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News for the Hospitality Executive

The Cendant Name Doesn't Appear On Any Hotel Facade,
But Sold 20% of All Midpriced and Economy Hotel
 Rooms in the United States and Canada Last Year

By Kevin G. DeMarrais, The Record, Hackensack, N.J.
Knight Ridder/Tribune Business News

Feb. 13, 2005 - Like a landscaper, Steven Rudnitsky is pruning the dead wood, nourishing the existing stock and filling in holes with new growth.

It's all part of his job as chairman and chief executive of the Cendant Hotel Group, the world's biggest and perhaps least-known hotel franchiser.

The Cendant name doesn't appear on any hotel facade; the company doesn't own a single piece of real estate, a single bed. But Parsippany-based Cendant owns some of the best known brands in the industry, which it franchises to others.

Cendant is Ramada and Howard Johnson, two of the nation's best-known midpriced hotel chains. It's also Days Inn and Super 8, two leading economy brands. And it's four other chains, each with its own market niche.

Combined, Cendant Corp.'s hotel unit -- with 520,000 rooms in nearly 6,400 hotels on five continents -- raked in more than $442 million in royalties and fees last year, 7.9 percent more than in 2003. The company sold one in five midpriced and economy hotel rooms in the United States and Canada.

The hotel business is a high-profile segment of the Cendant portfolio of real estate and travel service companies, but a small part of its total 2004 revenue of $19.8 billion. About a third comes from real estate franchises and operations, including its Century 21 and Coldwell Banker brands.

To bolster the hotel earnings, shortly after his arrival at Cendant in March 2002 Rudnitsky developed a strategic plan to build the Cendant brands.

The timing was tough because the travel industry was still reeling from the effects of 9/11. But the lag also gave Cendant a chance to plan "for the long-term turnaround that was eventual in the economy and in the industry," Rudnitsky said.

The plan is centered on shedding underperforming hotels, improving the performance of existing properties through stepped-up marketing support, and stricter quality assurance. Cendant has increased its marking budget by double digits in each of the past three years, Rudnitsky said.

Plans call also for selective growing of underdeveloped brands, especially outside U.S. borders, through the purchase of existing chains and locating new investors.

Most franchisees pay $36,000 upfront, an annual royalty fee of 4 percent to 5 percent, and a similar marketing fee, based on room revenues. For the Cendant model to work, "we need to make certain we are adding value to our franchisees," Rudnitsky said.

"It's their brand, their property, their livelihood," he said. "These franchisees invest a great part of their lives and a great part of their livelihood in their business. That's the way you need to look at it."

It's a balancing act between the franchisers and franchisees, said Chekitan Dev, professor of marketing at the Cornell University School of Hotel Administration in Ithaca, N.Y.

"One of the hardest things to manage is the overlapping of interest of the various entities," Dev said. "The franchiser's goal is to maximize fees. The franchisee's goal is to maximize profits. Cendant's customer is the franchisee; [the franchisee's] customer is the end user."

As a multichain owner, Cendant has to balance support for each brand as well as the entire group.

"You want to make absolutely certain that you are differentiating your brands," Rudnitsky said. "There are real points of difference between a Super 8 and a Days Inn brand. You make sure that your marketing plans are very specific to those respective brands."

Days Inn, for example, positions itself as a place for price-conscious business or leisure traveler, often located in suburban and resort areas. Super 8's are marketed to people looking for an inexpensive one-night stay.

Each brand has its own marketing plan, "800" number and budget, and there is no cross-selling of brands, he said.

Even so, in the fourth quarter of 2003, the company launched TripRewards, an umbrella loyalty program that provides reward points at any of the properties, as well as from renting cars from Cendant-owned Avis and Budget.

"It's a wonderful example of maintaining the individuality of the respective brands and establishing a marketing halo the likes of which no competitor can really deliver," Rudnitsky said.

Still, with its eight brands, a franchisee can end up with a competing Cendant hotel next door, said Robert Purvin, chairman and chief executive of the 5,000-member American Association of Franchisees & Dealers, a San Diego-based trade association. "Market protection is within your brand only."

Such conflicts are not unusual in franchising, Dev said.

"The franchise company sees itself as the keeper of the brand," he said. "The franchisee is required to do new things that become part of the brand standard. They want consistency across the brand."

But some franchisees may balk because they don't see the change as being applicable to their market, he said.

That's a big problem with Cendant, which is not a member of his association, Purvin said.

Potential buyers "should be looking for a franchiser who's going to do well by me, who I expect to be looking out for my interest," Purvin said. "Make sure you buy into a franchise that is contractually dedicated to respecting the equity rights of owners."

Holiday Inn, Red Roof Inns, and other hotel chains do a better job of protecting owners' interests than Cendant, Purvin said. The franchisees make a lot of decisions about their properties at the local level, but they have little input on systemwide mandates.

Cendant is in the final stages of relaunching its Ramada brand domestically to create a more consistent product from city to city. Ramada ranks second to Holiday Inn in the midprice sector.

The makeover started by eliminating the dead wood, canceling franchise agreements of more than 225 underperforming properties, Rudnitsky said. "We took out the worst-performing properties in the system," he said. "They weren't up to the Ramada position."

A hot property is Wingate Inns, the only brand Cendant built from scratch. The midpriced chain, which competes for business travelers with Courtyard by Marriott and Hilton Gardens, Wingate won a national award last week as tops in customer satisfaction.

"We can't open Wingates fast enough," Rudnitsky said. "They're great for our franchisees, a very good business proposition for us."

Ramada and Days Inn lead the way internationally, Rudnitsky said. Most American hotels now in emerging countries such as Russia or China are more upscale than Cendant's brands, creating openings in the midprice and economy market, he said.

"We have 6,000 properties, and only 600 outside the U.S.," he said. "That is an enormous opportunity for us. We have incredibly well-known brands that are very underdeveloped."

Cendant expanded its worldwide reach in December by purchasing international rights to the Ramada brand from Marriott International Inc. The deal included 204 hotels in 26 countries and territories. It already held rights in the United States and Canada, where there are 890 Ramada hotels.

"That gives us a worldwide brand, complete control over the brand," Rudnitsky said. "Having it under one umbrella made a tremendous amount of sense."

A month earlier, the company expanded into Russia and 14 other countries in the former Soviet Union by franchising 45 Days Inns under an agreement with Hermitage Hospitality Ltd.

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