Choice Hotel franchise owners oppose merger with Wyndham

When Patrick Pacious, chief executive of a broad portfolio of hotel brands, promoted a successful attempt to acquire a competitor in October, he said the proposed merger would cut costs and attract more family and small-scale customers. companies that own most of the company’s operations. Locations.

“Our franchisees immediately saw the strategic advantage this would bring to their hotels,” said Mr. Pacious, who runs Choice Hotels, said on CNBC.

But as the weeks went by, the reactions were not positive. Wyndham Hotels and Resorts, the target of the proposed deal, rejected Choice’s offering, which is now pursue a hostile takeover bid. And in early December, an association representing the majority of hoteliers who own properties under the Choice and Wyndham brands came out strongly against this proposal.

“We don’t all know what’s driving this merger. Many of us think it’s not necessary,” said Bharat Patel, president of the organization, the Asian American Hotel Owners Association. The group interrogates its 20,000 members and found that about 77 percent of respondents who own hotels under either or both brands thought a merger would hurt their business.

“I’m not against Choice or Wyndham,” said Mr. Patel, who owns two Choice hotels. “We just need robust competition in the markets.”

This opposition illustrates growing resistance to consolidation in sectors that have become more concentrated in recent years. Even some Wall Street analysts expressed skepticism that Choice’s proposal was a good idea.

The opinions of hotel owners could become an obstacle for Choice as it seeks approval for a merger from the Federal Trade Commission, which is interested in franchising as it is increasingly It is obvious that economic and legal relations are leaning more and more in favor of brand owners and away from franchisees.

To understand why franchisees are concerned, it helps to understand how hotels are structured.

About 70 percent of the country’s 5.7 million hotel rooms operate under one of several major national brands like Marriott or Hilton, according to real estate data company CoStar. The others are independent.

Over the past few decades, franchise chains have bought out and merged to the point where the top six companies by number of rooms – Marriott, Hilton, InterContinental, Best Western, Choice and Wyndham – account for about 80% of all franchises. branded hotels.

Unlike fast food franchisees, hotel owners typically develop or purchase their own buildings, representing a multimillion-dollar investment for each property. The industry has attracted thousands of immigrant entrepreneurs from South Asia. Some owners amass sprawling portfolios, but most end up with just a few hotels.

The average member of the Asian American ownership group owns only two hotels, most often with one of the economy or midscale brands. Choice and Wyndham dominate this segmentwith 6,270 and 5,907 hotels in the United States, including Days Inn, Howard Johnson, Quality Inn and Econo Lodge.

Being part of a franchise network means benefiting from a recognized name, a business plan and collective purchasing intended to offer small businesses advantages of scale. In exchange, hotel owners pay brands membership fees, ongoing royalties and other payments for marketing, technology and consulting.

As a result, franchisees are effectively customers of hotel brands. Less competition among hotel chains can leave owners with fewer options and, therefore, less leverage to demand better services at lower costs.

Consider the frustrations of Jayanti Patel, who possesses a Comfort Inn — one of the choices 22 brands — in Gettysburg, Pennsylvania.

He said Choice agreed to a deeper cut, through fees such as an $18 monthly fee for reporting its property’s energy usage, discounts for rooms booked with rewards programs and penalties when customers file a complaint. Mr Patel also laments the decline in services, particularly from revenue management consultants, who are supposed to provide advice that increases his profits. Choice subcontracted this work to a service that operates partly overseas.

Mr Patel said his profit margins had become “thinner and thinner” and he was considering signing with another brand when his franchise deal expires in a few years. Friends who own Wyndham-branded properties seem happy, so he might adopt one of their brands as long as Choice doesn’t acquire that chain.

“When my window comes in 2026, 99 percent I don’t want to renew my deal,” Mr. Patel said. “And maybe if I want to go to Wyndham, they have almost 20 brands, and I’m missing that opportunity because it’s going to be the same thing.”

Choice argues that as its competitors have grown and merged, it must also expand to offer hoteliers greater savings on supplies such as signage and linens. The company also promises to negotiate down the commissions hoteliers pay to websites like Expedia and Reservation.comwhich are especially crucial in the budget segment.

“Collaborating with Wyndham would allow us to continue to deliver increased profitability to franchisees – helping them reduce costs and increase direct revenue while providing our best-in-class technology platform,” Choice said in a statement .

However, many hotel owners say that even if Choice negotiated lower prices, they are skeptical that they would reap those benefits. In 2020, 90 franchisees filed a complaint which accused the company, among other things, of not passing on discounts on contracts with suppliers. A judge ruled that hotel owners should pursue their claims in separate arbitration cases, and several have done so.

Choice prevailed in two of these proceedings. But in one of the cases, brought by a North Dakota hotelier, an arbitrator found last summer that Choice had “made virtually no effort to leverage its size, scale and distribution to obtain volume discounts.” He ordered Choice to pay $760,008 in legal fees and compensation. The choice is challenge the reward.

This case is just one example, but it fits with recent economic research. HAS 2017 study found that while being part of a hotel franchise system helped attract customers, it did not reduce the cost of doing business compared to operating an independent hotel.

But pleading alone is expensive, which is why few franchisees do it even if they feel mistreated.

New Jersey hotelier Rich Gandhi is supporting a campaign for state legislation that would improve the rights of hotel franchisees. He leads a three-year-old group, Reform Lodging, which also opposes the merger.

Mr. Gandhi transformed four of his Choice-branded hotels into Best Westerns and Red Roof Inns, two non-Choice brands that he said offered better assistance, fewer restrictions and more reasonable fees. Choice, he argued, has brought too many competitors into its area because it makes money by selling new franchises and controlling more of the market, even though the practice squeezes existing owners.

“They want the biggest pie, because for them it all means extra income,” Mr. Gandhi said. “If you keep piling on all these buildings and don’t provide any support, it’s like one of those old pyramid schemes ready to collapse, and that’s exactly what’s happening.”

A Choice representative referred The New York Times to four hoteliers he said would speak favorably about the merger. Two of them, including the president of the Choice Hotels Owners Council – to which all franchisees must belong and pay dues – declined to comment on the matter. A third, who owns three Radisson hotels and was happy when Choice bought the brand, said buying Wyndham – a much larger company – could pose problems.

The fourth, a Azim Saju, Florida hoteliersaid that despite the loss of competition, if Choice acquired Wyndham, the company would still have an incentive to ensure franchisees stayed afloat.

“The concern is valid, but the bottom line is that franchising does not work well unless the franchisees are profitable,” Mr. Saju said. “I think Choice has become more aware of the importance of franchisee profitability in order to drive their success.”

Dissatisfaction among hoteliers could hurt Choice’s ability to absorb Wyndham, especially if more franchisees switch to other brands. That prospect has soured some Wall Street analysts on the deal.

“In the hotel franchise business, the critical group, as much as the consumers who walk through the door, is the franchise community,” said David Katz, an analyst who covers the hospitality and gaming industries for Jefferies & Company. “They’re going to own over 50% of the economy and limited-service hotels in the United States, and not have the full support of the largest franchise organization? I think this deserves further debate.

Franchise support isn’t just important for morale. It could also influence federal regulators, who have begun to consider the effect of corporate mergers not only on their consumers but also on suppliers like book authors, chicken farmers and Amazon sellers.

“Traditionally in antitrust there has been a consumer welfare standard, which focuses on ‘Is this going to be good or bad for consumers?’” said Brett Hollenbeck, an associate professor at Anderson School of Management at the University of California, Los Angeles. “If the FTC doesn’t think this argument will prevail, it might try a newer theory, one that says it could harm franchisees.”

Choice said it anticipates its deal will be approved and hopes to complete the transaction within a year. It is bid all outstanding Wyndham shares extend until March, when the company will attempt to replace directors on the company’s board with people who will approve the sale.