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Deflagging: How to transition from a franchise to an independent hotel
Deflagging: How to transition from a franchise to an independent hotel

Deflagging: How to transition from a
franchise to an independent hotel

Executives of flagged hotels like Marriott, Hilton, Wyndham, and Hyatt love to report how many hotels and brands they add each year, as though the bigger they get, the better. But how do the owners of these hotels feel? 

What we don’t often hear about is when the opposite happens – when hotels break away from a brand and go independent. Yet, by many accounts, it’s a frequent occurrence in the hospitality industry. 

In recent years, frustrations with franchisors combined with mounting operating costs have prompted many hotel owners to reevaluate their franchise agreements. Others look enviously upon the performance of independents like boutique hotels, a market projected to achieve a compound annual growth rate (CAGR) of 6.7 percent globally from 2022 to 2032. 

Some of these owners have decided they would be better off operating as an independent property. But what exactly does that entail?

What is hotel deflagging?

For hotel owners, affiliating with a well-known, global brand can be an enticing proposition. Under a franchise agreement, the hotel owner, or franchisee, is granted permission to use the franchisor’s brand name, business model, operating systems, and support network to operate the hotel in return for paying franchise fees.

This may sound great on the surface, but not every franchise agreement lives up to expectations. In time, entrepreneurs may decide that the hotel can operate a more successful lodging business by taking back control of branding, operations, and marketing. When a hotel owner decides to end a franchise agreement and act as an independent property, the process is called deflagging.


5 reasons hotels are deflagging 

The most common reasons hotel owners make the bold decision to end a brand relationship boil down to one or more of the following.

1. Excessive fees

The costs of maintaining a franchise are sizable and far-reaching, including paying an initial upfront fee for the license and ongoing fees for sales, reservations, marketing, guest loyalty programs, technology, and other services that may vary by brand. 

On average, HVS estimates that franchise fees range from 8.6 percent of room revenue for economy hotels to 12.4 percent for full-service hotels. If the hotel isn’t receiving a steady stream of profitable business from the affiliation, you might decide that the return on investment doesn’t justify the fees.  


2. Market saturation

In the U.S., about two-thirds of hotels are affiliated with a brand, whereas outside the U.S., the numbers are roughly reversed. This means many destinations are crowded with branded properties, creating confusion among travelers and intense competition among hotels. Operating as an independent property can be a way to stand out from the crowd. 


3. Lack of control 

Hotel brands often have stringent requirements for affiliated properties related to branding, property design, amenities, services, and style of service. Conforming to these standards can be costly and onerous at times, leaving little to the operators’ imagination. 

Ultimately, running a successful lodging business is about keeping guests happy and loyal. If that’s not happening under the current model, ownership may decide that they can achieve better results by gaining autonomy and control over branding and the guest experience.


4. Changes to brand standards

In an effort to combat inflation and boost profit margins in recent years, some brands in the hotel industry have cut back services. Some have opted to reduce housekeeping services from daily to on-demand, others have scaled back menu items and breakfast buffets, and others have canceled room service or reduced it to grab-and-go items. 

While some hotel owners may welcome these cost-saving measures, others may prefer to maintain higher standards of guest service. 


5. Shifts in traveler tastes

Traditionally, a big draw to global brands for travelers is the promise of a consistent guest experience no matter where they go in the world. But traveler tastes are changing. While some older travelers may prefer brands they know and trust, a rising tide of younger consumers, especially millennials and Gen Z, seek unique, localized experiences. 

Independent hotels have greater flexibility to adapt to the trends and provide the kind of authentic and personalized experiences sought by travelers of all generations today. As an independent property, you can take bigger risks to establish your brand on social media, attracting a new type of traveler. 


The deflagging process

Deflagging a property is a big decision that requires careful thought and planning. The first step is to review your franchise agreement. What are the terms and conditions? When does it expire? Franchise agreements tend to be a long-term commitment, and terminating a contract before it expires can be a difficult and costly undertaking. 

It’s also important to have a clear plan for taking the property independent. How will you thrive without the support of a well-known brand? While you may be able to piggyback on some of the work performed under the brand name, you will need to do things differently if you wish to change the outcomes. 

You may have to establish a new brand, rename the property, build a new website, and establish new relationships and connections with online travel agencies (OTAs) and other distribution partners. You will also need to identify your target markets, develop sales, marketing, and revenue strategies, and determine how you will earn guest loyalty and rave reviews. 

From an operational perspective, a change in branding may require property renovations, new standard operating procedures (SOPs), updates to the employee manual, and retraining of staff, as well as the replacement of on-property signage and branded materials like stationery and menus. 

Given the tasks at hand, a good time to start planning is now, even if your agreement doesn’t expire for a few years. 


Technology: the key to successful deflagging

Franchise hotels must often work with the brand’s proprietary technology and preferred suppliers. These systems can be pricey, outdated, and incompatible with third-party solutions. 

As an independent hotel, you will be free to choose the software and technology partners that best fit your needs and budget. Fortunately, modern technology makes it easier and less risky than ever to operate as an independent.

Here is how technology can put independent hotels on the fast track to greater efficiency and profitability. 


Curious about what technology independents are utilizing?


The core platform

Choosing a property management system (PMS) is perhaps the most important technology decision hoteliers make. Modern PMS solutions have evolved from standalone software into a cloud-based, integrated hospitality platform that seamlessly connects the core components needed to run a hotel. Staff can operate the platform from a single, easy-to-use interface and only need to deal with one technology partner for support.

In addition to the PMS, platform components include a channel manager to manage pricing and availability across OTAs and distribution channels, a booking engine to accept real-time direct bookings on the hotel’s website, and other built-in tools like a rate checker and guest email automation. An integral part of cloud-based solutions is their access to an integration marketplace so that hotels can add tools that make the most sense for their business. 


Top integrations for hotel operations 

To supplement the core platform, hotels can integrate technology add-ons to streamline operations and provide a higher level of automation and personalization. It also offers the opportunity to keep some of the tools that were beneficial to business while you were in your franchise. For example, accounting software like Quickbooks can be easily integrated into your new, cloud-based platform — a win-win scenario.

Depending on the property type, some popular integrations include:


Heartland Hotel & Suites parts from its hotel chain

Heartland Hotel and Suites is a 22-room property in Rock Valley, Iowa that parted from its chain hotel flag due to high-cost franchise fees and limited support.

The biggest challenges the hotel faced when deflagging were getting reconnected to OTAs and investing in advertising to increase reservations. The hotel chose Cloudbeds as its new hospitality management platform, and the money it saves on monthly franchise fees covers the software expenses for an entire year, significantly reducing operating costs and increasing cash flow.

For franchised property owners who are considering going independent, Hotel Manager, Ellen Koomia recommends checking everything out ahead of time, having a plan, and advising OTAs of the account change well in advance to avoid getting shut off and losing reservations.

With a fully integrated platform, hotel properties have access to the data and reporting they need to monitor performance, identify opportunities for improvement, and make informed decisions about revenue generation, cost control, and guest satisfaction. Importantly, guest data is kept secure and in compliance with regional security and privacy regulations.


See what it takes to operate independently in the Starting a Lodging Business guide.

Starting a lodging business: The complete technology guide

Looking to launch your own lodging business? Check out the complete technology guide.
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