Hotel chains entry mode in Bulgaria Maya Ivanova Varna, Bulgaria, e-mail: maya.g.ivanova@gmail.com Stanislav Ivanov, PhD. Associate Professor and Vice Rector, International University College, Bulgaria; tel.: +359 58 655612, e-mail: stanislav.ivanov@vumk.eu Reference: Ivanova, M., Ivanov, S. (2014). Hotel chains entry mode in Bulgaria. Anatolia 25(1), 131-135. Abstract: This exploratory research note focuses on the entry modes applied by foreign and domestic hotel chains in Bulgaria. Results reveal that foreign chains put an emphasis on non-equity entry modes (marketing consortium, management contract, franchise), while domestic chains prefer ownership (full or partial). Hotel chains perceive non-equity modes as most suitable for penetrating the Bulgarian hotel market, while local hotels consider equity and non-equity modes as equally suitable. Considering the very low market penetration of hotel chains in Bulgaria, the authors conclude that there is a vast ground for their expansion in the country and that this expansion should be based on non-equity modes. Research limitations and directions for future research are also discussed. Key words: hotel chain, entry mode, type of affiliation, franchise, management contract, Bulgaria 1
Introduction The process of expansion of hotel chains involves many decisions, one of the most important of which (after the question whether to expand at all) is how to expand, i.e. the choice of an entry mode. The choice of entry mode (the term reflecting the viewpoint of the chain) or type of affiliation (the term reflecting the viewpoint of the hotel) has received a lot of attention in the research literature (Brookes & Roper, 2011; Contractor & Kundu, 1998; Cunill, 2006; Martorell et al., 2013). Entry modes are generally classified into equity (full ownership, joint venture) and non-equity modes (franchise, management contract, lease, and marketing consortium), and research shows that non-equity entry modes prevail (Cunill & Forteza, 2010). Surprisingly, published research deals nearly unilaterally with the viewpoint of the chain and pays little attention to the viewpoint of the individual affiliated hotel (with some notable exceptions like Cho (2005) and Xiao et al. (2008)) a gap that will be partially filled by this note. In 2011 there were 3776 accommodation establishments in Bulgaria (http://www.nsi.bg) and as of 1 st December 2012 only 108 of them (2.86%) belonged to hotel chains (foreign or domestic), i.e. the market penetration of hotel chains in Bulgaria is extremely low which creates ground for their future expansion in the country. However, in the context of Bulgaria, research on hotel chains is very scarce (e.g. Ivanova, 2010; Dabeva, 2013). In this regard and in the light of the above discussion this exploratory research note aims at: a) identifying the entry modes applied by foreign and domestic chains in the Bulgarian hotel market; b) evaluating any differences in the entry mode strategies applied by foreign and domestic chains in Bulgaria; c) identifying the most suitable type of entry mode from the viewpoints of the chains and the affiliated properties; and d) analysing the differences in the opinions of the chains and the affiliated properties regarding the suitability of the various entry modes for the Bulgarian hotel market. Methodology Data collection took place during the period June-November 2012. The authors distributed by email questionnaires to 6 respondent groups: a) domestic hotel chains, b) foreign chains present in Bulgaria, c) foreign chains not present in Bulgaria, d) local hotels that were 2
currently part of a foreign chain, e) hotels that were once part of a foreign hotel chain, and f) independent hotels that had never been part of a chain. Hotels that belonged to domestic chains were not contacted, because they were fully or partially owned by the domestic chain, which means that the decision to join a chain was not based on market principles but on ownership relationships. The response rate was about 75% for the domestic chains and the current chain members, and between 2.40-5.31% for the rest of the respondent groups, which is in line with the Illum et al. (2010) results for online based surveys. From the 10 foreign chains with or without presence in Bulgaria one was in top 5, 4 in top 10 and 6 in top 20 chains for 2010 as per the Hotels325 ranking (Hotels Magazine, 2011) so that their opinion could be considered representative for the world s leading hotel chains. The final dataset included the responses of 5 foreign chains present in Bulgaria, 5 foreign chains not present, 9 domestic chains, 36 hotel affiliated to foreign chains, 7 hotels former foreign chain members and 103 independent hotels. Secondary data were also collected from the websites of the hotel chains and their affiliated properties. Differences between the opinions of hotels and hotel chains are identified via Mann-Whitney U-test, because the Kolmogorov-Smirnov test for normality of the distribution of respondents answers showed that the answers have normal distribution only for the responses of the hotels, and not for the chains. Results Table1 presents the entry modes applied by all foreign and domestic hotel chains present in Bulgaria, regardless whether these chains participated in the research or not. Results reveal huge difference between the applied entry mode by the foreign and the domestic chains. Definitely, marketing consortium seems as the most preferred entry mode by the foreign hotel chains with properties in Bulgaria 22 out of 47 hotels affiliated to foreign chains in Bulgaria have this type of affiliation. Management contract and franchise are applied for 15 and 14 hotels, respectively. For only 2 properties foreign chains have ownership arrangements while lease is not applied at all. Considering the main product of the hotel we see that marketing consortium is preferred for urban properties, while management contract and franchise are mostly preferred for seaside ones. From the view point of the category, mostly 4-star hotels have joined foreign hotel chains. We can firmly state that size does matter clearly, hotels which joined foreign marketing consortia have a much lower average capacity than those affiliated via franchise and management contract, and especially via joint venture. These 3
findings confirm previous results that non-equity entry modes prevail in the international expansion of hotel chains (Cunill & Forteza, 2010) and that managed hotels have higher average capacity (Ivanov & Zhechev, 2011) and higher category (Chen & Dimou, 2005). Furthermore, we see that the average capacity of hotels affiliated to foreign chains via franchise is nearly equal to those affiliated via management contract. The latter can be explained partially with Dev et al. (2002:101-102) s notion that when quality is not an important source of competitive advantage (like in Bulgaria, where price competition is the predominant hotel strategy), management contracts are less preferred and the use of franchising becomes more likely as the hotel size increases. INSERT TABLE 1 AROUND HERE Bulgarian chains show different preferences compared to their foreign counterparts. All chains apply ownership (full or partial) affiliation of the properties to their network, 10 properties are mentioned as affiliated via management contract, while no hotels are affiliated via franchising, marketing consortium or lease. Domestic chains affiliated hotels mostly in the mountains and the seaside, and middle class (3-4 stars) properties. Compared to the hotels affiliated to foreign hotel chains, hotels affiliated to domestic chains have lower category and smaller number of rooms. These results are logical: domestic chains prefer ownership as an entry mode which requires a lot of financial resources to apply constructing smaller and lower category properties decreases the financial pressure on the domestic chains. It should be noted that the authors discovered some inconsistencies in the data provided by the hotels and the domestic chains on their websites and in the completed questionnaires regarding their type of affiliation. Three of the properties claiming to be affiliated to one domestic chain by management contract, could not be found in the National Registry of Categorised Accommodation Establishments, i.e. the hotels seem uncategorised and operating illegally. Two other hotels affiliated to the same chain by management contract appear as affiliated to the chain only on the website of the chain and not on the website of the hotel. Despite authors efforts to receive explanation by the chain and the hotels, they explicitly rejected to answer. A check in the register of the Bulgarian Registry Agency 4
(http://www.brra.bg) shows that there are common owners of the chain and all 5 mentioned hotels. Therefore, although the chain does not own the hotels directly we think the links between them are based on ownership, not on management contract only. That s why we stated that hotels get affiliated to domestic chains on the basis of ownership. Nevertheless, in Tables 1 we report the official type of domestic chains entry modes as stated on their websites and the websites of their hotels. Table 2 presents the summary of the opinions of respondents regarding the level of suitability of each type of entry mode into the Bulgarian hotel market. All respondents are unanimous that lease contracts are least suitable. Chains rank management contract (m=3.68) and franchise (m=3.21) as most suitable entry modes, while hotels evaluate management contracts (m=2.71), franchise (m=2.80), full ownership (m=2.71) and joint venture (m=2.66) as nearly equality suitable. We find that statistically significant differences between the opinions of the chains and hotels exist only for the evaluation of the management contracts (p=0.012), preferred more by chains, and for marketing consortia (p=0.086), preferred more by hotels. These results are natural considering that management contracts give greater control to the chain over the affiliated property, while marketing consortia provide greater freedom to the chain members compared to franchise and management contract. However, comparing the responses of hotels that are currently affiliated to foreign hotel chains, we see that their opinions are much closer to the opinions of the chains and no significant differences between them were found. Unsurprisingly, this means that the experience of the affiliated hotels has led them to conclusions about the suitability of the various entry modes for the Bulgarian market that are much closer to the views of the chains themselves. INSERT TABLE 2 AROUND HERE Conclusion This research note revealed that foreign hotel chains prefer to use non-equity entry modes in Bulgaria while domestic chains have overwhelming preference on ownership. However, both groups of chains agree that franchise and management contracts are most suitable entry modes 5
to the Bulgarian hotel market. On the other hand, hotels perceive franchise, management contracts, full and partial ownership as nearly equally appropriate. Therefore, the non-equity modes are the touch points between the chains and hotels. Considering the low market penetration of hotel chains in Bulgaria, we could conclude that there is a vast ground for their expansion in Bulgaria, and this expansion should be based on non-equity modes as they are considered as most suitable by both the chains and their potential local hotel partners. The main limitation is the small number of foreign hotel chains that agreed to participate in the research. While for the domestic chains authors reached 75% response rate, this statistic was only 4.35% for the foreign chains despite the authors efforts. Future research could concentrate on the requirements hotel chains have towards their potential hotel partners and the requirements independent hotels have towards chains in order to become affiliated to them. Research could also shed light on the factors that drive chains and hotels preferences towards one or another type of entry mode/affiliation. References Brookes, M., & Roper, A. (2011).Realising plural-form benefits in international hotel chains. Tourism Management, 33(3), 1-12. Chen, J.J., & Dimou, I. (2005).Expansion strategy of international hotel firms. Journal of Business Research, 58(12), 1730-1740. Cho, M. (2005).Transaction costs influencing international hotel franchise agreements: The case of the Holiday Inn Seoul. Journal of Vacation Marketing, 11(2), 121-134. Contractor, F.J., & Kundu, S.K. (1998). Modal choice in a world of alliances: analyzing organizational forms in the international hotel sector. Journal of International Business Studies, 29(2), 325-357. Cunill, O.M. (2006). Growth strategies of hotel chains: Best business practices by leading companies. New York: The Haworth Press. Cunill, O.M., & Forteza, C.M. (2010). The franchise contract in hotel chains: a study of hotel chain growth and market concentrations. Tourism Economics, 16(3), 493 515. Dabeva, Т. (2013). Hotel and restaurant franchising. Varna: University of Economics (in Bulgarian). 6
Dev, C., Erramilli, K., & Agarwal, S. (2002). Brands across borders. Cornell Hotel and Restaurant Administration Quarterly, 43(6), 91-104. Hotels Magazine (2011). Hotels 325 for 2010, online. Available at: http://mydigimag.rrd.com/publication/?i=79695 (accessed 17 May 2012). Illum, S. F., Ivanov, S., & Liang, Y. (2010). Using virtual communities in tourism research. Tourism Management, 31(3), 335-340. Ivanov, S.,& Zhechev, V. (2011) Hotel Marketing. Varna: Zangador (in Bulgarian). Ivanova, М. G. (2010). Potential of Bulgarian accommodation establishments to join hotel chains. Proceedings of the Development Alternatives for Contemporary Tourism Conference. Varna: University of Economics, 363-373 (in Bulgarian). Martorell, O., C. Mulet, & Otero,L. (2013).Choice of market entry mode by Balearic hotel chains in the Caribbean and Gulf of Mexico. International Journal of Hospitality Management, 32(1), 217-227. Xiao, Q., O Neill, J., & Wang, H. (2008). International hotel development: A study of potential franchisees in China. International Journal of Hospitality Management, 27(3), 325 336. 7
Table 1. Hotel chains type of entry mode in Bulgaria (as of 01 st December 2012) Hotels affiliated to foreign chains (N=47) Hotels affiliated to domestic chains (N=61) Joint Franchise Management Marketing Ownership (Full or Management contract venture contract consortium Joint venture) Number of properties 2 14 15 22 56 10 Average capacity 551 235 262 87 149 105 (number of rooms) Main product Urban 0 5 4 17 10 0 Seaside 2 9 9 1 23 4# Mountain 0 0 1 4 22 6* Other 0 0 1 0 1 0 Category 2 stars 0 1 0 0 4 1 3 stars 0 1 0 4 13 5* 4 stars 0 10 10 13 30 4# 5 stars 2 2 5 5 9 0 Note: Several hotels belong to 2 foreign hotel chains simultaneously (to one chain through franchise/management contract and to another one through marketing consortium). # Two of the properties could not be found in the National Registry of Categorised Accommodation Establishments. The other 2 hotels appear as managed only on the website of the chain, but not on the website of the hotel. * One of the properties could not be found in the National Registry of Categorised Accommodation Establishments. In some of the properties more than one type of affiliation is applied 8
Table 2.Most suitable for Bulgaria type of entry mode / affiliation Most suitable for Bulgaria type of entry mode / affiliation Mean [standard deviation] Hotel chains# Full ownership by the chain 2.05 [1.84] Joint venture 2.37 [1.83] Franchise 3.21 [1.90] Management contract 3.68 [1.77] Marketing consortium 1.47 [1.47] Lease 1.26 [1.37] Total 2.71 [1.88] 2.66 [1.805] 2.80 [1.85] 2.71 [1.85] 2.18 [1.81] 1.73 [1.62] Hotels Current chain members 2.42 [1.93] 2.33 [1.83] 2.94 [1.81] 3.22 [1.73] 1.83 [1.77] 1.56 [1.59] Chains vs. Total hotels 1151.5 (0.217) 1259.5 (0.500) 1180 (0.272) 913*** (0.012) 1063* (0.086) 1163 (0.235) Mann-Whitney U test (Significance) Chains vs. Current chain members 318 (0.663) 337 (0.927) 303 (0.472) 269.5 (0.176) 307 (0.513) 311 (0.562) Number of respondents 19 146 36 Note: mean responses (µ) on a 5-point scale (1-extremely unsuitable, 5-extremely suitable). *Significant at 10%-level; *** significant at 1%-level # Includes the responses of foreign hotel chain present in Bulgaria, foreign chains not present in Bulgaria and domestic hotel chains 9