Franchising and Change in the Hotel Industry
By: Edward (Ned) Levitt

Franchising today has evolved from a little understood, almost quirky, alternative to traditional distribution models of the 60’s and 70’s to become one of the fastest growing and most widely used options in an ever-expanding range of industries and markets. It has also become a global phenomenon.  However, changing demographics, volatility in energy costs, natural and man-made disasters, and government regulations are just a few of the alphabet soup of problems that face franchise companies and their franchisees every day.

In this article, we will focus on how these changes affect the hotel industry, in particular, an industry that is becoming more competitive and more challenging and where the emphasis is more on branding, loyalty programs, reservations systems and categorization than on the traditional franchise issues of franchisee selection, training and support.  Attracting a loyal clientele is good for everyone and puts the hotel franchisor and franchisee on the same side, but an immutable fact is that the hotel franchisee is focused on the bottom-line and hotel franchisors want more top-line revenue and growing portfolios.  When one drills down deep enough into the fundamentals of the franchise relationship, the truth is that, in a perfect world (one where both sides of the equation work to meet their needs and the other guy’s as well), the differences are not obstacles.  However, all too often, to meet the challenge of the day, this difference of focus divides the players and makes the problem to be solved more daunting.

In any industry, change is inevitable:  change is good but it also costs;  change too slowly and you are left behind;  change too often and you confuse your customer. If you own your own hotel, the timing, the expenditures, the risks and the rewards are all yours.  In a franchised hotel chain, however, change is not so simple.  Decades ago the marketplace evolved over many years. Today, shifts in any number of important areas can take place seemingly overnight. Accommodating the laptop toting patron, for example, has evolved from a nice perk to a necessity in a very short time frame. A franchisee looks to the franchisor to be on top of such trends, to investigate what needs to be done and the best way to capitalize on them.

Sometimes, change comes swiftly, unexpectedly and is temporary. Does anyone need reminding about 9/11, SARS, or Katrina?  Turning crisis into opportunity is an age-old trick and could not be more appropriate than in a franchised hotel chain. The forward thinking franchisor can reap enormous benefits for resolving future issues by supporting a franchisee effectively and compassionately, when a temporary crisis strikes.

The dichotomy is that too frequent, too expensive or ill-conceived changes can wreak economic havoc on the franchisee and damage the franchise relationship; sometimes fatally. To complicate matters further, if the franchisor, with the right strategy, cannot get buy-in from enough of the other franchisees in the system, the benefits may be dramatically reduced, if not totally eliminated for the franchisees who did adopt the change.

A properly drafted franchise agreement gives the franchisor the right to require franchisees to implement changes to the system as required by the franchisor from time to time. However, franchise systems are not kept together and do not prosper under threat of litigation. The franchisor must “lead” the franchisees.  Thoroughly understanding the marketplace and devising plans for change that are cost effective, workable, and profitable for the franchisees are essential to implementing change in a system. That alone, however, is not enough. A franchisor has to have a sound communications capability that gets the attention of the franchisees, conveys ideas clearly and accurately, and motivates.  Creating the franchise “glue” is so important to so many aspects of running a successful franchise chain and implementing change is no exception. Where does the “glue” come from? Regular and clear communications with franchisees, such as newsletters, intranets, help lines and conventions are important.  Field visits that are supportive as well as investigative are great. Even franchisee associations, independent or advisory, can be extremely useful in forming a greater understanding among franchisees and the franchisor on the need for and best practices on issues brought about by the changes. 

Another challenge today is the changing demographics. With the aging population, the number of able-bodied hotel workers is shrinking, just as we are entering a period of tremendous opportunity brought about by masses of travelling retirees. This problem is made even more challenging where there are other market sectors with voracious appetites for young workers. Creative solutions, such as sourcing, securing and landing immigrant workers may be beyond the resources of a single hotel franchisee. That is where the franchisor, utilizing the purchasing power of all affected franchisees can play a critical leadership role for everyone’s benefit and make another barrel or two of glue.

Are you a "Steward" under Ontario's Blue Box Program?
By: Chad Finkelstein

As a franchisor with franchised units in Ontario, you may have been contacted by Stewardship Ontario with respect to your obligation to register as a “steward” under Ontario’s Waste Diversion Act.  Stewardship Ontario was created to ensure that certain companies that introduce packaging and printed paper into the Ontario consumer marketplace share in the funding of "blue box" recycling programs. 

Thousands of companies that produce or distribute packaged goods and printed paper for sale in Ontario are required to pay fees to offset the cost of the Ontario municipal Blue Box program.

Since the program was introduced in 2002, Stewardship Ontario has sought to notify various organizations which it believes may be designated Stewards under the Blue Box Rules.  Once notified, you will be required to make payments on your generated waste from the start of the program in 2002.  However, even if you have not been not notified, you are obligated to voluntarily register if you are resident in Ontario and your annual revenue and the amount of waste generated meet the prescribed criteria for registration, although penalties are imposed only if you have failed to register 90 days after having been notified.  Franchisors are specifically named as Stewards under the Blue Box Rules and will be required to register if they are deemed to be resident in Canada.  Having franchisees in Ontario will not alone deem an otherwise non-resident franchisor to be an Ontario resident.  Environmentally-conscious non-resident franchisors may elect to voluntarily register as Stewards under the program.

The franchisor of a franchise system, operated partly or wholly in Ontario, which generates annual revenues greater than $2 million is required to register as  a Steward and is obligated to report packaging and printed paper generated in Ontario by all of its franchisees.  Note that the annual revenues are those of the franchisor and all of its franchisees combined. However, if the franchisor is not resident in Ontario, its franchisees may be designated as Stewards and may be required to register and comply with the Blue Box Rules. 

The fees payable by each Steward are determined based upon the tonnage and type of waste generated, and in the case of a franchise system, is the combined total of the packaging and printed paper waste generated by the whole system.

Franchisors obligated as Stewards can choose to pay these fees themselves or can require each franchisee to contribute a portion of the fees to be paid under the Blue Box program.  If the franchisees are required to contribute or to themselves register as a Steward, these requirements should be disclosed in the franchise agreement and in the franchisor’s Ontario disclosure document.  Failure to comply with the registration and payment obligations will not only attract enforcement action by Stewardship Ontario but could render your Ontario disclosure deficient.

It is also worth noting that the Blue Box Rules, payment schedule and table of fees are subject to change by Stewardship Ontario on an annual basis.  A franchisor’s franchise agreement and disclosure document should reflect that a franchisee’s obligation for payment of these fees may vary over the life of their franchise agreement.

Speak with any Gowlings lawyer in our Franchise National Practice Group for more information.

Who, What, Where and When

• Congratulations to Len Polsky and Ned Levitt who were awarded certification as Certified Franchise Executives at the recent International Franchise Association Convention.  Certification by the Institute of Franchise Executives is a globally recognized endorsement of the highest levels of professionalism in franchising best practises.
• Debi Sutin has been selected to Co-chair the Ontario Bar Association’s 10th Annual Franchise Law Conference, being held in Toronto on November 4, 2010.
• Len Polsky’s article “Practical Issues in Making Proper Disclosure: Case Comment - Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc.” was published in the December 2009 issue of Franchise & Distribution Journal.
• Debi Sutin, Ned Levitt, Chad Finklestein, Guy Poitras and Joelle Boisvert will be attending the Annual Convention of the Canadian Franchise Association May 2 – 4, 2010 in Mt. Tremblant, Quebec.  Ned Levitt will lead a workshop at the Convention entitled “What the Hell Happened” which will focus on the intersection of franchisee discontent and franchise litigation.
• Len Polsky, Ned Levitt, Peter Snell, Debi Sutin and Chad Finklestein will be attending the International Franchise Association’s Annual Legal Symposium, being held May 16-18, 2010 in Washington, D.C.  Len Polsky and Peter Snell will also attend the International Bar Association/International Franchise Association Joint Conference May 18-19, 2010.
•  Len Polsky, Peter Snell and Melanie Choch will lead a Franchise Breakfast Roundtable on March 26, 2010 in Calgary  on protecting a Franchise system’s brands on Social Media sites.  Len Polsky and Peter Snell will lead one in Vancouver on April 8, 2010 on the same topic.