Choice Hotels International, Inc. (CHH)

How it makes money

Most revenue is franchise and management fees, charged as a percentage of each hotel's room revenue plus flat platform fees, so it rises and falls with how full and how expensive franchisees' rooms are, not with Choice's own costs. A large additional revenue line is money collected from franchisees for marketing and reservation systems and then spent on their behalf — this passes through the income statement without adding profit. A small owned-hotel portfolio and other services round out the total.

Revenue by segment

A hotel owner who signs a franchise agreement commits for years and invests in brand-standard renovations, so switching brands means losing that investment and the reservations that come through Choice's system and loyalty program. The moat is real but narrow: at renewal, owners can and do move to a rival chain if the economics no longer work.

Franchise fees are a percentage of room revenue, so they track how much people travel and how much hotels can charge — both of which fall in a weak economy. Growth in the number of franchised hotels also depends on owners being able to get construction financing, which tightens in the same downturns that reduce travel.

Key risks

• Dependence on franchisee performance — Because fees are based on franchisees' room revenue, Choice's results depend on the ability of thousands of independent owners to compete for guests and to obtain financing to build or renovate — factors the company does not directly control.
• Economic weakness reduces travel — The company states that a weak U.S. or international economy reduces demand for hotel rooms and for new hotel development, which lowers both existing royalty fees and the pipeline of new franchised properties.
• Competition for franchisees — Growing the franchise system means competing against other chains for the same hotel owners, which can force Choice to lower fees or offer loans and guarantees as incentives, eating into the margin on new growth.