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Hospitality Case Study: Franchising a Hilton Hotel

Hospitality Case Study:  Franchising a Hilton Hotel
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  • 0:05 A Hilton Hotel Franchise
  • 1:20 Fees
  • 2:41 Calculating Net Monthly Cost
  • 5:36 Example
  • 6:36 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Do you want to open up a Hilton Hotel franchise? Read this lesson to learn about all the costs involved in such a venture to see if you are in a position to do so.

A Hilton Hotel Franchise

Opening up and running your very own hotel is an exciting venture. To help you, some large hotel chains offer franchising opportunities. By purchasing a franchise, you immediately get to operate under a trusted name, helping you to get customers right away. One hotel chain that offers such a franchise is the Hilton brand.

A franchise is a license that you purchase for the right to operate under someone else's trademark using the procedures that have already been proven to work in that business. For example, a McDonald's franchise gets access to the brand name, all the recipes, and all the operating procedures for that brand. The Hilton brand actually offers franchises under many of its names, such as Waldorf Astoria, DoubleTree, and Hampton. Franchisees can choose to open up under any of these recognized brand names that are available in their area. In this lesson, though, you'll see what is involved in opening up a Hilton Hotels & Resorts franchise.

The information in this lesson is taken from the latest development brochure provided by Hilton Worldwide, as of August 2017. According to this brochure, more than 1,200 Hilton Hotels have been opened in the past six years. That's a lot of franchises!

Fees

According to this brochure, there were 557 Hilton Hotels & Resorts in April 2015, with a total of 200,360 rooms. Of these properties, 40.5% are franchised.

The initial license fee to start a franchise is $75,000. This fee covers the first 250 rooms. After that, there is a $400 per room charge. So if you wanted to open up a 300-room hotel, your initial license fee is $75,000 + $400 * 50 (for all the rooms past 250 rooms) = $75,000 + $20,000 = $95,000.

In addition to the initial license fee, you also have monthly fees based on the amount of sales you make each month. Each month, you have to pay 5% of your monthly room revenue as royalty and 4% for the program fee. That's a total of 9% right there. There is also a food and beverage fee of 3% of your food and beverage sales. If you want to operate a spa, then you'll also need to pay 5% of your spa sales.

All these fees are in addition to any costs you need to develop and build your hotel. Your total could be as much as $100 million. The franchise fees are so that you can operate under the Hilton brand.

Calculating Net Monthly Cost

Let's see how this all adds up for your 300-room Hilton Hotel.

Imagine that you've now been in business for a while. You are now calculating the fees you need to pay for the month that has just passed. You've already paid the initial license fee of $95,000, so now your monthly fees are simply the percentages of sales that you make. You have this list of your gross sales for your rooms, your food and beverages, and your spa:

Category Gross Sales
Rooms $1,056,938
Food and Beverage $298,385
Spa $873,529

Now, you can calculate your net monthly cost for this past month.

You need to pay a royalty fee of 5% of your gross room sales. This amounts to $1,056,938 * 0.05 = $52,846.90.

The franchise program fee is 4% of your gross room sales, which amounts to $1,056,938 * 0.04 = $42,277.52.

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