Choice Has Dumped Hundreds of Budget Hotels in Upscale Strategy Shift

Choice Hotels International has been orchestrating one of the U.S. lodging industry's most dramatic makeovers. The company that built its empire on roadside chains like Econo Lodge and Rodeway Inn is now aggressively pivoting toward sleek urban hotels and extended-stay suites.

Skift analyzed Choice Hotels' financial filings on Thursday for 2024 and compared them with 2019. The numbers on property counts and room counts tell a compelling story. Budget properties have been falling out of favor, while extended-stay and upscale offerings have been flourishing.

MainStay Suites, Choice's extended-stay brand, has nearly doubled its footprint since 2019, adding 68 properties and over 5,500 rooms.

This wasn't by chance. According to The Highland Group, extended-stay properties industry-wide have shown fatter margins than most other hotel segments. A key explanation is that weekly housekeeping and limited service offerings keep costs in check.

Meanwhile, Choice's upscale expansion strategy began with Cambria Hotels and sped up with the Radisson acquisition.

For context, Skift spoke with David Pepper, chief development officer, ahead of Thursday's earnings.

"We're definitely moving much more into the upscale space," Pepper said.

Pepper said the overwhelming majority of rooms in its pipeline are in "more revenue-intense brands" — with a RevPAR premium of over 30% compared to the existing portfolio. That matters because Choice earns higher royalties on these upscale properties.

Economy Brand Softening?

In the budget segment, some of Choice Hotels' brands have lost momentum in the past five years. Skift's analysis of financial filings found that Econo Lodge and Rodeway Inn together shed over 300 properties and nearly 21,000 rooms.

The divergence between extended stay and traditional economic lodging is striking. MainStay Suites' room count surged 119%, while Rodeway's fell 28%.

The trend reflected broader industry challenges. Rising labor costs make budget properties increasingly difficult to operate profitably, while aging buildings require substantial capital investments that owners may be unwilling to make given rising costs for materials.

If recent trends continue, Rodeway and Econo Lodge would shrink the most among Choice's 22 brands this year.

In contrast, MainStay (extended stay), Suburban (extended stay), and Cambria (upscale) have had the most positive trends in property and room counts over the past five years.

Also of note: The company's Sleep Inn brand in the "midscale" or mid-tier segment has shown notable gains in room count on a large base. Midscale stalwart Quality Inn is holding steady in popularity.

Shift in Emphasis to Upscale

Choice Hotels' strategy here appears clear: Double down on extended-stay and upscale segments like Cambria Hotels (which added 26 properties) while letting lower-end brands gradually wind down through attrition.

The company has nearly doubled its upscale domestic rooms pipeline year-over-year.

The group said Thursday that its overall domestic upscale portfolio delivered growth in revenue-per-available room (RevPAR) last year.

The Radisson upscale brands led the performance, increasing RevPAR by 4.2% year-over-year.

Radisson's properties already tended to charge higher rates on average than Choice's existing portfolio at the time of acquisition.

Choice has also worked to boost the performance of the Radisson brands it acquired. Since being integrated into Choice's systems, Radisson properties have seen a roughly 40% increase in direct online reservations. The company's Country Inn brand experienced over 20% growth in direct bookings. (Direct bookings are cheaper for owners than ones referred via online travel agencies.)

Urban and Resort Hotels

Choice Hotels franchises and runs over 1,000 upscale, upper upscale, and luxury hotels globally.

Pepper said that, against an industry backdrop of anemic supply growth — just 0.5% overall in the U.S. — Choice Hotels is positioning itself to capitalize on acquisition opportunities, particularly in urban and resort locations.

He said Choice's strategy was recently bolstered by a partnership with Westgate Resorts, which incorporated 25 properties and expanded the group's presence in premium leisure destinations.

Extended Stay Hotels

Choice Hotels' continues to demonstrate strength in the extended-stay segment. It has 500 open domestic extended-stay hotels, with over 350 in the pipeline.

"We dominate extended stay," Pepper said, claiming that Choice controls more than half of all midscale extended-stay construction projects currently underway.

"Over half of all mid-scale extended-stay construction today is ours," Pepper said.

Last year, it opened 25 WoodSpring properties — a record for the brand. The company also achieved record openings for its Everhome brand.

Potential Risks

Yet Choice Hotels' repositioning carries risks. Budget hotels still serve an important market segment, particularly in secondary and tertiary markets where MainStay and Cambria may struggle to generate sufficient demand.

Competition poses another risk. Executives at arch-rival Wyndham have re-affirmed their commitment to the budget and premium economy segments. It's only a matter of time before large hotel groups like Hilton, Marriott, and Hyatt, begin adding brands that push down into lower affordable segments.

Choice Hotels' challenge will be maintaining enough scale across segments while steering its portfolio upmarket.

Yet, for now, Choice appears to be reaping early benefits from its expansion upscale: The company's total franchise count grew by 433 properties.

Pepper believes that tougher conditions for credit availability and higher long-term interest rates will let Choice's development savvy and scale advantages shine.

"When interest rates were at zero, everybody was brilliant," Pepper said. "Now you have circumstances where you have weeded out who are the true developers and the true acquisition people."

2024 Performance Saw Year-Over-Year Gains

Overall, Choice's strategy has delivered system growth, more revenue per room, and more loyalty from guests, according to numbers the company published Thursday.

Accommodations Sector Stock Index Performance Year-to-Date

What am I looking at? The performance of hotels and short-term rental sector stocks within the ST200. The index includes companies publicly traded across global markets, including international and regional hotel brands, hotel REITs, hotel management companies, alternative accommodations, and timeshares.

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