Hotel owners are pushing back on the merger of national brands

When Patrick Pacious, the CEO of a major portfolio of hotel brands, promoted a successful effort to acquire a competitor in October, he said the proposed merger would lower costs and attract more customers to the families and small businesses that serve the own most of the company’s shares. locations.

“Our franchisees immediately understood the strategic advantage this would bring to their hotels,” says Mr. Pacious, leader of Choice Hotels, said on CNBC.

However, as the weeks passed, the reactions were not positive. Wyndham Hotels and Resorts, the target of the proposed deal, turned down Choice’s offering 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 strongly against it.

“We all don’t know what drives this merger. Many of us feel this is not necessary,” said Bharat Patel, president of the organization, the Asian American Hotel Owners Association. The group questioned among 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, owner of two Choice hotels. “We just need robust competition in the markets.”

This opposition illustrates a growing resistance to consolidation in industries that have become increasingly concentrated in recent years. Even some Wall Street analysts are skeptical of Choice’s proposal.

Hotel owners’ views could become a hurdle for Choice as it seeks approval for a merger from the Federal Trade Commission, which has expressed interest in franchising as evidence mounts that the economic and legal relationship is increasingly skewed in favor of brand owners has been tilted. away from franchisees.

To understand why franchisees are concerned, it’s helpful 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 such as Marriott or Hilton, according to the real estate data company CoStar. The rest is independent.

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

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

The average member of the Asian American ownership group owns just two hotels, usually from one of the budget or mid-range brands. Choice and Wyndham dominate that 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 provides a household name, a business plan and collective purchasing that should provide small businesses with the benefits of scale. In return, hoteliers pay the brands a membership fee, ongoing royalties and other payments for marketing, technology and consulting.

This means that franchisees are actually customers of the hotel brands. Less competition among hotel chains can leave owners with fewer options and thus less leverage to demand better services at lower costs.

Consider the frustrations of Jayanti Patel, who possess a Comfort Inn – one of Choice’s 22 brands – in Gettysburg, Pennsylvania.

He said Choice had made bigger cuts, through charges such as an $18 monthly fee for reporting its property’s energy use, discounts for rooms booked with rewards programs and fines if guests file complaints. Mr Patel also laments the decline in services, for example from revenue management consultants who are expected to provide advice that increases his profits. Choice has outsourced these activities to a service that partly operates abroad.

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

“If my opportunity comes in 2026, 99 percent will not want to renew my agreement,” Mr. Patel said. “And maybe if I want to go to Wyndham, they have almost 20 brands, and I lose that opportunity because it will be the same.”

Choice says that now that its rivals have expanded and merged, the company also needs to grow to offer hoteliers bigger savings on things like signage and bedding. The company also promises to negotiate the commissions that hotel owners pay to websites like Expedia Booking.comwhich are especially crucial in the budget segment.

“The combination with Wyndham would allow us to continue to improve profitability for franchisees – helping to reduce their costs and grow 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 were to negotiate lower prices, they are skeptical they would reap the benefits. 90 franchisees in 2020 filed a lawsuit who, among other things, accused the company of not passing on discounts on contracts with suppliers. A judge ruled that hotel owners would have to pursue their claims in separate arbitration cases, and several did so.

In two of these proceedings, choice prevailed. But in one, brought by a hotelier in North Dakota, 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 damages. Choice dispute the price.

This case is just one example, but it is consistent with recent economic research. a Study from 2017 found that while being part of a hotel franchise system helped bring in guests, it did not reduce the cost of doing business compared to operating an independent hotel.

But litigating on their own is expensive, which is why few franchisees do so even when they feel they have been mistreated.

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

Mr. Gandhi has turned four of his Choice-branded hotels into Best Westerns and Red Roof Inns, both non-Choice brands that he said offered better assistance, fewer restrictions and more reasonable rates. Choice, he argued, introduced too many competitors into its territory because it makes money by selling new franchises and controlling a larger share of the market, even as the practice puts pressure on existing owners.

“They want the biggest pie because it’s all extra income for them,” Mr. Gandhi said. “If you keep collecting all these buildings and not providing support, it’s like one of those old pyramid schemes that’s about to fall apart, and that’s exactly what happens.”

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

The fourth, one Florida hotelier Azim Sajusaid that despite the loss of competition, if Choice were to acquire 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 perform well unless the franchisees are profitable,” Mr Saju said. “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 absorb Wyndham, especially if more franchisees move to other brands. That prospect has soured some Wall Street analysts on the deal.

“In hotel franchising, the critical constituency, just like the consumers coming in, is the franchise community,” said David Katz, an analyst who covers the hospitality and gaming industries for Jefferies & Company. “Are they going to own more than 50 percent of the limited service and budget hotels in the United States, and not have the full support of the largest franchise organization out there? I think this deserves further debate.”

Franchisee 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 such as book authors, chicken farmers and Amazon sellers.

“Traditionally, in antitrust law, there has been a consumer welfare standard that focuses on the question, ‘Is this going to be good or bad for the consumer?’” said Brett Hollenbeck, an associate professor at the University of Anderson School of Management. California, Los Angeles. “If the FTC doesn’t feel like this argument will hold up, they could try a newer theory, which is that it could hurt franchisees.”

Choice said it expected the deal to be approved and expected to complete the transaction within a year. Are offer to buy all outstanding Wyndham shares will continue until March, when it will seek to replace directors on the company’s board with people who will approve the sale.