Hostile Hotel Consolidation

Another big hotel merger would be bad news for consumers and hotel owners.

Phot credit: Stef

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Late last year, Choice Hotels — which owns brands such as Radisson, Quality Inn, and Econolodge — proposed a merger with Wyndham Hotels and Resorts. That bid was rejected by Wyndham’s board of directors, so Choice is now attempting to a hostile takeover — meaning it’s trying to acquire Wyndham anyway, by going around its board and directly to its shareholders.

If this merger were to go through — and that’s a very big if — Choice buying Wyndham would be the latest in a slew of mergers and acquisitions in the hotel industry in recent years. And it would likely be bad news for both consumers and the owners of individuals hotels operating under both of those corporations.

On the flip side, the proposal could invigorate both some novel antitrust enforcement and state-level action to help not just hotel owners but anyone who owns a business that has a franchise agreement — but more on that in a little bit.

The first thing to know is that most of the big hotel brands you’ve heard are are actually owned by just a handful of mega-corporations. Wyndham, for example, owns Ramada, La Quinta, Days Inn, Super 8, and Howard Johnson, among many others. Marriott owns Sheraton, Westin, and Residence Inn, among many others. Hilton and its vast holding of various Hilton-branded properties also owns Embassy Suites and Doubletree.

You get the idea. Just six corporations account for 80 percent of all branded hotels in the U.S. The argument from the hotel industry is that this consolidation is necessary for hotel owners to retain bargaining power against players in other industries, such as online travel agencies that are also consolidating.

Call it the Power Rangers theory of corporate mergers: Hotel corporations argue they need to join together to fight the giant monster someone else created.

It’s true that antitrust enforcers have been too lax across the economy, including in the travel space, allowing fewer players to amass too much power. But rampant hotel consolidation has big downsides for consumers: For example, having fewer players in the industry makes it easier for the big hotel chains to collude on fees, scale back on points and loyalty programs, and also likely engage in the sort of price-fixing schemes I wrote about here that have been a problem in the Las Vegas hotel market.

If Choice acquires Wyndham, it will control nearly 20 percent of all hotel rooms in the United States, making it the largest branded hotel chain in the country. Choice and Wyndham currently dominate the midscale and economy segments of the hotel market, so joining them together would give Choice especially immense power among hoteliers in that price range.

But individual hotels aren’t run day to day by the corporations that own their brands. Instead, they’re run by franchisees: Individual owners who operate their hotels and pay their parent corporation for the right to be associated with it and use its branding. So a hotel owner in, say, New Jersey, pays Wyndham or Choice or Marriott or whoever for the right to call their hotel a Ramada or Days Inn or La Quinta.

And, of course, this isn’t a model unique to hotels: Fast food chains, accounting firms, hair salons, and many other industries rely on franchising to some degree. The idea is that associating with a big brand makes an individual hotel — or whatever sort of business — more likely to attract customers, and gives all franchise owners the ability to lower their costs because of the bulk purchasing power of the parent corporation.

The reality in recent years for franchise owners, though, has been something else. Just like on the consumer side, as industries have consolidated, they’ve been able to exert more leverage over franchise owners, extracting more fees, pushing more rules, making it harder to escape abusive franchise contracts, and overall extracting more money from local owners — and therefore local communities — in order to suck it back to the big corporate headquarters somewhere else.

Indeed, that makes sense and is a big incentive for franchisors to consolidate: Fewer available competitors with whom an owner can franchise means they have less bargaining power against those that remain. Franchisees increasingly complain that corporations are requiring more of them when it comes to special products, discounts, and deals, as well as using particular technology or designs in their businesses, which cut into their profit margins but benefit the parent company. (Read this wild story about McDonald’s always-broken ice cream machines for a sense of what I’m describing.)

One study has even shown that a key argument for hotel franchising — that it lowers costs for franchisees — isn’t even true: Franchises receive no cost benefit relative to independent hotels.

There have already been significant concerns expressed among Wyndham franchise owners that the above host of horrors is exactly what they’re in for should Choice succeed in purchasing Wyndham.

“A merger with these two very large hotel franchisors would mean 16,500 hotels across 46 brands all come under one franchisor. More impactful is the fact that they are both in the economy and limited service segment, which is where the vast majority of our members have their hotels,” said Laura Lee Blake, president and CEO of the Asian American Hotel Owners Association. “To suddenly have one franchisor have such dominance and control is frightening. And the reason I say that is it limits the options, the choices that the franchisees might have.” 

“Choice’s theory of why it benefits the consumer is totally bogus,” agreed Rich Gandhi, a former Choice franchisee who heads a group called Reform Lodging. “But it does benefit the shareholders of Choice, because it gives them more power to gouge the franchisee base, which really increases Choice shareholder profitably at the expense of franchisees.”

So what’s next? The Federal Trade Commission could conceivably challenge the merger if Choice is successful in purchasing Wyndham, on the grounds that it would give Choice too much monopoly power in the midscale segment of the hotel market or that it would be too harmful to franchisees. The FTC, alongside the Department of Justice, recently rolled out new merger guidelines that attempt to do more to encompass the various harms caused by mergers, including to workers and other businesses. A good test run would be a case based on harm to franchisees. State attorneys general could challenge the merger, as well.

Choice’s leadership clearly knows this is an issue and has been meeting with the FTC already.

States legislators have also been increasingly interested in recent years on doing more to protect franchisees. Bills have been introduced in several states to give franchisees more rights and protect them from some of the more abusive franchisor tactics: Most have run into a buzzsaw of lobbying, of course, but as interest grows in these efforts they’ll become harder and harder to stop.

So there’s good reason to think that Choice will have to abandon its hostility, if you will, and leave Wyndham alone. That won’t reverse any of the extreme consolidation already harming consumers and franchisees, but it’s good to, in the short term, at least stop making the problem worse.

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COME LEARN ABOUT JUNK FEES: I’ll be moderating an American Economic Liberties Project virtual event on Jan. 18 at 1 p.m. EST about how state legislators and advocates can work to ban junk fees, featuring Pennsylvania State Rep. Nick Pisciottano, Arizona State Rep. Analise Ortiz, and Jon Donenberg, a deputy director of the National Economic Council. RSVP to watch here.

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— Pat Garofalo