Asset light operators Wyndham and Choice fared better than most through the pandemic, with Choice turning a profit in the fourth quarter as they won market share.
At Choice, fourth quarter net income was USD7.865m, on revenues down 28% at USD63m. For the year as a whole, revenues were down 31% year on year. Wyndham was not far behind, declaring a USD7m net loss for the quarter on USD296m of revenues.
The pair both have portfolios oriented towards the budget end of the market, particularly in domestic US. And while white collar workers have been able to heed government advice and work from home, many blue collar workers have been on the road increasingly as normal, in the latter half of the year. And it is often at Choice or Wyndham hotels that they stay overnight.
“Demand from our essential everyday business travellers who travel for a living and who are not working from home has continued to improve, driving weekday bookings and weekday ADR, especially in our economy hotels average daily weekday rates, which were over 500 basis points higher year-over-year than their weekend rates,” explained Wyndham CEO Geoff Ballotti.
At Choice, being open and available in the right places – often edge of town and roadside – led to a competitive advantage. CEO Pat Pacious commented: “Our domestic systemwide year-over-year RevPAR change surpassed the industry by nearly 17 percentage points for the full year, declining 30.7% from 2019.”
The pair have seen a move towards more digital bookings helped, at Wyndham, by the launch during the year of a new, easier to use app, where Q4 saw app bookings up 18% year on year. Similarly, at Choice, Pacious reported: “Our website contribution increased by 150 basis points, ending the year with the three strongest months in 2020, while our loyalty program increased its contribution by 280 basis points quarter-over-quarter.”
“We are highly optimistic about what lies ahead,” said Wyndham’s Ballotti. “We’re encouraged that the vaccines are working and we believe that they will help to deliver a multi-year resurgence and leisure travel, unlike any other in our industry’s history.” He said there were three strands to Wyndham’s current focus. First, having had a clearout of 20,000 non-compliant rooms during 2020, he wants to resume growth, with a 1-2% NUG estimated for 2021. There will be further investment in digital, to drive sales growth. And Wydham wants to build on its 10% improvement in net promoter scores in 2020, to further increase customer satisfaction.
At Choice, the strong performance of the business means management are accelerating improvement plans, said Pacious: “We began to get a lot more confident around the resiliency of our business model, the performance of our brands, particularly what we are seeing on new conversions. And so we decided to accelerate a number of things.” He promised new room prototypes, investment in revenue optimisation tools, and investment in extended stay and upscale hotels. The company has also just announced a loyalty programme link with Penn National Gaming, adding 41 more properties where Choice Privileges points can be earned or spent.
And there will be capital to invest in growth: “We want to seek potential acquisition opportunities and when you go through a period of disruption as we’re going through, that may create some opportunity. If you look at our portfolio, there certainly continues to be white space in our portfolio that could make sense for either a tuck-in acquisition or a new brand opportunity.”
In contrast, Wyndham has its hands full dealing with conversion opportunities, said Ballotti: “There’s plenty of people that would like to engage in discussions with us both domestically and internationally. But I would say for the foreseeable future, this year and next we’re going to be focused on just driving our organic net run growth.”
He said the majority of the more than 14,000 rooms added in the quarter were from conversions. And the group remains focused on international growth: “Internationally, our openings were strongest in our direct franchising business across Mainland, China and Southeast Asia. Our teams were also very successful, and again, debuting multiple brands in multiple new overseas markets during Q4, including our first La Quinta in New Zealand, our first Trademark in St. Martin, our first Super 8 in the United Arab Emirates, our first Ramada in Nepal and our first Howard Johnson in Cambodia.”
HA Perspective [by Andrew Sangster]: Wyndham CEO Geoff Ballotti spoke in glowing terms about Wyndham’s “non-urban franchise business model” and its ability to “deliver in any environment”.
Wyndham’s results certainly back up these claims but the bigger question is whether the suburbs is where you are going to want to remain post-pandemic. Many argue that the world has changed and we are now in a post-urban and more dispersed environment. I think this analysis is wrong.
It appears true that the suburbs offer a more stable environment but just as the suburbs are not very exciting places to live, the hotels look unlikely to deliver exciting returns in coming years. City centres are more challenging and dynamic environments; they cost more to enter and in the recent past offer more volatile returns. The past, however, is not necessarily a route map to the future.
With 80% of its 2019 fee income from economy and midscale US properties, Wyndham remains wedded to this market, one that might be described as blue collar. But in post-industrial societies, blue collar does not look like a growth market, or at least a market that will not grow at the pace of white collar.
If you share my conviction that city centres will bounce back and resume their above trend growth rates relative to suburban and country regions, then urban hotels is where you want to be to deliver above trend growth.
Both Choice and Wyndham have put in strong performances during the exceptionally difficult pandemic period. At Choice, for example, 96% franchisees are paying their fees. Even at the trough it was between 75% and 80%.
The ability of these companies to maintain this outperformance relative to the rest of the industry will be a good indicator as to whether there has been a switch away from the urbanisation trend or not.
If I am right about how quickly cities recover, then these two hoteliers will quickly revert to trend, or below-trend, rates of growth unless they can quickly pivot into segments that look likely to maintain strong growth momentum, notably extended stay.
At Choice, there is high hopes for Woodspring Suites and the soon to be introduced Everhome Suites, a brand launched just before the pandemic took hold. The latter midscale concept further develops extended stay closer to residential.
During 2020, Choice added almost 110 extended stay franchise agreements, about a quarter of the total. This included the largest multi-unit deal in the midscale MainStay Suites history with 15 units. The brand has 90 hotels open and 140 in the pipeline.
It is clear that there is a switch from the traditional midscale at Choice. While midscale brands represent two-thirds of the domestic portfolio they were less than half of the franchise agreements signed in 2020.
Not surprisingly, conversions were the bulk of new signings, representing 70% of the total in 2020 across all brands. The issue for both companies is that conversions come from rival brands rather than independent hotels, particularly as you head down the chain scale segments. Picking up the off casts of rivals is not a great way forward to long-term growth.
The other option for both Wyndham and Choice is to push harder on overseas expansion where their respective brands are less wedded to the suburbs than they are in the US. But at Choice, discussion of anything outside of the US was noticeably absent from the analysts’ call.
With Wyndham, international hotels do at least get a shout out. The fourth quarter saw 91 new contracts signed, down from the 116 in the same quarter in 2019 but a creditable performance in the circumstances. And Wyndham CEO Ballotti did at least talk about the opportunity to grow Wyndham brands globally.
For Wyndham, direct is the preferred route to franchise growth. It now franchises directly to more than 60% of its international properties and obtains a royalty rate of three to four times what it gets through master licence agreements.
Internationally, particularly in Europe, there is a unique, once-in-a-generation opportunity to seize the growth initiative by converting independents. Wyndham at least seems to be looking beyond the US. But it is ruling out M&A activity, with Ballotti saying it is off the agenda for the foreseeable future or at least this year and next.