Choice Hotels International Inc.

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Choice Hotels International Inc.

10750 Columbia Pike
Silver Spring, Maryland 20901
U.S.A.
(301) 593-5600
Fax: (301) 680-4062

Wholly Owned Subsidiary of Manor Care, Inc.
Incorporated: 1981
Employees: 2,150
Operating Revenues: $138 million
SICs: 6794 Patent Owners & Lessors

Choice Hotels International Inc., a subsidiary of Manor Care, Inc., is the world’s second largest franchise hotel chain, overseeing more than 3,400 hotels and 400,000 rooms in 34 countries. Choice is also the fastest-growing hotel chain, adding nearly one hotel each day in 1994. Hotels in the Choice chain operate under seven market-segmented brand names (Clarion, Quality, Comfort, Sleep, Econo Lodge, Rode way, and Friendship), ranging from economy to luxury, with special attention to business travelers and senior citizens. While Choice, through Manor Care, owns a number of hotels, its business primarily provides marketing, reservations, and quality assurance programs to its franchisees in return for a three to eight percent licensing fee.

Although Choice Hotels International was formally incorporated in 1981, its origins reach back to 1941, when a group of independent motel owners and operators in Florida formed the nonprofit Quality Courts United membership corporation in response to a negative perception of motels that was prevalent at the time. The rise of the automobile and the development of the first highways had brought growing numbers of roadside tourist camps, later known as motels, to serve the increasingly mobile American population. By the 1930s, however, motels had already gained a reputation as hideouts for criminals and other undesirables, prompting J. Edgar Hoover to write in American magazine that “a majority of the 35,000 tourist camps in the U.S. threaten the peace and welfare of the communities upon which these camps have fastened themselves and all of us who form the motoring public.” The members of Quality Courts United sought to improve their image—and protect their businesses—by establishing and maintaining quality standards. The corporation also provided promotion and advertising services for its members. In 1963 Quality Courts United incorporated as Quality Courts Motels, Inc., and began a more formal, franchise-based relationship with its members.

One of these members was Stewart Bainum, a former plumbing contractor, who had entered the construction business in the 1950s and built a nursing home in 1960. In 1963 Bainum franchised his first motel with Quality Courts Motels. By 1968 Bainum operated eight nursing homes, incorporating them as Manor Care, Inc., while grouping five motels, franchised with Quality Courts Motels, under the name Park Consolidated Motels, Inc. In that year, Bainum merged Park Consolidated with Quality Courts, becoming president and chief financial officer of a company which by then represented 410 franchised and 12 company-owned motels. With most of its motels concentrated in the eastern United States, Quality Courts moved to expand into the rest of the country and Canada. Within two years, Quality Courts operated franchised motels in 33 states, and began its first international operations, opening an International Division in Brussels and its first hotel in Bonn. At the same time, Quality broadened its business with the purchase of Revere Furniture and Equipment company, a seller of motel furnishings, and Contempo Associates, which focused on motel interior design.

With plans to expand throughout Europe, Quality changed its name in 1972 to Quality Inns International. The oil embargo of 1973, however, disrupted these plans, The effects of the gas shortage were particularly severe on the motel business, as the numbers of automobile travelers dropped dramatically, to the point that Quality saw its survival threatened. In response, Quality put international expansion on hold, halted new construction, dropped its unprofitable properties, and concentrated instead on developing its franchising business. Several years would pass before the company fully recovered from the embargo and resulting recession. By 1977 Quality counted itself as the tenth-largest motel chain in the United States. The purchase in the following year of the Royale Inns of America chain, as well as a joint venture with a Mexican bank to open 40 motels in Mexico, brought the number of Quality owned or franchised motels to 286. By the end of the decade, Quality had become the seventh-largest motel chain, posting record profits and increased dividends and announcing plans to grow by an additional 225 properties in the United States and Canada.

Until this time, Manor Care and Quality had been operating as separate businesses. In 1980 Stewart Bainum merged the two companies, with Manor Care purchasing Quality for $37 million. The company reorganized in the following year. Manor Care, Inc., became a holding company with three subsidiaries: Quality Inns, Inc., which oversaw Manor Care’s own hotels; Quality Inns International, Inc., which directed the company’s franchise operation; and Manor Healthcare Corporation, which operated the company’s nursing home and health care-related businesses. The departure of Quality Inns president Joseph W. McCarthy in June 1980 left Quality without a president for nearly six months. At this time, Bainum appointed Robert C. Hazard and Gerald W. Petitt to head Quality. Together, “the Bob and Jerry Show,” as they called themselves, would dominate the growth of Quality for the next fifteen years, raising its value from $15 million in 1981 to more than $500 million in 1995.

Hazard and Petitt met in 1967 at International Business Machines Corporation, where they worked in the data processing division. Their introduction to the hotel business came when they designed a hotel reservation system with the American Express Company. Reservation systems had by then become a critical element of the travel industry, and the development of computer technology had already proved a significant factor in the growth of the airline industry. When Hazard and Petitt were hired by Best Western in 1974, their first step was to implement what was then the most advanced reservation system in the country. Soon after, Best Western posted dramatic increases in its reservations, and Hazard and Petitt were named Best Western’s chief executive officer and chief operating officer, respectively. By 1976 Best Western had become the world’s largest hotel chain, beating out Holiday Inn, whose hotel in Beirut had been destroyed by terrorists in that year. As Petitt told the Wall Street Journal, the bombing “put us over the top as the nation’s largest chain. We got a press release out immediately.”

At Best Western, Hazard and Petitt, apart from developing what has been called a controversial management style, gained insights into the hotel business that they would bring to Quality several years later. Standardization of the hotels, in which customers could expect consistency in both room design and quality of services, as well as low prices, were factors that distinguished Best Western hotels from other economy motels and from higher-priced chains such as Holiday Inn. To ensure quality, Hazard and Petitt instituted stricter and more frequent inspections of Best Western hotels.

Relations with hotel operators were not as cordial, however, and, in 1980, Hazard and Petitt left Best Western to join Quality, which by then controlled 339 hotels. At Quality, Hazard and Petitt were promised 10 percent of net profits, prompting them to embark on a rapid expansion of the chain. Within three years, Quality doubled the number of its hotels, adding two to three new franchises per week. Quality also resumed its international expansion, principally through the Crest hotel chain, a European affiliate.

When Hazard and Petitt arrived at Quality, the chain’s reputation for quality and cleanliness was rather low. Given free rein by Manor Care, the team instituted stricter quality standards and tougher inspections. Many hotels were dropped from the chain in the following years for failing to meet Quality’s standards. Standardization of hotel amenities, room design, and furnishings was also stepped up. A long-running advertising campaign, begun in 1983 and featuring celebrities jumping out of suitcases, proved successful in drawing customers to Quality hotels. Hazard and Petitt brought a further development to the industry as a whole when they introduced segmenting to their line of hotels. Quality hotels were initially divided along three market-specific lines: Quality Royale, which would later become Clarion and included higher-priced and luxury hotels; Quality, in the mid-priced market; and Comfort, in the economy market. A quality-control system was instituted at this time, eliminating twenty motels from the chain. In addition, Quality initiated its own reservation system. Other innovations included the introduction of non-smoking rooms, all-suite hotel formats, and rooms adapted to senior citizens, which featured large-button phones and in-room coffee makers.

Between 1981 and 1990 the Quality line of hotels grew to include seven brand names, each targeted toward a specific market segment. Clarion Hotels, Suites, and Resorts were marketed to the upscale and business traveler, featuring boutiques, 24-hour business centers, and other amenities. Comfort Inns and Suites were limited-service hotels designed for the luxury-budget traveler, based on the “all-suite” concept. These hotels have generated some criticism, as the “suites” were often no more than long rooms divided in two by a partition wall. Quality Inns, Hotels, and Suites targeted the traveler in search of mid-priced, full-service accommodations. Sleep Inns, which were originally to be called McSleep Inns—a name abandoned after McDonald’s Corporation threatened to sue for trademark infringement—appealed to the luxury-budget segment; unlike other segments, where older hotels were converted to meet segment requirements, Sleep Inns franchises featured entirely new construction. During the 1980s, Quality also acquired the brand names Rodeway, Econo Lodge, and Friendship, each targeting different areas of the budget and economy market. As reported in the Wall Street Journal, Robert Hazard referred to this segmenting approach as “seven ways to make more money.” For a time, Quality became the leading hotel chain in the world. However, the segmenting concept also proved successful for other hotel chains, and Quality lost its lead to Hospitality Franchise Systems, Inc., which operated Howard Johnsons and Days Inn among its six chains.

The 1980s saw further international expansion. In 1985 Quality purchased a majority share in England’s Prince of Wales Hotels, PLC, although it would sell its stake again two years later. This purchase, however, gave Quality a base from which to expand into the rest of Europe, and, by the end of 1986, Quality was represented in the United Kingdom, Belgium, Germany, Italy, and Switzerland, as well as in New Zealand, Mexico, and Canada. As the 1980s drew to a close, Quality had moved into Ireland, France, and India, and had instituted its Quality Suites, Comfort Suites, and Sleep Inn lines. Also developed during this time was the Clarion Hotels and Resorts line, begun as a chain of 37 resorts in a joint venture with the Associated Inns and Restaurants Company of America. Purchases in 1990 included the 148-motel Rodeway Inns International chain for $15 million, as well as the 615-motel Econo Lodges of America and 85-unit Friendship Inn chains for $60 million, completing the company’s seven-brand marketing strategy.

In order to reflect its new diversity, Quality Inns International changed its name to Choice Hotels International in 1990. In exchange for a percentage of gross room revenue, Choice franchisees were linked to Choice’s reservation system, which comprised 23 reservation centers worldwide. Customer calls, including those from travel agents and airlines, were routed through a toll-free number; operators then guided customers to one of the seven brand names. Franchisees further benefited from the national advertising provided by Choice, and by the company’s quarterly quality inspections, which helped to maintain a reputation for quality and consistency throughout the chain. Choice also began assisting franchisees in acquiring financing and in construction. In addition, Choice began offering incentive programs to franchisee employees, including health care programs, in an effort to attract new employees and reduce turnover. These programs were instituted in part as a result of a dispute with the Immigration and Naturalization Service, which had alleged that some Quality motels had employed undocumented workers, underlining the shortage of available personnel.

The U.S. growth of Choice slowed somewhat, along with the hotel industry as a whole, when overbuilding, coupled with the economic recession of the early 1990s, forced many hotels throughout the industry to close. During this time, as much as one-third of Choice’s hotels were losing money, and several filed for bankruptcy. Choice’s aggressive sales techniques were also criticized by some of its franchisees, who charged Choice with oversaturating the market by building one Choice brand next to another. Choice defended itself by pointing out that each brand appealed to a different market segment, and thus, different customers. Such charges, which extended into other franchise businesses, prompted calls for legislation to control the franchise industry.

By 1992 Choice’s five economy brands had captured 25 percent of the U.S. economy hotel market, and the company had grown to include 2,800 franchises and 12 company-owned hotels. By that year, Choice was also represented by 350 international hotels. As the growth of the hotel market in the U.S. market slowed, Choice increased its international expansion efforts. In 1993 Choice bought the failing Inovest, a large French chain of economy hotels, increasing its holdings with 144 French motels and 19 motels in six other European countries. In that same year, Choice began a joint venture with the largest Canadian motel chain, Journey’s End Corporation, with 120 properties. Joint ventures provided Choice with established properties as it increased its international efforts, and deals were announced with Friendly Hotels PLC of England, and Eco Hotels of Italy, among others. Partnerships in Mexico and Singapore added another 60 hotels to the Choice chain. During the 1990s, Choice expanded into South America and the former Soviet Union, and began plans to expand into China as well.

In early 1995 Hazard and Petitt were promoted to Manor Care’s board of directors, and Don Landry was appointed as CEO and president of Choice. Landry, who had been president of Manor Care’s hotel division, oversaw the consolidation of that division with Choice International. While Choice’s past emphasis had been on increasing its number of franchises, forecasting as many as 10,000 hotels by the year 2000, a refocusing of Choice’s mission for the future was, as Landry told Lodging Hospitality, “to be the market leader serving those who serve travelers.”

The new focus of the company looked forward to creating new relationships with travel agents and other travel industry businesses. Partnerships were developed with food service companies, bringing such partners as Pizza Hut, Metromedia Steak-houses, and Oh la la! into Choice hotels, providing added service without raising licensing fees. Differentiating the Choice product line, so that each brand represented a clear and separate market, became more important than simply increasing the number of hotels in the Choice chain. A reengineering of its brands, as well as the phasing out of the Friendship brand, were part of an effort to heighten awareness of each brand. In 1995 Choice combined customer satisfaction ratings with quality-inspection scores for the first time, arriving at a new minimum standard for its franchisees. Also in 1995, Choice initiated its own World Wide Web home page, becoming the first major hotel chain to offer real-time room rates and reservations through the Internet. Plans were made to add 200 hotels in China and another 200 hotels in South America over the next two decades. Preparing to enter the next century, Choice showed no sign of slowing down.