When Patrick Pacious, CEO of a large portfolio of hotel brands, promoted a successful attempt to acquire a competitor in October, he said the proposed merger would reduce costs and attract more customers for the families and small businesses that own most of the property of the company. locations.
“Our franchisees instantly understood the strategic benefit this would bring to their hotels,” said Pacious, who runs Choice Hotels, said on CNBC.
However, as the weeks have passed, the reaction has not been positive. Wyndham Hotels and Resorts, the target of the proposed deal, refused Choice offer, which is now pursuing a hostile takeover. And in early December, an association representing most hoteliers who own Choice and Wyndham brand properties came out strongly against it.
“Not all of us know what is driving this merger. Many of us feel it's not necessary,” said Bharat Patel, president of the organization, the Asian American Hotel Owners Association. The group respondent 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 Patel, owner of two Choice hotels. “We just need strong competition in the markets.”
That opposition illustrates 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.
Opinions from hotel owners could become an obstacle for Choice as it seeks approval of a merger from the Federal Trade Commission, which has taken a interest in franchising As evidence has mounted that the economic and legal relationship has been increasingly tilted in favor of brand owners and against 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 the big national brands such as Marriott or Hilton. according real estate data company CoStar. The rest are independent.
In recent decades, franchise chains have bought each other 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 percent percent of all 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 South Asian immigrant entrepreneurs. Some owners build extensive portfolios, but most end up with just a few hotels.
The average member of the Asian American ownership group owns just two hotels, typically budget or mid-scale 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 name recognition, a business plan, and collective purchasing that is supposed to give small businesses the benefits of scale. In exchange, 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 hotel brands. Less competition between hotel chains may leave owners with fewer options and therefore less influence to demand better services at a lower cost.
He said Choice had been taking a bigger cut, through charges such as an $18 monthly fee for reporting its property's energy usage, discounts for rooms booked with rewards programs and fines when guests file complaints. Patel also laments the decline in service, such as revenue management consultants who are supposed to provide advice that increases your profits. Choice has outsourced this work to a service that operates partly overseas.
Patel said his profit margins had become “tighter and slimmer” and he is considering signing with a different brand when his franchise deal ends in a couple of years. Friends who own Wyndham-branded properties seem happy, so he could adopt one of his 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,” Patel said. “And maybe if I want to go to Wyndham, they have almost 20 brands, and I miss that opportunity, because it will be the same.”
Choice maintains that as its rivals have expanded and merged, it also needs to grow to offer hotel owners greater savings on supplies such as signs and linens. The company also promises to reduce the commissions hotel owners pay to websites like Expedia and Reserva.comwhich are particularly crucial in the budget segment.
“Combining with Wyndham would allow us to continue to offer greater profitability to franchisees, helping them reduce their costs and increase their direct revenue, while offering 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 be able to reap those benefits. In 2020, 90 franchisees filed a lawsuit which accused the company of, among other things, failing to transfer reimbursements from contracts with suppliers. A judge ruled that hotel owners would have to bring their claims in separate arbitration cases, and several did.
In two of those proceedings the election prevailed. But in one, filed by a North Dakota hotelier, a referee 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 disputing the award.
The case is just one example, but it is consistent with recent economic research. TO study 2017 found that while being part of a hotel franchise system helped attract guests, it did not reduce the cost of doing business compared to operating an independent hotel.
But litigating on your own is expensive, which is why few franchisees do so even when they feel they've been mistreated.
Rich Gandhi, a New Jersey hotelier, is supporting a campaign for state legislation to improve the rights of franchisees in the hospitality industry. He heads a three-year-old group called Reform Lodging that also opposes the merger.
Gandhi has converted four of his Choice-brand hotels into Best Westerns and Red Roof Inns, both non-Choice brands that he says offer better support, fewer restrictions and more reasonable rates. The election, he argued, introduced too many competitors into his area because he makes money by selling new franchises and controlling a larger share of the market, even if the practice squeezes existing owners.
“They want the biggest pie, because to them it's all incremental revenue,” Gandhi said. “If you keep piling up all these buildings and not providing support, it's like one of those old pyramid schemes that's about to fall apart, which is exactly what's happening.”
A Choice representative referred the New York Times to four hoteliers who he said would speak favorably of 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 file. A third, who owns three Radisson hotels and was pleased when Choice bought the brand, said the purchase of Wyndham, a much larger company, could pose problems.
The fourth, a Florida Hotelier, Azim SajuHe said that despite the loss of competition, if Choice acquired Wyndham, the company would still have an incentive to make sure franchisees stayed afloat.
“The concern is valid, but the bottom line is that franchises don't work well unless franchisees are profitable,” Saju said. “I think Choice has become more aware of the importance of franchisee profitability in promoting their success.”
Hotel owners' dissatisfaction could hurt Choice's ability to absorb Wyndham, especially if more franchisees switch to other brands. That prospect has rankled some Wall Street analysts about the deal.
“In hotel franchising, the critical group, as much as the consumers who walk in the door, 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 economy and limited-service hotels in the United States and not have the full support of the largest franchise organization in existence? “I think that deserves further debate.”
Franchisee support is not only important for morale. It could also influence federal regulators, who have begun to take into account 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 there is this consumer welfare standard, which focuses on 'Is this going to be good or bad for consumers?'” said Brett Hollenbeck, an associate professor at the University of California's Anderson School of Management. The Angels. “If the FTC doesn't think this argument prevails, they could try a newer theory, which is that it could harm franchisees.”
Choice said it anticipated its deal would be approved and hoped to complete the transaction within a year. Is offer to buy all of Wyndham's outstanding shares extends until March, when it will attempt to replace the company's board directors with people who will approve the sale.
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