Choice Hotel Franchise Owners Push Back on Merger With Wyndham

0
124
Choice Hotel Franchise Owners Push Back on Merger With Wyndham


When Patrick Pacious, the chief executive of a large portfolio of hotel brands, announced a blockbuster attempt to acquire a competitor in October, he said the proposed merger would cut costs and attract more customers to the families and small businesses that own most of the businesses Locations.

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

However, as the weeks went by, the reaction was not positive. Wyndham Hotels and Resorts, the target of the proposed deal, rejected Choice’s offer, which is now seeking a hostile takeover. And in early December, an association representing the majority of hoteliers who own Choice and Wyndham-branded hotels came out strongly against it.

“We all don’t know what’s driving this merger. Many of us feel it’s not necessary,” said Bharat Patel, the organization’s president, the Asian American Hotel Owners Association. The group surveyed its 20,000 members and found that about 77 percent of respondents who own hotels under one 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 simply need strong competition in the markets.”

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

The hotel owners’ views could become a hurdle for Choice as the company seeks merger approval from the Federal Trade Commission, which is interested in franchising, as evidence mounts that the economic and legal relationship is increasingly in its favor Brand owners and owners have evolved away from franchisees.

To understand why franchisees are concerned, it’s helpful to understand how hotels are structured.

According to real estate data firm CoStar, about 70 percent of the country’s 5.7 million hotel rooms are operated under one of several major national brands such as Marriott or Hilton. The rest is independent.

Over the past few decades, franchise chains have been buying up and merging each other, so that the six largest companies by room count—Marriott, Hilton, InterContinental, Best Western, Choice and Wyndham—account for about 80 percent of all branded hotels.

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

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

Belonging to a franchise network provides a recognized name, business plan and shared purchasing designed to provide small businesses with economies of scale. In return, hotel owners pay the brands an entry fee, ongoing licensing fees and other payments for marketing, technology and consulting.

This means that franchisees are de facto customers of the hotel brands. Less competition between hotel chains can result in owners having fewer options and therefore less power to demand better services at lower costs.

Consider the frustration of Jayanti Patel, who owns a Comfort Inn — one of Choice’s 22 brands — in Gettysburg, Pennsylvania.

He said Choice has taken major cuts, such as an $18 monthly fee for reporting its property’s energy usage, discounts for rooms booked through rewards programs and penalties when guests file complaints. Mr. Patel also complains of declining service, such as from revenue management consultants who are supposed to provide advice that will boost his profits. Choice has outsourced this work to a service that operates partially overseas.

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

“When my window expires in 2026, I have a 99 percent chance of not renewing my contract,” Patel said. “And if I want to go to Wyndham, they might have close to 20 brands, and I’ll miss that chance because it’ll be the same thing.”

Choice argues that as its competitors expand and merge, the company also needs to grow to provide hotel owners with greater savings on supplies such as signage and linens. The company also promises to reduce the commissions hotel owners pay to sites like Expedia and Booking.com, which are particularly important in the budget segment.

“Combining with Wyndham would allow us to continue to provide greater profitability to franchisees – helping to reduce their costs and increase their direct revenues, while providing our best-in-class technology platform,” Choice said in a statement.

However, many hotel owners say that even if Choice had negotiated lower rates, they were skeptical about whether they would benefit from these benefits. In 2020, 90 franchisees filed a lawsuit accusing the company of, among other things, failing to pass on discounts from contracts with suppliers. A judge ruled that hotel owners would have to pursue their claims in separate arbitrations, and several did.

In two of these cases the election prevailed. But in a case brought by a hotelier in North Dakota, an arbitrator found last summer that Choice had made “virtually no effort to use its size, scale and distribution to obtain volume discounts.” He ordered Choice to pay $760,008 in attorney fees and restitution. Choice disputes the price.

The case is just one example, but it is consistent with recent economic research. A 2017 study found that while participating in a hotel franchise system helps attract guests, it does not reduce the cost of doing business compared to operating an independent hotel.

But it’s expensive to litigate on your own, which is why few franchisees do so, even if they feel they’ve been mistreated.

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

Mr. Gandhi has converted four of his Choice hotels into Best Westerns and Red Roof Inns, both non-Choice brands that he says offer better service, fewer restrictions and more reasonable fees. Choice, he argued, had brought too many competitors into its territory because it made money by selling new franchises and controlling a larger share of the market, even as the practice squeezed existing owners.

“They want the biggest pie because everything is additional revenue for them,” Gandhi said. “If you keep piling up all these buildings and don’t provide any support, it’s like one of those old pyramid schemes that’s on the verge of collapse, and that’s exactly what’s happening.”

A Choice representative referred The New York Times to four hoteliers who were sympathetic to the merger. Two of them, including the chairman of the Choice Hotels Owners Council – to which all franchisees belong and must pay dues – declined to comment on the files. A third party, who owns three Radisson hotels and was happy when Choice bought the brand, said buying Wyndham – a much larger company – could cause problems.

The fourth, a Florida hotelier, Azim Saju, said that despite losing competition, the company would still have an incentive to ensure franchisees stay afloat if Choice takes over Wyndham.

“The concern is legitimate, but the bottom line is that franchising only works well when the franchisees are profitable,” said Saju. “I think Choice has become more aware of the importance of franchisee profitability in driving their success.”

Hotel owners’ dissatisfaction could hurt Choice’s ability to acquire Wyndham, especially if more franchisees move to other brands. That prospect has some Wall Street analysts upset about the deal.

“In hotel franchising, the franchise community is the critical audience, as are the customers who come through the door,” said David Katz, an analyst who covers the hotel and gaming industries for Jefferies & Company. “You’re going to own more than 50 percent of the limited-service, economy-class hotels in the United States and not have the full support of the largest franchisee organization out there? I think this deserves further debate.”

Supporting the franchisee is important for more than just morale. It could also influence federal regulators, who have begun to consider the impact of corporate mergers not only on their consumers but also on suppliers such as book authors, chicken farmers and Amazon sellers.

“Traditionally in antitrust there’s been this consumer protection standard that focuses on the question, ‘Will this be good or bad for consumers?'” said Brett Hollenbeck, an associate professor at the Anderson School of Management at the University of California, Los Angeles. “If the FTC doesn’t believe this argument will prevail, it could try a more novel theory that it could harm franchisees.”

Choice said it expects the transaction to be approved and expects to close the transaction within a year. His offer to buy all outstanding Wyndham shares runs through March. An attempt is then made to replace the directors on the company’s board with people who agree to the sale.



Source link

2023-12-21 10:02:06

www.nytimes.com