Nendels Has Ambitious Agenda -- Hotel Chain Sets Sights On Major Market Expansion

DOWNTOWN

Three years ago, Nendels Corp. was, at best, an aging, sleepy hotel chain. At worst, it was on the verge of extinction.

There's no looking back now. The company, which sells franchises to independent hotel owners to use the Nendels name and symbols, went public last month and raised $1.5 million to finance a planned 10-fold expansion.

Nendels, which now has 66 hotels under franchise agreements, plans to have 700 by 1996.

"It's obviously an ambitious plan," said Joseph Doyle, a hotel industry analyst for Smith Barney Harris Upham & Co. Inc., New York City.

"Theoretically, this could be a good time to make this kind of expansion, because the market has been so weak," said Doyle. "There's been overbuilding of hotel properties, which could create an opening for a franchisor."

How the company dodged oblivion and embarked on an expansion that may take it to the East Coast, Asia and Europe is a tale of luck, savvy, and the execution of a simple but powerful plan.

President and Chief Executive Officer John Matlick arrived in late 1988 and found a company that "was fraught with problems and carried a checkered past."

At the time, 17 hotels used the Nendels name. The company had not owned or managed any of its hotels since 1986. It licensed use of the Nendels name and access to the company's reservations system to independent hotel owners in exchange for a franchise fee.

Locally, Seattle-based Nendels has hotels in Everett, Renton, Tukwila, Tacoma and Sea-Tac.

Nendels typically earns about $40,000 per franchise, Matlick said. But upon Matlick's arrival, he found that only three of the 17 Nendels were actually paying a franchise fee.

"I said, `Why the hell do we do this?' " said Matlick, recalling his disbelief that 14 hotels used the Nendels name for free.

"The accountant said, `We're afraid that if we start billing them, they'll quit the chain,' " recalls Matlick. "I said, `Who cares? If we're not even getting a fee from them, what does it matter?' ".

Making matters worse, Matlick said, Nendels had a reputation among business travelers as being inconsistent from one franchise to the next, said Matlick. "Reputation is everything to a hotel company," said Matlick.

"I'm still amazed that a company like (Nendels) could have existed at all," he said.

One of Matlick's first actions was to develop a system to judge the quality of the franchisees. He and a newly hired quality-control manager set a minimum score of 800 out of 1,000 as the baseline for franchisees. But on the first complete inspection of the chain under the new system, Matlick recalls, the highest score was 650.

"I remember my quality-control manager said we should kick them all out. But that wouldn't have left much," said Matlick. "We finally agreed to go back and try to teach them all how to do it right."

It took a year-and-a-half to whip the franchisees into shape and build permanent quality control and reservations systems, he says.

By May 1990, the company had relocated its headquarters from Portland to Seattle, increased staff from eight to 30 people and installed a sophisticated computer-reservations system. The company was ready to pursue its ambitious expansion plans.

Those plans include franchising 300 Nendels west of the Rocky Mountains, 200 east of the Rockies, 100 in Asia and 100 in Europe.

"We want to be in virtually every viable market west of the Rockies," said Matlick. "In other markets, we'll be much more selective and concentrate only on major cities."

Matlick's challenge outside the west, in areas where the Nendels name is little known, will be to convince hotel owners to hang the Nendels sign.

"It's inconceivable that they could expand to 700 if they were actually going to buy existing properties or build new hotels," said Doyle. "It's at least possible for a franchisor. But it can be difficult to deal with a lot of independents."

Some hotel companies, such as Best Western and Ramada, sell franchises but aren't actually in the hotel-management business. Others, such as Westin and Marriott, manage and sometimes own their own hotels.

Matlick said one advantage Nendels has over other franchised hotels is lower franchise fees. He said the company is careful to keep its costs down. For example, the expansion plan is based on spreading marketing costs over many properties in order to be cost effective. In practice, that means the company won't have six franchises spread throughout Illinois, but might eventually have six in the Chicago area.

The company went public by selling stock and warrants that enable holders to buy additional shares of stock at a specific price. In Nendel's case, the warrants allow holders to buy additional stock for $8 a share. Nendels closed yesterday in over-the-country trading at $5.50 a share. Nendels went public at $5.75 a share.

Sam Wilson, president of Wilson-Davis and Co., the Salt Lake City-based brokerage that took Nendels public, said if Nendels' stock rises above $8 a share and warrant holders buy the stock, Nendels will make more than $2 million.

"I think they were in the right place at the right time," said Wilson. " They've got an excellent plan and very little overhead."

Wilson said his company did the initial offering because bigger, New York City-based brokerages weren't interested in doing such a small deal. "I was impressed with Matlick," Wilson said. "He convinced me that he had planned all this out, and it could work. It doesn't have the risks of most initial offerings."