ROI, resilience keep budget brands viable
ROI, resilience keep budget brands viable
24 JUNE 2019 7:26 AM

Executives from G6 Hospitality, InterContinental Hotels Group, Meininger Hotels, Wyndham Hotels & Resorts and RLH Corporation talk about why lower-cost hotels are enjoying popularity among guests and owners around the world.

NEW YORK—With an evolving guest profile and expanding ownership interests, economy hotel brands are enjoying a growth period right now, according to brand executives.

Speaking on a panel titled “Economy: The in place to be?” at the recent NYU International Hospitality Industry Investment Conference, executives from G6 Hospitality, InterContinental Hotels Group, Meininger Hotels, Wyndham Hotels & Resorts and RLH Corporation talked about the returns and resiliency that characterize today’s budget-conscious hotel brands.

Product evolution
“I think the most significant change we’ve all seen is the dynamic evolution of the product,” said Lance Miceli, EVP and chief marketing officer of G6 Hospitality, which owns the Motel 6 and Studio 6 brands. “There’s absolutely no shortage of high-caliber design and guest-facing functionality, and that applies not only to the physical asset, but also to the technology assets and technology environment.”

Chip Ohlsson, EVP and chief development officer, North America, for Wyndham Hotels & Resorts, added lower-segment brands don’t need to be excluded from the trend of lifestyle hotels.

“Every hotel is in the lifestyle sector. Every customer has a lifestyle they adhere to, and we need to deliver on that,” he said. “Whether it’s Motel 6 or some of our (Wyndham) brands or Avid … it’s interesting to see that evolution from a homogenized ‘how cheap can I get it?’ approach to one of ‘how much value am I bringing in?’”

Karen Gilbride, head of Avid Hotels for IHG, pointed out that while Avid sits in what she called the lower-midscale segment, the brand grew out of similar needs to provide a lifestyle experience at a lower price point.

She said that customers have evolved to expect quality design at a lower cost, and hotels have had to keep up.

“Look at Ikea and Trader Joe’s and Southwest Airlines—all these companies showing that regardless of price point, you can have a high-quality, fresh and modern experience,” she said. “Guests looked at hotels and asked, ‘Why do I have to pay more to experience that?’”

Hannes Spanring, CEO of Meininger Hotels, said “certain basics need to be fulfilled, even in the budget sector,” and guests have evolved to expect experiences at all price points that include good design, cleanliness and safety.

Miceli said budget-sector hoteliers have another advantage in that guests today are more self-sufficient and may not need as many bells and whistles from the hotel product itself, largely thanks to technology. As long as hotels have strong Wi-Fi capabilities, he said guests can stream their own TV and movies, and order food they like via online delivery services, such as Grubhub.

Amenity creep?
Many budget-conscious brands make design and amenities a priority, but amenity creep worries must be front-of-mind, the panelists said. The key to that is having a laser-focus on yield, Miceli said.

“Unless you can yield it, is it really viable to put in the room?” he asked.

Paying constant attention to what’s necessary and what isn’t keeps these costs in check, speakers said.

Meininger Hotels, which Spanring described as a “hybrid brand” of traditional hotel-style rooms mixed in with multi-bed rooms, went through an exercise several years ago that proved this point.

“About seven years ago, we included breakfast in the rate, and it was not that appreciated. We stopped free breakfast and offered it for a fee, and suddenly it was way more appreciated,” he said.

Now, the brand concentrates on great amenities in shared public spaces, and even considers a future where guests “may not even need televisions in their rooms, because they stream everything on their devices anyway,” he said.

Paul Sacco, EVP and president of global development for RLHC, said good Wi-Fi now is more important than any other amenity, noting results of an RLHC guest survey which showed that “Wi-Fi was 64% more important than a change of clothes.”

“People would rather do without clean underwear than Wi-Fi in their rooms,” he said.

Construction vs. conversion
Underwriting new construction in the economy space is a big consideration, speakers said, and all agreed that many current economic factors support new-builds and conversions.

Sacco, whose company does some new-construction in the economy space, said there’s a fair amount of “economic opportunity” for it.

“There’s a lot of new supply in upscale right now, and you have to be careful in a lot of markets, when you’re underwriting, if there are maybe five or so upscale projects coming in and competing with each other,” he said. “So sometimes you notice there’s an opportunity to build something at a lower (level) that you can build very nicely, that guests want and can offer a lower rate, and (the owners) don’t get as hurt in the down cycle.”

He said that often new-build economy hotels with higher design standards can go into a market dominated by midscale properties, which might be aging, and provide stiff competition with a better prospect for owners.

Spanring, whose company does a lot of use-conversions (for example, converting a brewery or office building into a hotel), said he notices advantages for economy hotels in European cities where mixed-segment development is a growing trend.

“Municipalities and zoning (committees) are stating in certain areas that new hotels have to be budget,” he said. “That happened in Amsterdam, for example, because the city has enough supply in the (higher) segments, and that gave us an advantage.”

Gilbride said IHG did a lot of work in the planning phases to determine that Avid Hotels would all be new-construction projects, while focusing on keeping costs down for owners.

“We wanted customers to know from the outset exactly what they would get so we made strategic decisions to keep the costs in line,” she said. “Things like going with a smaller room size, for example, become cost-prohibitive if you’re going to be allowing conversions, because it’s more costly to start moving walls around.”

Still, conversions are a great option for some brands, Sacco said.

“It’s an opportunity if there’s a really well-located hotel, and there are those,” he said. He cited the example of original budget properties that started out in great locations but need some work.

“It’s an opportunity to not add more supply to a market, but take a building that has good bones, that’s in a great, irreplaceable location, put the right money behind it and reinvent it.”

Owner changes
As guest expectations have in large part matured for budget-sector hotels, owner profiles have as well, panelists said.

“When I first started in this business, owners just bought the commodity and ran it as cheaply as they could,” Ohlsson said. “As second and third generations come on board, they want to create more value in the hotel, and that’s a big jump. They realize there are better ways to channel-manage, to revenue-manage, have more technology and deliver a good experience.”

Miceli pointed out that the introduction of institutional capital to the budget space has created a big opportunity.

Ohlsson added that “10 years ago, institutional money didn’t even want to look at select-service, and now the secret’s out on what you can do with economy.”

“Everyone thought economy had to be owner-operated, and that was the only way to make money. Now institutional (capital) realizes they can make money in this sector, too,” he said.

Sacco said he sees multiunit owners now with more diversity in their portfolios, including economy.

“Some of these groups now buy upscale, full-service hotels and still own economy,” he said. “It’s opportunistic for them because on the acquisitions front, a good deal is a good deal. People are more than willing to own in various segments.

Ohlsson and Gilbride said in their companies, they see many examples of franchise owners diversifying across many brand segments within a brand family they trust.

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