Red Lion Comes Roaring Back
With many more properties and a new upscale hotel line, the Spokane chain dares to be noticed.
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AT A BOUTIQUE HOTEL in the chic Dupont Circle neighborhood of Washington, D.C., you can use your smartphone to check in and use it again to unlock the door to your room. Later, you might grab a free espresso in the lobby coffee shop and check out the “Living Stage” for live music. Have a meeting elsewhere in the city? Borrow a free bike to get there.
This property, targeting the “millennial-mindset consumer” with a “Northwest ethos” of techno-convenience and community activities, is part of a new, upscale brand called Hotel RL. It represents a changed look for Spokane-based Red Lion Hotels Corporation (RLHC), a company better known for operating reliable, albeit unremarkable, mid-tier lodging.
The new brand, which offers a path for midscale accommodations in metropolitan areas to upgrade their facilities and charge more per room, is part of a broader initiative by CEO Greg Mount to transform Red Lion.
“It’s impressive what Red Lion has been able to do in just a couple of years,” says Alex Fuhrman, a Craig-Hallum Capital Group senior research analyst. “Greg and his team developed the new concept Hotel RL from scratch. They’re trying to bring a very cool, Northwest experience to these venues.”
The effort to remake Red Lion began in 2009, when the Great Recession hammered Red Lion’s business. Jon Eliassen, a member of the company’s board, stepped in as CEO and began the difficult process of stemming losses by cutting staff, selling properties and paying down debt.
Mount came aboard in January 2014 to chart a new course, employing an “asset-light” strategy. He raised $100 million by selling a 45 percent share of Red Lion’s hotel holdings to investors. Some were sold outright, others in part. The sale of the Red Lion Bellevue alone brought in $35.5 million. In each case, the hotels signed joint-venture agreements in which they retained the Red Lion brand. Mount then used the cash to pay off debt, fix up properties, improve the chain’s technology and marketing platform, acquire new brands and build a global franchising business.
“When we got to Red Lion, the company had become mired down in its real estate,” Mount explains. “We thought we’d unbuckle from that real estate and reinvent.”
An executive team outlined steps for a national push. “We felt that if we had the right platform, created the right brand and built a franchising organization,” notes Mount, “there was the opportunity to build a special organization. We’re in that early execution phase.”
In 2015, the company set a goal of adding “100 hotels in 100 weeks” by February 2017 through internal development efforts. It set out to use acquisitions to expand geographically and into new market segments. In 2015, RLHC acquired GuestHouse, which offers economy lodging, and Settle Inn, a chain of extended-stay hotels. Last October, the company completed acquisition of Florida-based Vantage Hospitality Group, adding franchise agreements with 1,042 hotels under 10 brands, increasing the brands under the Red Lion umbrella to 14.
“The recent Vantage transaction gave us some great ubiquity, scale and foothold in the economy and midscale markets,” Mount says. “We’re leveraging that to really grow in the midscale and upscale hotel sectors.” Mount adds there is still significant opportunity to expand in the top 80 to 100 American cities, along with “equal opportunity in secondary and tertiary cities.”
MOUNT'S STRATEGY APPEARS to be working. The company now has 1,200 hotels in its portfolio, up from 55 in early 2014, making it one of the top 10 hotel franchises in the country. In earlier periods, Mount notes a bulk of Red Lion’s earnings came from real estate that wasn’t yielding strong revenue and required big capital spending. Now, under new owners, says Mount, the properties are all performing well: “We have no debt on our balance sheet. It really helped position us to become more of a nationally franchised platform.”
Payments from franchisees last year accounted for 20 percent of Red Lion’s earnings, up from 3 percent in 2014. This year, the company expects to add 90 to 120 new franchise agreements.
While heavy investments in technology and renovations have depressed net income — the company posted a loss of $4.7 million for fiscal 2016 — adjusted earnings before income tax and depreciation rose 56 percent last year to $19.5 million.
The success has been in large part the result of efforts by Red Lion to improve services to franchises, including website and marketing support, says analyst Fuhrman. Mount invested early on developing a revenue management system called “RevPak” to provide franchisees with analytics on consumer demand, preferences and retention so each hotel could manage everything from site marketing to pricing.
RLHC revamped its website booking system to entice customers. For example, websites might display images of city life or mountain scenes that cater to users’ interests and are relevant to a particular property. Through its new offerings, franchisees who used to have just four channels through which to get customer reservations can now connect to 300, Mount boasts.
The new distribution channels and improved marketing have allowed franchisees to increase earnings per room significantly.
The company also created a Hello Rewards loyalty program. Rather than simply allowing consumers to earn points toward a later reward, it strives to reward guests whether it’s their first stay or their 25th. “It might be a free iTunes song or a gift card,” says Mount. “Or you stay seven nights and get one free night.” Contributions to RLHC’s effort to address homelessness can also result in a free room.
Red Lion signed a deal with Expedia in which the travel site agreed to funnel users toward becoming members of Red Lion’s guest reward system. Expedia users who want to access special loyalty rates at Red Lion properties must sign up as a loyalty member. The enticements on Expedia are important, says Mount, because online travel agencies make up about 55 percent of all room bookings.
Red Lion is negotiating similar deals with other online booking sites. Once guests are loyalty members, Mount says, “We can market to them on a one-on-one basis. The reward system becomes a customer acquisition tool as much as it is a booking tool.”
RED LION'S IMPROVED technology and marketing programs have played an important role in the rapid expansion. “Those are the kinds of things that make franchisees more interested in becoming a Red Lion hotel,” says Fuhrman, who attributes Red Lion’s success in penetrating tough East Coast markets to the strong brand it has built up with its services to franchisees. “East Coast franchisees have been willing to partner with Red Lion because it’s a great brand, it’s been managed well and it has a good reputation for taking care of guests.”
The chain’s improved image also set the stage for the company to move from being a mid-market player to moving into the premium market with its Hotel RL concept. The first Hotel RLs opened in Baltimore and Washington, D.C., in 2015.
Last year, the company completed multimillion-dollar renovations to convert sites in Olympia, Spokane and Salt Lake City to the new concept. Now it’s looking at adding franchisees, with the goal of having RL Hotels in 80 markets. Once the brand reaches 25, Mount says it will have the scale to allow for faster growth.
HANG TIME: One section of the "communal lobby" in Spokane's new Hotel RL offers a hippie-chic vibe.
One challenge is the cost of renovating mid-tier properties to match the demands of the premium brands as well as lost revenue from not having rooms available for guests. Another, says Mount, will be maintaining brand standards and quality guest experiences. “When you have 55 hotels,” he acknowledges, “it’s not as difficult to maintain that great experience as it is at 1,200.”
He says Red Lion will focus on quality through the auditing of hotels and ongoing education at sites. Mount also describes a legacy still resonating. “Red Lion created strong emotional connections, primarily in the Pacific Northwest, as a place for a family vacation or a place to go for the prom.” He promises that a key component of the expansion plan is to maintain that “ethos of the Pacific Northwest.”