Hilton is one of the largest and most successful hotel chains in the world, with over 6,600 properties in 119 countries and territories under 18 different brands.
In this article, we will focus on how Hilton benefited from the franchising model, We will also explore what would have happened if Hilton did not use this model.
Franchising Transformed Hilton Hotels
Franchising model is a strategy that enables Hilton to expand its global presence and market share without investing too much capital or taking too much risk.
According to Hilton’s annual report, out of 6,610 hotels under Hilton’s portfolio, 6,316 were franchised with 1,005,000 rooms. This means that about 95.5% of Hilton’s hotels were franchised. Franchising accounted for 52% of Hilton’s total revenue in 2020.
Benefits of the franchising model for Hilton are:
Revenue generation: This model allows Hilton to generate revenue from franchise fees and royalties paid by franchisees. These fees and royalties are based on a percentage of the franchisees’ revenue or profit. According to Hilton’s annual report, franchising accounted for 52% of Hilton’s total revenue, which was $4.3 billion out of $8.3 billion.
Brand awareness: It enables Hilton to increase its brand awareness and recognition by having more hotels under its portfolio in various locations and segments. This can attract more customers familiar with and loyal to Hilton’s brands. According to Brand Finance’s 2021 report, Hilton was ranked as the most valuable hotel brand in the world, with a brand value of $10.8 billion.
Operational efficiency: It allowed Hilton to focus on its core competencies, such as brand development, marketing, distribution, technology, and quality assurance, while delegating the day-to-day operations and management of the hotels to the franchisees. This can reduce Hilton’s operational costs and increase its profitability. According to Hilton’s annual report, franchising had an adjusted EBITDA margin of 85%, which was higher than any other business segment.
Year | No. of franchised hotels | % of total hotels | Revenue (in USD) |
2017 | 5,189 | 86.8% | 6.58 Billion |
2018 | 5,524 | 87.8% | 8.13 Billion |
2019 | 6,316 | 95.5% | 9.45 Billion |
The above chart explains how franchising the Hilton brand boosted its revenue growth, and helped it recover quickly from C-19.
Challenges of Franchising Model for Hilton
The franchising model also poses some challenges for Hilton that need to be managed carefully. Some of these challenges are:
Quality control: This model requires Hilton to maintain the quality and consistency of its services and products across all its franchised hotels. This can be difficult to achieve when dealing with different franchisees with different standards and practices. Franchising also exposes Hilton to the risk of reputational damage if the franchisees fail to meet Hilton’s expectations or face legal issues.
Franchisee relations: This model involves a complex and long-term contractual relationship between Hilton and its franchisees. This can create conflicts and disputes over various issues, such as fees, performance, compliance, termination, renewal, etc. Franchising also requires Hilton to balance its own interests with those of its franchisees and provide them with adequate support and incentives.
Market saturation: If Hilton has too many franchised hotels in the same location or segment. This can result in competition among its own brands and reduce its market share and profitability. Franchising also limits Hilton’s ability to adapt to changing customer preferences and needs by imposing certain restrictions on its franchisees.
If Hilton did not use the franchising model, it would have missed out on many opportunities and advantages that this model offers. Some of the possible outcomes are:
Slower growth: Hilton would have relied more on other business models, such as management contracts or leases, which require more capital investment and risk exposure from Hilton. This would have limited Hilton’s ability to grow its global footprint and market share as fast as it did with the franchising model.
Lower revenue: Hilton would have generated 50% less revenue from franchise fees and royalties paid by franchisees. This would have reduced Hilton’s income stream and profitability, especially during the pandemic when hotel occupancy and revenue declined significantly.
Less brand value: Hilton would have had fewer hotels under its portfolio in various locations and segments. This would have lowered its brand awareness and recognition among customers who may prefer other hotel brands that offer more options and variety. This would have diminished Hilton’s brand value and competitive edge in the hotel industry.
Catch up Quick
Franchising model is a powerful and effective strategy that has transformed the hotel industry and enabled Hilton to become one of the largest and most successful hotel chains in the world. The franchising model offers many benefits for Hilton, such as revenue generation, brand awareness, and operational efficiency, as well as some challenges, such as quality control, franchisee relations, and market saturation.
Without franchising model, Hilton would have faced slower growth, lower revenue, and less brand value. Therefore, franchising model is a key factor that contributes to Hilton’s success and leadership in the hotel industry.
