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When Patrick Pacius, chief executive of a large portfolio of hotel brands, promoted a blockbuster effort to acquire a competitor in October, he said the proposed merger would lower costs and attract more customers to those looking for families and small businesses. Who owns the majority of the company. place.
“Our franchisees immediately understood the strategic benefit it provided to their hotels,” Mr. Paisius, who leads Choice Hotels, said on CNBC.
However, even as weeks have passed, the response has not been positive. Wyndham Hotels & Resorts, the target of the proposed deal, rejected Choice’s offer, which is now pursuing a hostile takeover. And in early December, an association representing the majority of hoteliers who own Choice and Wyndham-branded properties came out in strong opposition.
“We all don’t know what is the reason behind this merger. “Many of us feel like it’s not needed,” said Bharat Patel, president of the Asian American Hotel Owners Association. The group surveyed its 20,000 members and found that about 77 percent of respondents who had a hotel owned by any brand or have hotels under both, thought that the merger would harm their business.
“I’m not against Choice or Wyndham,” said Mr. Patel, owner of two Choice hotels. “We need stronger competition in the markets.”
This opposition reflects 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.
Hotel owners’ views could be a hurdle for Choice as it seeks approval for the merger from the Federal Trade Commission, which has taken an interest in franchising as evidence has emerged that economic and legal ties are increasingly leaning in favor of brand owners and Away from the franchise.
To understand why franchisees are concerned, it is useful to understand how hotels are structured.
About 70 percent of the country’s 5.7 million hotel rooms are operated under one of several large national brands, such as Marriott or Hilton, according to real estate data firm CoStar. The rest are free.
Over the past few decades, franchise chains have bought each other out and merged to such an extent that the top six companies by number of rooms – Marriott, Hilton, InterContinental, Best Western, Choice and Wyndham – own all branded hotels. Holds about 80 percent stake in.
Unlike fast food franchises, hotel owners typically develop or purchase their own buildings, representing an investment of several million dollars for each property. The industry has attracted thousands of immigrant entrepreneurs from South Asia. Some owners amass large portfolios, but most are left with only a few hotels.
The average member of the Asian American owners group owns only two hotels, most of which are economy or midscale brands. Choice and Wyndham dominate that segment with 6,270 and 5,907 hotels in the United States, respectively, including Days Inn, Howard Johnson, Quality Inn and Econo Lodge.
Being part of a franchise network provides a recognized name, a business plan, and collective buy-in that gives small businesses the advantage of scale. In return, hotel owners pay brands a fee to join, ongoing royalties and other payments for marketing, technology and consulting.
As a result, franchisees are effectively customers of the hotel brands. Less competition among hotel chains leaves owners with fewer options and thus, less opportunity to demand better services at lower costs.
Consider the frustration of Jayanti Patel, owner of Comfort Inn – one of Choice’s 22 brands – in Gettysburg, PA.
He said Choice is making big cuts through fees like an $18 monthly fee to report its properties’ energy use, discounts for rooms booked with rewards programs and penalties if guests file complaints. Mr Patel also laments the decline in services such as revenue management consultants, who are expected to provide advice that increases their profits. Choice has outsourced this work to a service that partially operates overseas.
Mr Patel said his profit margins have fallen “to the bare minimum” and he is considering signing up with a different brand when his franchise agreement expires in a few years. Friends who have Wyndham-branded properties seem happy, so until Choice acquires that chain, they might switch to one of its brands.
“When my window opens in 2026, 99 per cent of the time I don’t want to renew my deal,” Mr Patel said. “And maybe if I wanted to go to Windham, they have about 20 brands, and I lose that opportunity, because it would be the same thing.”
Choice argues that as its competitors have expanded and merged, it also needs to grow to offer hoteliers big savings on supplies like signage and bedsheets. The company is also promising to cut the commissions paid by hotel owners to websites like Expedia and Booking.com, which are especially important in the budget segment.
Choice said in a statement, “The combination with Windham will allow us to continue to deliver increased profitability for franchisees – helping them reduce their costs and increase their direct revenues, while also leveraging our best-in-class technology.” Will also provide a platform.
However, many hoteliers say that even if Choice had negotiated lower prices, they doubt they would get those benefits. In 2020, 90 franchisees filed a lawsuit accusing the company of, among other things, not providing waivers from contracts with vendors. A judge ruled that hotel owners must pursue their claims in separate arbitration cases, and many did so.
The alternative prevailed in two of those proceedings. But in a case 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. Competing for the Choice Award.
This case is just one example, but it is consistent with recent economic research. A 2017 study found that being part of a hotel franchise system helped bring in guests, but did not lower the cost of doing business compared to operating an independent hotel.
But suing yourself is expensive, which is why some franchisees do so even if they feel they have been abused.
Rich Gandhi, a hotelier in New Jersey, is supporting a campaign for state legislation that would improve the rights of franchisees in the hospitality industry. He leads a three-year-old group called Reform Lodging that is also opposing the merger.
Mr Gandhi has converted four of his Choice-branded hotels to Best Western and Red Roof Inns, both non-Choice brands he says offer better support, fewer restrictions and more reasonable fees. He argued that Choice introduced too many competitors into its field because it makes money by selling new franchises and controlling more of the market, even if this practice squeezes existing owners.
“They want the biggest share, because for them it is all incremental revenue,” Mr Gandhi said. “If you continue to pile up all these buildings and provide no support, it’s like one of those old pyramid schemes ready to collapse, and that’s exactly what’s happening.”
A representative of Choice referred The New York Times to four hoteliers who said they would speak in favor of the merger. Two of them, including the president of the Choice Hotels Owners Council — which all franchisees must join and pay dues — declined to comment on the record. A third, who owns three Radisson hotels and were happy when Choice bought the brand, said the purchase of Wyndham – a much larger company – could create problems.
Fourth, Azim Saju, a Florida hotelier, said that despite losing the competition, if Choice acquired Wyndham the company would still have an incentive to ensure that the franchises survived.
“The concerns are legitimate, but the bottom line is that franchising does not perform well unless the franchise is profitable,” Mr Saju said. “I think Choice has become more conscientious of the importance of franchise profitability to drive its success.”
Hotel owners’ dissatisfaction could hurt Choice’s ability to absorb Wyndham, especially if more franchisees switch to other brands. That possibility has some Wall Street analysts nervous about the deal.
“In hotel franchising, the key constituency, other than consumers walking in the door, is that franchising community,” said David Katz, an analyst covering the hospitality and gambling industries for Jefferies & Company. “They’re going to own over 50 percent of the limited service and affordable hotels in the United States, and they don’t have the full support of the largest franchise organization there? I think it deserves further debate.”
Franchisee support isn’t just important for morale. It could also impact federal regulators, who have begun to take into account the impact of corporate mergers not only on their consumers but also on suppliers like book authors, chicken farmers, and Amazon sellers.
“Traditionally in antitrust it’s been a consumer welfare standard, focused on ‘Will this be good or bad for consumers?'” said Brett Hollenbeck, associate professor at the Anderson School of Management at the University of California, Los Angeles. “If the FTC doesn’t feel that this argument will be effective, they may try another new theory, which is that it could harm franchisees.”
Choice said it expects its deal to be approved and expects to close the transaction within a year. Its offer to buy all outstanding Wyndham shares will continue until March, when it will try to replace directors on the company’s board with people who will approve the sale.