CEO succession is a hot topic in the travel industry. For proof of that, you need only look at this weekend’s surprise announcement that Expedia CEO Dara Khosrowshahi is leaving the online travel agency company to become the CEO of Uber.
In the hospitality industry, however, the succession of Pat Pacious to become the new CEO of Choice Hotels, wasn’t a surprise at all. Pacious, who’s had a more than 20-year history with the hotel company, has been the No. 1 pick to replace current CEO Steve Joyce for at least the past three to four years.
Pacious first began working with Choice Hotels in 1997 when he was an industry consultant, and he became a full-time associate in 2005. In that time, the company has grown rather significantly: One in every 10 hotels in the U.S. is a Choice Hotels brand, and those brands include Comfort Inn, Sleep Inn, Econo Lodge, and Cambria Hotels & Suites.
And for the past three to four years, the company has been deliberately planning this succession process, Pacious noted. Throughout his career at Choice, Pacious has worked directly with various aspects of the business, from online distribution, brands, and marketing to international business, operations, and franchise development.
“They looked at the environment, and with the digital disruption that we have going on — a lot of the customer acquisition is being driven by a company’s ability to be successful in the digital economy,” Pacious said. “They were looking for someone who brought that as part of their background, and that’s where my background is at Choice and before that as well. … I think the thing we liked hearing the most was, the day after we announced the transition, one of the analysts said, ‘Well, this CEO transition has been hiding in plain sight.'”
What was a bit of a surprise, however, was when Pacious’ CEO start date was moved up from the end of 2017 to September 12. Even so, that bit of news isn’t going to change what Pacious intends to do once he becomes CEO.
“Was it surprising?,” he said. “Not really, that someone of Steve’s caliber would find their next role. Once you announce, you’ve sort of started the process moving. I think it worked out best for Steve’s timing to accelerate it.”
Skift spoke to Pacious last week to ask him about his plans for the company, and what he thinks the future of hospitality will be both in the near term and further ahead. Here’s what he had to say.
Skift: What are you looking forward to doing most in becoming the CEO of Choice? What are your top goals?
Pacious: There are really two key goals that I’m focused on right now. The first is to capitalize on the momentum we have in the upscale segment. As you know, we have 11 brands, two of them in the upscale segment: Cambria and our soft brand collection, Ascend Hotel Collection. We have so much upside and opportunity there. I don’t have six upscale and upper upscale and luxury brands to bump into. In our portfolio of brands I’ve got a lot of white space and a lot of opportunity. We’re really excited about the developer interest and the customer interest in the Cambria brand. So, I’m really excited to expand on that momentum.
Ascend has just been a huge success for us with hotels, both open and in the pipeline. We have about 230 Ascend properties. And when you look at the other soft brands, if you take the next three soft brands and combine them, they’re still smaller than Ascend. We expect to open somewhere around 45 to 50 Ascend hotels this year. So, momentum for us in upscale, both in Cambria with a full brand, and a soft brand with Ascend is really exciting.
The second piece is that I’m excited to continue to fortify and expand the dominate position that we have in the midscale segment. We have four great brands in that segment, that are well positioned, they all have growth opportunities and from a RevPAR [revenue per available room] index perspective, they’re beating their competitive set. Our Comfort Inn brand has had 33 consecutive months of RevPAR index gains against its competitive set and we expect that to continue.
It’s real exciting to see that core part of our business be as vibrant as it is. I like to tell people this quote from Warren Buffet: “Great businesses are ones that have a deep and wide moat around them, and it’s management’s job to keep expanding the width and depth of that moat.” That’s what we intend to do with our midscale business, is to continue to expand and fortify the dominant position that we have in the midscale segment.
Skift: Is it a challenge for a company like Choice that is so known for its more midscale brands to expand into the upscale space, especially because all the other major hotel companies seem to be wanting to do more midscale brands? You seem to be going in the opposite direction of the rest of the industry in that respect.
Pacious: Yeah, it was a challenge. But that challenge to move into upscale has been overcome. We were already effectively in upscale. We have 350 upscale hotels around the world. With Cambria, we have 31 open. We’ll have 40 open by the end of the year. And we have a pipeline that gets us to 100. So, we’re well on our way.
Was it a challenge to begin with? Yes. Have we overcome it? Absolutely. And we feel really good about the opportunity there. The great thing about what we have to do, versus what our competitors are trying to do, is for every Cambria that we develop, it’s worth about five times what the average other hotels in our systems come out to be, from a revenue perspective. I have to sell 20 hotels for every 100 that my competitors have to sell, is the way I think about it. And I love having that one focus on that.
Skift: What parts of Steve Joyce’s strategy do you want to keep and what might you want to do a little bit differently?
Pacious: I’ve had responsibility for the company’s strategy since I joined in 2005. And I partnered very well with Steve to help him execute on his vision for the company, which was really about establishing ourselves in upscale, refreshing many of our midscale brands, and expanding internationally. We’re going to continue to do all of those. We’ve laid the foundation, already, for growth in international, growth in upscale, and have fortified and refreshed our midscale brands. Now we need to get back to expanding our market share.
The difference is, I think, you’ll see from what my tenure is going to look like versus Steve’s, is we’re going to move faster as a company. The industry is moving very fast and so, Choice Hotels has to move even faster. The way we’re going to do that is we’re going to continue to invest in our technology, and create innovative things like we did with the soft brand, like we’ve done with our vacation rental platform. Without losing sight that the most important metric we look at is franchisee ROI. The return on investment that a franchisee gets when they buy a Comfort Inn, or a Quality Inn, or a Sleep Inn, or Clarion, or Econo Lodge. And that has two components to it. It’s not just the revenue side; it’s the cost side as well.
Having that consistent focus on owners, hotel owners, which has been a hallmark of Choice Hotels throughout the years, is going to continue to be something that we champion and that we focus on.
Skift: What kinds of technological innovations can we expect to see from Choice going forward?
Pacious: We’re really just finishing up some pretty key investments in three areas. The first is cloud computing. We’re getting ready to move our entire 30-year-old central reservations system onto a cloud-based platform that we built.
Secondly, we’re looking at our investment in big data. Anybody who’s trying to operate in the travel space today has huge amounts of customer information, travel information, hotel information, reservations data, all of that. We’ve redesigned and are ready to launch a new data platform.
The third is machine learning. I think we’ve talked a lot about the impact that Smart Rates, our revenue optimization tool has had for our hotels. When you have cloud computing and you have big data, if you can marry it up with machine learning, you can really create opportunities for your hotel owners to price their inventory more efficiently, and to attract more consumers.
That’s going to be a key push of ours as these platforms start to come to market. So, you’ll see more of that coming from us in the medium to longer term.
Skift: With the collection of data about your consumers, especially your loyalty members, will you be using that to personalize the guest experience more as well?
Pacious: Yes. We have a lot going on, on that front, around personalization, that’s going to really change the consumer experience and how they interact with our hotels. It’s not just shopping and booking, but once they’re on property. To do all that we needed the infrastructure on the back end to make it easier for our franchisees to interact with the guest and improve the consumer experience. With that infrastructure I just mentioned being built, it’s really going to allow us to leverage some of those personalization capabilities moving forward.
I think the industry is going to see a big shift towards voice-based search. Be it Amazon’s Alexa, or Google Home, or some of these other ways that consumers are going to want to interact with that hotel owner. And we want to be on the forefront of that. So, we’ve already got folks working on that. To enable that, you’ve got to be able to handle the volume and the velocity and the veracity of data that comes at you in order to make the right business decision about how to price your hotel room for that particular guest.
Skift: I know some of your peers are in the process of piloting some of those voice-based search technologies. Are you thinking of placing an Amazon Echo in rooms, or using devices connected by the Internet of Things?
Pacious: We are. In the lab, we’ve been able to figure out how to use Alexa to book a hotel room through our central reservation system. Then the question becomes, how do you bring that to the consumer in a way that’s frictionless? So, we’re playing around with the different models on that front.
I think voice-based search will become one more channel, the way online became for call centers, which is to say, I think it’s going to be a different channel. But, as you mentioned, the Internet of Things is expanding; that was the main reason we decided to shift to a newer central reservation system that could handle not just 10s and 20s of channels, but hundreds and thousands of channels. And so, that’s where the world is going, and to compete on that front, we needed to have state-of-the-art technology on the back end to be able to handle all of that.
Skift: Speaking of reservations and bookings, one of the bigger hotel industry headlines this summer involved one of your peers, Hyatt, and its contract negotiations process with Expedia. That story highlighted a lot of the tensions between hotels and online travel agencies, in terms of the hotels’ collective push for more direct bookings. I know both you and Steve have been vocal about Choice’s stance on pushing for more direct bookings. Going forward, where do you see these campaigns going?
Pacious: We’re going to keep doing what we’re doing because it’s showing great results. Our goal is to build a direct relationship with our customers. We’ve built and we maintain a lot of really effective systems in order to do that. Our websites, our loyalty program, our central reservation system, the corporate accounts, the group business we do, and a book direct campaign is simply reminding the consumer that they’re going to find the best price when they come through one of our direct channels.
Secondly is the marketing campaign. Our Badda Book, Badda Boom campaign has been significantly well received by the consumer, in getting them to understand that perception about where they can find the lowest price. So, we’re going to continue that and continue to do more on that front.
I think the industry, itself, meaning the online world is going to continue to shift. If you think about the size of the screen, going from desktop to tablet to mobile phone, and now to voice, the amount of real estate there that you can, as a third-party provider, divvy up amongst hotel inventory is shrinking. There are becoming a lot more ways to rebuild that direct relationship with the customer, and we’re going to continue to focus on that.
Skift: Another headline that got a lot of news this summer for hotels was in relation to cancellation policies from Marriott, Hilton, and then shortly followed by IHG. What is Choice Hotels stance on cancellation policies, and will you be implementing more restrictive policies going forward?
Pacious: No, we don’t have plans, today, to change our policies. We’re pretty pleased with the business that we do get from corporations, and groups, and some of the others that are more concerned about the change in cancellation policies.
Skift: How is Choice handling this ever-present threat of Airbnb, which I’m sure is a question you’re asked all the time?
Pacious: You’re right, we’ve been asked this question probably every opportunity for the last three or four years. It’s interesting. The iPhone was launched 10 years ago. Airbnb was launched 10 years ago. And a lot has changed in the last 10 years. Some of these things impact your business. Obviously, the smartphone has impacted the hotel business in a significant fashion. Airbnb just has not had that big of an impact on our business and there are several reasons why.
Really only about one-third of their inventory is something that is similar to a hotel. Secondly, that inventory is not available 365 days a year the way a hotel room is. And their length of stay is much longer than the average Choice Hotels’ length of stay. Ours is a two-night stay; theirs is closer to a week. And their locations are more urban and destination, which is not the primary areas where our inventory is.
I think what our consumer and our traveler is looking for is consistency. They want a hot breakfast, they want to know they got parking right outside, they want to know that the Wi-Fi works, they want to know if something goes wrong there’s someone at the front desk. So, if you’re staying for two nights, that matters to you. If you’re going to stay longer, then you might be more willing to want to stay in that more unique product.
If it’s more of what we’re looking at on the vacation rentals side of the house, we do know that our consumer, when they have a longer stay, is interested in that product. Which was why we started our business in the vacation rental space. And again, it fits very nicely with the portfolio that we have of transient hotel room nights. When someone’s looking for a vacation destination, and they want to use their Choice Privilege Loyalty points, and they want to have the consistency and backing of a large hotel brand behind it if something goes wrong; then we’ve seen that resonate both with consumers and with the vacation rental management companies who are partnering with us.
Skift: Can you give us an update on your vacation rentals business?
Pacious: It’s like any good business; you learn a lot along the way. As a franchisor, you approach things as a franchise business model. As you get into looking at how vacation rental management companies work, there’s been some adapting on both sides between ourselves and our customers who are using the platform.
We’re learning along the way, but I think it’s interesting how much of a business delivery channel that’s really important for vacation rental management companies that we’re working with. So, we’re shifting our focus a little bit less toward the franchise full package, more towards the business delivery aspect of it, which is a key strength of ours. We feel pretty confident about the direction we’re heading in and the partners that we’re attracting.
Skift: What regions are you looking at in terms of expanding internationally?
Pacious: Our major focus has been Europe. The primary reason for that is we do direct franchising in Germany, in the U.K., and in France. In Northern Europe, we have a great master franchise relationship with Nordic Choice in the Scandinavian countries. We like the opportunity in Europe. We have about 406 hotels there, a little over 50,000 rooms. And we’ve been on a strategy there where we’re shifting away from tertiary markets and smaller hotels to more primary and secondary markets with larger hotels. That shift’s been underway for the last several years and is showing a lot of promise from the standpoint of being in the right locations where our consumers want to travel.
We like Europe. There’s a lot of independent product there. The idea of flying a U.S.-branded flag — the momentum around that is continuing in the right direction. So, we like our opportunities in Europe.
We like Mexico. We have a pretty strong group of hotels there with a nice pipeline.
And we are seeing some growth in China. It hasn’t been a key focus of ours, primarily because of that not being a direct franchise where we’re not managing hotels. To compete in that market, you really need to find the right partner, which we believe we’ve found in China. And they’ve developed a number of hotels for us over the last several years that are just starting to open.
Those are the ways we think about international expansion, but I would say that Europe continues to be our key focus.
Skift: Let’s talk about the travel ban that came out earlier this year. Choice Hotels was the only major U.S. hotel company to actually issue a statement about it. How do you see Choice Hotels responding to future U.S. travel policies and the current, often tumultuous, geopolitical landscape we find ourselves in?
Pacious: Our approach has always been that we’re looking for the administration to find a balanced approach that promotes travel. If you think about where the prior administration started, coming out of the Great Recession, they were telling people, “Don’t go to Las Vegas.” But that administration became very pro-travel as time went on. We expect the same thing to happen with this administration.
Balancing between security and promotion of travel is going to be important. But what’s also really important is the message you’re sending. A lot of this is about what you are hearing in the court of public opinion, and what the international inbound traveler is hearing about. It’s about how open United States is to travel. So, people can come to our country and enjoy the sights and the landmarks, conduct their business, visit their family, and stay in our hotels. We’re going to continue to be outspoken on those types of policy issues that impact our business.
Skift: What happens when this great economic cycle that we’ve had for so many years ends, and an eventual downturn begins?
Pacious: I think if you go back and look at our history, Choice does well on the upturns and we do well on the downturns. The reason for that is the portfolio of brands that we have. Usually what you’ll see is a shift from new construction as government financing becomes a little bit harder to find. You’ll see a shift more to conversion of hotels from one flag to another. What we’ve been doing during the upswing here, as I mentioned, is improving the value proposition, so if we do get to a downturn there may be hotels that were independent hotels, or with a flag with another company that want to be part of a large-scale distribution platform. We’ve seen that in every downturn that I’ve seen, where we tend to attract more hotels to us because they are finding it more difficult to do it on their own.
Now on the same-store sales side of the house, that’s really looking at when demand is softer how do you find customers? How do you continue to find customers and how do you continue to grow? I think the great thing about 2018 and what the forecasters are showing is, we’re still seeing RevPAR growth. A lot of the indicators of a downturn, where supply is north of 2 percent, we’re not there. Where rate is far ahead on growth as far as occupancy, we’re not there. We’re still seeing occupancy gains. The fundamental signs that you look for around an industry downturn just are not there.
Will we see growth not as strong as it was in ’16 or ’17? That is where the prognosticators are pointing us to, and we’ll see when we get there.