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.
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.
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|
|Express by Holiday Inn||108|
|Welcome Break Group||3|
|Hoxton Urban Lodge||1|