – and the subsequent baby boom. There was an overwhelming need for all types of products and services, and franchising was the ideal business model for the rapid expansion of the hotel/motel and fast food industries.
According to the International Franchise Association, the economic impact of business format franchising is much greater than product distribution franchising. In 2007, business format franchising (restaurants, real estate services retail, lodging, business services and personal services) provided five times the jobs and had twenty times as many establishments as product franchising (gasoline/service stations, automotive and truck dealers, beverage bottling).
The outlook for 2013 in the USA is optimistic as franchise businesses are expected to continue to grow at a slightly faster rate than other businesses in the private sector, in terms of contribution to GDP and job creation. The lodging industry would rank fourth in terms of contribution to employment as it is expected to provide jobs for more than 706,000 people, with quick service restaurants still ranking at the top. The output of lodging franchise establishments is expected to reach $802 bn, also ranking fourth in terms of output.
Franchising is an appealing way for growth-oriented firms to enter new markets and expand delivery of service concepts to multiple locations without incurring high investment costs ensuing from company-owned and managed sites. By developing successful business models and exporting them to franchisees, a franchisor taps into new markets, cultures, resources, skills and networks and strategically integrates diversity into his business. Although franchising is most commonly associated with fast-food restaurants, new concepts have been created, developed and commercialised continuously in countries around the world.
To remain highly competitive and surf through economic downturns, companies in the hospitality industry are increasingly recruiting from a diverse pool of investors and entrepreneurs in different international markets attracting them through lucrative franchising offers and incentives. Hotels represent a type of service that requires direct contact with the customer for which local presence is essential to compete, which entails having the necessary personnel, buildings, equipment, and supplies to reach out to target customers or follow existing ones to new locations (or both).
Benefits for franchisors include economies of scale, stronger brand presence and recognition, lower financial risks and lower investment costs. Some of the drawbacks, however, include some loss of control over the delivery system and over customer experience as activities are delegated to franchisees. To overcome these drawbacks, franchisors seek to maintain control over all aspects of their service format through a contract that ensures that the franchisor would adopt exactly the same priorities and procedures and thus maintain consistency in service quality delivery. Specifications on tightly defined service standards, procedures, scripts, physical environment and presentation, employees outfit and performance, and service timetables are clearly stipulated in this contract for strict adherence. In this manner, the promotion of brand image through a standardised format that ensures uniform standard items, menus, outside appearance, inside layout and décor, staff uniforms that customers easily recognise or with which they find familiar.
A franchisee benefits from an established brand name and image instead of creating a new business format and brand that help him/her gain a strong foothold in the marketplace, in addition to training, know-how, and sharing of resources and risks with the franchisor. In certain cases, a franchisee might perceive the fees paid to the franchisor as being too high and believe that they have gained enough experience to be able to operate the business without the constraints imposed by the agreement, often resulting in legal fights between both parties. However, far-sighted franchisors build long-term relationships with franchisees through lucrative offers, incentives, training programmes and strategies that guarantee optimal benefit from the franchisee’s local knowledge and experience.
In the mid-1990s, North America and Europe accounted for 79 per cent of world tourism. Asia-Pacific, the Middle East and Africa have been the leading regions since then. According to the latest ILO data, the Hotels, Catering and Tourism sector (HCT sector) accounts for more than 260 million jobs worldwide, contributing 9% of global GDP.
Growth drivers in the hospitality industry are also coming from the Middle East, offering many opportunities in terms of expansion for regional and international hotel chains through intermediaries with local knowledge, goodwill and a strong business portfolio. In the Middle East/Africa hotel development pipeline comprises 485 hotels totaling 118,535 rooms, according to the July 2013 STR Global Construction Pipeline Report. Among the countries in this region, Oman reported the largest expected supply growth (+59.9 percent) of all 4,577 rooms in the total active pipeline open. Five other countries also reported expected supply growth of more than 15 percent: Saudi Arabia (+56.8 percent with 31,518 rooms); Qatar (48.7 percent with 7,671 rooms); United Arab Emirates (+33.2 percent with 32,261 rooms); Kuwait (+21.5 percent with 1,418 rooms); and Jordan (+16.6 percent with 2,972 rooms). This prospected growth is derived from a marked increase in international tourist arrivals in the Middle East corresponded to 6% with the emergence of new destinations in this region and heavy investments in tourism infrastructure and services. International hotel brands have also increasingly expanded into the Arab region, which has benefited for a long time from international hotel franchising as an importer of hotel brands and business service formats, with Arab partners playing the role of franchisees.
Will the next few years herald the era of Arab-owned hotel franchises in the Middle East region?
Franchising continues to be a popular model for regional expansion for many good reasons; a franchisor can expand its business quickly into a growing economy while mitigating some of the commercial risks and significant capital investment that are often involved with establishing a presence on the ground.
A new trend has emerged in recent years stimulated by the spillover effects of international hotel franchising in the region. Arab franchisees, entrepreneurs, managers and employees in the hospitality industry increasingly gain experience and personnel benefit from education, training and work at international hotel chains – thus learning about best-in-class practices, standards, procedures, scripts, physical environment design, and improving their skills and performance in this field. Instead of being recipients of hotel business formats, supplies and managerial practices from developed countries, new hotel brands are being created and successfully developed and managed in Arab countries. Creators of these Arab brands are now able to create and maintain standards of quality, reliability, performance in service delivery and promotion guidelines that franchisees must comply with. Many of these local franchises have found their way to new markets in the region bringing in diversity and innovation to the pool of knowledge and practices in hotel franchising. These local brands successfully obtained star ratings in line with international schemes with comparable standards related to their locally-developed facilities, standards, scripts, procedures and designs. Among these are Jordanian and Palestinian hotel brands.
For example, the lodging sub-sector in Jordan reached 497 hotels in 2012 and employs 15,400, (compared to 491 in 2011); the number of visitors to the country reached 8,234,000 in 2012, with an average of 32 employees per hotel.
Landmark hotel of Jordan is an example of an Arab franchise classified as a 5-star hotel. The CEO of Landmark hotel perceives hospitality as an integral part of the Arab culture, known globally for going out of its way to please guests. Providing guests with the warmest welcome, best food, entertainment, and even insisting that they extend their stay is common practice according to Mr. Aysar Batayneh, CEO of Landmark hotel.
He comments: ‘These are the values we have all been brought up with. It is in our nature to be generous, pleasant and welcoming to our guests. In the hospitality industry, the trick is to be able to transfer this common practice from home to the hotel’.
In fact, pleasing guests and going out of the way to make them feel comfortable are synonymous with delighting customers, exceeding their expectations. The service philosophy of creating and maintaining customer-focused brands and strategies is based on customer delight, which goes beyond offering added-value to providing unique value, generated by an extraordinary experience.
According to Mr Batayneh there is a unique value that an Arab hotel franchise brings to the hotel industry regionally and globally. Standards, scripts, and best-practices are mostly derived from a western perspective and based on western culture. Mr Batayneh continues: ‘When operating a hotel in our region, it is very important to adapt western standards to conform with local customs and values’.
In fact, shaping international standards and scripts to meet local standards and values while maintaining their basic managerial approach is widely practiced in the Gulf countries. Deloitte’s ‘Hospitality 2015’ report highlights the fact that the Gulf States provide the greatest evidence of localisation with alcohol-free hotels and women-only floors.
In Mr Batayneh’s view, uniqueness stems from what he termed the ‘Arabic flare in hospitality, cuisine, and language’ as these overshadow that of any other culture as many of Landmark’s western guests expressed in their customer satisfaction testimonials. As to the economic and developmental impact of Arab hotel franchising, a large percentage of the revenue of the hospitality industry is usually transferred directly to the foreign hospitality chains. This percentage of revenue could largely contribute to the local economies as revenues feed into their economic output. He also pointed out that Arab hotel chains exist that have an excellent track record in hospitality and are willing to share their resources with experienced local hotel owners. Mr Batayneh further emphasised this fact in saying: ‘ It is time for hotel owners to stop relying on Western chain hotels and give local talent an opportunity to blossom’.
Landmark’s strategic plan for the coming year entails market development by expanding into foreign markets. The hotel entered the Palestinian market via franchising in East Jerusalem, where Landmark St George is located overlooking the old city. The current unstable conditions in neighbouring countries, however, has meant putting plans on hold for the time being.
In Palestine, Grand Park Hotel has successfully managed to create a Palestinian hotel brand and is expanding locally before penetrating regional markets. The hotel also aspires to become an internationally-known Palestinian brand of hospitality.
Established in 1997, Grand Park Hotel retains its position as one of the first hotels in Palestine. It is ideally situated on top of a hill in Ramallah with a panoramic view of the city of Jerusalem. A comprehensive renovation of its facilities that took 30 months transformed it into a five-star hotel characterized by a blend of oriental and Western designs. CEO of Grand Park Hotel, Mr. Mohammad Zomlot, points out that the hotel provides modern amenities, communication and IT facilities. It aims at building a reputation for distinct Palestinian hospitality that appeals to business and leisure travellers at competitive prices.
He emphasizes: ‘The staff have been trained to uphold high quality standards that exceed the clients’ expectations, making their stay a ‘homely’ and memorable experience’.
In fact, offering luxury services and facilities at competitive prices has been a clever strategy as business and leisure travelers are increasingly becoming cost-conscious due to unstable political and economic conditions in the region. Additionally, the global recession has taken its toll on the hospitality industry, changing consumer behaviour patterns; it now demands consistent delivery of the ‘brand promise’, with the experiential-dimension becoming a key determinant of the success of a hotel’s brand as much as the quality dimensions of design and amenities.
Mr. Mohammad Zomlot indicates that Grand Park Hotel invested heavily in modern IT that enables guests to watch hundreds of satellite channels, movie channels and use the TV screen for attending to e-mails, surfing through the internet and using social media via a wireless keyboard. The first channel presents useful information about Palestine that the visitor may need with several language options, a 4-day weather forecast and the possibility to check a detailed statement of his/her account at the hotel, both during and at the end of their stay. These services are integrated with Palestinian hospitality so that the room becomes the visitor’s home during his stay in Palestine.
Mr. Zomlot adds: ‘Our exquisite and elaborate menus offer Oriental and Western dishes in exquisite settings providing guests with the opportunity to indulge in a diverse and unique culinary experience’.
To ensure consistent delivery of the hotel’s brand promise, the staff are carefully recruited and trained to ensure customer satisfaction. Mr. Zomlot asserts that the staff consider themselves as members of the ‘Grand Park family’ – and also part of its continuing success story.
As to the benefits of local hotel brands, he comments: ‘The hotel sector plays a critical role in combating unemployment among our youth, and stimulates growth and job creation in the SME sector. Our hotel sources its supplies from local vendors’.
Indeed, the hotel was able to achieve a successful launch even amid an adverse, and at times volatile, situation. Occupation and uncertain conditions increase transaction costs due to the complexities of dealing with Israeli security measures at the borders and at check-points.
The hospitality and lodging sub-sector in the West Bank consists of 107 hotels. The percentage of foreign guests staying at these hotels reached 54% during the second quarter of 2013, of which 40% were from the European Union and 10% from Asia.
The Grand Park brand intends to develop its market locally as it plans a grand opening for its Bethlehem hotel, with another hotel planned for Jericho city. The hotel chain boasts its ability to recruit and train dedicated local staff whose members are able to offer services that match international standards.
At present, the top ten hotel brands in the world are from the West, with the top five being the InterContinental Hotels Group (GB), Wyndham Hotel Group (USA), Marriott (USA), Hilton (USA) and Accor (FR). The emergence of Arab hotel brands as creators, innovators and trend-setters in the hospitality sector may be an interesting phenomenon that deserves contemplation as the next few years may witness the rise and proliferation of Arab hotel franchising.
-ILO working paper:‘International Perspectives on Women and Work in Hotels, Catering and Tourism’, 2013