Many lodging establishments especially small hotels and inns are managed by their owners. But it is also very common for a hotel to be owned by one party but managed by a different party. The relationship between ownership and management may be one or three basic types:
(i) Proprietary ownership,
(ii) Franchise, and
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(iii) Management contract.
i. Proprietary Ownership:
Proprietary ownership is the direct ownership of one or more properties by a person or company. Small motels are owned and operated by a couple or family is common examples of proprietary ownership.
A chain is a group of hotels that are owned or managed by one company. In general, three or more units constitute a chain but major hotel chains have from 300 to 5,000 properties. A proprietary chain is owned entirely by one company.
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In a co-owner chain, ownership of individual properties is shared by the hotel company and by independent investors. Marriott, Sheraton Intercontinental are examples of successful chains.
A chain property has certain competitive advantages over an independently owned hotel. Chain hotels attract experienced employees, it also benefits from national advertising campaigns that independent operators cannot afford.
Consumers favour products that are well known to them and hotels are no exception to this principle. A famous chain attracts travellers who recognize and trust the brand name.
ii. Franchise:
Not all hotels that have the same name belong to a proprietary chain. A different type of chain a franchise chain comprises properties they have the same name and design but are owned and operated by different parties.
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A franchise is a license given by a company or franchiser, to use the company’s ideas, methods or trademarks in a business. By paying a fee, a private investor or franchise can obtain a trademark license, architectural plans, designs, training and operating methods. The franchisee is responsible for financing the construction of the property.
The franchisee may be an individual, a partnership, a small corporation or group of investors. Thus many hotels that have Holiday Inn, Sheraton or Hilton signs are actually owned by local independent investors.
A franchisee pays an initial fee upon signing the franchise agreement. Franchisees also pay ongoing royalties based on the total income of the hotel.
Besides Holiday Inn other well-known franchise chains include Days Inn, Ramada Inn, Super 8, and the choice chain which includes Quality Inns, Comfort Inns etc.
iii. Management Contract:
Under a management contract, a property owner contracts with a hotel management company to operate the establishment. In some cases a well-known chain may build a new property and retain ownership, while arranging for a local firm to manage the hotel.
In other cases, local investors may fund the construction and development of a property, while contracting with an experienced chain such as Ramada or Marriott, to manage the operations. In either case the management firm receives a share of profits.