Budget is best…

It's official: budget is the new cool. It seems that it's now trendier to get a flight to Europe for £29 with EasyJet than it is to have a British Airways Gold card. We are all getting used to looking for a good deal - and the same applies, of course, to hotels.

Budget hotels have come a long way since the first Travelodge, selling rooms at £14.95, appeared in 1986. There's now a host of me-toos, and the sector continues to grow. Industry watchers think that budget brands in the UK account for roughly 12% of the hotel market, compared with 30% in the USA. In its Business Outlook 2003 report, property expert Christie & Co tips the budget sector as the area of the hotel market most likely to expand. And consultancy Deloitte & Touche in its UK Budget Hotel Survey 2002 notes that while the rest of the hotel sector has hit tough times with the fallout from foot-and-mouth and 11 September, budget has weathered the storm.

The message is clear. When it's just a question of getting your head down for the night, why pay more? Times are changing. Corporate expense accounts have largely fallen from the £100-a-night allowance, to the more modest £50 mark charged by most of the budget chains. And in the same way that budget airlines have opened up the skies, budget hotels encourage people who don't usually stay in hotels to change their habits. In 1999 only 25% of the UK population had stayed in a British hotel. Now that figure is more like 70%.

The growth of budget is nothing short of "gravity defying", summarises Melvin Gold, managing director (Hotel Consultancy Services) and a partner at PKF. But what drives this continued growth? Price is undoubtedly key - perhaps price is all. After all, why pay an extra 50p for a shower cap that you don't intend to use?

But budget-watchers say that price is only part of the story. With the budget sector you know what you'll get for your money. The consistency of the budget product and its relative anonymity - in most cases you pay when you arrive and have few encounters with the staff - is undoubtedly appealing. There's no one knocking on the door to check minibars, telephones or carry out turndown and you can sit in your undies if you want to without fear of being constantly disturbed.

Consequently, where budget has really scored is in taking away share from the vast, unbranded mid-market sector where choosing a hotel can be a lottery. Budget has taken away the fear factor of turning up at what could be a pretty average hotel with swirly carpets, nylon sheets and owners who are, frankly, just a bit too attentive at times.

For operators, the challenge has been to run low-price, high-volume businesses with very tight cost controls. Running a budget hotel chain is more about being a retailer of rooms than a traditional hotelier. It's an honest type of hotelkeeping - what you see is what you get, with none of the hidden extras that can leave customers with a bad taste in their mouths.

So will budget brands continue to expand in the UK? There will inevitably come a saturation point, predicted by some to be about five years away, but for the time being budget is still growing. Travel Inn, Travelodge and the up-for-grabs Premier Lodge lead the core field, but other players have seen the opportunities presented by segregation within the sector and are diversifying into lower-budget and upper-budget.

If the budget sector offers plenty of opportunities, it also poses a problem: as a budget operator, how do you differentiate your offering from that of your competitors? The risk, after all, is that your product becomes just another me-too in the great budget universe. It's not a possibility that worries the three hoteliers featured here, however.

Travel inn
It's big, it's brash and it's making a statement. The 590-bedroom Travel Inn at London's Heathrow airport, which opens today (Thursday 5 June), is the UK's biggest budget hotel to date. And at £39m, it's a pretty hefty investment for owner the Whitbread Hotel Company. Even so, Travel Inn's 35-year-old managing director Carl Leaver is confident the investment is a sound one.

So sound, in fact, that the company intends to look for another 200 rooms in the Heathrow area over the next couple of years. It's all part of Whitbread's strategy to dominate the budget hotel sector, and the UK's budget sector is nowhere near saturation. In the USA, budget hotel stock has risen from 18% of total hotels in 1998 to 23% in 2003. Leaver is confident there's room for similar growth here. "If all people want is a good night's sleep then they won't pay more. Budget is the new cool," he claims.

Other hoteliers at Heathrow, who have always enjoyed high occupancies and average achieved room rates, must be worried by the arrival of Travel Inn, where a room for up to four people costs just £69.95 midweek and £49.95 at weekends. Anticipated occupancy for the new hotel's first 10 months of trading is 70% and annual turnover expected to be £8.8m.

So what differentiates all the budget brands? Travel Inn's main point of difference is its "100% satisfaction or your money back guarantee", a scheme borrowed from budget hotel chain Hampton Inns in the USA. "Our competitors probably thought we were mad when we launched the offer, but it has been very successful," Leaver says. Since the scheme was launched, in January 2001, money refunded has amounted to half a percent of revenue, some £1.1m, compared with a quarter of a percent of revenue before the scheme was launched. All staff are empowered to offer the refund if they feel it is appropriate, no questions asked. Leaver says it has boosted staff morale because employees take more ownership of guest satisfaction.

In the long term, Whitbread's strategy is to increase its current stock of 17,500 budget hotel rooms to 25,000 within five years. Leaver says that growth will largely be organic, but admits being interested in Scottish & Newcastle's Premier Lodge chain, recently put up for sale. "We'd be mad not to look at it, but price would be a big issue. We looked at Travelodge [recently sold to venture capitalists Permira for £712m] but felt the price was far too high," he says. And this is the budget sector - so why pay more than you need to!

Who owns what?
The UK budget sector is dominated by four companies:

Other players…

What they cost
In a low-price, high-volume business, containing costs is key to profitability. Over the years, the challenge for the budget operators has been to reduce these costs. Travel Inn's Carl Leaver reckons the average cost of producing a room is £30,000; Travelodge's Grant Hearn says the figure is £28,000 out of town to £38,000 in city centres. As for Nick Read at Premier Lodge, well, he declines to answer the question as this is "sensitive" information.

Source: Deloitte & Touche UK Budget Hotel Survey 2002

Pricing
Pricing is a key part of the budget hotel market. The leading brands have different price bands and entry levels, depending on their location. City-centre and airport locations are more expensive than out-of-town equivalents. Sample entry-level prices are as follows:

Travel Inn - £44.95
Travelodge - £42.95
Premier Lodge - £44
Express by Holiday Inn (current special offer) - £42.50

All tied up?
Question: What do Carl Leaver at Travel Inn, Grant Hearn at Travelodge and Nick Read at Premier Lodge all have in common?

Answer: Apart from the fact that they have all worked together in different combinations and in different budget hotel companies, none of them wears a tie to work. It's all part of walking the talk, they say. The budget hotel sector is more casual, more easy-going than its full-service counterpart, and stuffiness is definitely out.

Premier Lodge

Analysts are in accord: Premier Lodge has been a breath of fresh air in the budget sector, offering rooms with more amenities than its rivals and carrying out an aggressive plan of refurbishments and new openings.

"There's no doubt that they've done extraordinarily well and have moved the budget sector on no end," says Simon Johnson, analyst at investment bank UBS Warburg.

Premier Lodge was formed out of the acquisition of Premier Inns & Lodges by Scottish & Newcastle (S&N), from the Greenalls Group. It was rebranded Premier Lodge and is now the third-biggest player in the budget sector, behind Travel Inn and Travelodge.

And even the fact that Premier Lodge is up for sale does little to daunt the confidence of brand development director Nick Read, who knows a thing or two about the budget sector - he was marketing manager at Travel Inn when Grant Hearn was managing director. "The sale will enable us to have a new owner, hopefully one with a large wallet," he says.

When Read joined Premier Lodge three years ago, it had only 22 lodges, compared with Travel Inn's 205. His friends and colleagues thought he was mad, but Read enjoyed the freedom that a young brand presented. "We had an advantage over our competitors because we could almost start from scratch." The result is rooms that have higher levels of design than their budget counterparts. For example, in a Premier Lodge room you can watch television from the bathroom as the TV can be swivelled round. Bathrooms have blue grouting and not white grouting, which shows up mould more quickly, and Premier Lodge is also the only budget operator to have six-foot beds.

But Read refutes any suggestion that by adding amenities he is trying to push prices up. "Our competitors are adding price creep but not giving anything extra for it. We are able to give more amenities at the same price by keeping a tight handle on costs and being more efficient in our purchasing."

As for catching up with Travel Inn, Read says he is not too bothered. Rather he wants to make his mark with more of the same - a quality offering at an affordable price. Proving that it can be done.

"The ugly duckling has turned into a swan," he concludes.

Travelodge
You could say that running budget hotels is in Grant Hearn's blood. His cousin, Alan Hearn, brought Travelodge over from the USA in the mid-1980s and his father, Dennis, was a main board director of Forte, the original owner of Travelodge. Grant Hearn himself was managing director of Travel Inn from 1997 to 2000. And just to add a further touch of irony, his very first job was washing up in Little Chef - the other side of the Travelodge business, of which he is also chief executive.

No doubt this pedigree stands Hearn in good stead, as he has a tough job on his hands. Industry observers view Travelodge as a brand in need of investment and Little Chef as a concept that has largely had its day.

Hearn's move back to the budget sector is quite recent. Until this January he was managing director for Hilton UK and Ireland. But when Travelodge and Little Chef were sold by Compass to Permira and a new chief executive for Travelodge and Little Chef sought, it was a challenge that he couldn't resist.

"I love budget," he says. "I love the simplicity of the offer and the integrity of the relationship with the customer."

So what makes it different to Travel Inn? Hearn believes the advantage Travelodge has over its competitors is that it is still the generic budget hotel, so much so that customers talk about "one of those Travelodges". Market research by BDRC Consulting shows Travelodge as the UK's third most popular hotel brand in terms of recognition, behind Hilton and Holiday Inn. It's this level of recognition Hearn intends to build on, creating a high-volume, high-yield business.

Travelodge has 12,600 rooms and has ambitions to run 20,000 rooms, still 5,000 fewer than Travel Inn. Despite the increasing number of competitors, Hearn feels there is room for everyone as they all have different backgrounds and geographical locations. Travel Inn and Premier Lodge's properties tend to be sited with pubs, whereas Travelodge's are traditionally next to Little Chef outlets, and usually out of town.

But that's today's picture. As budget hotels begin to have more presence in city centres, the leading brands will inevitably compete head-to-head. Hearn believes the fact that Permira is not tied to another hotel brand - in the way Whitbread is to Marriott - will mean he's more likely to get investment for growth. "We stereotype venture capitalists and think they want a quick return on their investment. But in fact it's far worse in Plc land, with pressure from analysts and shareholders. We have three to five years in which to make money for Permira and then we'd expect someone to buy the business. In most Plcs a return is expected in three years."

So would Premier Lodge be an attractive proposition for Permira and Travelodge? "Yes, definitely," Hearn says, "but at the right price. Who could afford to spend £2.3b [a figure touted around, but not yet confirmed] on it? And you would have to want the pubs, too."

Budget US-styleBy Gillian Drummond in the USA

The performance of budget hotels here in 2002 was a complete reversal of their fortunes in 2001, according to PKF Consulting's Hospitality Research Group (HRG) in Atlanta, Georgia. They suffered the least of all the sectors in 2001, but this "relative insulation" against the recession was short-lived, says HRG's executive managing director, Mark Woodworth. "Customers were saying, ‘We can get a lot more for our dollar', and limited service hotels really felt that."

"We've seen a consistent and sizeable decline in profitability in the economy and budget sector in the past three years," he adds.

Analysts don't predict an upturn in the US industry until 2004. Woodworth says the budget sector will be one of the last to bounce back, because of planned new construction, and therefore more competition, in other sectors.

Chase Burritt, national director of Ernst & Young's Hospitality Services Group, based in Los Angeles, gives a different perspective. He says the budget sector has performed "relatively well" compared with luxury resorts and hotels. "That's because, typically, the economy segment does not go up or down that much."

Like the rest of the hotel industry, budget brands are trying hard to stand out in a sea of value offers that cuts across all sectors.

What's happening in Europe?By Christina Golding
The UK's budget hotel market may be a hive of activity, but the rest of Europe is years behind the game, with the exception of France. The budget sector in France, mainly because of the dominance of Accor, is a mature market with more than 1,000 branded budget hotels. Of these, Accor's economy brands - Formule 1, Ibis and Etap - account for 822 hotels. Another fast-expanding brand in France is Groupe Envergure's Campanile, a major force with 395 hotels across Europe, of which 240 are in France.

Spain and Germany are the key markets for growth. In its annual look at the budget sector, Deloitte & Touche found that 90% of budget players intended to expand overseas and Spain and Germany were thought to have the greatest potential.

"The opportunities for scale and the economic reasons make these countries tempting," explains Shane Harris, vice-president of development for Europe for InterContinental Hotels, which owns the Express by Holiday Inn brand. "Big companies are looking for large countries where they can roll out 80-100 hotels," he adds.

However, like the UK, the dominant brands to emerge are just as likely to be domestic rather than international operators.

German company, Steigenberger hotel group, which mainly operates midmarket hotels across Germany and Austria, has already set the ball rolling by gradually expanding its budget portfolio of three brands: Intercity, Expris and Steigenberger Max hotels. It now has 34 budget hotels.

In Spain the major force is NH Hoteles, which owns 239 hotels in 16 countries in Europe, Latin America and Africa. It also has a budget brand, NH Express: it has 16 in Spain and plans to add a further seven this year.

Popular Eastern European cities are also likely to provide opportunities for brand operators once they have established a name.