It won’t be an easy task, but Choice Hotels moving beyond the sectors that gave it durability during the pandemic makes sense for the recovery — if it manages to build the right upscale portfolio.
The mix of affordably priced, drive-to hotels that gave Choice Hotels a leg up during the pandemic isn’t enough for company leaders. They want to elbow more into high-end lodging.
Choice wasn’t far behind the extended-stay hotel sector, which drew investor interest early in the pandemic due to its ability to stay open when so many other hotels faced temporary closures. Choice was the first major hotel brand during the recovery to outperform 2019 levels.
Choice’s portfolio, dominated by brands like Comfort and Econo Lodge, was well-poised to seize upon drive-to leisure travel as well as road warrior business travel — healthcare workers, infrastructure teams, and other groups that can’t rely on remote work technology to conduct business — that continued throughout the health crisis.
It is curious then that leaders at Choice Hotels are pushing more financial resources into beefing up the company’s presence in higher-end hotels. The company earmarked $750 million of its corporate balance sheet to grow its Cambria brand, one of Choice’s two upscale brands along with the Ascend Hotel Collection. But leaders at Choice Hotels are also looking to go a step further — and higher.
“We’ve discussed it internally, and we have a mergers and acquisition group that’s out looking … If you look at our portfolio, it’d be nice to have an upper-upscale, full-service brand, potentially,” Mark Shalala, senior vice president of development for upscale brands at Choice Hotels, told Skift during the Americas Lodging Investment Summit before admitting with a laugh: “Although, a full-service brand right now may not be the right play.”
Look no further than the company’s most recent annual 10-K filing with the U.S. Securities & Exchange Commission to see what echelon Choice Hotels might be aiming for.
Shalala gave no mention of what specific brands Choice might be eyeing, but the upper-upscale chain scale breakdown in the company’s SEC filing includes brands like Sheraton as well as the namesake brands for Marriott, Hilton, and Hyatt — hotels often geared toward business travelers that aren’t necessarily seen as winners during the pandemic. Should Choice want to go a step further and elbow its way into the luxury sector, the company would be competing against the likes of Four Seasons, W, and JW Marriott.
The company isn’t necessarily just pursuing an acquisition, however.
“We’re always out there looking at different things [and] different options. Never say never,” Shalala said. “It’s not off the table that we might do that, but we’ve also been a company that has been able to launch and grow brands organically pretty successfully. We don’t necessarily have to acquire brands to grow.”
But acquiring a high-end brand can help Choice Hotels accomplish its high-end goals a lot faster than organic growth. It takes a lot more time and money to launch a new high-end brand than something more affordable like Everhome Suites, an extended stay brand Choice launched in early 2020.
“If it’s sort of mainstream, it’s not too difficult to sort of just pull it out of thin air,” Richard Clarke, a managing director covering global leisure and hotels at Bernstein, said. “It’s very difficult in the luxury end of the market.
Most of the brand launches seen in the high-end sector during the pandemic have involved soft brands, collections of hotels that retain more of an independent feel rather than adhering to a singular brand and the various standards that go with it. Accor launched the Emblems Collection and IHG came out with the Vignette Collection in the last year.
But Choice already has its Ascend Hotel Collection, meaning there is more room to introduce a hard brand. That’s where an acquisition might make more sense given the financial resources and patience needed to build up something in the higher-end sector. Marriott’s Edition, first announced in 2008, and Hyatt’s Andaz, revealed the year prior, are the only two new high-end, hard brands announced by major hotel companies in the last 15 years that came to mind for Clarke. Marriott spent $800 million on the first three Edition hotels to jumpstart the brand.
“If you want to be in that space, you kind of have to do [a merger or acquisition],” Clarke said. “You have to do what IHG has done with Six Senses and Regent.”
The problem Choice has that IHG didn’t is that Choice’s portfolio is significantly more concentrated in the U.S. than IHG’s. IHG, which also has the InterContinental brand, could look globally for an ultra-luxury brand to introduce to its international customer base. It is likely to be a smaller potential brand pool for Choice, which would need to bring in something that its mix of American customers and would-be owners easily recognize.
“It is a problem because it comes back to that theory of launching luxury brands and why organic development is difficult because most luxury brands have some sort of existing heritage,” Clarke said. “It’s very difficult to go up to an owner and say, ‘Would you be willing to invest a huge amount of money to build a hotel for a brand that you’ve never heard of?’”
That said, there is still plenty of motive for Choice Hotels to want to chase the high-end market. The sector is the most underserved for the company. Choice has even adjusted its Cambria development prototype to enable the brand to expand more into smaller U.S. cities — a trend the hotel industry has increasingly adopted for higher-end hotels during the pandemic.
Moving beyond two brands and elbowing into the higher-end market makes a lot of sense. One of the worst things that can happen to a hotel company when it comes to customers or potential franchisees is not having a brand that can fit their needs and losing the business to a competitor that does like Hilton or Marriott. If both want a high-end hotel, Choice can’t afford not to go out and find — or create — one to offer.
“Owners do want in that space, and if you look at where global construction is going on right now, yes, select-service is doing well, extended stay is doing well, and things like boutiques are doing well. But luxury is also doing very well,” Clarke said. “The growth rates at some of the luxury brands is very strong because the rich keep getting richer, and there is a lot of demand.”
Tags: choice hotels, coronavirus, coronavirus recovery, extended stay, four seasons, hilton, luxury, marriott, mergers, mergers and acquisitions, w hotels
Photo credit: Beefing up its Cambria Hotels is only one part of a Choice Hotels' push into higher-end sectors. Pictured is the Cambria Hotel Downtown Asheville in Asheville, North Carolina. Warren LeMay / Wikimedia