The Brands Went Asset Light. Your Costs Didn’t.

An asset-light pivot is compressing your margins – here’s what the new wave of conversion brands means for what’s left

By Sumit Dalwadi, DBA

There is a version of hotel franchising that most of us bought into. The brand brings the flag, the loyalty program, the reservation system, and the marketing muscle. You bring the capital, the land, the debt, and the operational sweat. In exchange for shouldering those risks, you gain access to a system designed for mutual success. That was the promise.

I’ve been an AAHOA Member and a hotel owner-operator for years. I also just completed a doctoral dissertation at the University of Houston examining exactly how that promise has held up under the industry’s shift to what academics call the Asset-Light, Fee-Oriented, or ALFO, model. What I found should concern every owner in the industry.

The Brands Got Out of the Hotel Business

Over the past few decades, the major hospitality companies systematically divested their real estate holdings. Marriott, Hilton, IHG, Wyndham, Choice – they’re no longer primarily in the business of owning hotels. They are, as one veteran operator in my research put it, “platform companies.” They license the name, control the distribution system, and collect fees. The operating risk stays with you.

This isn’t inherently sinister. Asset-light models are good for shareholders. They enable rapid global expansion with predictable, high-margin fee income and minimal capital risk. That makes these companies attractive to investors. The problem is what happened next: The fee structures didn’t stay light.

What the Data Shows

In a survey of hotel franchisees conducted as part of my dissertation research, 82.8 percent of respondents reported that their Net Operating Income (NOI) had decreased over the prior three years.

At the same time, 85.1 percent reported that their franchisor-mandated non-room expenses, such as technology fees, loyalty program assessments, and marketing contributions, had increased as a percentage of gross revenue.

Multiple interviewees described total franchise-related costs that had climbed from roughly 12 percent to nearly 20 percent of gross revenue over the life of their agreements. Academic research corroborates this: A 2021 study documented that cumulative franchise fees can exceed 10 to 12 percent of gross sales under typical agreements – and that was before the category creep of recent years.

The survey results on trust were worse. When asked whether fees are proportionate to the value received, on a scale from 1 to 5 with 1 being the lowest score, the average score was 1.85 out of 5. Agreement that franchisors balance revenue growth with franchisee profitability scored 1.85, too. Trust that the franchisor acts in franchisees’ long-term best interests scored 1.97. Franchisor transparency on costs and markups scored the lowest of any item in the entire study at 1.72.

Here’s the structural reason this happens: When a franchisor earns royalties based on your gross room revenue and not your NOI, they get paid whether you’re profitable or not.

When they introduce a new technology platform, a refreshed loyalty program, or a mandatory vendor arrangement, their revenue base expands regardless of whether your bottom line can absorb the cost. The incentives have diverged. This is not a conspiracy; it’s arithmetic.

Now Add the Conversion Brand Rush

Which brings us to Spark by Hilton, Garner by IHG, City Express by Marriott, and the growing economy and lifestyle soft brand tier more broadly. Conversions are faster and cheaper than ground-up construction, which makes them attractive vehicles for system-wide unit growth. And system-wide unit growth is how fee-based companies grow their top line.

The concerns owners raise about this expansion are legitimate and, in at least one case, empirically documented. Kalnins (2004) provided the first systematic evidence of intra-brand encroachment in the Texas lodging market, finding that when a franchisor approves a new same-brand hotel nearby, it measurably takes revenue from the existing owner. The important contrast in his findings: Company-owned chains did not show the same encroachment effect. When the franchisor owns the units, they internalize the cost of cannibalization. When you own the units, they don’t.

Conversion-driven expansion, by definition, absorbs existing properties built to different specifications, under different vintages of brand standards, and with varying physical conditions. The guest experience under your flag is only as consistent as the weakest property flying it. You bear the reputational spillover; the franchisor collects the fee. This was a concern raised consistently across my interviews.

What Owners Can Actually Do

None of this means franchising doesn’t work, or that the brands provide no value. It means the terms of the relationship deserve the same scrutiny you apply to your debt structure and your RevPAR. Here is where to start.

1. Know your real cost basis. Pull every fee category from your last 12 months of franchise invoices. Not just royalties, but technology, loyalty, marketing, reservation, and vendor-mandated charges and calculate the total as a percentage of gross revenue. If that number is approaching or exceeding 18 to 20 percent, you are in the range multiple operators in my research described as unsustainable. You cannot negotiate what you haven’t measured.
   
   
2. Use the Franchise Disclosure Document as a due diligence tool, not a formality. Item 6: Other Fees lists current fees. Item 19, if included, shows financial performance representations. What neither capture is how fees can grow mid-contract through program introductions, reclassifications, or escalation clauses. Before any renewal or conversion decision, have a franchise attorney specifically red-line the fee modification language. That is where margin disappears quietly over the life of an agreement.
   
   
3. At renewal or initial signing, negotiate territorial protections explicitly. The encroachment risk is real and empirically documented. Insist on defined protected territory language, not just a right of first refusal. Mid-contract, your options are limited (read: nonexistent), but knowing what you didn’t secure the first time is the most important preparation for next time.
   
   
4. On vendor mandates, understand what collective action can achieve. My survey data showed marketing, loyalty, and technology costs as the most cited sources of unreasonable financial pressure with vendor mandates and markups close behind. Individually, your contractual leverage here is limited. Franchisee autonomy on vendor selection scored near the bottom of every measure in my research. But this is precisely where organized advocacy has the most traction. Pushing for competitive bidding rights and mandatory disclosure of brand rebates and vendor incentives is both achievable and precedented. It requires association-level pressure, not just individual negotiation.
   
   

Nearly 60 percent of survey respondents offered specific reform proposals, and the pattern was consistent: Mandatory itemized disclosure of how marketing and technology fund collections are actually spent, competitive bidding rights on vendor programs, fee caps tied to revenue benchmarks rather than franchisor discretion, and franchisee voting rights on new fee introductions.

These are not radical asks. They are the minimum conditions for a franchise relationship that functions as advertised: Shared risk, mutual success. None of them will be won property by property. They require the kind of sustained, collective pressure that only an organization like AAHOA can apply. The data from franchisees is now strong enough to make that case.

The brands changed their business model. The contracts haven’t kept pace. The question is whether our advocacy will.

---

Sumit Jay Dalwadi, DBA, is a second-generation hotelier, founder of Dalwadi Hospitality Management, LLC, and a longtime AAHOA Member. In 2026, he completed his doctorate at the University of Houston’s C.T. Bauer College of Business, where his research examined franchise economics from the owner’s perspective. He serves on the board of the Hotel & Lodging Association of Greater Houston, Texas Hotel & Lodging Association, and Houston Hospitality Alliance.

Image: Andrii/stock.adobe.com