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Choice eyes expansion in Europe
March 28 2013

After cleaning up its portfolio in Europe, Choice Hotels International expects to build on recent deals to enhance its presence throughout the continent.

Highlights
  • Big deal with Akkeron Hotels gives Choice Hotels Europe a foothold for future growth.
  • Conversion is the name of the game, although the company will continue to seek new-construction opportunities.
  • A new property-management system will help European franchisees better manage the large number of distribution outlets, according to Duncan Berry, Choice Hotels Europe’s chief executive.

LONDON—With an eye cast on expanding its presence across the continent, Choice Hotels Europe is focusing its early attention on adding to its portfolio in the United Kingdom.

Steve Joyce, president and CEO for Choice Hotels International, had made it clear in recent statements that expansion in Europe is a must for the Maryland-based franchising giant with more than 6,200 hotels comprising nearly a half-million rooms around the world. Duncan Berry, chief executive for Choice Hotels Europe, has helped set the stage for that growth since joining the company as chief operating officer in 2008.

Beginning in 2010, Choice has been upgrading its portfolio by terminating the contracts of sub-par properties, Berry said.

“If we hadn’t done that we wouldn’t have been able to sit around the table with (companies such as) Akkeron (Hotels Group),” he said during an interview at the company’s Saffron Hill offices. “There was that need to take a couple of steps back to bring the overall caliber of the hotels up. We were keen from a brand standards point of view that they were being maintained.

Duncan Berry
Choice Hotels Europe

 

“We just want to put ourselves in that position where we’re in consideration with these guys,” he said. “Now we’re at a point where we have a compelling business case. We shouldn’t lose sight of the fact we’re offering a credible opportunity for people who want to get into a market.”

Choice has about 500 properties in Europe, including 42 in the United Kingdom. Scandinavia and Ireland have master-franchise agreements; the rest of Europe is serviced by corporate.

“The focus is wanting to make sure we can do as much as we can in the markets in which we have existing product,” Berry said, adding that Choice is focusing on expanding the Comfort, Quality and Clarion brands, in that order.

The company’s research indicates that 63% of hotel stock in the U.K. is unbranded and there are plenty of hotels with more than 40 rooms that would fit nicely into Choice’s portfolio, Berry said.

U.K. markets high on the company’s wish list include central London, Edinburgh, Glasgow and Leeds. The majority of expansion would be through conversion, although a new-build project in Manchester is notable, the executive said.

“We need to make sure we have a stronger distribution of hotels in the market we’re in,” Berry said.

Berry pointed to France and Germany as countries with many expansion opportunities.

“Conversion is what the business has been built on,” Berry said. “It’s been difficult to get those new builds out of the ground. Whilst there have been a few new builds happening, they’re not a cheap option at the moment. We need to concentrate on conversions.”

A deal signed earlier this year with Akkeron brings nine U.K. hotels into Choice’s fold. The deal was completed in large part because Choice provided an undisclosed amount of mezzanine financing, which represents the first time the company has leveraged its balance sheet in Europe.

“In the international markets there previously hadn’t been a strong case to take to (corporate headquarters) to utilize,” Berry said. “We’re excited about what the Akkeron agreement provides us. It took a few months to get it together, but there’s no doubt it will help us.”

The overall affect the Akkeron deal has had on Choice can’t be underestimated, Berry said. Akkeron owns 34 hotels overall.

“We felt in Berlin (at the International Hotel Investment Forum earlier this month) that (the deal with Akkeron) helped certain people take us more seriously in the market place,” he said.

The chief executive didn’t discount the notion of Choice leveraging its balance sheet for the right single-property deal.

“If I could put a strong business case to a single opportunity, then the U.S. (team) will consider it,” he said. “But that would be very location specific. The multi-unit deals are by and large the ones we want to get actively involved in.”

Berry said the company has identified other groups in the U.K. that it would like to bring on board as a package deal.

“These don’t grow on trees, but there are ones that do fit,” Berry said.

Berry emphasized that while Choice is fine with leveraging its balance sheet to speed expansion of its brands in Europe, it is not interested in being hotel owners.

“The asset light phrase is right—there hasn’t been the appetite to get into that,” Berry said. “We’ll use the balance sheet to help support deals, but at the moment there hasn’t been any wish to buying bricks and mortar. We’re not shifting the goal posts away from where our success has been.”

He also said the company would explore opportunities to acquire or partner with other brands as a means to grow its portfolio.

Choice has a number of one-off type deals in the pipeline but all parties involved are waiting for the lending landscape to loosen, the executive said.

“It’s not that (owners) don’t want to brand with us,” Berry said. “It’s waiting for the approval for the financing piece to get the refurbishments underway that is taking the time. Looking six months ahead I would hope there is progress made on it. It’s something we’re going to still have to work hard on.”

The company’s U.K. roster has surpassed 100 hotels in the past, and Berry is confident it will achieve that again.

“We want to gain those goals in time,” he said. “We don’t want to foolishly grab every conversion we can. It’s not what you want from a franchise relationship.”

Berry said the addition of the Choice Advantage property management system to the U.K. is a big deal when it comes to convincing independent properties that the franchising model works for them. Nine hotels in the U.K. have already switched to the system.

“Our ability to drive direct connect through CA is going to be a bigger attraction for potential franchisees,” Berry said.

The Choice executive said the revenue management component of the hotel business is more important than ever because the number of distribution channels available to hoteliers.

“It becomes more important the job you do on rate management is as good as it can be,” Berry said. “Owners recognize the investment it would take for them to get on the platform, they can’t do it. They look very much for us to give them that platform. Driving rate and occupancy is what we’re here to support them doing.”

The cost of the Choice Advantage system is a little more than £3,000, Berry said.

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