Buried within Choice Hotels' recent Q1 2024 earnings call lies a subtle but significant shift in their international growth strategy: a move towards direct franchising. While most analysts focused on the revenue synergies from the Radisson Americas integration and the abandoned Wyndham bid, Choice quietly revealed a pivot with potentially explosive implications for its long-term growth.

The linchpin of this strategy is evident in the announcement of a franchise agreement with Zenitude Residential Hotels in France. This deal, representing over 4,000 rooms, is poised to double Choice's hotel footprint in the country – and it's a direct franchise agreement. While Choice has traditionally employed a mixed approach internationally, utilizing both direct franchising and master franchise agreements, this latest deal signals a distinct preference for the former.

Direct Franchising vs. Master Franchising

Why is this shift so crucial? The answer lies in the fundamental differences between the two models. Direct franchising allows Choice to exert more control over brand standards, marketing, and technology implementation, leading to a more consistent and profitable experience for franchisees. More importantly, direct franchising yields a "full fat" fee structure, as Scott Oaksmith, CFO of Choice Hotels, confirmed during the call. This translates to higher royalty rates and potentially more lucrative economics for Choice compared to master franchise agreements.

"Advantages of Direct Franchising for Choice Hotels: * Greater control over brand standards * Improved marketing and technology implementation * Higher royalty rates * More lucrative economics"

The Zenitude deal is not an isolated incident. Choice emphasized during the call that their international unit pipeline grew by a staggering 33% quarter-over-quarter in Q4 2023, more than doubling the number of hotels year-over-year. This impressive growth suggests a concerted push towards direct franchising in strategically chosen markets.

Projected International EBITDA Growth

The potential financial impact of this strategic shift is substantial. Consider this: Choice's international EBITDA contribution in Q1 2024 was over $9 million. If their direct franchising strategy allows them to maintain even half the 33% quarterly growth rate they achieved in Q4 2023, their international business could be generating over $30 million in annual EBITDA within the next few years.

This international growth trajectory is further bolstered by Choice's renowned conversion capability, a distinct advantage in the current development landscape. Their ability to quickly convert existing hotels to their brands allows them to generate revenue sooner and capitalize on immediate opportunities. This is particularly evident in the 36% quarter-over-quarter growth in their global rooms pipeline for conversion hotels, including a 9% increase in the lucrative Radisson upscale brand.

The timing of this strategic shift couldn't be better. As travel demand roars back post-pandemic, Choice is positioning itself to capture a larger slice of the global market. Their focus on more revenue-intense hotels, coupled with their direct franchising approach, will translate to higher royalty rates and more lucrative economics for the company.

"Key Takeaways for Investors: * Choice Hotels is shifting towards direct franchising internationally. * This strategy offers greater control and higher royalty rates. * International EBITDA is projected to grow substantially. * Choice is well-positioned to capitalize on post-pandemic travel demand."

This silent revolution in Choice Hotels' international strategy is one that investors should watch closely. While the company has historically flown under the radar compared to its larger competitors, their strategic focus and execution prowess could propel them to new heights. In the global hospitality race, Choice Hotels may be the quiet dark horse that steals the show.

"Fun Fact: Choice Hotels' loyalty program, Choice Privileges, has over 65 million members! This vast network of loyal guests provides a significant competitive advantage, driving direct bookings and lowering customer acquisition costs for franchisees."