Choice Hotels’ New Interim CEO’s First Task: Fix the Revenue Gap

The primary metric of concern is Revenue per Available Room (RevPAR), a critical industry benchmark that combines occupancy rates and average daily rates to provide a snapshot of a hotel’s financial health. According to data provided by CoStar, a leading provider of online real estate marketplaces and information, Choice’s performance in the upscale and above segments saw a modest year-over-year increase of 1.3%. While any growth is generally welcomed, this figure pales in comparison to the industry average for those same chain scales, which surged by approximately 5% during the same period. This nearly 400-basis-point gap suggests that while travelers are returning to upscale accommodations, they are increasingly choosing brands owned by competitors such as Hilton, Marriott, or IHG over Choice’s premium offerings, which include brands like Cambria Hotels and the Ascend Hotel Collection.

The narrative remains similarly strained in the midscale and upper-midscale segments, which have historically functioned as the bread and butter of the Choice Hotels portfolio. Brands like Comfort and Quality Inn are designed to capture the heart of the American traveling public—middle-class families and business travelers seeking reliability and value. However, in the second quarter, Choice’s midscale and upper-midscale properties grew by only 1.1% year-over-year. This performance lags significantly behind the industry average for these segments, which posted a growth rate of roughly 4%. For a company that prides itself on its dominance in the mid-market space, failing to keep pace with the general market trend is a signal that brand loyalty may be fraying or that the product offering is not evolving quickly enough to meet modern traveler expectations.

Perhaps most concerning is the performance of the budget or economy segment. Choice’s budget hotels saw a RevPAR decline of 0.7%, a contraction that occurred even as the segment overall managed to eke out a 1% gain across the industry. The economy sector is often viewed as a bellwether for the financial health of the lower-income consumer. While inflation and rising costs of living have undoubtedly pressured this demographic, the fact that Choice is seeing a decline while the rest of the segment is growing suggests a specific loss of traction for Choice’s value brands, such as Econo Lodge and Rodeway Inn.

This consistent underperformance across tiers has not gone unnoticed by Wall Street. Patrick Scholes, a prominent analyst at Truist Securities, noted in a recent report that the results imply Choice is continuing to lose market share. Market share loss is a particularly painful diagnosis for a franchisor, as it suggests that the value proposition offered to hotel owners—the promise that joining the Choice system will drive more revenue than staying independent or joining a rival—is being called into question. If franchisees perceive that they can achieve better RevPAR growth with a different brand, the long-term pipeline of new hotel signings could be at risk.

Dominic Dragisich, who previously served as the company’s Chief Financial Officer and has been a key architect of its financial strategy, acknowledged the gravity of the situation during Wednesday’s earnings call. Addressing analysts with a blend of transparency and resolve, Dragisich stated, "My job is to close the gap between where we are today and where I believe this business can perform." His 11-week tenure at the top has been characterized by an immediate need to diagnose why the company’s revenue engine is sputtering at a time when travel demand, while normalizing, remains historically high.

The reasons for Choice’s lagging performance are multifaceted and rooted in both internal strategic shifts and external macroeconomic pressures. One significant factor is the company’s ongoing efforts to integrate Radisson Hotels Americas, an acquisition finalized in 2022. While the deal was intended to accelerate Choice’s push into the upscale and upper-midscale segments, integration at this scale is often a double-edged sword. The resources, management attention, and operational restructuring required to absorb hundreds of Radisson properties can sometimes distract from the core mission of driving organic growth across the existing portfolio. Furthermore, the migration of Radisson properties onto Choice’s technology platforms and loyalty programs is a complex process that can cause temporary disruptions in booking patterns and guest experiences.

Another element to consider is the "normalization" of the travel market. During the immediate post-pandemic surge, travelers were less price-sensitive and more desperate for any available room, which benefited many midscale and economy operators. As the market has stabilized, consumers have become more discerning. There is a growing trend toward "premiumization," where travelers are willing to pay more for enhanced amenities and superior loyalty rewards. Competitors like Hilton and Marriott have been aggressive in expanding their mid-market footprints with new, "sparkling" brands that compete directly with Choice’s legacy offerings. If Choice’s older properties have not undergone necessary renovations or if their brand standards are perceived as inconsistent, they will naturally lose out to newer, fresher inventory from rivals.

Furthermore, the failed hostile takeover attempt of Wyndham Hotels & Resorts earlier this year cannot be ignored as a contextual backdrop. Choice spent months and significant capital pursuing a merger that would have created an economy and midscale behemoth. The ultimate abandonment of that bid in March 2024 left the company needing to pivot back to a standalone strategy. The pursuit of Wyndham was a massive undertaking that likely consumed a significant portion of the executive team’s "bandwidth." Now, in the wake of that failed deal, the company must prove to investors that its organic growth strategy is sufficient to sustain its valuation.

Dragisich’s explanation for the underperformance also touches on the specific geographic and demographic mix of the Choice portfolio. A large portion of Choice’s domestic hotels are located in secondary and tertiary markets, often along highways or in rural areas. While these locations were highly resilient during the pandemic when travelers preferred driving to flying, the return of international travel and the resurgence of major urban centers have shifted the "share of wallet" back toward gateway cities and luxury destinations—areas where Choice has a smaller relative footprint compared to its larger global competitors.

To rectify the RevPAR gap, Dragisich is expected to lean heavily on Choice’s technological advantages and its loyalty program, Choice Privileges. The company has long been a leader in hospitality technology, utilizing its ChoiceEdge property management system to help franchisees optimize pricing and distribution. However, technology is only as effective as the product it sells. The interim CEO has signaled a renewed focus on brand consistency and property improvements. By incentivizing franchisees to renovate and upgrade their facilities, Choice hopes to reclaim the quality perception that is essential for competing in the upscale and midscale tiers.

The road ahead for Choice Hotels is also paved with broader economic uncertainties. High interest rates have slowed the pace of new hotel construction across the industry, making "conversions"—taking an existing hotel and reflagging it under a Choice brand—more important than ever. Choice has been successful in the conversion space, but as competition for these conversions intensifies, the company must demonstrate that its platform can deliver superior RevPAR to justify the franchise fees.

Moreover, the "interim" nature of Dragisich’s title adds a layer of complexity to the company’s strategic execution. While he is a veteran of the company and highly respected by the board, an interim period can sometimes lead to a "wait and see" approach from both employees and investors. To counter this, Dragisich appears to be moving with the urgency of a permanent CEO, emphasizing that the current revenue gap is unacceptable and that the company has the tools necessary to reverse the trend.

As the hospitality industry moves into the latter half of the year, all eyes will be on Choice’s third-quarter results. Analysts will be looking for signs that the 1.3% growth in upscale and the 1.1% in midscale are beginning to trend upward toward the industry mean. If the gap continues to widen, pressure may mount on the board to seek a permanent leadership solution or to consider more radical strategic shifts to protect shareholder value. For now, Dominic Dragisich remains at the helm, tasked with steering one of the world’s largest hotel franchisors through a period of transition and proving that Choice Hotels can still be a top-tier performer in a market that is no longer satisfied with the status quo. The challenge is clear: in a world where travelers have more choices than ever, Choice Hotels must prove it is still the best one.