Does Paying Higher Franchise Fees Command Higher RevPAR?

Keywords

Franchising, Hotel industry, Hotel performance, RevPAR, Franchise royalties, Value-added hypothesis

Abstract

Purpose This study aims to validate the value-added hypothesis in hotel franchising using data from 2,120 properties across the United States with a total of 12,720 observations over a six-year period of 2008-2013. Design/methodology/approach A series of annual cross-sectional regressions for each of the sample years and aggregated panel regressions for all sample hotel years were conducted. Newey–West errors were computed to address potential issues of autocorrelation and heteroscedasticity, and sensitivity tests were also performed. Findings The paper concludes that franchise royalty fee adds value to hotel franchisees as it significantly and positively affects revenue per available room (RevPAR) for all sample years after controlling for the major determining dimensions of RevPAR. A series of sensitivity tests also show robustness of results. Research limitations/implications This study offers a rational and empirical explanation for the positive and significant effect of franchise royalty fees on hotel performance and the value-added hypothesis. Hoteliers need to ensure that there is a proper match between hotel specific attributes and the potential franchise when making a franchise selection. Individual entrepreneurs can partner with franchisors to reap the benefits of franchising, while experienced hoteliers can also use the findings of this study to make strategic decisions. Originality/value This study is the first using actual performance data from a large hotel property sample over multiple years to validate the value-added theory, where a higher royalty fee does command a higher RevPAR.

Publication Date

1-1-2017

Number of Pages

2941-2961

Document Type

Article

Language

English

Source Title

International Journal of Contemporary Hospitality Management

Volume

29

Issue

11

College

Rosen College of Hospitality Management

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