To Franchise Or Not To Franchise?

Performance differences between corporate-owned and franchised hotels are slim to none, according to new research.

Stephen M. Ross School of Business:

For a company pondering the question, ‘To franchise or not to franchise?’ new research from Michigan’s Ross School of Business suggests that performance differences between corporate-owned and franchised outlets, when chosen right, could be slim to none.

Ross Professor of Business Economics and Public Policy Francine Lafontaine and colleagues Renáta Kosová of Cornell University and Rozenn Perrigot of University of Rennes 1 studied the effect of vertical integration on the performance of individual hotels. They found that a company’s decision whether to franchise or own a particular hotel has little effect on yield (average price) or performance.

Lafontaine and her team studied an unnamed multi-chain hotel company that has both franchised and corporate-owned hotels under each of its several brands, running the gamut from budget to luxury. They collected data to determine whether organizational form for each hotel has an effect on any of three outcomes: monthly revenues per available room (i.e., what the industry calls ‘RevPar’), price or yield (average room rate per month), and monthly occupancy rate. Across all three variables, Lafontaine and her colleagues found that franchising per se does not have a statistically significant effect.

‘We conclude that the firm chooses which outlets to franchise and which to own in a way that yields no differences in pricing or performance, in the end, between the two sets of hotels,’ the authors state. ‘This result is important as it suggests that when firms can choose, they indeed adjust organizational form in such a way that there are no real differences in outcomes.’ Read more.