A Quality Inn franchise in Central Kentucky

ATLANTA — Choice Hotels has agreed to loosen up some on its criticized franchising practices in order to be let back into good standing with a franchisee group, the Asian American Hotel Owners Association.The relieved franchisor is expecting a much better year for franchise sales and conversions in 2012 than it had during last year, one of great conflict with AAHOA.

Hotel franchisees disagreed with a policy that franchisees largely deem as unfair, but are commonplace in most franchise sectors, such as hotels, restaurants or services — a franchisor's ability to permit competing properties next to existing franchises without their approval.

At the end of September, the 10,000 member-strong AAHOA gave notice that the franchisor had 90 days to cure its unfair franchising practices or it would be terminated from the association. "Our AAHOA Board has decided that it would be best to go our separate ways and not renew Choice's membership for 2012," the association wrote last year.

"We at AAHOA are here to ask for fairness and a level playing field," says hotel franchisee and AAHOA chair Hemant Patel about the association's experience with Choice Hotels.

Encroachment on a franchise's territory

The biggest issue hotel licensees had with Choice Hotels was a lopsided franchise agreement that allowed the franchisor to place new properties close to existing franchises with impunity, say the members of AAHOA. That might be good for a franchisor, but it can be bad for franchisees. Two neighboring Comfort Inn hotels might collectively provide franchisor Choice Hotels with more revenue in combined royalties, but franchisees argue that the two separate hotel owners would likely see a great reduction in their own business's revenue and profits as customers split between the pair.

Hemant Patel / photo from AAHOA

Encroachment of a franchise territory is a problem that occurs in most franchise sectors. But unlike other sectors, hotel franchisees have through time demanded that their franchisors contract out impact studies by third parties to show the effect of the new establishment on the old franchise's revenues, profits and value. If the impact to a franchisee's profits is too high, the project should be disapproved.

Franchisee Keith Miller, who is not a hotelier but owns subway sandwich shops in California and is also chair of another group of franchisee associations that represents franchisees in some of America's largest restaurant, service and hotel brands, including AAHOA delegates, declares that franchisees in other sectors typically do not rely on impact studies to know the damages done for a new encroaching store. "The hotel industry [franchisees] usually owns their properties; therefore, when their franchise agreement ends, hotel owners have the opportunity to stay with the same brand or rebrand," states Miller. In sectors outside of hoteling, franchise owners take their lumps. The sandwich franchisee continues, "In most franchise sectors, even with a hard location like a McDonald's or a Subway would have, the franchisee does not own the location. In fact, the franchisor owns or has the direct lease to that location. Therefore, a franchisee would not have rights to change to any other brand."

Without AAHOA's endorsement, Choice struggles to open hotels

Choice Hotels International Inc. (NYSE: CHH) hit a slump.

In the fourth quarter of 2011, Choice Hotels struggled to open hotels. Choice declared in its earnings call that only 128 hotels were added during the fourth quarter of 2011, which was "fewer than we were targeting," said Steve Joyce, president and CEO of Choice Hotels. Despite a slight uptick in the hotel industry in 2011, the franchisor signed only 332 new domestic hotel franchise contracts last year, compared to 357 in 2010.

Choice opens its 5,000th US hotel, 2/27

An analyst told HotelNewsNow that Choice's "growth profile remains subdued," according to a research note from Robert W. Baird senior research analyst David Loeb. "The company's current pipeline accounts for approximately 9 percent of total rooms, well below the 17 percent to 35 percent rate for peers," Loeb said.

Conversions of outside properties into the Choice system, the mainstay of Choice's franchise sales, has suffered in 2011 as well. "Conversions are 90 percent of our business," Joyce said last week at an earnings conference. "We've been relatively flat at this point, but it should move in the right direction from here."

With the disagreement settled, Choice anticipates better franchise sales in 2012. "We expect to execute more franchise contracts in 2012 than we did in 2011," said Choice's chief financial officer David White. AAHOA, franchisee problems and the settlement with Choice were not mentioned in the earnings conference, nor did the analysts ask about the settlement's impact.

Choice responds to racism charge

Franchise owners also accused Choice Hotels of discriminating against Asian Indian franchisees. AAHOA members felt shut out from leadership positions from which franchisees strategically advise Choice's national brand efforts. The advisory board's former chairman Todd Winkler had exacerbated an already existing wound when at the end of 2010 he announced at a Choice Hotel Owners Council (CHOC), which is a franchisee advisory council for Choice, "It [having AAHOA members lead Choice hotel owners] is just like sending your child to school, to college. Do you want to send them to the best college? Do you want them to be taught by the best professors? Or do you want them to be taught by the worst?"

Jay S. Patel (no family relationship to Hemant — Patel is a very common name in the part of India most AAHOA members originate from) was on a panel that represented AAHOA members. He asked Choice's executive team in a negotiation meeting, "Did Todd Winkler make these statements on his own recognizance or was he just repeating the conversations he had with Choice's leadership?"

"Hell no, we never said that to him," replied Choice's executives, according to Patel.

The Florida hotel owner adds that this was an issue that went beyond Mr. Winkler and his poorly chosen words. "Last year Choice Hotels tried to change the bylaws," says Patel. He describes the hotel franchisor trying to sneak in a new advisory board bylaw that would have given Choice the final say on whether or not an elected individual could become a member of the franchisee advisory board for Choice Hotels, CHOC. "AAHOA put them on notice and they canceled that new bylaw," he states. AAHOA was concerned that Choice Hotels was tinkering with the bylaws so as to bar Asian Americans from being active in CHOC. Patel declares, "We felt that we had to be active because we own 60 – 70 percent of the licenses of Choice."

A spokesperson for Choice says in its defense that the franchisor has a dedicated department to manage its diversity efforts and train employees and franchisees. Leaders from the franchisor and from the advisory council of franchisees attended diversity seminars last year. After Mr. Winkler resigned from his office, Choice held a diversity workshop for CHOC's leadership, who are elected by franchisees. Unfortunately that was not enough in 2011 to quell a growing anger from Asian Indian franchisees, who felt they were being blocked from key leadership roles.

After meeting with AAHOA, Choice's CEO Steve Joyce wrote to franchisees at the end of December to reassure them. "While the incident in question was unfortunate, the comments of a single individual do not represent the views of a large and diverse organization such as CHOC, nor do they represent the views of Choice," he stated.

According to AAHOA vice chairman Alkesh Patel (no family relationship to Hemat and Jay Patel), the association told Choice that it wanted the franchisor to communicate more frequently with members about future diversity initiatives that would include Asian Americans in leadership roles. President of the Asian American Hotel Owners Association Fred Schwartz says, "Steve Joyce made it very clear in our meetings that he was going to ratchet up his communications with AAHOA's membership on its diversity efforts." Schwartz says he is working to meet with Choice Hotel's chair Stewart Bainum and CEO Steve Joyce for a follow-up meeting to better resolve these issues.

Choice chooses to change

The result of the negotiations with the powerful group of hotel owners who own nearly half of the hotels in America is that Choice Hotels decided to change.

Steve Joyce / photo from Choice website

"Choice has made significant changes to its business policies and practices that will benefit the Choice franchisees and the brands overall," declared AAHOA's board and its president in an advisory that went out to its membership on January 27.

Choice was brought back into the fold. "AAHOA will continue our relationship and renew Choice's membership for the year 2012," the Asian American Hotel Owners Association board declared.

One result of the franchisee negotiations with Choice was that a decade-old impact policy was updated to include all, not just a select group of supposedly "well-performing" franchisees. The old 1999 impact policy stated that a few franchisees in good standing were entitled to a third-party study to ascertain whether a new hotel in the franchise's neighborhood would adversely affect its business.

New York-based Stan Turkel, a hospitality expert who has carefully watched AAHOA through the years, is critical of the negotiations. He thinks the franchisees negotiated something that is far less than it appears. "The option to select an exclusive territory applies only to new applicants, not to Choice's existing 6,000 franchisees," Turkel points out.

But AAHOA leaders state that they took an important first step, negotiating to take out restrictions on who the impact policy would selectively apply to. "We took out the 80 percent RevPAR requirements," says Jay S. Patel, one of the negotiators for AAHOA and the chair of its Franchise & Industry Relations Committee.

RevPAR is revenue per available room, a metric calculated by multiplying a hotel's average daily room rate by its occupancy rate. The lodging industry uses it to judge a property's performance.

Negotiators for AAHOA think that using an artificial 80 percent bar of a hotel's revenue per available room essentially eliminates a large group of franchisees. Franchisees also had to be current on royalty payments before the franchisor would conduct an impact study to see if a new hotel in the neighborhood hurt the existing one. Franchisees felt that franchisor Choice used arbitrary policies of good standing to ignore and encroach on a large body of franchised properties.

Jay Patel understands that there is still room for the franchisor to be heavy-handed. "Choice still has the ability at their own discretion to decide that this property meets what their goals are," he states. "Even if you were in compliance with everything, they still have the last say." But he adds, "The progress for us is that a number of irrelevant hoops that we had to jump through are gone."

Will Choice have an independent association?

An outcome of the negotiations is that the franchisor recognizes that its franchisee advisory council needs to change. Choice is rethinking its methodology for its board of advisors. One of the criticisms of the Choice Hotels Owners Council (CHOC) is that it is currently made up of large, multi-unit owners.

AAHOA chair Hemant Patel sees a better way.

"CHOC should be a combination of multiple and single property owners," he says. "Let's say 25 percent of Choice properties are owned by people who have multiple properties. If there is no participation in the owners council by the owners of the remaining 75 percent, then the majority of the people are not heard," notes Hemant. "I recommended as a decent compromise to have one single property owner and one multiple property owner represented in the council as a first step." But Patel is quick to add that little progress has been made on getting fairer representation. "Choice Hotels acknowledged that this was a big issue with CHOC, but it's still a work in progress," he notes. "We haven't seen anything in writing about representation change."

Choice says it will change. But first it plans to carry out a survey of Choice licensees to ask what they believe is the best route for them — an independent or a corporate supported advisory board. "We will have access to the survey results," says Jay Patel. "We will have input on how CHOC will be formed in the coming years."

Industry expert Stan Turkel again is critical. "Letting Choice commission and monitor such a study about CHOC's future almost guarantees the outcome: there will be no fully independent CHOC organization," he states emphatically.

Turkel thinks that franchisees should simply form their own independent association. There is no need to ask that the hotel chain's advisory council become independent.

AAHOA wants to try to work first within the chain's existing framework.

Turkel replies, "If Choice franchisees want a fully independent owners association, they must support complete separation of CHOC from Choice with an independent chief executive, with a separate office location and, most importantly, funding support solely from franchisees with no Choice contribution."

Franchisees could have successfully negotiated much more

Regarding the successful negotiations, the AAHOA chair declares, "When a board completely stood together, 100 percent united, then there was no room for failure." Hemant Patel continues, "There was no room for any loopholes or divided opinion. That was very essential to show a collective agreement from the board and unity of purpose."

Fred Schwartz / photo from AAHOA

But hotel consultant Turkel thinks the franchisees missed a great opportunity to get what they wanted. Turkel thinks that AAHOA let Choice Hotels avoid the fair franchising standards that the association champions, called the 12 Points of Fair Franchising. These delineate standards of good faith and fair dealing, such as the right to transfer a business, protection from encroachment, and other franchisee protections. "AAHOA's 12 points of Fair Franchising has been in the marketplace for over ten years. Choice Hotels has never agreed to those 12 points," declares Turkel. "They don't even get 50 percent. Only the small franchise chains have agreed to the 12 points. They pass. InterContinental Hotels Group, Choice, Wyndham and Marriott do not pass."

Jay Patel emphasizes one step at a time. "While it does not seem like the success has been there, if you look at brands like Motel 6, Red Roof Inn, La Quinta and America's Best Value Inn, most of the 12 points are being practiced by them," Jay observes. He thinks there's been success with the big brands too, albeit more slowly. "Even at Wyndham, there are 5 or 6 of our 12 points that they are practicing," says Patel. "What AAHOA has done over the last 10 to 12 years is to make a significant change in our industry. The restaurant and other industries have made very little progress."

Turkel judges that AAHOA could have sped up Choice Hotels' compliance with the 12 points of fair franchising. There was no need to wait. Turkel points out that AAHOA should have had Choice Hotels agree with the 12 points and put it in writing, setting them on a firm path to compliance. "It's not even mentioned," he states.

Choice Hotel's spokesperson declined to speak with Blue MauMau specifically about the 12 points of fair franchising. "Those are AAHOA's points and they are best qualified to speak to them," the spokesperson maintained.

Still, having franchisees successfully negotiate change from a franchisor is worthy of note, according to Keith Miller, chairman of another franchisee group, the Coalition of Franchisee Associations. "It's great for the franchise industry anytime that franchisees can be represented in negotiations and be in a sense treated as equals at the table," submits Miller. He thinks a franchisor becomes a better performing company for its shareholders as it learns to work in improved ways with its franchisees and their independent associations.

AAHOA president Fred Schwartz emphasizes that his association has made significant inroads with Choice Hotels, but he thinks that considerable work still needs to be done. "We've opened the dialogue with the leadership of Choice," he declares. "We appreciate Choice reaching out to us and listening to our concerns. The year 2012 will provide new opportunities to strengthen the relationship. It's vital that we work together to ensure that progress continues in achieving our goals."

Related Reading:

• Choice Hotels Answers Questions on AAHOA, Mar 1, 2012
• Have We Reached Hotel Franchising Détente by Ed Watkins, Lodging Hospitality
• AAHOA Resolves Concerns with Choice Hotels
• Conversion Business a Slow Go for Choice