Hostel Franchising: a Pathway to Expansion

Hostel Franchising: a Pathway to Expansion Assignment topic Franchisors are innovative and entrepreneurial. Businesses wishing to profitably and successfully grow need to understand that franchising enable firms to expand more quickly and into more markets than they could otherwise manage. Word count: 2724 words. Executive summary Creating a franchise starts with the customer. The franchisor needs to identify potential customers and produce a business format which will meet their needs and create wealth for both the franchisor and the franchisee. This paper proposes a strategic planning for a franchise system of a hostel.

First, it provides a brief description of the latter. Then, it analyses the major factors that the hostel shall consider when embarking in franchising. This is followed by crafting a franchise system strategy with respect to some aspects of the franchisor-franchisee relationship. Finally, the paper gives clear arguments into a final position to extern why franchising is appropriate and relevant for the hostel to create wealth.

This alliance can only come into reality when a successful company store has been established, a franchise appointed, and then both the franchisor and the franchisee seek to exploit the opportunity in a joint venture operation to create wealth for both (Spinelli, Rosenberg and Birley 2004).

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In this context, the purpose of this paper is to propose the expansion of a hostel by franchising. The latter is indeed an entrepreneurship act where opportunity is an obsession, the approach is holistic and leadership is balanced – for the purpose of wealth creation (Spinelli, Rosenberg and Birley 2004).

The paper has four sections. First, I will provide a brief description of the hostel, mentioning the services and the processes involved with it. Then, I will state and analyse the major factors that the hostel shall consider when embarking in franchising. This will be followed by crafting a franchise system strategy with respect to some aspects of the franchisor-franchisee relationship such as real estate issues, marketing issues, selecting and monitoring franchisees, financial analysis and relationship dynamics.

A highlight will be given in the latter to stress how potential conflicts in the franchise relationship should be minimised in earlier and later stages of the partnership. The conclusion will give clear arguments into a final position to extern why the proposed franchise system is appropriate and relevant for the hostel to create wealth and accomplish its goals. 2. The hostel The hostel’s name is Pele, an allusion to the greater Brazilian soccer player ever. The “product” offered by it is a major service with accompanying minor goods and services (Kotler et al. 2009).

Its core business is located in the heart of the “Pampulha” neighbourhood, in Belo Horizonte, Brazil. Pele Hostel targets a segment based on life stage (demographic segmentation) (Kotler et al. 2009). This segment is comprised by young travellers seeking for a cheap, comfortable and safe place to stay as well as an accommodation where they can meet different people and party. The accommodation has five mixed rooms with an average of 10 beds per room and five common bathrooms. It offers breakfast (daily from 7am to 10am) and, optionally, guests can buy snacks and drinks from electronic machines available 24 hours.

Check-in is at 1pm and check-out is at 11am. All guests are required to pay their stay in advance whilst doing the check-in (a 10% discount applies if more than five nights are booked). Since services are intangible in nature, most service providers strive to incorporate certain tangible elements into their offering to enhance customer experience (Barber & Godman 2011). Thus, the hostel provides free WI-FI internet, TVs in common areas, ping-pong and snooker tables for guests. Every night guests are welcomed for movie sessions. There is also a kitchen with fridges, ovens and other storage and cooking facilities available.

In the human factor side, the hostel recognizes that people are a defining factor in a service delivery process since it is inseparable from the person providing it (Kotler et al. 2009). Therefore, top management supervision, staff training and clear procedures for major tasks (i. e. cleaning and cooking) are top priority for the business to operate profitably and satisfy its customers. Finally, when seen as necessary, the hostel adapts the proposed services and tangible elements according to consumer tastes and preferences, differences in infrastructure and distribution channels and host government demands (Hill 2010).

This adaptation is seen as vital for the success of each local business. 3. Franchising: major factors of consideration Assessment of an opportunity requires an articulate understanding of marketing demand. A prospective franchisee should ask probing questions of the franchisor, about their customers and how deeply the franchise system understands the nature of the customer (Spinelli, Rosenberg and Birley 2004). Thus, Pele Hostel seeks to reliably answer the “five key market demand questions”. They are as follows:
• Who is the customer? Locals and foreign young travellers with a reduced budget looking for a cheap, omfortable and safe place to stay as well as an accommodation where they can meet different people and party.
• Is the customer reachable? The customer is totally reachable since Brazil will host FIFA 2014 World Cup and the Olympic Games in 2016. Both events will generate an increasing demand for hotel complexes of the host cities, not only due to the events themselves, but also to the hike in tourist inflow caused by the country’s increased international exposure as a tourist destination.
• Is the price-value relationship attractive to the customer? Each bed will cost R$149. 99 during June and July 2014 (World Cup period) and R$99. 9 in the other months. However, depending on the market situation of each franchisee, going-rate pricing can be applied (Kotler et al. 2009). The prices seem adequate when compared with competitors’ prices that have similar or even lower quality, size and target market.
• Can the business achieve a 20 percent market share and growth at an aggressive annual rate? With its recognised national and international brand, standardised quality and price as well as an accommodation well-known for its casual environment, Pele Hostel can achieve 20 per cent market share and grow at an aggressive annual rate.

In the market structure side, it is important to state that the most attractive markets are those in developed and developing countries that have a free market system and do not have surging inflation rates and private sector debt, as is the case of Brazil (Hill 2010). In addition, 2013 is the right moment to invest in the Brazilian hospitality market since the country will host the FIFA 2014 World Cup and the Olympic Games in 2016. The country also has one of the world’s fastest growing economies, and its economic reforms have given the country a new international recognition and influence (http://www. ndexmundi. com/brazil). 4. Deployment strategies Strategy is a course of action which sets the direction of the company for the foreseeable future as it negotiates its pathway through the external environment with all its competitive and market influences and potential for good fortune and tragedy alike (Thompson et al. 2012). Moreover, strategy is about pleasing customers, competing successfully, growing the business, conducting operations and achieving targeted objectives (Thompson et al. 2012).

In this context, real estate issues, marketing issues, selecting and monitoring franchisees, financial analysis and the franchisor-franchisee relationship dynamics are the cornerstones for developing a SDS system which will foster wealth creation. 4. 1 Real estate issues Spinelli, Rosenberg and Birley (2004) state that real state is only valuable if it provides a platform to deliver a product or service in fulfilment of market demand. Moreover, the identification of the primary target audience (PTA) is a crucial input in the design of the SDS of a franchise.

Only when the PTA is identified can decisions be made on real estate needs (Spinelli, Rosenberg and Birley 2004). In this context, Pele Hostel’s customers are described as having a semi-planned purchase behaviour. First there is a triggering event that initiates the actual decision to make the purchase (the wish to travel, for example). Second there is a time gap between the time at which the “problem/wish” is identified, the decision to make the purchase has been made and the purchase transaction occurs (Spinelli, Rosenberg and Birley 2004).

Thus, Pele Hostel’s franchisees trade areas do not need to be in prime locations. Since the majority of the business’ customers will have already made the purchase online or through the phone, there is no significant need for site visibility, traffic flow to the site and traffic volume/patterns. However, Pele Hostel shall be located in a region where zoning allows such hospitality business. Moreover, it must be positioned within an area with intense nightlife (complementary neighbours) where targeted guests (young travellers) will have the chance to party.

Finally, Pele Hostel building/house must have at least 5 rooms and 5 bathrooms, with an area ranging from 100 to 200 square meters. The property finding as well as the leasing/purchasing contract with the property owner will be the franchisee’s responsibilities. All the decoration and standardised appearance of franchises will be a responsibility of the franchisor. 4. 2 Selecting and monitoring franchisees Franchisors put great effort into creating a superior business format for their franchise with the best potential return on investment for their franchisees and themselves.

Yet unless they can attract and select suitable franchisees their efforts are largely wasted (Spinelli, Rosenberg and Birley 2004). Therefore, Pele Hostel’s potential franchisees need the following attributes:
• A passion for having fun and making people happy;
• A dedication to customer service and a commitment to delivering on our vision to be ‘the happiest accommodation experience’;
• Ambition to develop and grow a successful business and to maximize each hostel’s potential;
• A strong work ethic and desire to succeed including a willingness to put in the hard yards as the store owner/manager; A thirst for knowledge and a willingness to undertake ongoing training;
• Excellent leadership and communication skills;
• Sound management and administrative skills and strong computer literacy. In addition to the listed attributes above, Pele Hostel does not require a specific age, marital status, education level, or business management experience to become a franchisee. The only requirement is in regards to the funds available, which 25% need to be provided in cash. Finally, franchisees will be monitored by field support, peer review and mainly by customer feedback.

The latter is relevant for Pele Hostel’s franchising success since in case of services the “product” is intangible, heterogeneous and perishable. Hence, there is scope for customizing the offering as per customer requirements as he/she assumes particular significance (Kotler et al. 2009). 4. 3 Marketing issues Marketing is about delivering value to customers in order to satisfy their needs and wants competitively and profitably. It is the tactical process of marketing that ensures products and services are available to us at the right places, time, prices and with the right information and service available to purchase them (Kotler et al. 009). Thus, Pele Hostel recognises that marketing is important not only to franchisees in achieving a high level of sales but also in promoting the franchise itself to potential franchisees. At the end, the more franchisees appointed and the wider the area of expansion, the stronger the brand name becomes (Spinelli, Rosenberg and Birley 2004). In the proposed business, franchisees will be charged a marketing fee of 3% of net sales and the majority of marketing will be carried out by the franchisor.

Since a large portion of franchisee’s customers come from out of their current locations, local marketing will be restricted and totally a responsibility of the franchisee. Finally, the promotion of the franchise will be based on partnerships with albergues. com. br, hostelbookers. com, agoda. com and expedia. com. Additionally, national and international advertisements in newspapers and magazines as well as campaigns on TV and radio will be launched in a regular basis. Joint advertising with local pubs and grocery stores will be also considered, but as a franchisee’s responsibility and own cost. . 4 Financial analysis Spinelli, Rosenberg and Birley (2004) stress that it is a combination of economies of scale and local entrepreneurial capacity that drives competitive advantage for the franchise company. Moreover, the proof of a successful SDS lies first in its ability to generate profit and second in its ability to be precisely duplicated (Spinelli, Rosenberg and Birley 2004). Therefore, the financial aspects that are a matter of concern for Pele Hostel’s franchising are summarised and described as: Revenue: Pele Hostel’s franchises are estimated to have a 70% average occupancy during the year. If a franchise has 50 beds (10 beds x 5 rooms) at a cost of R$99. 99/bed/night, then each franchise should expect an annual revenue of R$1,277,500 (50 x 99. 99 x 365 x 0. 7). However, it is important to state that this amount will depend on the management of each franchise as well as external market factors and the franchisor cannot ensure its achievement.
• Labour: increased sales or service can only be achieved if there is sufficient labour available (Spinelli, Rosenberg and Birley 2004).

Thus, each franchise of Pele Hostel is estimated to expend from 15% to 20% of total revenue in labour costs. The franchise’s standardised procedures and proven operating efficiency will help franchisees in reducing labour costs.
• Costs of goods sold: Pele Hostel’s franchises take advantage of economies of scale combining the buying power of all outlets. Thus, all the furniture, kitchen appliances, bed linen, decorations as well as food and beverage are transferred to each franchise with costs that represent a key competitive advantage. Royalties: a 5% royalty fee of net sales will apply to all Pele Hostel’s franchises.
• Rent: the most appropriate location is one that produces the lowest rent as a percentage of sales (Spinelli, Rosenberg and Birley 2004). If the franchisee chooses to rent instead of buying a property, the renting cost shall range from 20% to 30% of the total revenue. Real estate issues and site selection criteria were already discussed in topic 4. 1.
• Advertising and promotion: a 3% marketing fee of net sales will apply to all franchises. The way Pele Hostel conducts its marketing was already discussed in topic 4. . The initial investment comprises of the franchise fee, intellectual property, store design, fixtures and fittings, equipment, operating systems and training. Depending upon the location this cost can range from approximately R$350,000 to R$450,000. Finally, and not less important, the return on investment (ROI) will vary from each franchise. Pele Hostel’s management experience verifies that if the franchisee follows the successful business model provided from the franchisor and correctly manages its franchise, the ROI should range from 15% to 20% on an annual basis. . 5 Franchisee-franchisor relationship dynamics Prospective and current franchisors must bear in mind that the first and foremost, franchising is about relationships. The franchisor and franchisee knowingly and voluntarily enter into a long-term interdependent relationship to create wealth, each depending on the other for success (Spinelli, Rosenberg and Birley 2004). In this context, Pele Hostel provides to all its franchisees a solid business model that foster wealth creation, decreasing the potential stress if forecasted ROI does not eventuate.

Moreover, the franchisor stimulates clear and open communication with all its franchisees, giving them the opportunity for inputs in the franchise agreement as well as in the day-to-day running of the business. Pele Hostel also cares about providing to its franchisees a strong brand perceived as bringing all the benefits expected from it. It is also important to state that the importance of assessing the cost of exiting the franchise relationship is closely allied to the value placed on the brand (Spinelli, Rosenberg and Birley 2004).

Nonetheless, conflicts between the franchisor and the franchisee can be initially minimised by setting up a franchise agreement that protects the franchise system. Then, Pele Hostel, as a franchisor, retains control over its unique business format and its outward appearance. Yet, since franchisees are joining with the franchisor in an entrepreneurial alliance, it is reasonable and necessary that they be treated fairly in the agreement (Spinelli, Rosenberg and Birley 2004).

Finally, if unexpected conflicts arise, Pele Hostel as a franchisor will try mediation or arbitration with its franchisees. The business sees these types of approaches as less costly and quicker than litigation. Moreover, the latter damages customer’s perception of the franchise and unsettles other franchisees in their relationship with the franchisor (Spinelli, Rosenberg and Birley 2004). 5. Conclusion From the evidences above, we can conclude that Pele Hostel has a solid strategic planning to be a successful franchise.

This was demonstrated by the way the business appropriately deals with real estate and marketing issues as well as selecting and monitoring franchisees. The financial analysis also provided some valuable guidance for Pele Hostel franchise to gather a competitive market advantage and accomplish its growth goals. Finally, the franchisor-franchisee relationship dynamics is a high priority for the business. It is understood by the latter that maintaining strong relationships and trust must be a major goal of brand owners (Rugless 2003).

In sum, Pele Hostel has a unique strategic planning that guides it in terms of what the business should do to achieve its goals as a franchise. It performs activities in a different and more effective way than rivals do, which is the essence of strategy to compete successfully and operate profitably. References Barber, N & Goodman Jr. , R 2011, “A strategic approach to managing customer service quality”, Journal of Service Science, vol. 4, iss. 2, pp. 17-32. Brazilian data, viewed 9 June 2013, . Hill, CWL 2010, Global Business Today, 7th edn, McGraw Hill, Boston. Kotler,

P, Keller, KL, Ang, SH, Leong, SM and Tan, CT 2009, Marketing Management: An Asian Perspective, 5th edn, Singapore, Prentice Hall. Rugless, R 2003, “IFA: Communication key ingredient in fruitful franchise relations and Liddle”, Nation’s Restaurant News, February 24, 2003. Spinelli, S, Rosenberg, RM and Birley, S 2004, Franchising: Pathway to Wealth Creation, Prentice Hall, Upper Saddle River, NJ. Thompson, AA, Strickland, AJ and Gamble, JE 2012, Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases, 18th edn, New York, McGraw-Hill.