Greetings from Dubai! After a productive business trip to this fast-growing city, we’re thrilled to announce the opening of our fifth LHC office – following Berlin, Mallorca, Singapore, and Bangkok. Our journey has allowed us to witness significant shifts in the hospitality industry, particularly in hotel ownership and operations. More owners are taking stronger control of their assets, opting for franchise models instead of traditional management contracts.
The Shift: From Management Contracts to Franchise Models
As we engage with clients and investors across Europe, the Middle East, and Asia, we can’t help but notice the rising trend of hotel owners moving away from management contracts and favoring franchise models. These agreements allow owners more control over operations, strategies, and financial outcomes. Franchise models still offer owners the global distribution and brand strength of companies like Marriott, Accor, and Hilton, but with less operational oversight from the brand itself, which is crucial for maximizing asset value in today’s market.
Global Data Illustrating the Trend
We’re seeing clear evidence of this global shift toward franchise models, with trends varying by region:
• Middle East: In early 2024, about 68% of new hotel openings in the region were under franchise agreements, up from 65% in 2023. According to the latest data from the Middle East Hotel Investment Conference (MEHIC), owners in key markets like Dubai and Riyadh are pushing for more control over operations to maximize asset profitability, while still leveraging the strength of major international brands.
• Europe: Franchise deals in Europe have surged by 32% over the past four years. In 2023, 67% of new hotel agreements in Western Europe were franchise deals, particularly in major tourist cities like Berlin, Madrid, and Lisbon, where owners are looking to improve operational efficiency by aligning with local market needs.
• Asia-Pacific: Asia-Pacific has seen a 24% increase in franchise agreements in early 2024, with countries like Thailand, Vietnam, and Indonesia at the forefront. Owners in these regions increasingly recognize that franchises offer more flexibility while retaining the benefits of global brand reach and loyalty programs.
Why Are Owners Moving to Franchise Models?
The shift to franchise models is driven by a few key factors:
• Improved Profitability: According to STR, hotels in Europe under franchise agreements reported 12-15% higher gross operating profit (GOP) margins in 2023 compared to those under management contracts, thanks to more streamlined operations and quicker adaptability to market shifts.
• Operational Control: Owners in the Middle East saw a 10% higher average daily rate (ADR) for hotels under franchise agreements compared to managed properties in 2023, allowing for more localized decision-making and tailored guest experiences.
How Global Brands Are Adapting: Accor, Marriott, and Hilton
Major hospitality brands like Accor, Marriott, and Hilton are adapting to this franchise model shift:
• Accor: Over 50% of Accor’s new agreements in Europe and the Middle East in 2023 were franchise deals, part of an asset-light strategy that reduces operational risks while leveraging the strength of brands like Ibis and Novotel.
• Marriott: Marriott has significantly expanded its franchise portfolio, with 72% of its properties globally operating under franchise agreements by 2023, compared to 58% in 2015. This trend is particularly strong in Europe and North America, with growing traction in the Middle East and Asia.
• Hilton: Hilton has embraced the asset-light model even further, with over 90% of its global properties operating under franchise or lease agreements in 2023. This shift has allowed Hilton to focus on its core strengths of brand loyalty, global distribution, and marketing, while owners manage day-to-day operations.
A Global Perspective: Comparing Europe, Middle East, and Asia
The transition from management contracts to franchise agreements varies across regions:
• Europe: A mature market leading the charge, Europe has seen rapid growth in franchise deals, especially in upscale and mid-market segments. Major cities like London, Paris, and Berlin are at the forefront.
• Middle East: The Middle East, particularly in the luxury and upper-upscale segments, is seeing a fast-growing preference for franchises. MEHIC estimates that 50% of the hotel pipeline in the Gulf Cooperation Council (GCC) for 2024-2026 will be franchise-based.
• Asia-Pacific: Southeast Asia is experiencing a notable rise in franchise deals, particularly in resort destinations like Bali, Phuket, and the Maldives. Franchise agreements accounted for 30% of new hotel deals in 2023, a figure that’s expected to grow as more owners seek greater control.
New Market Shifts in the Middle East: Dubai Holding, Nakheel, and Abu Dhabi National Hotels
Recent developments in the Middle East reinforce the growing trend of owner-operators seeking more control. The merger of Dubai Holding and Nakheel illustrates this consolidation, giving the entities more control over property development and operations. Likewise, Abu Dhabi National Hotels (ADNH) has made a strategic shift toward franchise models, aligning itself with global brands while maintaining operational control. This transition marks a significant shift in the region, where franchises are becoming the preferred model for maximizing asset value and profitability.
The Future of Hospitality: Control and Flexibility
Are we witnessing the end of traditional management contracts? Not quite, but it’s clear that owners are demanding more control. The role of big global brands like Marriott, Accor, and Hilton will likely evolve to focus more on driving top-line revenue through brand strength, distribution, and loyalty programs, while operational control shifts to the owners.
At LHC, we’re proud to be at the forefront of this transformation. We work closely with owners, operators, and investors across Europe, the Middle East, and Asia to navigate this evolving landscape. The future of hospitality will be shaped by flexibility, control, and innovation—and we’re excited to see where it leads.
Until next time,
Garry Levin & Victor Mogilev
LHC International