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Budget hotel boom

19 July 2007 by
Budget hotel boom

As the UK's budget hotel sector breaks through the £1b barrier for the first time, hotel consultancy TRI Hospitality has released its first report into the market. Emily Manson reports

"Nobody goes out of their way to stay in the Dartford Travelodge," declares Grant Hearn, chief executive of Travelodge. Yet the budget hotel sector is now worth £1.06b.

The phenomenon Hearn has identified is one of the most significant changes to occur in the hotel sector in the last two decades. The rapid emergence of the branded budget hotel since the mid-1980s has developed a niche market where the hotel is mainly the vehicle facilitating other reasons for travelling, rather than being the reason for the break itself, as was so often the case before.

In doing this, the sector has not only taken on traditional bed and breakfast operations, but has also made significant inroads into the midmarket sector, with the large chains snapping up unbranded, frequently cash-starved three- and four-star properties, and spending millions to upgrade them to their "budget" standards.

On a mission

A concept that was initially developed to cope with motorway breaks, the budget hotel has moved a long way from its original roots and is now on a mission to democratise the whole sector. Hospitality adviser TRI Consulting this week published its first comprehensive report into the budget hotel sector, which last year broke the £1b barrier for the first time and is now worth a staggering £1.06b, up 13% from £940m in 2005.

One of the most encouraging trends to come from the research is the apparent resilience of the market. Total rooms revenue for the sector has nearly doubled since 2000. Between 1994 and 2006 business guest stays rose from 2.7 million (38 million roomnights) to 3.8 million (57 million roomnights) a year.

The leisure market has seen a similar expansion, from 7.6 million adults in 1994 to 15.3 million last year, taking total leisure nights from 25 million to 54 million. With average occupancy rates of 75.5% and average room rates of £46.96 last year, revenue per available room (revpar) was £35.47, up 4.6% from the previous year, and the typical budget hotel room generated about £12,947 revenue annually. This resulted in a standard 73-room unit making about £945,131 a year.

These findings would seem to imply that, irrespective of the post-9/11 effects, geo-political events or fluctuations in the UK economy, the market seems to be less susceptible to market variations than other segments of the hotel sector.

Ben Walker, research analyst at TRI, says: "The growth in revenue and therefore growth in demand for the budget product has steadily increased since 2000 and appears to be less susceptible to market variations."

The growth of the budget brand may well be partly responsible for this resilience, with Travelodge, Premier Travel Inn and Express by Holiday Inn all having put considerable resources into building up strong brand recognition and consumer confidence that their room, despite being labelled "budget", will be clean and up to a certain standard.

Strict rules

Colin Roy, vice-president for marketing, EMEA, InterContintental Hotels Group, explains: "Brands are all about trust. The fact that they work is because we stick to some very strict rules to ensure the customer gets consistency throughout the network. With unbranded properties you get something different every time."

It would also appear that the creation and growth of the budget hotels supply chain has effectively stimulated demand, enticing customers who had not previously stayed in hotels to do so, as the desire for travel and new experiences filters through all echelons of society.

Hearn told Caterer: "While we have the same demographic as other hotel sectors, we also significantly increased our lower-income families' market share last year for the first time, which indicates we are having some success in growing the overall market."

Hoteliers and developers are also keen to push the budget proposition as they can be a better financial model than the more upmarket products. Budget properties are generically more economical to build and the advancing techniques of volumetric construction, where rooms are built away from site as individual pods and then transported whole to the property, can considerably lower initial set-up costs.

"Volumetric construction can only help to lower costs," explains Walker, although he warns: "There can be logistical drawbacks to this regarding transport-to-site issues. If your hotel is in the middle of Piccadilly Circus, for instance, it may be difficult to deliver the rooms whole."

On top of lower initial capital costs, the simple operating model requires fewer staff to work in the property and generates a higher growth in operating profit than a typical full-service hotel.

The TRI report finds that most budget hotels can operate with fewer than 20 full-time staff with some, such as the 104-bedroom Birmingham Nitenite, managing to keep to as few as nine staff, taking payroll to just 10% of sales, compared with an average of 30% for full-service hotels.

Market potential

In addition, the more recent development of windowless brands such as Nitenite, Yotel and EasyHotel have also increased the market potential. Lower-revenue spaces which previously would never have been suitable for a hotel, such as basements, can now be used.

"This is one to watch," says Walker. "This Japanese pod model is optimising lower-revenue space for people who just want somewhere to sleep in a city centre. It will be interesting to see if it emerges further." As Guy Parsons, chief operating officer of budget hotel chain Travelodge, boasted recently on Caterersearch's editor's blog: "Budget hotels may lack grand fireplaces, chandeliers and quiet corners for gentlemen to yarn, but we are the future."

Roy agrees, adding: "The growth of the budget hotel sector so far has been phenomenal but we've not come to any impasse. It's going to continue and we already have a 65-strong pipeline in place. The concept works in cities, regions, roadways and conurbations and is going from strength to strength."

As low-cost airlines changed the face of foreign travel, so budget hotels are making hotel stays available to everyone, and with still only a third of the UK staying overnight in hotels of any description, there's quite a market out there waiting to be converted.

To get a full copy of Budget Hotels 2007 UK, go to www.bdrc.co.uk/budgethotels.html

UK budget hotel sector by brand

Number of hotels
Premier Travel Inn 488
Travelodge 304
Express by Holiday Inn 108
Innkeeper's Lodge 89
Ibis 48
Days Inn 25
Comfort Inn 23
Campanile 16
Jurys Inn 14
Sleep Inn 10
Formule 1 10
Etap 6
Ramada Encore 5
Tulip Inn 5
Stop Inn 5
Welcome Break Group 3
Future Inns 2
Big Sleep 2
EasyHotel 2
Hoxton Urban Lodge 1
Nitenite 1
Base2Stay 1
Dolby Hotels 1
Hotel Bannatyne 1
Sleeperz 1
Total1,171
Budget hotel time line - 1985 Travelodge - 1987 Premier Travel Inn (originally Travel Inn) - 1991 Formule 1 - 1993 Dolby hotel - 1996 Express by Holiday Inn - 1997 Sleeperz - 1999 Sleep Inn, Days Inn, Big Sleep - 2000 Etap - 2002 Ramada Encore - 2004 Tulip Inn, EasyHotel - 2005 Future Inns - 2006 Nitenite, Hoxton, Base2stay What the key players say…Grant Hearn, chief executive, TravelodgeOn the driving forces "One of the exciting things about the sector is its twin strategy to take market share from existing accommodation providers, including B&Bs and three- and four-star hotels, as well as grow the market. While 60% of the UK population stay away from home every year, only 30% stay in hotels. We're trying to increase the share of the pie and grow the size of the overall pie." On strategy "We're doing a lot to make sure the product is not only affordable, but also approachable, and to remove the la-di-da stigma that's put people off in the past. We've moved away from the road network - it now represents only 5% of our portfolio - and are developing city-centre and urban locations. Our focus is on London: we want to be the largest hotel brand in the capital in time for the Olympics and are adding 1,000 rooms this year alone. It's very important for the London hotel market that more branded operators get in to counter the horrible stuff around the back of King's Cross. That kind of unregulated stock does none of our reputations any good and it's great to see it being replaced with the likes of Easyhotel." On the sector "At the moment the hotel sector is like an inverted pyramid compared with the population, with far more three-, four- and five-star properties than mid or budget, and we need to reverse that percentage. Budget hotels should comprise 40-50% of the hotel room supply in this country to bring it more in line with the demographics. But that's not all new stock - it's about regeneration too." Patrick Dempsey, Managing Director, Premier travel InnOn the driving forces "People are primarily looking for value for money with a clean and consistent product, and are fed up with going to hotels not knowing what they're going to get. We have a 50:50 split between leisure and corporate, but both markets are attracting people who used to stay in B&Bs who weren't sure what they were going to get, and who now come to us for consistent standards and good value for money. For us, our consistent price means people have a clear view of our policy and what to expect." On strategy "We've got five ways of growing our hotel portfolio: through extending existing properties, where there's little or no land cost involved through developing hotels on the sites next to the 100 or so pub-restaurants we retained through developing new pub-restaurants with Premier Travel Inns \[PTIs\] next to them - we plan around 10-15 this year through building bigger stand-alone PTI sites and finally through buying going concerns and upgrading them. We're now going into smaller towns where before there were only independent, unbranded properties, as well as developing our stock in London. That will be good value for inbound, domestic and business travellers, and I think that will continue." On the sector "In terms of the UK there's currently 32,500 rooms and 500 hotels, which we're looking to grow to 45,000 rooms by adding 3,000-5,000 rooms each year until 2011, and there's further opportunity beyond that."
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