Choice Hotels International, Inc

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Choice Hotels International, Inc.

10750 Columbia Pike
Silver Spring, Maryland 20901
U.S.A.
Telephone: (301) 592-5000
Fax: (301) 592-6157
Web site: http://www.choicehotels.com

Public Company
Incorporated: 1963 as Quality Courts Motels, Inc.
Employees: 1,728
Sales: $477.4 million (2005)
Stock Exchanges: New York
Ticker Symbol: CHH
NAIC: 721110 Hotels (Except Casino Hotels) and Motels; 533110 Owners and Lessors of Other Non-Financial Assets; 551112 Offices of Other Holding Companies

Choice Hotels International, Inc., is one of the world's largest hotel franchisers, operating through ten brands in the United States and in more than 40 countries. Choice Hotels' segmented line of hotels compete in the economy, mid-scale, and upscale sectors of the lodging market, offering a range of services running from limited service to full service. The company brands are led by the more than 2,400-unit Comfort Inn chain, a limited service line, and the more than 1,000-unit Quality Inn chain, which serves the mid-scale hotel segment. Other brands include Clarion Suites, Cambria Suites, Comfort Suites, Sleep Inn, MainStay Suites, Suburban Extended Stay Hotel, Econo Lodge, and Rodeway Inn. Choice Hotels franchises more than 5,200 hotels throughout the world. One of its first franchisees, Stewart Bainum, owns approximately 45 percent of the company.

ORIGINS

Aside from a lengthy record of industry innovations and its sprawling size, Choice Hotels was distinguished by numerous changes at the corporate level during its history. Name changes, adjustments in strategy, and sweeping restructuring efforts punctuated the company's development, turning what began as a federation of the first motels in the country into one of the world's largest hotel franchisers. The roots of the company stretched back almost two dozen years before it was incorporated, drawing its impetus from the negative public perception of "tourist camps," or "motor courts," the common name in the 1930s of modern-day motels. Roadside lodging facilities, an outgrowth of the popularity of automobiles and the construction of the first highways, had developed an unseemly reputation, notorious for serving as hideouts for criminals and hangouts for the dregs of society. The problem festered, developing into blight on the industry that attracted the attention of the Federal Bureau of Investigation's J. Edgar Hoover, who perceived many of the country's 35,000 tourist camps to be a threat to public safety. With their livelihoods in jeopardy, a group of independent motel owners in Florida attempted to counter the unsavory reputation of their businesses by imposing quality standards. In 1941, they formed Quality Courts United, a nonprofit organization, to bring decorum to an industry in dire need of gaining respectability.

Quality Courts served as a membership corporation for its first 22 years of existence. The company established and maintained quality standards and, to a lesser extent, provided marketing and advertising services to its constituents, adhering to its original mission until it incorporated in 1963. The company changed its name to Quality Courts Motels, Inc. and began serving as a franchiser to its members, forging no relationship more important than its dealings with Stewart Bainum. A former plumbing contractor, Bainum ventured into the construction business during the 1950s and built his first nursing home in 1960, starting what would become a small chain of nursing home properties. When Quality Courts began offering motel franchises in 1963, Bainum moved in, franchising the first of what would become a small chain of motels under his control. By 1968, he owned eight nursing homes, grouping them under the name Manor Care, Inc., and five motels franchised from Quality Courts that were controlled by another of his companies, Park Consolidated Motels, Inc.

No individual exerted more influence on the development of Choice Hotels than Bainum, an ambitious businessman whose drive to build a personal fortune led the franchising system created in 1963 toward the worldwide dominance that described the company in the early 21st century. His control over the company began in 1968, when he merged Park Consolidated with Quality Courts, taking charge of the franchising system that had once counted him as a franchisee. Following the merger, Bainum served as president and chief financial officer of the company, taking command of 410 franchised and 12 company-owned motels that were located primarily in the eastern United States. Having turned his modest holdings of five motel properties into a sizeable business empire, Bainum quickly expanded Quality Court's operations, seeking to broaden its geographic presence. By 1970, two years into his expansion campaign, Bainum extended Quality Courts' reach into 33 states. He also had ventured overseas, establishing international offices in Brussels, Belgium, and opening a hotel in Bonn, West Germany, the first step in what was expected to be an aggressive expansion campaign throughout Europe.

The company changed its name to Quality Inns International, Inc. in 1972 in anticipation of making good on its growth plans, but the OPEC-imposed oil embargo the following year scuttled plans for expansion and put the company on the defensive. Fewer automobile travelers forced Bainum to close motels rather than open new units, leaving him with 286 franchised and company-owned motels by the end of the decade. Despite the damage done by gas shortages, Bainum stood atop the seventh largest motel chain in the United States by the end of the 1970s, confident that Quality Inns would elevate its stature in the coming years.

Before pushing ahead with plans to add more than 200 properties to his holdings, Bainum reorganized his assets. In 1980, he merged Quality Inns with Manor Care, the nursing home and healthcare arm of his business endeavors. As the merger was structured, Manor Care purchased Quality Inns, becoming a holding company for three subsidiaries: Quality Inns, Inc., the operator of hotels Bainum had controlled under Manor Care; Manor Healthcare Corp., which oversaw Bainum's nursing home properties and other healthcare businesses; and Quality Inns International, Inc., the company in charge of franchising motels and hotels.

RAPID EXPANSION AND BRAND
SEGMENTATION

Shortly after Bainum reorganized his assets, he appointed two new executives to lead the franchising operation, giving the company the leadership team that would guide it for the next 15 years. Robert Hazard and Gerald Petitt joined Quality Inns International after helping Best Western eclipse Holiday Inn to become the world's largest hotel chain, serving as chief executive officer and chief operating officer, respectively. At Quality Inns International, the pair inherited 339 lodging properties that had begun to suffer from neglect by some franchisees. Taking the company back to its roots, they imposed stricter quality standards throughout the chain and began to expand aggressively, doubling the size of the chain within three years by adding two to three franchises per week.

COMPANY PERSPECTIVES

Our Comfort Inn, Comfort Suites, Sleep Inn, Quality, Clarion, Econo Lodge and Rodeway Inn brands continue to provide an outstanding value to our franchisees and guests, and an integral part of our strategy is to continue to improve our portfolio of properties by leveraging our world-class sales team with brands that provide strong growth potential and a compelling value proposition for hotel owners.

Hazard and Petitt also greatly increased Quality Inns International's presence overseas, establishing properties throughout Europe, as well as in New Zealand and India. Perhaps their greatest contribution to the chain was segmenting the properties into different brands, giving the company the diversified attack on the niches of the lodging market that described its profile in the 21st century. The branding effort began by separating the line of properties into three segments, each designed to compete in a particular market category. Quality Royale became the company's competitor in the upper end of the price scale, while Quality Inns and Comfort Inns became the brands to compete in the mid-priced and economy segments of the market, respectively.

As the decade progressed, the company's three-pronged approach developed into an attack waged on several fronts. After a joint venture with Associated Inns and Restaurants of America created a 37-unit chain of resorts under the name Clarion Hotels and Resorts, the brand became the new vehicle for the upper end of the price scale, replacing Quality Royal. New brands were also added via acquisition, including three purchases completed in 1990: the 148-unit Rodeway Inns International chain, the 85-unit Friendship Inns chain, and the 615-unit Econo Lodges of America chain, each of which competed in the economy segment of the market. The company also developed a chain of motels under the name Sleep Inns, which competed in what was referred to as the "luxury-budget" segment of the market.

The enormous growth achieved under the stewardship of Hazard and Petitt created one of the world's largest hotel and motel chains. There were 2,800 franchised units and 12 company-owned units operating under seven brands by the beginning of the 1990s, a sprawling, diversely segmented line of properties that required a new corporate banner to reflect the breadth of its brands. In 1990, the company acknowledged its diversity by changing its name from Quality Inns International to Choice Hotels International, Inc., and began focusing its expansion efforts overseas. In 1993, the company acquired a struggling French chain of economy hotels owned by Inovest, gaining 144 properties in France and 19 units in six other European countries, adding its base of 350 international hotels. Joint ventures and partnerships with a number of international hotel operators followed, giving Choice Hotels additional properties in Canada, England, Italy, and Singapore. The company, in the last years of the Hazard-Petitt era of leadership, began hatching plans to expand in South America, China, and the former Soviet Union, displaying an insatiable appetite for bolstering its geographic presence.

As reward for their efforts in increasing the size of the franchise system roughly eightfold, Hazard and Petitt were appointed to Manor Care's board of directors in early 1995. In the succeeding months, the hotels that were at one time controlled by Manor Care—those assets operated by Quality Inns Inc. after the 1980 merger of Manor Care and Quality Inns International—were consolidated within Choice Hotels. There were also discussions about spinning off Choice Hotels from Manor Care, which led to the separation of Choice Hotels from its parent company in late 1997, though Bainum continued to own a substantial stake in the franchise operations following the spinoff. Soon afterwards, another significant era of leadership began, giving Choice Hotels the executive whose contributions rivaled the accomplishments of Bainum, Hazard, and Petitt.

KEY DATES

1941:: Quality Courts United is formed.
1963:: The company is incorporated as Quality Courts Motels, Inc. and begins operating as a franchiser.
1968:: A franchisee, Stewart Bainum, merges his properties with Quality Courts Motels.
1972:: The Bainum-led Quality Courts Motels changes its name to Quality Inns International, Inc.
1980:: Quality Inns International is acquired by another Bainum-controlled company, Manor Care, Inc.
1990:: After a decade of robust domestic and international expansion, Quality Inns International changes its name to Choice Hotels International, Inc.
1997:: Manor Care spins off Choice Hotels into a separate, publicly traded company.
2002:: Choice Hotels opens its 5,000th hotel.
2006:: A new brand, Cambria Suites, debuts.

LEDSINGER TAKES CHARGE
IN 1998

Charles A. Ledsinger, Jr., was appointed president and chief executive officer of Choice Hotels in 1998. Like Hazard and Petitt before him, Ledsinger inherited a line of hotel properties suffering from a lack of uniformity among its thousands of franchised units. Quality standards had not been maintained, tarnishing the image of Choice Hotels' seven brands. In a September 4, 2006 interview with Forbes, a franchisee recalled his perception of management before Ledsinger's arrival. "Choice gave us a lot more freedom—sometimes too much," the franchisee said. "This company was anti-mandate, but if a guy with another Comfort Inn has a bad mattress, bad coffee, and he's serving a frozen danish, he's hurting the rest of us."

Ledsinger had spent the first half of the 1990s working for hotelier Promus Hotel Corporation, where he was credited with making sure every unit of the Hampton Inn chain looked identical, and he realized he needed to apply the same treatment to the Choice Hotels brands, but he was wary of offending franchisees. To apply tougher standards to the 3,500 units in operation, he needed the cooperation of franchisees, who would have to invest their own money in the improvements he intended to suggest. Ledsinger held dozens of meetings with franchisees to explain the benefits of implementing systemwide refurbishment measures and waited two-and-a-half years before issuing his first directive. In 2001, he convinced franchisees to invest in new signage, which cost each franchisee between $8,000 and $50,000 per unit. "It was a big deal," Ledsinger reflected in his September 4, 2006 interview with Forbes, "and a fair amount of cost. People asked us if we really knew what we were doing. Two years later they said it was the best thing we ever did."

Ledsinger's capital improvement campaign widened in scope after the positive reaction to changing signage, growing to include improvements in bathrooms, new mattresses, bedcovers, and towels. Meanwhile, he followed the example established by his predecessors and expanded aggressively. Between 1998 and 2006, Ledsinger added 1,700 properties to the Choice Hotels system, which enabled the company to average 7 percent annual revenue growth during the period. The expansion campaign included the acquisition of Suburban Franchise Systems, a leading economy, extended-stay brand. The acquisition gave Choice Hotels another brand, one marketed as Suburban Extended Stay Hotel, but the most notable addition to the company's portfolio of properties was one it created itself. In 2002, Ledsinger began developing plans for a new brand, revealing his intention at a meeting in 2004 when franchisees first learned of "Hotel Concept 2004." The brand, which was given its permanent name, Cambria Suites, in 2005, was developed to compete against Courtyard by Marriott and Hilton Hotel's Garden Inn, where research revealed 40 percent of Choice Hotels' customers stayed in 2004. Cambria Suites was slated for debut at the end of 2006 in Boise, Idaho, giving Ledsinger another vehicle for expansion as he plotted the company's future. In the years ahead, Choice Hotels was expected to do what it always had done: expand aggressively and assiduously maintain the quality standards that had underpinned its development from marketing cooperative into one of the world's largest hotel companies.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Brentwood Boulevard Hotel Development, LLC; Choice Capital Corp.; Choice Hospitality (India) Private Ltd.; Choice Hoteles de Mexico S. de R.L. de C.V.; Choice Hotels Australasia Pty. Ltd. (Australia); Choice Hotels Australia Pty. Ltd; Choice Hotels Canada, Inc.; Choice Hotels Limited (Cayman Islands); Choice Hotels Netherlands Antilles N.V.; Choice Hotels Systems, Inc. (Canada); Choice Hotels International Services Corp.; Choice International Hospitality Services, Inc; Choice International Hospitality Services Licensing Co. B.V.; Dry Pocket Road Hotel Development, LLC; Hotelsupplies.com, LLC; Park Lane Drive Hotel Development, LLC; Suburban Franchise Holding Company, Inc; Suburban Franchise Systems, Inc.; Quality Hotels Limited (U.K.).