Choice Hotel Franchise Owners Push Back on Merger With Wyndham

World Choice Hotel Franchise Owners Push Back on Merger With Wyndham By Julia Carroll – December 30, 2023 In October, Patrick Pacious, the CEO of a large collection of hotel brands, proposed a major move to acquire a rival firm. He positioned the proposed merge as a means to reduce costs and draw more clientele for the predominantly family and small-business-owned locations of his company. “The strategic advantages this move would bring to our hotels were immediately understood by our franchisees,” stated Mr.

Pacious, the leader of Choice Hotels, during an interview on CNBC. Nevertheless, as time has gone on, the reception to the proposed merger has been largely negative. Wyndham Hotels and Resorts, the target of the deal, have spurned Choice’s overtures, prompting Choice to make a move for a hostile takeover.

In early December, a group representing most of the hotel owners of Choice and Wyndham-branded properties voiced their strong disapproval of the idea. “It’s still unclear why this merger is necessary. Many of us believe it isn’t,” said Bharat Patel, who chairs the Asian American Hotel Owners Association.

His group conducted a survey of its 20,000 members and discovered that about 77 percent who own hotels of either or both brands believe a merger would harm their business. “I have no issues with either Choice or Wyndham,” Mr. Patel, an owner of two Choice hotels, added.

“What’s important to us is a strong market competition. ” This resistance reflects a larger trend of growing opposition to consolidation in increasingly concentrated sectors. Even some analysts from Wall Street have voiced doubts about the soundness of Choice’s merger proposal.

As Choice seeks regulatory approval for a merger from the Federal Trade Commission (FTC), the opinions of hotel owners might present a significant roadblock. This comes in light of the FTC’s growing interest in the franchising sector following mounting evidence that the economic and legal dynamics have shifted in favor of brand owners over franchisees. To appreciate why franchisees are concerned, a grasp of the hotel industry’s structure is important.

According to the real estate data company, CoStar, about 70 percent of all 5. 7 million hotel rooms in the US operate under major national brands like Marriott or Hilton. Independent hotels make up the remainder.

Over the decades, franchise chains have continued to consolidate through mergers and acquisitions. Consequently, the top six companies in terms of the number of rooms — Marriott, Hilton, InterContinental, Best Western, Choice, and Wyndham — own about 80 percent of all branded hotels. Unlike quick-service restaurant franchisees, hotel owners commonly invest in or develop their own properties, each usually requiring millions of dollars of investment.

The industry has attracted countless immigrant entrepreneurs from South Asia. While some owners have amassed vast portfolios, most own just a few hotels. The average member of the Asian American owners’ association owns just two hotels, typically with an economy or midscale brand.

With 6,270 and 5,907 US hotels respectively, Choice and Wyndham lead in this segment which includes Days Inn, Howard Johnson, Quality Inn, and Econo Lodge. Participation in a franchise network provides hoteliers with a recognized name, business plan, and collective purchasing which offers small businesses the advantages of scale. In return, owners must pay the brands a joining fee, continuous royalties, and other marketing, technology and consulting charges.

Because of this model, franchisees effectively become clients of the hotel brands. A decrease in competition between hotel chains can result in reduced options for owners, leaving them with less influence to negotiate better services at lower costs. One can look at the frustrations of Jayanti Patel, owner of a Comfort Inn — one of Choice’s 22 brands — in Gettysburg, Pennsylvania.

According to him, Choice has been claiming a larger slice of the pie through charges like a $18 monthly fee for reporting his property’s energy utilization, discounts for rooms reserved through loyalty programs, and penalties for guest complaints. Mr. Patel also expressed concerns over declining service quality such as from revenue management consultants expected to provide profit-boosting advice.

Work of this nature has been outsourced to an overseas service by Choice. Claiming that his profit margins keep dwindling, Mr. Patel is contemplating partnering with a different brand when his franchise agreement expires in a few years.

He might consider one of Wyndham’s brands, encouraged by friends’ positive experiences with Wyndham-branded properties — provided Choice doesn’t acquire the chain. “By the time I’m up for a renewal in 2026, I’m 99 percent sure I won’t renew my agreement,” he stated. “And if I then want to switch to Wyndham which offers nearly 20 brands, I would lose that opportunity because the situation will remain the same.

” Choice counters that its growth is necessary to offer hotel owners considerable savings on materials such as signage and bedsheets in response to the expansion and consolidation of its competitors. The company pledges to negotiate lower commissions that hotel owners pay on websites like Expedia and Booking. com — a particularly crucial factor in the budget segment.

“Joining forces with Wyndham would empower us to continue generating improved profitability for our franchisees — by facilitating cost reductions and enhancing their direct revenue through our top-class technology platform,” Choice remarked in a statement. However, many hotel owners express doubts that they would see the benefits even if Choice were to secure lower prices. In 2020, 90 franchisees filed a lawsuit alleging that among other things, the company did not share rebates derived from vendor contracts.

A judge concluded that hotel owners should individually pursue their claims through individual arbitration, which a number of them did. Choice won two of these arbitration cases. However, in a case pursued by a North Dakota hotelier, the arbitrator ruled this summer that Choice had “virtually made no attempts to exploit its size, scale, and distribution to secure volume disconts.

” The arbitrator mandated Choice to pay $760,008 in legal costs and compensation. Choice is currently contesting this decision. While this is a single instance, it aligns with recent economic studies.

A 2017 research discovered that despite driving customer traffic as part of a hotel franchise system, there were no cost reduction benefits compared with running an independent hotel. However, pursuing legal cases as an individual can be costly, which is why it’s uncommon for franchisees to do so, even if they feel aggrieved. Rich Gandhi, a hotelier based in New Jersey, is campaigning for state law modifications that would bolster the rights of hospitality industry franchisees.

He presides over a three-year-old group dubbed Reform Lodging that also opposes the merger. Mr. Gandhi has transitioned four of his Choice-branded hotels into Best Westerns and Red Roof Inns, both non-Choice brands that he says deliver better assistance, fewer limitations, and more reasonable charges.

Gandhi asserts that Choice has introduced too many rivals into his area, because it profits from selling new franchises and controlling more market share, despite the pressure this places on existing owners. “They want to own the biggest pie because it results in incremental revenue for them,” stated Gandhi. “But continually adding to the portfolio without proper support is a recipe for a pyramid scheme-like collapse, which is precisely what’s happening.

” In response, a representative from Choice provided The New York Times contact information for four hoteliers who they claimed would support the merger. However, two of them, including the chairman of the Choice Hotels Owners Council—who all franchisees have to report to and pay dues—declined to make an on-record comment. Of the remaining individuals, one said that he was pleased when Choice purchased Radisson, the brand his three hotels belong to, but was concerned that acquiring Wyndham—a much larger firm—could raise issues.

The fourth hotelier, Azim Saju from Florida, stated that despite reducing competition, Choice would still be incentivized to keep its franchisees profitable if it attains ownership of Wyndham. “Although the worry is legitimate, the harsh reality is that franchising doesn’t excel unless the franchisees are turning a profit,” Mr. Saju stated.

“In my opinion, Choice has become more mindful of the importance of franchisee profitability as a factor to fuel their success. ” The dissatisfaction of hoteliers could negatively impact Choice’s ability to assimilate Wyndham, especially if a growing number of franchisees migrate to other brands. This possibility has made some Wall Street analysts apprehensive about the deal.

David Katz, a Jefferies & Company analyst specializing in the hospitality and gambling sectors, opined: “In the hotel franchising sector, the franchisee community is as critical a constituency as the customers. If they’re going to own more than 50 percent of America’s limited service and economy hotels and lack the backing of the largest franchisee organization out there, I think that deserves further discussion. ” Besides boosting morale, gaining franchisee support could influence federal regulation’s positions, which have been considering the impact of corporate mergers not only on the end customers but on suppliers such as book authors, chicken farmers, and Amazon sellers.

“Historically in antitrust, there’s a concentration on the consumer welfare standard, which asks ‘Will this action be beneficial or detrimental for consumers?’” explained Brett Hollenbeck, Associate Professor at the Anderson School of Management at the University of California, Los Angeles. “If the FTC isn’t convinced by this argument, they might consider a more innovative theory, suggesting it could harm franchisees. ” Choice predicts that it will receive approval for the deal and aims to finalize the transaction in a year’s time.

Its offer to buy all outstanding Wyndham shares extends until March, at which point it will attempt to replace current company board directors with individuals open to the sale. Choice Hotel Franchise Owners Resist Merger with Wyndham TAGS Choice franchise hotel Merger owners push Wyndham Facebook Twitter Pinterest WhatsApp Linkedin ReddIt Email Telegram Previous article Price Increases Cooled in November as Inflation Falls Toward Fed Target Julia Carroll.