Hilton Hotel Franchise Analysis (2023)
Written by: Qingyi (Shirley) Cao
Last Updated by
Facundo Bermudez: January 18, 2023
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This article is based on its 2022 FDD
Hilton is one of the well-known hotel and resort brands in the nation and around the world. This is one of the places that business and leisure travelers would first go to. As a franchisee, you will be operating a Hilton Hotel with the franchisor Hilton Franchise Holding LLC. The company has been the franchisor for the Canopy and Curio brand hotels, the Conrad, DoubleTree, Embassy Suites, and Hampton Inn.
Contents
Who Owns Hilton Hotel Franchise?
Hilton Franchise is currently owned by Hilton Domestic Operating Company Inc., whose parent company is Hilton Worldwide Holdings Inc. The American multinational hospitality company that manages and franchises a broad portfolio of hotels and resorts was founded by Conrad Hilton in 1919. As of December 31, 2021, Hilton owns 6,800 properties and 1 million rooms in 122 countries and territories. As the hospitality industry moved toward recovery from the COVID-19 pandemic, Hilton’s proven growth strategy led to significant results – opening more than one hotel per day in 2021! Although expanding worldwide, 83.33% of the hotels are located in the Americas with 810,296 rooms. Its supportive and inclusive environment has helped Hilton win the #3 World’s Best Workplace, #2 Best Company to Work for in the U.S., and the #1 Best Big Company to Work For.
Hilton has 19 brands across different market segments, using various tiers to distinguish its properties.
Additionally, Hilton has its own customer loyalty program, Hilton Honors, through which members have access to their diverse brand portfolio, rich benefits, and travel experience. As of December 31, 2021, Hilton has 128 million members as Hilton Honors, a 13% increase from December 31, 2021.
Hilton Worldwide Holdings Inc. (NYSE: HLT) was publicly traded on December 13, 2013, at a price of $45.34. It is currently $142.25 as of May 29, 2022. With a market capitalization of $39.593 billion, the stock is relatively volatile with a beta of 1.16.
How is the Hilton Hotel Franchise Positioned in the Hotel and Residential Industry?
The Travel, Hospitality, and Leisure industries intersect with multiple industries, such as Food & Beverage, Hotel, Recreation, and Tourism. As it is both a capital and labor-intensive industry, it relies on investments in fixed assets. This industry generates over $1.6 trillion in economic output, representing 2.8% of GDP.
The travel and hospitality industry has grown tremendously over the last few years as flights have become more affordable and people are willing to spend their money on vacations and travel. Under the COVID-19 pandemic, the industry can expect some changes in consumers’ demand, where people will tend to travel more within the borders than abroad. However, this pandemic proves that this is a resilient industry. With rising vaccination rates and the opening of the borders, the industry saw an immediate surge in demand. Further, in 2021, the overall easing of travel and other restrictions generated a renewed interest in travel and tourism activities around the globe.
Hilton Hotel competes in the travel industry against other hotel and resort properties, ranging from national and international hotel brands to independent, local, and regional hotel operators, as well as alternative lodging companies that rent residential inventory in a manner consistent with hotels.
What is the Hilton Hotel Franchise Cost?
The total investment necessary to begin the operation of a typical 300-room Hilton hotel, excluding real property, is $38,704,705 to $162,293,082, including up to $467,585 that must be paid to the franchisor.
Opening a hotel requires multiple payments that need to be paid beforehand. Franchisees must pay an application fee: you are expected to pay $75,000 plus $400 for each additional guest room or suite over 250. There are also pre-opening fees, including $103,395 to $279,805 for computer systems installation, $5,000 to $20,000 for training program fees, and multiple miscellaneous service fees.
Once the operations begin, franchisees are expected to pay the company a royalty fee of 5% of gross room sales, 3% of gross food and beverage sales, and 4% of gross room revenue.
The average industry royalty fee is approximately 5.2%, while Hilton has a royalty fee of 5% of gross room sales. Although Hilton has a royalty fee lower than the industry average, franchisees of Hilton are expected to pay other monthly fees other than the royalty payments.
How Much Do Hilton Hotel Franchise Owners Make?
Hilton does not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. However, if you are purchasing an existing Hilton Hotel franchise, the company may provide you with the actual records of that franchise.
Usually, we can estimate sales figures from the average revenue per available room (RevPAR) provided by the FDD. The estimated revenue for hotels can be based on a formula multiplying the chain’s revenue per available room (RevPAR) by the number of rooms and the number of days in the year. Specifically, the Hilton franchise provides a RevPAR Index, which measures a hotel’s RevPAR relative to an aggregated grouping of hotels, rather than the RevPAR directly. An index greater than 100 represents more than a fair share of the aggregated group’s performance. With a RevPAR index of 107.6 and 106.9 for 2020 and 2021, respectively, Hilton outperformed its competitors.
The RevPAR Index is calculated as follows: (Hotel RevPAR / Comp Set RevPAR) * 100 = RevPAR Index. Since the competitive set of RevPAR is identified by STR LLC, an independent research firm that provides information to the hotel industry, we are not able to calculate the Hotel RevPAR directly and derive the estimated sales of each franchised Hilton hotel.
Alternatively, we can employ the RevPAR provided by the parent company Hilton Worldwide Holdings Inc., which is $80.88 in 2021
We estimate the average Hilton franchise owner makes $8.85M in sales a year.
Estimated Sales: $8,856,360
| Initial investment (midpoint) | %Profit margin of median franchise sales | Estimated Profits | Time to recoup investments |
|---|---|---|---|
| $100,498,893 | 7% | $619,945 | 162 years |
| 11% | $974,199 | 103 years | |
| 15% | $1,328,454 | 76 years |
Is the Hilton Hotel Franchise Profit Worth the Cost?
Normally, the hospitality industry requires a large amount of initial investment in assets before starting to make profits. The Hilton Hotel franchise is no exception. According to our estimation above, it requires approximately 103 years to reach breakeven. However, for an industry with a 12% growth rate, we are expecting the RevPAR to increase, which results in higher estimated sales and the value of the hotel assets to grow. The time to recoup the investment will be shortened accordingly. For Hilton Hotel franchisees, you should be ready to leverage the use of the loan to finance your initial investment to start the business.
We believe that this is a prospective industry. As soon as the pandemic restrictions were loosened, the RevPAR increased by 64.5% to $80.88. The ADR increased by 13.8% to $132.94. The adjusted EBITDA was $1,629 million in 2021, compared to that of $842 million in 2020.
How Many Hilton Units Have Opened and Closed?
The number of franchisees increased immediately after the restrictions in response to the pandemic were loosened. During the COVID-19 pandemic in 2020, there was one franchised Hilton hotel terminated and one non-renewal franchised Hilton hotel. In 2021, the number of franchisees increased from 179 to 188. The average failure rate of Hilton franchised hotels across three years is 1.6%, which is significantly lower than the average industry failure rate of 15.61%!
| State | Year | Hotels at Start of Year | Hotels Opened | Terminations | Non-Renewals | Reacquired by Franchisor | Ceased Operations – Other Reasons | Hotels at End of Year |
|---|---|---|---|---|---|---|---|---|
| Total | 2019 | 180 | 8 | 1 | 0 | 0 | 6 | 181 |
| 2020 | 181 | 0 | 1 | 1 | 0 | 0 | 179 | |
| 2021 | 179 | 5 | 0 | 0 | 0 | +4 | 188 |
Hilton Worldwide Holdings, Inc Income Statement Takeaways
The COVID-19 pandemic began to negatively affect the company’s franchise and licensing fees in March 2020. However, in 2021, the company experienced increases in fees, driven by an upward trend in travel and tourism from increased desire to travel by the customers. Additionally, there were fewer hotels that had suspended operations as a result of the pandemic. The franchise and licensing fees increased from $945 million to $1,493 million, which is a 58% increase from 2020 to 2021.
Increases in other measures were also reflected in the increase in revenues. For the year ended December 31, 2021, RevPAR increased 62.3 percent at our comparable franchised properties and 55.2 percent at our comparable managed properties as a result of increased occupancy of 18.3 percentage points and 12.7 percentage points, respectively. The ADR increased by 13.4% and 12.3%, respectively. As of 2021, Hilton Worldwide Holdings added over 730 managed and franchised properties on a net basis, providing an additional 105,000 rooms.
With a little increase in the expenses, Hilton Worldwide Holdings’ net income was $407 million in 2021. Compared to 2020, it was a $720 million increase. The net loss in 2020 was due to the pandemic, where many hotels were forced to cease operations.
HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in milions)
| Years ended on December 31, | |||
|---|---|---|---|
| 2021 | 2020 | 2019 | |
| Revenues | |||
| Franchise and licensing fees | $1,493 | $945 | $1,681 |
| Base and other management fees | $176 | $123 | $332 |
| Incentive management fees | $98 | $38 | $230 |
| Owned and leased hotels | $598 | $421 | $1,422 |
| Other revenues | $79 | $73 | $101 |
| $2,444 | $1,600 | $3,766 | |
| Other revenues from managed and franchised properties | $3,444 | $2,707 | $5,686 |
| Total revenues | $5,788 | $4,307 | $9,452 |
| Expenses | |||
| Owned and leased hotels | $679 | $620 | $1,254 |
| Depreciation and amortization | $188 | $331 | $346 |
| General and administrative | $405 | $311 | $441 |
| Reorganization costs | – | $41 | – |
| Impairment losses | – | $258 | – |
| Other expenses | $45 | $60 | $72 |
| $1,317 | $1,621 | $2,113 | |
| Other expenses from managed and franchised properties | $3,454 | $3,104 | $5,763 |
| Total expenses | $4,771 | $4,725 | $7,876 |
| Gain (loss) on sales of assets, net | (7) | – | 81 |
| Operating income (loss) | $1,010 | (418) | $1,657 |
| Interest expense | (397) | (429) | (414) |
| Loss on foreign currency transactions | (7) | (27) | (2) |
| Loss on debt extinguishments | (69) | (48) | – |
| Other non-operating income (loss), net | 23 | (2) | 3 |
| Income (loss) before income taxes | 560 | (924) | $1,244 |
| Income tax benefit (expense) | (153) | 204 | (358) |
| Net income (loss) | 407 | (720) | 886 |
| Net loss (income) attributable to noncontrolling interests | 3 | 5 | (5) |
| Net income (loss) attributable to Hilton stockholders | $410 | ($715) | $881 |
Hilton Worldwide Holdings, Inc Cash Flows Statement Takeaways
Liquidity is one of the most important measurements of a company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, operations, and expansion of franchised locations. According to the cash flows statement, Hilton Worldwide Holdings, Inc has a $1,751 million decrease in cash and cash equivalents due to debt repayment. At the end of the fiscal year, its total cash and cash equivalents amounted to approximately $1,512 million.
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||
|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||
| Operating activities: | ||||
| Net (loss) income | $407 | ($720) | $886 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||
| Amortization of contract acquisition costs | $32 | $29 | $29 | |
| Depreciation and amortization expenses | $188 | $331 | $346 | |
| Impairment losses | – | $258 | – | |
| Loss (gain) on sales of assets, net | 7 | – | (81) | |
| Loss on foreign currency transactions | 7 | 27 | 2 | |
| Loss on debt extinguishments | 69 | 48 | – | |
| Share-based compensation expense | 193 | 97 | 154 | |
| Amortization of deferred financing costs and discount | 16 | 17 | 16 | |
| Deferred income taxes | (4) | (235) | (20) | |
| Contract acquisition costs | (200) | (50) | (90) | |
| Changes in operating assets and liabilities: | ||||
| Accounts receivable, net | (301) | 488 | (105) | |
| Prepaid Expenses | (22) | 60 | 6 | |
| Other current assets | (107) | (26) | 15 | |
| Accounts payable, accrued expenses and other | 273 | (414) | 99 | |
| Change in operating lease right-of-use assets | 96 | 94 | 43 | |
| Change in operating lease liabilities | (123) | (142) | (80) | |
| Change in deferred revenues | (128) | 215 | (17) | |
| Change in liability for guest loyalty program | (105) | 610 | 191 | |
| Change in other liabilities | (111) | 8 | (14) | |
| Other | (78) | 13 | 4 | |
| Net cash provided by operating activities | 109 | 708 | 1,384 | |
| Investing activities: | ||||
| Capital expenditures for property and equipment | (35) | (46) | (81) | |
| Proceeds from asset dispositions | 6 | – | 120 | |
| Capitalized software costs | (44) | (46) | (124) | |
| Other | 16 | (15) | (38) | |
| Net cash used in investing activities | (57) | (107) | (123) | |
| Financing Activities: | ||||
| Borrowings | 1,510 | 4,590 | 2,200 | |
| Repayment of debt | (3,230) | (2,121) | (1,547) | |
| Debt issuance costs and redemption premiums | (76) | (71) | (29) | |
| Dividends paid | – | (42) | (172) | |
| Repurchases of common stock | – | (296) | (1,538) | |
| Share-based compensation tax withholdings | (49) | (58) | (44) | |
| Proceeds from share-based compensation | 52 | 31 | 17 | |
| Other | – | (1) | – | |
| Net cash provided by (used in) financing activities | (1,793) | 2,032 | (1,113) | |
| Effect of exchange rate changes on cash, restricted cash and cash equivalents | (10) | – | (2) | |
| Net increase (decrease) in cash, restricted cash and cash equivalents | (1,751) | 2,633 | 146 | |
| Cash, restricted cash and cash equivalents, beginning of period | 3,263 | 630 | 484 | |
| Cash, restricted cash and cash equivalents, end of period | $1,512 | $3,263 | $630 | |
| Supplemental Disclosures: | ||||
| Cash paid during the period: | ||||
| Interest | $359 | $433 | $360 | |
| Income taxes, net of refunds | $181 | $79 | $363 | |
Conclusion
Unlike other franchise businesses, franchising with Hilton Hotel requires careful consideration and the ability to make a large investment at the initial stage of the process. Besides, the time period to recoup your initial investment could be long, while varying drastically. As an individual franchisee, you may have to leverage the use of loans. However, the Hilton Hotel franchise proves to be a stable and resilient business once the hotel starts to operate. The average failure rate is 1.6% across three years, even under the impact of the COVID-19 pandemic. The hospitality industry is prospective, and it is an industry that will never go away. If you are a determined franchisee interested in the hospitality industry, the Hilton Hotel franchise could be a challenging opportunity.
