Choice Hotels Looks to Transcend Budget Image by Going Upscale

25.08.2023 - 14:41 / skift.com / Sean Oneill

Choice Hotels‘ recent acquisition of Radisson’s Americas business looks like a post-pandemic statement of intent. The $675 million deal will help shift the company’s portfolio mix upmarket.

“Currently, every new unit entering our portfolio has continued to generate, on average, twice the revenue as a unit leaving it,” said Dominic Dragisich, chief financial officer, in a Monday earnings call. “The addition of approximately 60,000 Radisson America’s domestic rooms open or in the development pipeline as of the end of the third quarter marks the next chapter in Choice’s higher revenue per room growth trajectory.”

Adding hotels that generate more revenue has already bolstered the Rockville, Maryland-based company. Choice Hotels forecasted that its full-year 2022 adjusted earnings before interest, taxes, depreciation, and amortization — a measure of profit — would rise by more than 25 percent versus its full year 2019, which had been its pre-pandemic peak.

In the third quarter, Choice generated a net income of $103.1 million on $414.3 million in revenue. Net income was down 12 percent year-over-year as higher costs mainly related to the merger weighed on profit. Revenue was up 28 percent year-over-year. 

A strategic move upmarket underscores the comparatively sluggish long-term growth of the U.S. economy segment.

Choice Hotels’ brands — from its flagship Comfort to roadside stables like Rodeway Inn — have been like fast-casual restaurants. Its brands are, for the most part, tolerable, well-priced, and, most crucially, consistent. This formula has enabled Choice to grab a significant chunk of business from inconsistent independent roadside hotels in the U.S., a fragmented sector.

Yet the economy segment for overnight travelers has been shrinking, executives said. In the U.S., the only high-growth brands in the economy segment are extended-stay properties. This dynamic is true even as rates have firmed up as many owners exit the hotel business, reducing supply. 

The company’s budget brands Rodeway Inn and Econo Lodge together saw about 5 percent of hotels exit the network this year. Executives said they’re “continuing to strategically evaluate” certain brands, which analysts may interpret as a sign the company may want to sell them.

The company isn’t abandoning its value-based brands. It has a prototype for a new design for its flagship Comfort, under development in several locations.

“Our overall strategy is to be growing in segments that are growing, and the two highest growth segments today are up … upscale select service and upper mid-scale,” Pacious said. “We’ve got great brands positioned and are taking advantage of those trends. And then extended stay, which is just a segment that is undergoing